Western Economic Developments
April 1998
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- Led by the surging California economy, the 12th District economy
expanded at a vigorous pace in 1997. District growth during the first
two months of 1998 was solid but below the fourth quarter 1997 pace.
- Recently revised payroll employment data show that all areas
of California picked up substantially between 1996 and 1997, as the
rate of nonfarm job growth accelerated from 2.7 to 3.8 percent.
- The construction and manufacturing sectors have provided a key
impetus to the District’s expansion. For the District as a whole,
both sectors show little or no signs of slowing; however, real estate
markets and construction activity are cooling in some states as they
heat up further in California.
- Data for banks headquartered in the 12th District show strong
earnings and healthy asset quality in the fourth quarter of 1997. In
addition, data from a sample of large California-based banks show solid
loan growth for the same period.
The 12th District economy expanded at a vigorous pace during 1997 and
appears poised for continued solid growth in 1998. District nonagricultural
payroll employment expanded by 3.7 percent in 1997, compared to 3.3 percent
in 1996. Data for the first two months of 1998 suggest some moderation
of growth, although this may be a temporary lull following the strong
fourth quarter.
The California economy bears primary responsibility for the District's
pick up in 1997. Following its acceleration to a solid growth path during
1995-96, California's economic expansion gained further momentum last
year. Recently revised payroll employment figures show growth of 3.8 percent
in 1997, compared to 2.7 percent in 1996. Although growth during the first
two months of 1998 was at about half the 1997 pace, the outlook for the
state economy remains upbeat.
Employment growth elsewhere in the District during 1997 and early 1998
was slower than in previous years, but it remains robust in most areas,
with Hawaii being the main exception.
Furthermore, the District unemployment rate fell by just over a percentage
point since the end of 1996. Tightening labor markets in California are
the primary source of this decline, although the unemployment rate remained
stable or fell in several other states that are competing with the surging
California economy for scarce workers. The District unemployment rate
stood at 5.2 percent as of February. Although this is above the national
rate of 4.6 percent, labor markets are tight in most areas of the District.
The goods-producing industries of manufacturing and construction continue
to provide a key impetus to the District’s ongoing expansion. District
manufacturing employment grew 3.6 percent in 1997. This sector shows little
or no signs of slowing in late 1997 and early 1998, as sales of
many durable manufactured products continue at a rapid pace. Among major
industrial sectors in the District, the construction industry experienced
the most rapid job creation in 1997, growing by nearly 8 percent; a substantial
acceleration in California more than offset slowed growth in other states
between 1996 and 1997. Correspondingly, as measured by sales price and
volume data, real estate markets have heated up in California but have
cooled in other fast growth states.
Finally, it appears that the net effect of the East Asian economic turmoil
on the District economy remains small for now. Anecdotal evidence suggests
that some exporters of agricultural crops, metal products, lumber, pulp
and paper, processed food, athletic equipment, and a few high-tech products
have felt the impact of reduced East Asian demand. Although the effect
on net employment growth in these sectors appears to be limited thus far,
the effects may grow as 1998 progresses.
Economic Growth in California
Recently revised payroll employment statistics show that California's
economic expansion gained substantial additional momentum in 1997. This
updated view is primarily attributable to an upward adjustment to payroll
job estimates in 1997, although it is partly due to a downward adjustment
for 1996. All areas of the state picked up substantially in 1997, although
Los Angeles County still expanded at a slower rate than most.
Industrial Job Growth Estimates
Early each year the sample-based monthly Current Employment Survey is
benchmarked to relatively comprehensive employment counts available from
unemployment insurance tax records for the previous year. This year, the
revised figures produced a large upward adjustment to payroll employment
growth in 1997. In particular, the benchmark revision for 1997 shows that
total nonagricultural payroll employment growth for California was 3.8
percent in 1997 and 2.7 percent in 1996. These figures reflect an upward
adjustment of 1.0 percentage points for 1997 growth and a downward adjustment
of 0.3 percentage points for 1996 growth.
Table 1 shows the 1996 and 1997 revised growth rates, along with the
percentage revision due to the 1997 benchmark, for major industrial sectors
in California. Growth in most major sectors accelerated between 1996 and
1997. Furthermore, the benchmark revisions raised the 1997 growth estimates
for all sectors except government.
The most pronounced acceleration between 1996 and 1997 occurred in the
construction industry; revised figures show a tripling of the growth rate.
This is consistent with the pronounced increase in construction activity
in the state in 1997. The revised figures also show a substantial acceleration
in service job growth between 1996 and 1997. However, underlying this
is a downward revision for the 1997 employment levels and an even larger
downward revision for the 1996 levels.
Manufacturing employment growth picked up slightly in 1997. This improvement
is primarily due to the non-durables sector, for which the growth rate
more than doubled between 1996 and 1997. Growth in the durable manufacturing
sector remained rapid in 1997, as the industrial machinery and electronics
sectors (which include many high-tech industries) continued their impressive
performance. However, traditional industries such as primary and fabricated
metals, furniture, and stone, clay, and glass also grew rapidly in 1997,
with much of the growth occurring in Southern California.
Although data based on the previous benchmark showed weak growth in
retail trade employment, the revised figures show a slight acceleration,
from 2.1 percent growth in 1996 to 2.9 percent growth in 1997. This pattern
is only partially consistent with the pattern in California taxable sales.
Data available through the third quarter of 1997 show that nominal taxable
sales growth in 1997 was running about a point below that in 1996 (5.9
vs. 6.8 percent). Since these figures are in nominal terms, the reduction
in national consumer price inflation between 1996 and 1997 may imply that
real taxable sales growth was very similar in the two years.
Revised figures also show that employment growth in the Finance, Insurance,
and Real Estate sector (F.I.R.E.) picked up a bit in 1997. Ongoing employment
declines among depository institutions restrained overall growth in this
sector. Other parts of the industry are adding jobs, however. For example,
employment at security and commodity brokerage firms increased by nearly
13 percent in 1997. Similarly, job growth in the real estate sector accelerated
substantially during the past several years, with year-over-year growth
of 5.3 percent as of February. This is consistent with sharply increased
sales activity in the real estate sector.
Regional Growth
Table 2 shows 1996 and 1997 employment growth, and the percentage revisions
due to the 1997 benchmark, for broad regions and selected MSAs in the
state. Although Northern California remained the state’s growth leader,
the Southern California economy expanded at a brisk pace. In fact, the
most pronounced acceleration in 1997 occurred in the Los Angeles area
MSAs of Orange and Riverside-San Bernardino, and in San Diego. Growth
in each of these counties has been broad-based, with particularly rapid
growth in the construction and durable manufacturing sectors.
In contrast, despite the acceleration throughout Southern California,
growth in the Los Angeles-Long Beach MSA remains slower than in most other
areas of the state. Conditions were ripe for the area to catch up in 1997.
Following job losses during 1996, the construction sector there turned
around and has posted solid growth since then (6.1 percent year-over-year
growth as of January). Durable manufacturing employment grew at an exceptionally
strong pace of 3.7 percent during 1997, with particular strength in traditional
industries such as metals. The apparel industry also expanded at a rapid
pace in Los Angeles-Long Beach (around 7 percent during 1997), and growth
in most service industries was good. However, a key source of job and
economic growth in Los Angeles—motion picture production—weakened
substantially in 1997, with job growth falling under 1 percent for the
year. Job growth in a number of population-dependent services—such
as retail trade, personal services, and health services—also remained
slow in Los Angeles-Long Beach during 1997.
Relatively slow growth in population-dependent sectors suggests that
Los Angeles County is suffering from weak demographics. Although population
growth picked up substantially in most areas of the state in 1997, as
the rate of net out-migration to other states slowed, its pace in Los
Angeles County continues to lag that in the rest of the state. Due to
this slow population growth, residential construction and sales activity
also has been slow in Los Angeles County. Chart 1 shows yearly growth
in total residential housing permits for Los Angeles and the state as
a whole. As of 1997, residential permits for the state as a whole had
returned to nearly 45 percent of their pre-recession peak. In contrast,
residential permits in Los Angeles County were down around 20 percent
of their pre-recession peak. Nonetheless, residential building activity
in Los Angeles County picked up during 1997. This pick up should continue
and is likely to accelerate further in 1998, since recent home sales data
show substantial year-over-year increases in sales volume and prices in
most parts of Los Angeles.
Overall, despite some negatives, the Los Angeles-Long Beach economy
has improved tremendously since the start of 1997. The seasonally adjusted
unemployment rate fell 1.3 percentage points during the year, to 6.4 percent,
and it fell to 6.2 percent in January. Furthermore, a large job surge
in January raised year-over-year employment growth in Los Angeles-Long
Beach to 3.1 percent. This surge contrasts with limited growth for the
state as a whole in January, and it may foreshadow additional acceleration
in Los Angeles-Long Beach during 1998.
Conclusions
Recently revised payroll employment statistics show that California’s
economic expansion gained substantial additional momentum in 1997. This
updated view is primarily attributable to an upward adjustment to payroll
job estimates in 1997, although it is partly due to a downward adjustment
for 1996. All areas of the state picked up substantially in 1997, although
Los Angeles County still expanded at a slower rate than most. Conclusions
Recently revised payroll employment figures paint a slightly different
portrait of California’s economic expansion than had earlier employment
estimates. Although the California recovery accelerated in 1995 and 1996,
the revised figures show an even larger acceleration in 1997. One caveat
is that some of the acceleration is attributable to a downward adjustment
applied to 1996 employment; a similar adjustment to the 1997 data in next
year’s benchmark may change the characterization of growth for the
year. Nonetheless, for now it appears that the 1997 pick up occurred in
all areas of the state, including Los Angeles-Long Beach, although growth
there remained slower than in most other parts of the state.
District bank earnings were strong in the fourth quarter of 1997, with
banks headquartered in the District reporting average return on assets
(ROA) of 1.5 percent and return on equity (ROE) of 14.7 percent. Both
of these figures are up more than a percentage point over fourth quarter
1996. ROA was slightly higher than average ROA for the nation as a whole,
while ROE equalled the national average. Average capital ratios for banks
of all sizes across the District remained strong in the fourth quarter.
Banks headquartered in California also showed slightly higher average
ROA than nationally, but ROE was slightly lower. For small banks in California,
fourth-quarter profitability was solid, with average ROA at 1.2 percent
and average ROE at 11.8 percent. This was a notable improvement from fourth
quarter 1996, but in terms of ROE still lagged overall bank performance
nationally. Profitability at small banks in Southern California was comparable
to that for small banks in the state as a whole, while small banks in
Northern California performed better, and those in the Central Valley
performed worse.
Asset quality across the District was healthy at the end of 1997, as
the average past-due loan ratio continued to fall. The District’s
average past-due credit card loan ratio also declined, but as in the rest
of the nation was still high at the end of 1997.
Data from a sample of large California-based banks shows solid loan
growth in the fourth quarter, backed by very strong gains in business
loans outstanding. In contrast, consumer loans declined in the fourth
quarter, continuing the recent trend. Commercial real estate lending remained
strong in the final quarter of the year.
Economic growth in Alaska has been uneven, although
somewhat weak overall. Nonfarm payroll employment surged in January and
February, following net losses during the second half of 1997. The recent
surge primarily was due to sudden sharp gains in the seafood processing,
construction, and retail sectors. For 1997 as a whole, payroll employment
grew by 1.4 percent, as healthy growth in transportation, communications,
and services jobs was offset by losses in the manufacturing, construction,
and government sectors.
Within the state, Fairbanks, Anchorage, and the Kenai Peninsula all
posted employment growth well above the state average during 1997. In
contrast, growth in the southeast part of Alaska has been hampered by
employment losses in the timber, fishing, and government sectors. A poor
1997 salmon harvest resulted in many areas of Southeast Alaska being declared
economic disaster areas; Federal Disaster Aid of $9.3 million is expected
to help the worst hit areas in the next couple of months. On a positive
note, the outlook for Alaska’s oil industry appears good despite
weak oil prices; for example, Phillips Petroleum Co. recently announced
plans to develop a large new oil prospect.
The Oregon economy continued to expand at a solid pace
in 1997, growing more rapidly toward the end of the year than in the beginning.
Despite the fourth quarter surge, however, state employment growth in
1997 remained below the rapid pace of previous years. Nonfarm payroll
employment increased by 3.4 percent in 1997, led by strong gains in construction,
high-tech manufacturing, retail trade, and business, consulting, and personal
services. Although most sectors exhibited signs of slowing compared to
their 1996 rates, both the manufacturing and services sectors grew more
rapidly in 1997 than in 1996.
Despite fears arising from the East Asian economic turmoil, Oregon’s
high-tech manufacturing sector expanded further in recent months. Intel
Corp., Oregon’s largest industrial employer, recently began construction
of a $1.5 billion plant in Hillsboro. This plant will develop manufacturing
technology for the company’s complex logic chips, and it is expected
to employ up to 2,000 people. In contrast, Nike recently announced plans
to eliminate about 550 permanent and temporary jobs in Oregon, as part
of a broader effort to reduce costs and weather the decline in sales of
its athletic equipment to East Asia.
Washington's economy expanded rapidly in 1997, although
more slowly than in 1996. Nonfarm payroll employment grew by 3.3 percent
in 1997, with approximately the same pace maintained in late 1997 and
early 1998. Continued solid growth has held the state unemployment rate
steady at 4.5 percent. The aircraft manufacturing and business services
sectors continue to be the primary engines behind Washington’s expansion.
However, population-based industries such as residential construction,
retail trade, finance, insurance, and real estate, and personal services
also posted healthy growth in 1997.
The state's economic expansion has been uneven across regions, with
growth in Western Washington far outstripping that in Eastern Washington
last year. The rapid pace of growth in Seattle continued to put pressure
on area consumer prices, particularly for housing. Consumer prices there
rose by 2.9 percent in 1997, with almost half of that figure attributable
to increased housing costs. The growth gap is likely to increase further
in 1998 if the financial turmoil in East Asia continues to affect the
agricultural, lumber, and wood processing industries in Eastern Washington
more than the high-tech and transportation sectors in Western Washington.
Employment growth in Arizona was rapid in 1997 and
continued strong in the first two months of 1998. Last year, the state
added jobs at a 4-1/2 percent pace, only a bit below the torrid pace of
job growth during 1994 to 1996. With four full years of rapid job growth,
Arizona’s unemployment rate has dropped sharply, from about 6-3/4
percent in mid-1994 to 3-3/4 percent at the beginning of 1998. The expansion
has been broad-based, with manufacturing, wholesale trade, and business
services payrolls posting particularly rapid gains. In contrast, government
employment has grown more slowly than employment in most other sectors,
owing largely to weakness in federal government employment in the state.
Unlike some other fast growth states in the District, the pace of construction
job growth in Arizona has been below the pace of total job growth during
the past several years. However, construction job growth recently accelerated
a bit, owing to a pickup in both residential and nonresidential building
activity in the state. The resurgence of growth in building activity also
appears to have boosted payrolls in manufacturing industries which supply
construction materials such as stone, clay, and glass products, and lumber.
Economic growth in California was very rapid in 1997,
although it moderated in early 1998. Payroll employment increased 3.8
percent last year, up about 1 percentage point from the 1997 pace. In
January and February of 1998, California job growth averaged 1-3/4 percent.
The 1997 pickup in employment growth was broad-based; employment growth
accelerated in all major sectors and regions last year.
Among California's major regions, job growth last year was fastest in
San Diego and in the San Francisco Bay Area, where payrolls increased
at more than a 4 percent pace. In the Central Valley and in the Los Angeles
area, 1997 employment growth was 3.2 percent. The San Diego and Los Angeles
areas experienced the largest acceleration of job growth last year, more
than 1 percentage point. Most of the pickup in Los Angeles area job growth
was from sectors oriented to the needs of the local population, such as
construction, real estate, retail trade, and local government education.
Los Angeles area manufacturing job growth also picked up, but employment
growth in motion picture production services slowed.
Hawaii has the weakest economy among U.S. states, and
indicators of the near-term outlook are unfavorable. Employment edged
down in 1997 and dropped sharply in early 1998, with all major sectors
shedding jobs over the past twelve months. The decline has been sharpest
in construction, where payrolls have been shrinking at least 5 percent
at an annual rate for more than 5 years now. Employment in the retail
trade sector, which caters to both locals and visitors, has been flat
to down for several years. Among service-producing industries, hotel employment
dropped back in 1997, after picking up slightly in 1996.
No end to the weakness in the construction sector is in sight, as residential
permit issuance and nonresidential contract awards remained weak in late
1997 and early 1998. Furthermore, the state has been losing residents
to other U.S. states; recent Census Bureau figures show an accelerating
net outmigration from Hawaii. This has undermined home prices in the islands,
which have been trending down. However, they still are high relative to
most of the nation: among all major metropolitan areas in the U.S., the
$300,000 median price of a single-family home in Honolulu is surpassed
only by home prices in the San Francisco Bay Area.
Idaho's economy has been expanding at a moderate pace.
Payroll employment grew by 2.6 percent in 1997, which reflects a substantial
upward revision (1.6 percentage points) arising from the annual benchmarking
of employment statistics. The pace of growth slowed somewhat during the
second half of 1997 and first two months of 1998, and year-over-year growth
as of February stood at 2.2 percent. The state’s durable manufacturing
sector grew very rapidly during the entire period, spurred by large gains
at electronics firms located around Boise. However, several key industries
concentrated outside of Boise—logging and lumber, and processed food
(primarily potatoes)—have had only weak employment growth during
much of the past year. Growth was slow to moderate in most other sectors,
but fast enough to keep the state unemployment rate around 5 percent.
Construction employment growth was solid overall during 1997, and mild
winter weather contributed to a surge in January and February of this
year. This surge may be temporary, however. New building permits came
down a bit in 1997 compared to previous years, and the rate of home price
appreciation has decelerated in the state.
Economic growth in Nevada remains very strong, but
the state has fallen from the top spot in the national employment growth
rankings. Payroll employment expanded by 4.3 percent in 1997, with a slowing
growth trend pulling the yearly growth rate down to 3.8 percent as of
February. Growth remains relatively balanced across the major industrial
sectors, with the most rapid gains in several population-dependent services,
such as the financial sector, health services, and state and local government.
The state unemployment rate had been at or just below 4 percent since
the middle of 1997, but two consecutive monthly increases raised it to
4.5 percent in February.
Although the Las Vegas economy continues to boom, areas outside of Las
Vegas have encountered some difficulties. In the Reno and Lake Tahoe areas,
the tourism sector has struggled. Reno area employment in the hotel and
amusement sector shrank on net during 1996 and 1997. Also, the state’s
gold mining industry has been hit hard by low gold prices; 700 jobs have
been eliminated over the past year, nearly 5 percent of industry employment.
Although this sector is small, it provides an important stimulus to the
state’s rural economies.
Utah's economy continues to expand rapidly. Payroll
employment grew by 3.9 percent during the 12 months ending in February,
a slower pace than in previous years but ranking the state third among
all states. Employment growth rates have been well balanced across the
goods-producing and service-producing sectors. Although growth in total
manufacturing jobs was held down a bit by weak growth in the state’s
fabricated metal, machinery, and electronics sectors in 1997, these sectors
expanded at a strong pace during the first two months of 1998. Furthermore,
due to the economy’s overall strength, the state unemployment rate
has remained at or below 3 percent since October 1997.
Among all industrial sectors in Utah, construction was the most vibrant
last year. Employment in this industry grew by nearly 8 percent in 1997,
spurred by a variety of transportation and other infrastructure projects,
many associated with Salt Lake City’s preparations for hosting the
Winter Olympics in 2002. On the residential side, new home building has
continued at a rapid pace lately, although the rate of home price appreciation
has slowed.
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