Western Economic Developments
January 1998
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
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- The District contains four of the ten fastest growing states in the
nation, with Nevada, Arizona, and Utah topping the list.
- The pace of employment growth in the District accelerated in recent
months, climbing to 3.9 percent at an annual rate during the three months
ending in November 1997.
- The District unemployment rate fell to 5.3 percent in November, as
job growth continued to outpace growth in the labor force.
- Construction activity continued to be a main source of strength in
the District economy late into 1997, adding jobs at an annual rate of
7 percent between December 1996 and November 1997.
- Manufacturing growth picked up in recent months, increasing at an
average annual rate of 3.8 percent during the three months ending in
November.
- Though the District has substantial exposure to developments in East
Asia, as of November 1997 only a few industries showed signs of weakening.
Economic growth in the District accelerated in recent months, bolstered
by rapid gains in Arizona, Nevada, and California, and continued solid
expansions in Washington, Utah, and Oregon. Payroll employment expanded
at about a 4 percent average annual pace during the 3 months ending in
November, up significantly from the 2½ percent pace of the third
quarter. The acceleration in growth pushed the average unemployment rate
in the District to 5.3 percent in November, a full percentage point lower
than a year earlier, and the lowest it has been since March of 1990.
Construction continued to be the fastest growing sector in the District,
adding jobs at an annual rate of 4 percent during the three months ending
in November 1997. Relative to a year earlier, the construction sector
has grown by nearly 7 percent, adding over 70,000 new jobs to District
payrolls, and making it a main contributor to the District's ongoing expansion.
Employment gains in this sector were broad based, occurring in most District
states and owing to gains in both residential and non-residential building.
Although many anticipated that recent difficulties in East Asia would
diminish growth in the District's manufacturing sector, as of November
1997 only a few manufacturing industries are showing signs of weakening.
Overall, manufacturing continued to post solid employment gains, increasing
payrolls by 3.8 percent in recent months. Most of the growth in manufacturing
came from expansions in aerospace and high-tech equipment industries in
the Pacific Northwest, California, Idaho, and Arizona. Gains in these
industries more than offset job losses in food processing and lumber and
wood product manufacturing, two sectors that have been significantly affected
by recent developments in East Asia.
The Twelfth District contains a number of banking institutions with
ownership based in East-Asian countries. As of the third quarter of 1997,
there were 15 East-Asian-owned, U.S.-chartered commercial banks headquartered
in the District, all located in California. Together these banks accounted
for about 7.2% of total banks assets (combined assets of commercial banks
headquartered in the District and foreign branches and agencies in the
District) and about 10.7% of business loans in the District.
East-Asian-owned branches and agencies also are a significant source
of business and real estate credit in the District. As of the third quarter
of 1997, East-Asian branches and agencies accounted for nearly 20% of
business loans in the District. Overall asset quality at East-Asian branches
and agencies was relatively healthy, although the past-due loan ratio
for real estate loans were somewhat higher than for commercial real estate
loans in the District as a whole.
Available information indicates some tightening of credit standards
and loans terms on bank business loans to East-Asian firms operating in
the District. Consistent with this, a sample of East-Asian-owned branches
in the District noted a tightening of credit standards in general. There
also are reports of increased demand for bank business loans from Japanese
firms operating in the District, in part due to less favourable financing
terms or the lack of funds from other lending sources.
Since July 2 when the Thai baht fell by 17 percent against the U.S.
dollar, numerous economists have forecast the effect of developments in
East Asia on growth in the United States. At this point, the consensus
estimates of the effects of East Asia on the U.S. macro economy range
from ½ to 1 percentage point off GDP growth in 1998. Given that the
Twelfth District is more than twice as dependent on trade with East Asian
nations than is the U.S. as a whole, some observers have speculated that
District growth could decline by twice this much, or by a full percentage
point over the next year. However, there are reasons to be cautious about
using this simple calculation to measure the impact of East Asia on District
growth.
Effects of East Asia on Growth in the U.S. and the District. Estimates
of the impact of East Asia on U.S. growth over the next year assume that
developments in East Asia will affect economies in the U.S. through two
channels. First, reductions in the value of East Asian currencies will
increase the relative prices of U.S. produced goods and services, slowing
U.S. exports to East Asia and the world and accelerating East Asian imports
to the U.S. Second, underlying economic weakness in many East Asian nations
will slow economic growth there, further depressing demand for U.S. exports.
Such changes in the terms and patterns of trade as well as significant
weakening among some of our primary East Asian trade partners worsen the
U.S. trade balance, ultimately damping growth.
Ideally, estimates of the impact of recent developments in East Asia
on District growth would account for import and export effects through
both of these channels. However, data constraints relating to imports
make a complete analysis at the state and regional level impossible. Therefore,
a number of analysts have relied on an examination of District export
exposure to East Asia to provide a basis for judging the relative impact
of the East Asian currency crisis on District states. Under the assumption
that the effects of import substitution are similar across states in the
U.S., the export component of the problem can provide a basis for judging
the relative impact of the East Asia crisis on District states.
Relative Exposure of Twelfth District Exports to East Asia. The United
States exports about 11.5 percent of GDP to the world. Approximately 30
percent of these exports of goods and services, or about 3.4 percent of
U.S. GDP, is shipped to destinations in East Asia.1 However, this estimate for the U.S. masks important
differences in export ties to East Asia by region. The figure displays
merchandise and service exports to the world and to countries in East
Asia as a share of GDP for the Twelfth District and the U.S. Merchandise
exports include manufactured and non-manufactured commodities and reflect
Department of Commerce data on origin-of-movement of goods.2
Service exports include business and personal services, passenger fares,
royalties and licensing fees, and freight and port services,3 and were estimated for the District.
The estimates shown in the figure indicate that the Twelfth District
exports a larger fraction of its GDP than the U.S. The U.S. exports about
11.5 percent of GDP compared to about 14 percent exported by District
states. Moreover, when exports to East Asia are compared, the District's
dependence relative to the U.S. grows. The average District state ships
more than 50 percent of its total exports to destinations in East Asia,
compared to about 30 percent exported to East Asia by the average U.S.
state. In GDP terms (as shown in the figure), District states export approximately
7 percent of GDP to East Asia, or more than twice the 3.3 percent of GDP
exported to East Asia by the average U.S. state.
Thus, other things equal across the U.S. and the District, an equivalent
percent decline in East Asian exports in the District and the U.S. might
be expected to reduce District growth by about twice as much as it reduces
U.S. growth.
However, a number of factors suggest caution is warranted when using
this estimate. First, such a calculation assumes that any decline in East
Asian demand for exports affects the U.S. and the District equivalently,
or more simply, that the product mixes of District and U.S. exports are
similar. Second, it assumes that the total value of exports shipped from
the District is created in the District and that District industries are
not affected by reductions in exports from other areas of the U.S. Finally,
it assumes that a given export decline produces the same employment effect
in the District as it does in the U.S. The remainder of this analysis
reviews why these assumptions may not hold.
Factors Complicating the Measurement of District Growth Effects from
District Export Exposure. Differences in the composition of exports between
the U.S. and the District (detailed in the December issue of WED) suggest that the District-U.S.
export exposure ratio may not accurately characterize the vulnerability
of the Twelfth District relative to the U.S. In particular, relative to
the U.S., District exports to East Asia are more concentrated in high-tech
products, aircraft production, and business services and less concentrated
in agricultural and resource related products. Anecdotal reports and preliminary
data from coastal ports indicate that the composition of District exports,
to date, has worked to damp the relative impact of developments in East
Asia.
In the case of high-tech manufacturers in the District, who provide
nearly 25 percent of District exports to East Asia, reports indicate only
slight declines in export demand since the East Asian currency crisis
began. In the transportation sector, Boeing currently has a backlog of
orders and is running operations at full capacity. Thus, outstanding orders
from customers in the U.S. and other countries could substitute for any
slowdown in demand from East Asia.
Overall, only about 15 percent of District exports to East Asia are
of products that have experienced the most significant slowdowns in demand,
such as agricultural commodities, processed food items, and lumber and
wood products.
Another concern with using the District's relative East Asian export
exposure to characterize the impact on District growth is that the total
value of exports shipped from the District may not be added in the District.
The total value of exports represents a collection of value-added components,
many of which are produced outside of the District. Thus, the effect of
a dollar reduction in demand for District exports may not be borne entirely
by the District. Rather, it will be distributed throughout the U.S. in
proportion to the value-added inputs to the final good. However, on the
other side of the coin, District manufacturers of intermediate and capital
goods used in non-District exports to East Asia also will be affected.
The net effect of these two factors must be considered in any calculation
of the effect of East Asian developments on District growth.
Similarly, use of the District's East Asian export exposure ratio to
estimate the impact on District growth relative to the U.S. assumes that
a given export decline produces an equivalent employment decline in the
U.S. and the District. This may or may not be true. For example, in addition
to the issues cited above, if the District specializes in products with
high capital-labor ratios, such as aircraft, the direct employment effects
of export declines may be much smaller than the export exposure calculation
would suggest. On the other hand, although the direct effects would be
smaller, the multiplier effects of high productivity workers may be larger,
magnifying the export exposure calculation. Ultimately, the size of the
employment effect of a decline in District exports is an empirical question;
one that is important to characterizing East Asia's effect on District
growth.
Conclusions. In summary, although Twelfth District states are about
twice as dependent on exports to East Asia as the U.S., this may not imply
that the East Asian impact on District growth will be twice as large.
Other factors, including the District's product mix, value-added component
of exports, and employment to export ratio relative to the U.S. could
serve to mitigate or magnify the District's vulnerability to East Asia
as measured by export exposure ratios.
Payroll employment in Alaska remained flat in recent
months, as job gains in November were just sufficient to offset job losses
in September and October. In a reversal of patterns observed during the
first half of 1997, employment growth in manufacturing and mining made
up for declines in construction, retail and wholesale trade, and services.
Despite the sluggish finish, annualized employment growth for 1997 (through
November) was 1.4 percent, about one percentage point faster than experienced
in 1995 and 1996.
Alaska's construction sector, which was a net job loser in 1997, is
scheduled to get a number of boosts in 1998. State and local government
projects include: state highway repair and reconstruction totaling $80
million, various local road projects totaling $40 million, and a number
of school construction projects totaling $1 billion. In the private sector,
new hotels are under construction in Fairbanks and Anchorage, as are a
number of new office complexes for companies in the revitalized oil industry.
Economic forecasters in the state estimate that these projects will create
1,000 new construction jobs over the next two years.
Economic growth in Oregon remained solid in recent
months. Nonfarm payroll employment expanded by 2.4 percent at an annual
rate during the three months ending in November 1997, led by strong gains
in manufacturing and retail and wholesale trade. Manufacturing employment
increased by 7 percent at an annual rate between September and November,
due to large job gains in high-tech manufacturing, metal products, and
transportation equipment. Following a flat third quarter, wholesale trade
employment surged in recent months, growing by nearly 9 percent at an
annual rate during October and November, with gains in both the durable
and non-durable sectors. Retail trade employment also increased during
the period, owing to job gains at general merchandise stores, building
materials and garden supply outlets, and home furnishing and equipment
stores.
During the 12 months ending in July 1997, Oregon's population grew more
slowly than the nation's for the first time in 11 years, according to
the Center for Population Research at Portland State University. The slowdown
of in-migration worked to ease home price appreciation in the state, but
has put additional pressure on already tight labor markets.
The pace of growth in Washington remained strong in
recent months. Payroll employment increased at an annual rate of 3.1 percent
during the three months ending in November, with almost all sectors of
the economy adding jobs. The state unemployment rate fell to just 4.2
percent in November, more than two percentage points lower than a year
earlier. High-tech manufacturers, Boeing, and business and computing services
firms continued to add jobs at double digit rates in recent months, more
than offsetting declines in employment among food processors and lumber
and wood product manufacturers.
Although Boeing and high-tech manufacturers have felt some of the negative
effects of the currency turmoil in East Asia (for example, order delays
and cancellations), there are few signs that developments in East Asia
are tempering employment growth in these sectors. In contrast, port and
employment data indicate that producers of agricultural products, processed
food items, and lumber and wood products are feeling the impact of significant
declines in demand from East Asia.
Arizona's pace of economic growth was rapid toward
the end of 1997. Payroll employment increased at about a 9½ percent
average annual pace in October and November, up substantially from the
roughly 3¾ percent pace in the first nine 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. Much
of the employment strength has been in manufacturing, where payrolls increased
about 5¼ percent relative to a year earlier. Job gains in 1997 were
particularly large at manufacturers of electronic, computer and other
machinery and components; about one-half of Arizonas manufacturing job
gains have been in these industries.
Increasing exports from Arizona manufacturers was one of the favorable
factors in 1997. In the first eleven months of 1997 Arizona exports were
54 percent higher than exports in the comparable period a year earlier.
The states leading foreign destination for exports is Mexico, and the
recovering Mexican economy has been helping Arizona manufacturers.
The California economy grew rapidly in the fourth quarter
of 1997, as payroll employment registered about a 3¼ percent average
annual gain. The strong fourth quarter follows moderate employment growth
in the preceding two quarters, when the job count increased at about a
2¼ percent average annual pace. Over the year as a whole, California
employment increased 2.8 percent, down slightly from the 3 percent gain
of 1996.
California manufacturing employment growth slowed about ½ percentage
point in 1997 to a 2.1 percent pace. Employment in the services and wholesale
and retail trade sectors also slowed last year. The slowdowns in these
sectors were largely offset by pickups in construction and government
employment growth. State and local government budget positions in California
continued to improve last year, facilitating additional hiring. The pickup
in construction employment owed to gains in both nonresidential and residential
building. Nonresidential building awards were particularly strong in the
second half of 1997. Residential building permit issuance also was strong
during the summer and posted even larger gains late in the year.
Hawaii's weak economy deteriorated further in recent
months. Payroll employment fell at about a 3 percent average annual pace
in October and November, after posting only a slight increase earlier
in the year. Retail trade employment decreased sharply in recent months,
and there also were noticeable job losses in the state and local government
sectors. Last year marked the fourth consecutive year in which Hawaii's
payroll employment remained flat or declined. Given the lack of employment
growth, the state unemployment rate has been stuck near 6 percent for
several years.
Much of the initial deterioration in the Hawaiian economy in the early
1990s owed to a decline in tourism activity, as westbound visitor arrivals
from the U.S. and other points of origin fell off sharply. In 1995 and
1996 growth in eastbound arrivals, particularly from Japan, offset the
weakness in westbound visitor traffic. However, data for 1997 confirm
a decline in eastbound visitor traffic to the state and show reductions
in both length of stay and total dollars spent per eastbound visitor.
Recent disruptions in many East Asian currencies and continued appreciation
of the dollar against the yen point to a continuation of this trend.
Idaho's economy posted moderate growth in recent months,
although growth was highly uneven across sectors. Nonfarm payroll employment
expanded by 2.6 percent at an annual rate during the three months ending
in November 1997, led by very strong growth in the state's durable goods
manufacturing sector. Most of the added jobs were in the industrial machinery
and electronics sector around Boise, which surged during most of 1997,
following a slow 1996. The nondurable manufacturing sector also contributed,
creating 2,100 new jobs in the food processing sector. In contrast, the
state's logging and lumber industry shrank steadily throughout the year,
as did the retail and wholesale trade sectors. The construction job tally
fell during the three months ending in November, dropping by 7 percent
at an annual rate. However, construction industry employment has grown
by over 8 percent in 1997.
Nevada's torrid expansion has slowed somewhat, but the state continues
to lead the nation in its rate of yearly employment growth. Nonfarm payroll
employment has grown 4.8 percent over the last year, and growth accelerated
to an annual rate of 6.6 percent during the three months ending in November.
Nearly all sectors experienced solid growth in 1997 (through November),
although most growth rates remain below those of previous years. Construction
continued to post the most rapid employment gains, spurred by total construction
awards that have been higher in 1997 than in 1996. However, construction
employment growth slowed in the third quarter and for the year remains
well below rates from the preceding several years.
After remaining above 5 percent during 1994-96, Nevada's unemployment
rate dropped sharply in early 1997, and it fell further in recent months.
The rate in November was 3.9 percent, down from 4.5 percent earlier in
the year. In the Las Vegas area, where 2/3 of the state's jobs are located,
1997's sharp decline in the unemployment rate was accompanied by a sharp
decline in labor force growth. This may be due in part to improvement
in the Southern California labor market, which may be attracting reverse
migration from the Las Vegas area.
The Utah economy continued its steady, vigorous expansion.
Nonfarm payroll employment expanded by 4.6 percent at an annual rate during
the four months ending in November, approximately equal to the 12-month
expansion of 4.4 percent. The services sector has been the largest job
creator, expanding by 6 percent in 1997 (through November) and accounting
for nearly 40% of payroll jobs created during the year. Manufacturing
employment growth slowed in 1997, due to job losses in the state's electronics
sector and a slowdown in most other durable manufacturing sectors. Weakness
in durable goods manufacturing partially was offset by strong growth in
the food processing sector. Growth in local government jobs also was rapid
in 1997, with a surge in recent months. Steady overall growth helped to
keep the state unemployment rate at or below 3 percent for most of the
second half of 1997.
Payroll job expansion in Utah's construction sector accelerated in October
and November, and growth for the year was substantially stronger than
in 1996. Residential construction permits in 1997 were well above their
1996 levels, and housing prices remain high. Furthermore, although new
nonresidential construction permits declined in 1997, long-term highway
and other state infrastructure projects are keeping construction companies
busy.
1East Asia includes Malaysia,
Thailand, Indonesia, the Phillipines, South Korea, Taiwan, Singapore,
Hong Kong, Japan, and China.
2 State export estimates are from MISER,
series 1, 1994 and 1995. State GDP estimates come from the Bureau of Economic
Analysis and reflect revised estimates of 1994 GDP. Export shares of GDP
are computed by scaling the 1994 total exports to GDP ratio by the 1995
country composition of exports by state.
3 The value of District service exports
was estimated based on the assumption that the relationship of service
exports to merchandise exports for District states is similar to that
for the U.S. Two relevant observations for the U.S. regarding service
exports are: 1) service exports are half the value of merchandise exports,
and 2) the most common services exported are business and consulting services,
which include engineering and management services, packaged software products,
and telecommunications support. An additional observation at the District
level is that business and consulting services represent a larger fraction
of the economy in western states than in the U.S. Based on this information,
District service exports were estimated by multiplying the value of merchandise
exports by a weighted merchandise to service export ratio, where the weighted
ratio equals ½ times the ratio of the value of business services
in District states to the value of business services in the average state
in the U.S.
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