Western Economic Developments
December 1997
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
download the Adobe Acrobat PDF version of this document.
- The District contains six of the ten fastest growing states in the
nation, with Nevada, Arizona, and Utah topping the list.
- The pace of economic growth in the District remained solid in recent
months, although below the rapid trend of 1996.
- In much of the District, employment growth continues to outpace growth
in the labor force, pushing state unemployment rates down and creating
very tight labor markets.
- Growth is beginning to even out across District states. Slower growth
in Oregon and the Intermountain states combined with solid expansions
in California and Washington are narrowing the growth gap among the
Districts most populous states.
- Banks headquartered in the District reported healthy third quarter
earnings. Average past-due loan ratios for most District-based banks
improved relative to a year ago.
- Recent developments in East Asia may damp the pace of growth in many
district states but should not derail the Districts solid expansion.
The pace of economic growth in the District remained solid in recent
months, although below the rapid trend of 1996. Payroll employment expanded
at about a 3 percent average annual pace during the 3 months ending in
October, down slightly from the near 3¼ percent pace of the first
half of the year. Despite the slowdown, growth in most District states
has outpaced national growth over the past year; only Idaho, Alaska, and
Hawaii are expanding at a pace below the national rate of 2.3 percent.
Throughout much of the District, employment growth continues to outpace
growth in the labor force, pushing state unemployment rates down and creating
very tight labor markets, particularly in urban areas.
Construction currently is the fastest growing sector in the District,
creating jobs at an annual rate of nearly 8 percent since December 1996.
Employment gains in this sector have been broad based, affecting nearly
every state in the District and owing to increases in both residential
and commercial building activity. The manufacturing sector also has made
an important contribution to the Districts sustained expansion, adding
jobs at about the same 3 percent pace this year as in 1996.
Geographically, growth is evening out across District states. Slower
growth in the Intermountain states and Oregon combined with the resurgence
of the California and Washington economies has served to narrow the growth
gap between most District states, with Alaska and Hawaii being the notable
exceptions. Annualized employment growth among District states in 1997
(through October) ranges from 4.8 percent in Nevada to 2.0 percent in
Idaho. This 2.8 percentage point gap in District growth rates (excluding
Alaska and Hawaii) is down from a nearly 5 percentage point gap in 1996.
The gap in unemployment rates across District states also has narrowed.
Twelfth District bank earnings were solid during the third quarter,
with banks headquartered in the District reporting healthy return on assets
(ROA) and return on equity (ROE). Profitability for small banks in Southern
California showed continued improvement, with average ROA at just over
1 percent and average ROE at nearly 10¾ percent. Average capital
ratios for banks of all sizes across the District remained strong.
Overall asset quality for most banks in the District was healthy during
the third quarter, although banks in several states continued to report
average past-due loan ratios above the national average. Average past-due
loan ratios for most banks headquartered in District states showed some
improvement from a year earlier. Average past-due loan ratios for California-based
banks continued to trend lower. Although loans to individuals continued
to perform poorly for banks headquartered in the District, average past-due
ratios for these loans remained steady across District-based banks as
a whole and were slightly lower than the U.S. average.
During the past three months a wave of devaluation has spread through
countries in East Asia. Although the United States and East Asia actively
trade and compete for trading partners, most experts agree that the recent
developments in East Asian currency markets will have only a small impact
on net exports and thus on growth in the United States. In the Twelfth
District, where trade relationships with East Asia are stronger than for
the U.S. as a whole, the effects of the East Asian currency crisis likely
will be larger.
East Asia Currency Developments and Growth in the U.S.
Between July 2 and October 24, 1997 the Thai baht depreciated by 60
percent against the U.S. dollar and triggered a wave of speculation against
other East Asian currencies that, to date, has caused currency adjustments
in Indonesia, Malaysia, the Philippines and South Korea. The implications
of these developments for the U.S. and Twelfth District economies depend
both on the size of the exchange rate depreciation and the underlying
level of economic disruption each country experiences. Through these two
channels, developments in East Asia potentially affect U.S. growth by
decreasing the trade competitiveness of U.S. producers and by slowing
the demand for exports in affected countries. Combined, these factors
weaken net exports from the United States, ultimately damping production.
The magnitude of the impact on growth depends on a number of factors,
including our dependence on East Asia as an export destination and the
degree to which the U.S. and other nations can substitute less expensive
East Asian commodities for more expensive U.S. commodities.
Although both factors are important for the calculation of the effect
of East Asian currency devaluations on U.S. growth, at the state and regional
level data constraints relating to imports make a dual analysis impossible.
However, under the assumption that the degree of import substitution is
similar across states in the U.S., investigating the export component
of the problem can provide a basis for judging the relative impact of
the East Asia crisis on District states.
Disproportionate Exposure of District Exports to East Asia. The
Figure displays merchandise exports to the world and to countries in East
Asia as a share of GDP for the U.S. and for the Twelfth District.1 State GDP estimates come from the Bureau
of Economic Analysis and reflect revised estimates of 1994 GDP. State
export estimates are from MISER, series 1, 1994 and 1995, and reflect
Department of Commerce data on origin-of-movement of exports of manufactured
and non-manufactured commodities. These data do not include components
of exported services or purchases by foreign visitors to the United States.
East Asian countries include Malaysia, Thailand, the Philippines, Indonesia,
Japan, China, Korea, Taiwan, Singapore, and Hong Kong.
The first two bars in the Figure indicate that the United States and
the District are almost equally dependent on merchandise exports. However,
the Figure also shows that District states are significantly more dependent
on exports to East Asia than the U.S. as a whole. On average, the U.S.
exports about 2.1 percent of its GDP to East Asia. The average state in
the Twelfth District exports more than twice this fraction, about 4.3
percent of GDP. Therefore, relative to the national average, merchandise
exports to East Asia are twice as important in the District economy.
The remainder of the Figure decomposes the ratio of merchandise exports
to East Asia as a percentage of GDP into four country groups. Although
the recent wave of speculation and ensuing currency devaluations have
affected much of theEast Asian region, some countries have experienced
greater financial and economic adjustments than others. Moreover, because
of their size (GDP value) and level of industrialization, particular countries
and country groups in East Asia are likely to influence U.S. exports and
production more than other countries. Thus, it is useful to divide East
Asia into four groups broadly reflective of size (valued in GDP), level
of industrialization, and current financial stability. The ASEAN(4) group
includes Malaysia, Thailand, the Philippines, and Indonesia, each of which
have experienced substantial currency devaluations in the last two months.
Japan and China are entered individually: Japan because of its importance
to the U.S. export calculation and China because it has not been affected
by the recent bout of devaluations. Finally, the NIE(4) or newly emerging
economies include Korea, Taiwan, Singapore, and Hong Kong, among which
Korea has seen the largest adjustment in its currency.
Two points are worth noting in this country decomposition of exports
to East Asia. First, similar to the nation, District states rely most
heavily on exports to Japan and the NIE(4) and are less dependent on countries
in the ASEAN(4) group, the group that has experienced the greatest degree
of difficulty in recent months. Second, in all country groups but China,
the District is more than twice as dependent on exports to East Asia than
the national average, making District export flows more vulnerable to
changes in East Asia than the U.S. as a whole. In fact, the District exports
nearly the same share of GDP to the NIE(4) as the U.S. does to all of
East Asia.
Commodity Composition of District Exports to East Asia. Forecasts
of the effects of developments in East Asia on the rate of growth of the
U.S. economy take into account both the relative importance of exports
to East Asia in the U.S. as well as the product mix or commodity composition
of exports. Commodity composition matters for both the timing and the
magnitude of the export effects. For example, countries undergoing a currency
devaluation may find it too expensive to purchase U.S. agricultural products
and seek other lower cost providers of these goods. In addition, countries
experiencing underlying economic difficulties may delay purchases of durable
goods such as computers and aircraft, slowing the demand for such products.
Table 1 reports the composition of merchandise exports for the United
States and the District by major industry groups. The columns in Table
1 show the share of exports to the world and East Asian countries contributed
by each listed industry. A comparison of columns (1) and (3) highlights
the product lines the District specializes in relative to the nation,
with industrial machinery and equipment, electrical machinery and components,
and agriculture, forestry and fishing topping the list. Comparing columns
(2) and (4) shows the extent to which this specialization carries over
into exports to East Asia. In general, the product mix of exports to East
Asia is more similar between the U.S. and the District than the product
mix of total exports. However, a few notable differences exist. The largest
difference is in lumber and wood products, where the District is twice
as dependent as the nation on demand from East Asia. The other major difference
is in transportation equipment; the District exports approximately one
third as much transportation equipment, primarily aircraft, to East Asia
as the U.S. as a whole.
Areas to Watch in the Twelfth District
Although, overall, the District is more vulnerable to fluctuations in
East Asian economies than the nation as a whole, within the District certain
states are particularly exposed. Table 2 provides the information in the
Figure for each of the nine District states, ranked by total merchandise
exports as a share of GDP. This table highlights the importance of merchandise
exports to East Asia in many District states. According to Table 2, of
the Districts nine states, only Nevada and Hawaii export a smaller share
of state GDP to East Asia than the national average. However, tourism
dollars spent by East Asian visitors are not counted in these export totals.
Thus, the impact of developments in East Asia liely is substantially understated
for Nevada and Hawaii, states which gain substantial revenue from tourism.
In the remaining states, estimates of the percentage of GDP exported to
East Asia range from 2.4 percent in Utah to 10.0 percent in Washington.
In general, District states break down into three groups in terms of
their dependence on merchandise exports to East Asia. The Intermountain
states, with the exception of Nevada, are about 25 percent more dependent
on East Asia than the average state in the nation. California and Oregon
are roughly twice as dependent on East Asian demand for exports than the
U.S. average. Finally, Washington and Alaska are about 5 times more dependent
on exports to East Asia than the average state in the U.S.
Conclusions
In summary, Twelfth District states are more dependent on merchandise
exports to East Asia than is the U.S. as a whole. For a number of years,
this disproportionate exposure has benefitted District states by providing
a ready source of demand to a variety of industries. Recent disruptions
in both the financial and economic health of East Asian nations likely
will damp the pace of growth in many District states, particularly in
California, Alaska and the Pacific Northwest. However, with the exception
of Alaska, these states have posted healthy growth during the past year
and their solid expansions should not be derailed by the current level
of difficulty in East Asia.
1 East Asian export shares of GDP are computed by scaling the 1994 total
exports to GDP ratio by the 1995 country composition of exports by state.
Economic growth in Alaska declined slightly in recent
months, but employment remains above year ago levels. Nearly all of the
recent decline is attributable to reductions in retail and wholesale trade
and services, accounting for ninety percent of the jobs lost in October.
The recent weakness in these sectors, in part, can be linked to Alaska's
fishing and fish processing sectors, both of which fell short of production
expectations this year. Declines in the number of non-resident seasonal
workers employed in fishing related industries reportedly dampened sales
at retail and service outlets. Despite the recent slowdown, annualized
employment growth for 1997 has averaged more than twice that experienced
in 1996.
Alaska's oil exploration and production industry continues to gain strength.
Arco Alaska recently announced plans to develop a new field on the North
Slope. In-state fabrication of the fields production modules will create
approximately 250 new jobs, boosting growth in Alaskas manufacturing sector.
Oregon's economy continued to grow at a solid pace
in recent months. Nonfarm payroll employment expanded by about 2 percent
at an annual rate over the past four months, accelerating in September
and October. Since December of last year, payroll employment has increased
by 2.8 percent at an annual rate, off the near 4 percent pace of the previous
three years, but sufficient to make Oregon the 8th fastest growing state
in the nation. Strong growth in manufacturing has been one key to Oregon's
sustained expansion. Following a sluggish summer, employment growth in
manufacturing returned to its early 1997 pace in recent months, bringing
annualized employment growth in the sector to 4.2 percent since December
1996. The largest employment gains have been in high-tech manufacturing
and transportation equipment, but paper and pulp producers also have added
jobs. Manufacturing's resurgence helped push the state unemployment rate
down to 5.1 percent in October, one percentage point lower than a year
earlier.
The slight slowing of Oregon's fast-paced economy during 1997 appears
to have tempered home price appreciation in the state. The latest figures
from the National Association of Realtors show that the median price of
a home in the Portland area rose by 7.6 percent between the third quarter
of 1996 and the third quarter of 1997, down from the 10.2 percent increase
between 1995 and 1996.
The pace of growth in Washington remained strong in
recent months. Payroll employment expanded by nearly 3½ percent at
an annual rate during the last 3 months, with almost all sectors posting
job gains. Sustained job growth in Washington pushed the state unemployment
rate down to just 4.4 percent in October. Manufacturing employment continues
to expand, boosted largely by sustained expansions at Boeing and by makers
of computer and electronics equipment. Other areas of manufacturing, such
as the lumber and wood products sectors and primary and fabricated metal
products, also are expanding, although not at the rapid clip of aerospace
and high-tech producers.
Rapid growth in manufacturing continues to spill over into other sectors
of the economy. Retail trade, health and educational services, andstate
and local government payrolls all have expanded during the past year.
Robust growth in the Seattle area is translating into higher home prices.
According to the National Association of Realtors, home prices in Seattle
have appreciated nearly 4 percent since last year, bringing the median
price of a home in the area to $175,300.
Arizona's pace of economic growth was relatively rapid
in recent months. Payroll employment increased at about a 6 percent average
annual pace in the three months ending in October, up substantially from
the roughly 4 percent pace in the first seven months of the year. Relative
to a year earlier, Arizona employment has increased 4.4 percent, making
it the second fastest growing state in the nation on this basis. The pace
of job growth is outpacing the rate of expansion in the labor force, and
the state unemployment rate is low and declining. At 3.9 percent in October,
the Arizona unemployment rate is down about 1¾ percentage points
from a year earlier.
A rapidly growing manufacturing sector has helped boost the Arizona
economy this year. Manufacturing employment increased at about a 4 percent
pace over the past twelve months, after posting smaller gains in 1995
and 1996. The largest job gains this year were at manufacturers of electronic,
computer, and other machinery and components. Aerospace employment also
has increased rapidly. Arizonas construction sector has been adding jobs
at about a 4 percent annual rate, fueled by a pickup in residential building
activity. The nonresidential real estate market also is healthy. In the
Phoenix area, office and industrial vacancy rates have declined recently
and are well below the national average.
Economic growth in California continued to proceed
at a solid pace in recent months. Payroll employment increased at about
a 2¾ percent average annual rate in the three months ending in October,
which is similar to the pace earlier in the year but down slightly from
the 3 percent rate of growth in 1996. Among the major sectors, the job
gains have been most rapid in construction and services, particularly
the business service category which includes software development. Manufacturing
employment has only increased at a slow pace in recent months, after increasing
at a rapid 2½ percent annual rate in 1996 and the first half of 1997.
The rapid growth in construction employment reflects strong gains in
both nonresidential and residential building activity. In the first nine
months of 1997, the value of new nonresidential building permits awarded
increased 42 percent relative to the same period a year earlier, and residential
permit values increased about 14 percent on this basis. The largest gains
in both residential and nonresidential construction activity were in the
San Francisco Bay Area, Orange County, Riverside-San Bernardino and San
Diego. Construction activity in Los Angeles County also is increasing,
but at a slower pace than elsewhere in the state. Within the Bay Area,
the San Jose/Silicon Valley real estate market is quite tight. The San
Jose market reportedly has the lowest office vacancy rates in the nation,
and home prices there have jumped about 20 percent in the past year.
Economic growth in Hawaii remained sluggish in recent
months. Payroll employment increased at about a 1 percent average annual
pace in the three months ending in October, after no change earlier in
the year. Among major sectors, jobs have been added this year at government
and services employers, but construction, manufacturing, finance, and
other payrolls are down. Within services, the job growth this year has
been mainly for business-oriented services. In contrast, the job count
declined at hotels and other lodging places, which cater to the tourist
trade. Retail employment declined in the first half of the year, but a
pickup in recent months partly offset the earlier job losses.
The Idaho economy picked up in September and October,
returning to a moderate growth path following a sluggish summer. Nonfarm
payroll employment expanded by nearly 2½ percent at an annual rate
during the last 4 months, with an acceleration in September and October.
The states high-tech manufacturing sector has undergone a substantial
resurgence in 1997, with large job gains in the electronics and computer
manufacturing sectors during the past 6 months. Further impetus for growth
has come from a huge surge in business services employment, which has
grown by 25 percent this year. In contrast, state growth has been restrained
somewhat by declining employment in the retail trade sector, which has
lost 2,000 jobs so far this year.
Preliminary tallies of Idaho's 1997 potato crop suggest an approximately
normal harvest level, despite concerns regarding late season crop health.
Idaho accounts for nearly one-third of total U.S. fall potato production.
However, the sales prognosis is mixed; demand for 1997 french-fry grade
potatoes reportedly is low, due in part to overstocking by producers of
frozen potato products arising from last years record low prices.
Nevada's rate of payroll employment growth continues
to lead the nation, although it is not as rapid as in preceding years.
Growth during the third quarter and October was under 3 percent on an
annual basis, but the underlying trend remains around 5 percent in 1997.
Although growth in most sectors has settled somewhat this year, both the
communications and public utilities and the finance, insurance, and real
estate sectors have picked up a bit. Moreover, the labor market tightened
further in recent months, with unemployment falling to a record low of
4.2 percent in October.
Growth in Nevada construction payrolls this year, while still above
7 percent at an annual pace, is averaging less than half its 1996 pace.
However, construction activity in and around Las Vegas remains an important
impetus to the states economic expansion, as it continues to be spurred
by rapid population growth and expansion of the tourism industry. Recently
commenced construction projects in the Las Vegas area include parking
garages, food and beverage establishments, shopping centers, and a hotel/motel
complex valued at $400 million.
Utah's vigorous economic expansion remains largely
on track. Total payroll employment grew 3.2 percent at an annual pace
during the third quarter and October. The underlying trend in 1997 is
4 percent growth, which has kept the state unemployment rate hovering
around 3 percent. Construction payrolls grew 10 percent at an annual rate
during the first 10 months of the year. Services sector growth of 6 percent
at an annual rate during the same period represents nearly half of all
new jobs created in the state this year. In contrast, the manufacturing
sector has been somewhat sluggish this year, with job growth during the
past four months restrained by job losses in the electronics and transportation
equipment industries.
Recent tourism data indicate the number of visitors at Utah tourist
information centers and the number of convention bookings both have increased
compared to last year. However, hotel occupancy rates for the year have
declined on net, due in part to rapid building of smaller, limited service
hotels and motels. Furthermore, employment growth in the hotels and lodging
sector has slowed substantially this year, in sharp contrast to large
gains in 1996.
1East Asian export shares
of GDP are computed by scaling the 1994 total exports to GDP ratio by
the 1995 country composition of exports by state.
|
