Western Economic Developments
November 1997
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- The District states of Nevada, Utah, Washington, and Arizona have
been the fastest growing states in the nation over the past twelve months.
- Relative to the first half of the year, employment growth slowed
in the third quarter in each of the seven most populous District states.
Elsewhere, job growth picked up slightly in Alaska and remained weak
in Hawaii.
- Employment growth in 1996 and early 1997 has outpaced labor force
growth in most areas of the District, leading to lower unemployment
rates. In California, job growth was particularly strong over this period,
and the pace of labor force growth in other District states appears
to have been held down by a slowing of the inmigration of former California
residents.
The pace of overall District economic growth has slowed so far this
year, particularly in the third quarter. Payroll employment increased
at a 2.4 percent annual rate in the third quarter, down from a 3¼
percent annual pace in the first half of the year, and 1 percentage point
below the 3.4 percent growth rate in 1996.
By sector, the slowdown this year stems from less rapid growth in government,
services, and wholesale and retail trade employment. Government payroll
employment growth slowed to about a 1.2 percent annual rate in the first
three quarters of 1997, down from 1.8 percent in 1996. The recent slowing
owes to the state and local government sector, which tends to expand and
contract with the size of a regions population. In Oregon and the Intermountain
states, where population growth reportedly has slowed recently, state
and local government employment growth also has begun to moderate. Employment
in the business service sector, which includes a wide range of activities
such as management consulting and software development, grew very rapidly
in 1996 in many District states; this source of rapid growth also has
moderated somewhat this year.
Geographically, the third-quarter slowdown is most evident in the Intermountain
states of Nevada, Utah, and Arizona where growth had been quite rapid
earlier in the year; the cumulative increases in employment over the past
twelve months were large enough to place these three states among the
four fastest-growing states in the nation. On this basis, Washington also
is among the top four states, as employment growth accelerated to a 3.9
percent pace over the past twelve months. Elsewhere in the Pacific Northwest,
the Oregon state economy is slowing. Further north, economic conditions
in Alaska have improved steadily this year. In California, employment
growth slowed in the second and third quarters after picking up in 1996
and early 1997. Hawaiis economy remains quite weak.
Labor markets are very tight in most areas of the District. Until recently,
California was a notable exception. Californias unemployment rate was
relatively high in the first half of the 1990s, and a large outflow of
people from California to other western states helped meet the growing
employment demand outside of California. More recently, job growth in
California has picked up, and the net outmigration from California to
other states has slowed substantially, holding down the rate of expansion
in the labor force of other District states. Thus, given continued increases
in employment demand, the slowing outmigration from California is exerting
downward pressure on unemployment rates in other states, exacerbating
labor market tightness there.
We do not know how this process will continue to unfold. However, history
provides some guidance as to the range of likely outcomes. Historical
studies of regional economic data suggest that most of the cyclical variations
in regional labor markets are reflected in three variables: the rate of
employment growth in the state, the unemployment rate, and the labor force
participation rate.1 A fourth factor, the rate at which a state
population changes, is implicitly tied to these three other variables
through the identities relating employment, unemployment, and labor force
participation.2
Employment growth tends to be quite variable from year to year (chart
1). Most regional economic models assume that the bulk of these short-run
variations in employment growth are caused by changes in employment demand.
For example, in the early 1990s California suffered an adverse shock to
employment demand from downsizing of defense-related industries. Labor
supply-side reactions to such shocks can take a long time to unfold, as
most of the adjustment is through inducing changes in the size of the
population and the labor force.
Population growth also is a determinant of long-run average employment
growth rates, which have differed substantially across regions. California
non-agricultural payroll employment increased at a 2.4 percent average
annual rate over 1971-96, which is slower than the 3.7 percent rate of
growth in the District excluding California, but about ½ percentage
point faster than the average employment growth rate for the U.S. excluding
the District.
Most of the long-run differences in employment growth rates across regions
are explained by differences in population growth rates (chart 2). Labor
force participation rates and unemployment rates also differ by region,
affecting the degree to which a given amount of population growth translates
into employment growth, but these factors are less important than differential
rates of population growth in explaining longer-run patterns of employment
growth. For example, over this two and one-half decade period during which
employment growth in the District excluding California exceeded that in
the U.S. excluding the District by about 1¾ percentage point, population
growth in the District excluding California was about 1¾ percentage
point faster than in the U.S. excluding the District.
Differences in employment and population growth rates across regions
tend to be relatively persistent, but they are subject to shifts. For
example, during the 1970s and 1980s, Californias average employment growth
rate was about 1 percentage point higher than the pace of employment growth
in the U.S. excluding the District, consistent with the slightly more
than 1 percentage point excess of California relative to the other area
in annualized rate of population growth. However, in the 1991-96 period,
when Californias employment growth rate fell about 1 percentage point
short of that in the U.S. excluding the District, the gap between the
rates of population growth in these two areas narrowed to close to zero.
Population growth did not absorb the slowdown in job growth in California
on a one-for-one basis. Rather, the California unemployment rate increased
sharply in the early 1990s and has remained higher than unemployment rates
elsewhere for more than seven years (chart 3). In the 1990-1992 period
of national recession and weak recovery, Californias unemployment rate
increased more rapidly than that of the rest of the nation and in 1993
continued to edge up to a peak of about 9½ percent. Californias unemployment
rate was almost 3 percentage points higher than that in the remainder
of the nation in 1993 and 1994 (chart 4). This differential narrowed to
about 2 percentage points by 1996 and now is only about 1½ percentage
points.
California's recent population and labor market adjustment process is
consistent with the patterns revealed in historical studies of regional
economic data from each of the fifty U.S. states. These studies show that
unemployment rate differentials tend to go through relatively protracted
periods of adjustment after regional economic shocks, but they eventually
tend to return to their long-run average values. Migration tends to be
the main mechanism by which this adjustment is accomplished. When the
unemployment differential for a state relative to other areas widens beyond
historical average values of the differential, that state tends to experience
a net outflow of residents to other states.3 The attendant
slower population growth holds down the rate of increase in the labor
force, allowing increases in employment demand to exert a larger downward
pressure on unemployment rates in the state than they otherwise would.
Eventually, in the absence of additional shocks, the unemployment rate
differential narrows to its historical average value, as employment, labor
force, and population growth return to their trend paces.
During the most recent three years, California has been in the phase
of a narrowing unemployment rate differential relative to other states.
As the California unemployment rate differential has narrowed to a gap
which is now not far from the long-run average differential, the net out-migration
has slowed.
The slowing of net out-migration is evident in the U.S. Census Bureaus
estimates of California's population, which extend through mid-1996 and
show a pickup in state population growth to about a 1 percent pace that
(fiscal) year, up from about a 0.6 percent pace in the preceding year
(chart 2). The underlying components of population change show that at
the peak of the exodus from California in 1994, the net outflow was close
to 1½ percent of California residents that year, but the pace of
net domestic outmigration from California slowed to about ¾ percent
of the population in 1996.
The Census Bureau estimates of net domestic migration reflect IRS data
on tax return address changes. The IRS address change data is available
on an annual basis over a longer span of time than the published Census
Bureau estimates of net domestic migration and indicate that the 1990
to 1996 outflow of Californians to other states was quite a change from
each year in the 1980s, when California was attracting more residents
from other states than it was sending to them (chart 5).
The IRS data also facilitate more specific tracking of the migration
flows. For example, at the peak of the exodus in 1994, the net outflow
from California to all other states was about 340,000 exemptions (chart
5); the state-by-state detailed statistics show that 155,000 of the people
represented by these exemptions moved from California to other states
in the District (chart 6). The net outflow from California to other District
states fell to 100,000 exemptions in 1996.
The slowdown in net arrivals from California to these states accounts
for more than all of the recent slowdown in overall net migration to District
states excluding California. At the peak of the California exodus in 1994,
net domestic in-migration from all U.S. states was adding about 1¼
percent per year to the population of the District states excluding California.
By 1996, overall net domestic migration to the District excluding California
had slowed to about 1 percent of the population in these states. Even
with the reduced flow from California in 1996, the Golden State still
was the origin of about two-thirds of the net migration to other District
states that year. Thus, it is important to understand the likelihood of
various possible amounts of additional slowing in the exodus from California.
In this regard, the major uncertainty is our usual inability to foretell
the impending path of employment demand, which is subject to shocks which
could postpone or hasten a further narrowing of the unemployment rate
differential. Determining an equilibrium value for the differential between
unemployment rates in California and other states also is difficult, but
history provides some guide. Over both the 1983-96 period shown in chart
4 and the longer 1948-96 period for which data is available, the average
difference between Californias unemployment rate and the unemployment
rate for the remainder of the United States was close to one percentage
point. As of September of this year, the unemployment rate differential
between California and other states was about 1½ percentage points.
Thus, using the historical average as an equilibrium differential would
imply that the California unemployment rate eventually is likely to fall
about ½ percentage point relative to the unemployment rate in the
remainder of the U.S.; for comparison, the California unemployment rate
differential has narrowed about 1¼ percentage points since the year
of the peak exodus, 1994. Thus, historical regularities suggest that as
of September of this year California was slightly more than two-thirds
of the way through its labor market disequilibrium and cyclical migration
swing.
Alaska's economy continued to show signs of improvement
in recent months, despite disappointing summer seasons for both the fishing
and tourism industries. Payroll employment increased 2¼ percent at
an annual rate in the third quarter, up from a 1½ percent pace in
the first half of the year, and well above the ½ percent rate of
job growth in 1996. Employment growth has picked up in the air transportation,
retail trade, and services sectors. Overall job growth has begun to outpace
the rate of increase in the labor force. Alaska reportedly is experiencing
a net out-migration of permanent residents and a decline in the number
of seasonal job seekers. Accordingly, with weak labor force growth and
moderate job gains, unemployment rates have fallen recently in most areas
of the state.
There has been some good news about the future capacity of Alaskas seafood
processing and tourism sectors. Last month, the American Seafoods company
opened an Anchorage office and announced plans to hire more than 300 Alaskans
from Bristol Bay, the Yukon-Kuskokwim Delta and Southeast Alaska by the
end of 1998. The capacity to provide visitor services is expanding, as
construction of five new Anchorage hotels reportedly got under way in
recent weeks.
The pace of growth in Oregon remained solid in recent
months but slowed from its previously rapid pace. Payroll employment increased
at a 1½ percent annual rate in the third quarter, down from about
3¼ percent in the first half of the year and quite a bit slower than
the 3.8 percent pace in 1996. Construction employment growth has slowed
noticeably this year but still proceeded at a rapid 8 percent annual rate
in the third quarter. Manufacturing employment growth was strong in the
first half of the year but declined slightly in the third quarter, owing
to a drop in the lumber and wood products employment and a slowdown in
job growth among computer and electronics manufacturers.
Most of this years growth in Oregon's manufacturing sector can be attributed
to growth of high-tech firms, but some other types of manufacturers also
are announcing expansion plans. For example, growing demand for heavy-duty
trucks reportedly has prompted Freightliner Corporation, a Portland based
company, to begin searching for 550 workers in the Portland area. After
making these hires, Freightliner would employ about 4,600 people in Oregon,
making it the states ninth largest manufacturing employer.
The level of economic activity in Washington state
jumped in the first half of this year, and the rapid pace of growth moderated
only slightly in the third quarter. Payroll employment increased at a
3 percent annual rate in the third quarter, following a 4¼ percent
at an annual rate increase in the first half of the year. For the first
three quarters of the year as a whole, job growth has been about 4 percent
at an annual rate, which is about ½ percentage point faster than
in 1996. Manufacturing employment has continued to increase rapidly this
year, boosted by additional gains in aerospace and computer and electronics
manufacturing employment. Job growth also has been strong at firms providing
computer services, such as software. Real estate and construction activity
picked up noticeably in 1996 and continued to grow at a moderate rate
this year.
Boeing has been increasing production and delivery of aircraft this
year but recently experienced some difficulties meeting the higher goals.
Parts shortages and other factors have led Boeing to scale back slightly
the pace at which it plans to work down its five-year order backlog.
The level of economic activity in Arizona is very high,
but the pace of economic growth is slowing. State payroll employment increased
at a 3¾ percent annual rate in the third quarter, down from a 4 percent
annual rate in the first half of the year and quite a bit slower than
the 5.4 percent pace of employment growth in 1996. Government payrolls
have declined this year, and trade sector employment growth slowed. Last
year, there was a large jump in service sector employment, owing to a
15 percent increase in business service jobs and large gains in the health
services and hotel industries. This year, business service job growth
has slowed to a still rapid pace of 10 percent at an annual rate, and
there has been little change in employment in the health services and
hotel industries.
The Center for Business Research at Arizona State University estimates
that state population growth slowed in late 1996 and 1997, owing to less
net in-migration. These estimates are consistent with recent patterns
in unemployment, employment and implied labor force growth. The state
unemployment rate actually edged up over the course of 1996, when rapid
payroll employment growth could not keep up with an even more rapid rate
of expansion in the labor force. Over the first three quarters of 1997,
the Arizona unemployment rate fell about 1¼ percentage points, even
though job growth slowed relative to 1996.
Employment growth in California moderated to a 2¼
percent average annual pace in the second and third quarters of 1997,
down from a gain of 3.4 percent at an annual rate in the first quarter
and 3 percent in 1996. Manufacturing and business service employment growth
has slowed a bit this year, and this was only partly offset by a pickup
in job growth in the construction, real estate, and local government sectors.
Construction employment has increased at a 10 percent annual rate so far
this year, up from a 5¾ percent pace last year. The real estate sector
has posted its first employment gains in several years. Among types of
local governments, employment increases this year have been particularly
rapid for educational districts, and county government (non-educational)
payrolls also began to increase, after declining in 1995 and 1996.
The pickup in local government employment in California reflects the
state governments sharing of increased tax revenues with school districts
and county governments under the terms of recent state budgets. State
general fund revenues increased rapidly last year, and in the first three
months of this fiscal year, July through September, general fund revenues
have continued to be strong but have not increased as rapidly as projected
by state officials during the budgeting process. The observed shortfall
in personal income tax withholdings is consistent with the somewhat weaker-than-expected
pace of employment growth in the state toward the middle of this year.
Taxable sales, the base for sales taxes, have continued to increase, but
the growth rate of taxable sales slowed to about a 5½ percent annual
pace in the first half of 1997, down from a 6½ percent increase in
the preceding fiscal year.
Only a few bright spots are evident in Hawaii. On the
positive side, the state managed to add about 2,400 jobs to its payrolls
so far this year, which is about a ½ percent annualized rate of increase.
However, all of these jobs (and then some) were from increased hiring
by state and local governments, which are in a difficult fiscal position
due to years of weak private sector activity. Most types of private sector
jobs have continued to decline this year.
Idaho's economic expansion paused in recent months.
Total payroll employment shrank on net during the third quarter and is
up only 700 jobs since the beginning of the year. The most notable third
quarter losses were in retail trade employment, which was down 14 percent
at an annual rate. Wholesale trade employment also contracted, and many
jobs were lost in the railroad industry recently. Both federal and local
government payrolls declined during the third quarter. In contrast, construction
employment increased about 17 percent at an annual rate in the first half
of the year and posted additional third-quarter gains. The states manufacturing
sector was weak in the first half of the year but picked up in recent
months, as gains at high-tech firms around Boise more than offset sharp
job losses in the lumber and logging industries.
Most economic strength in the state is centered around Boise, where
job growth remains close to 4 percent yearly. Transportation employment
has increased about 5 percent at an annual rate and is poised to increase
further. Airborne Freight Corporation recently announced plans to move
its nationwide call-center operations to Boise and to expand its existing
package-distribution center near the airport.
The pace of economic growth in Nevada remains brisk
but decelerated further in recent months. Total payroll employment expanded
by 2½ percent at an annual pace during the third quarter, down from
a 6½ percent pace in the first half and from a 7¾ percent gain
in 1996. Much of the large gain in 1996 owed to booming construction employment,
which subsequently slowed to a still rapid 11½ percent annual pace
in the first half of 1997 and moderated further in the third quarter to
a 3 percent annual growth rate. Third-quarter residential construction
permit issuance was down about 18 percent relative to a year earlier,
and home sales in the first half of 1997 also declined. In contrast, non-residential
construction contract awards have been very strong recently.
For the first three quarters of 1997 as a whole, Nevada employment increased
5¼ percent at an annual rate, which apparently far outstripped the
pace of expansion in the state labor force. The state unemployment rate
dropped about one percentage point in the first half of the year and remained
at this lower 4.4 percent unemployment rate throughout the third quarter.
Utah's economy continued to grow rapidly, albeit somewhat
more slowly than in 1996 and early 1997. Total payroll employment increased
at a 3½ percent annual rate in the third quarter, down from a 4¼
percent pace in the first half of the year and from a 4.6 percent rate
in 1996. The strong employment growth in early 1997 pushed the state unemployment
rate down about ½ percentage point to 2.8 percent in the first quarter,
and the unemployment rate remained near this lower level through September.
Most sectors have experienced solid job gains this year, although nearly
half the jobs created have been in the states large services sector. Growth
in construction employment also has been excellent this year, led primarily
by nonresidential construction projects. In contrast, the states manufacturing
sector has suffered from a decline in electronics industry employment
this year.
The states construction and service industries have been benefitting
from the creation of new hotels and other lodging places. The number of
hotel rooms across the state has increased substantially, and construction
recently began on a new 70 million dollar hotel in Salt Lake City.
1See, for example, Olivier Blanchard and Lawrence Katz (1992),
"Regional Evolutions," Brookings Papers on Economic Activity,
0(1), 1-61.
2The labor force participation rate is the ratio of the labor
force to population, and the labor force itself is comprised of those
employed and those unemployed. Thus, there is an implicit rate of population
growth implied by given values of employment, unemployment, and labor
force participation.
3For a detailed statistical study of this phenomenon, see
Stuart A. Gabriel, Joe P. Mattey, and William L. Wascher (1995), "The
Demise of California Reconsidered: Interstate Migration over the Economic
Cycle," Federal Reserve Bank of San Francisco Economic Review, No.
2., 30-45.
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