Western Economic Developments
May 1998
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
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- District employment growth was strong in the first quarter, led
by particularly fast growth in Arizona and Utah.
- Employment growth in California was solid in the first quarter,
but slower than in 1997. Oregon also experienced slower job growth in
the first part of this year.
- The negative effects of reduced foreign demand and increased import
competition recently have become more evident for District manufacturers,
but activity in other sectors such as real estate and construction continued
to grow quickly.
- The adverse effects of foreign trade developments have led some
District manufacturers of high-tech electronic goods to scale back employment.
However, domestic competitive factors also explain some of the weakness
at particular firms and segments of the market, and the outlook for
the high-tech sector as a whole remains positive.
Economic activity in the District remained at a very high level throughout
the first quarter of 1998. Unemployment rates were low and steady in most
District states recently; the overall District unemployment rate was 5.4
percent in March, unchanged from December, and down ½ percentage point
from a year earlier. Last year's rapid 3‹ percent pace of District payroll
job growth exceeded the strong rate of labor force and population growth.
In the first quarter of 1998, District job growth eased back a bit to
a 2‹ percent annual pace, more in line with the region's potential for
expanding without pushing unemployment rates even lower.
Job growth was particularly fast in Arizona and Utah in late 1997 and
early 1998. Employment in Arizona, the fastest-growing state in the nation,
increased 4‹ percent at an annual rate in the first quarter, which matches
the rapid pace of the second half of 1997. Utah also has been adding jobs
at more than a 4 percent pace in recent quarters. Elsewhere in the Intermountain
region, recent slowing of job growth was evident for Nevada and Idaho;
however, the 3½ percent average annual rate of job gains in Nevada during
the first quarter still was fast relative to the pace of growth in most
states in the nation. Washington state employment growth picked up to
a 3È percent rate in 1997 and remained near this elevated rate in early
1998. In contrast, employment growth slowed a bit in Oregon and California
in the first quarter of this year.
The construction and real estate industries continued to be leading sources
of District job growth in early 1998. Also, activity in the wholesale
trade and transportation industries has picked up in most District states,
probably due, in part, to the increasing volume of imports flowing through
District ports. In contrast, District manufacturing employment growth
slowed to a 2È percent annual rate in the first quarter, down about 1½
percentage points relative to the 1997 pace. Employment in various District
durable manufacturing industries levelled off in early 1998, after posting
strong gains in 1997. The aircraft and parts industry stopped adding to
job growth in Washington. In California, both aircraft and motor vehicle
manufacturing employment dropped back in the first quarter; in the state's
high-tech computer and electronics manufacturing industries, a jump in
employment in January was only partly offset by slight declines in February
and March. In Oregon, lumber and wood products employment was weak in
early 1998.
A recent weakening in exports and a pickup in import competition from
foreign manufactured goods likely has contributed to the slowing of District
manufacturing employment growth. In 1997, the dollar value of exports
from District states jumped 11½ percent, boosted by a nearly 25 percent
increase in exports from Washington state, as shipments of Boeing aircraft
to foreign customers picked up. In January and February of this year,
the dollar value of overall District exports remained higher than a year
earlier, by 5½ percent, but this is down from the strong pace of exports
in the second half of 1997. Much of the high January-February level of
nominal exports owes to additional increases in shipmets of aircraft from
Washington state, where overall exports increased about 10 percent relative
to a year earlier. However, nominal export figures for California and
other District states were weak in the first two months of the year. Also,
separate data from various District ports reveal that in the first few
months of 1998 the number of outbound containers of waterborne cargo dropped
noticeably, while the flow of inbound containers of imported goods increased
sharply.
Several prominent computer and electronics high-technology firms--many
with operations in the San Francisco Bay Area of California and in other
District states--recently announced employment cutbacks. For the overall
United States, data through April suggest that a moderate slowdown in
high-technology industry employment growth is taking place. Information
drawn from the corporate reports of individual high-tech companies and
industry sources suggests that the recent slowdown owes to a variety of
factors, including weakening demand from Asian customers. However, much
of the recent negative news relates to particular high-tech computer and
electronics firms which are losing market share as domestic industry competitive
developments unfold. These domestic industry developments appear likely
to lead to some worker displacement at a few firms in the near-term, but
the adverse employment effects of this restructuring are likely to be
short-lived.
Several large California-based high-tech companies announced employment
cutbacks in April. Intel plans to reduce its workforce by 3,000 workers,
National Semiconductor will eliminate 1,400 jobs, and Silicon Graphics,
Inc. (SGI) will downsize 1,000 employees. These recent announcements follow
the loss earlier this year of about 2,000 jobs at other San Francisco
Bay Area firms, including Sybase, Netscape, Apple, and Lam Research.1
Official payroll employment figures for the Bay Area are available only
through March, prior to the recent round of job cutback announcements.
Although payroll counts show strong net job gains in Bay Area high-tech
electronics manufacturing sectors through January, there was virtually
no growth, on balance, in February and March.
Payroll employment figures for the overall U.S. are available through
April and show a net loss of about 6,000 computer and electronic components
(semiconductor) manufacturing jobs last month. Also, the workweek dropped
back noticeably in the corresponding industry groups, as some firms have
cut back on employee hours instead of immediately reducing the number
of jobs.
The recent job cutbacks are concentrated in computer-related high-tech
industries, as distinguished from the communication-related industries
which have been benefitting from the rapid growth of the networking infrastructure.
Intel and National Semiconductor make semiconductors, particularly the
microprocessors which provide the main computing power in workstations
and servers. Lam Reseach is a semiconductor equipment maker. Sybase and
Netscape develop software, and Apple and SGI are manufacturers of personal
and business computer hardware systems.
Beyond the firm-specific announcements of employment cutbacks, broader
indicators of high-tech industry profitability and revenue growth show
some signs of moderation in the first quarter. Major firms in the high-tech
sector have been growing very fast for the past several years and expanding
employment to try to achieve expected high rates of future revenue growth.
To the extent that these hiring decisions have been predicated on expectations
of faster-than-realized sales growth, moderation of growth can lead to
employment cutbacks even if actual revenues continue to grow at a solid
pace.
To shed some light on these dynamics, table 1 presents information on
revenues from the corporate earnings reports of 57 major computer and
electronics firms.2 Relative to the same
period a year earlier, first-quarter revenues for this group of firms
increased 8.7 percent, a slowdown of about 3½ percentage points relative
to the 1997 pace, and well below the 14.6 percent rate of growth in 1996.3
Revenue growth slowed in the first quarter for each of the major segments
of the high-tech sector. However, the semiconductors and equipment group
is notable both for the magnitude of the deceleration and for the fact
that this left first-quarter revenues only 2.2 percent above a year earlier.
The absolute pace of revenue growth also was only in the single-digits
for computer hardware manufacturers, whereas first-quarter revenues of
software and communications equipment firms still were more than 20 percent
above a year earlier.
Within the semiconductor and equipment group, first-quarter revenues
fell at both makers of microprocessors and makers of memory chips. Revenue
growth in the semiconductor equipment subgroup has slowed, and order backlogs
for semiconductor equipment are shrinking. Recent weakness among U.S.
and foreign semiconductor manufacturers has led these potential equipment
purchasers to revise capital spending plans downward.
Within the computer hardware sector, first-quarter developments were
mixed, as strong revenue growth continued at some firms, whereas business
conditions deteriorated noticeably at other firms. On balance, this resulted
in a moderate slowing of revenue growth at computer hardware firms to
a level 6.3 percent above a year earlier.
Major software and communications equipment firms revenue growth has
slowed somewhat from very fast 1996 and 1997 growth rates, but first-quarter
revenues still were more than 20 percent above year-earlier levels. The
slowdown in software revenues primarily was attributable to Microsoft's
declining sales in Japan and Southeast Asia, which partly offset continued
strong growth elsewhere. Among communications equipment manufacturers,
the moderate slowing of revenue growth was broad-based. However, almost
all sizeable individual firms in this industry continued to expand, not
contract.
Other indicators of industry-wide trends show recent weakness in revenues
in the semiconductor sector. Worldwide semiconductor sales fell to about
$10.4 billion in the first-quarter of 1998, down about $1/2 billion from
a year earlier (Chart 1). Most of the decline was in the Japanese market,
where March sales were down 11½ percent relative to a year earlier, but
the Semiconductor Industry Association also reported that sales in the
Americas were down. Separate data from the Census Bureau show that the
dollar value of shipments of electronic components from U.S. manufacturers
declined in the first quarter of this year.
Semiconductor prices have fallen sharply in recent months, likely owing
to both increasingly abundant supply and slowing demand. Chip consumption
apparently has been weaker at those domestic computer manufacturers which
recently slowed production to control inventories. Also, global economic
factors have been applying downward pressure on semiconductor memory chip
prices.4
Intense competition among semiconductor microprocessor manufacturers
also has driven down prices, supporting unit sales, but holding down revenues.
Some microprocessor manufacturers now are able to make low-cost chips
which are Pentium-class, although not at the leading-edge of performance.
Availability of such low-cost microprocessors has been helping sales in
the "sub-$1000" personal computer market.
Overall unit sales of computers have been boosted, but production of
computers appears to have been lower than sales of computers recently.
Some major manufacturers have been attempting to lower inventories of
computers in distribution channels.
The computer manufacturers interest in achieving leaner inventories appears
to stem both from a desire to be cautious in the face of uncertain demand
conditions and from an interest in revamping distribution methods. One
major manufacturer (Dell Computer) has popularized a "direct-to-the-customer"
business model in which it obtains many build-to-order sales directly
from customers over the Internet. Correspondingly, inventories of Dell
models in distribution channels are very lean (inventories comprise only
about seven days worth of sales); the corresponding cost savings have
allowed Dell to be very competitive on price and responsive to changing
customer tastes and to new product introductions.5
Other computer makers are attempting to revamp their manufacturing and
distribution systems along the lines of Dell's or other competitors' successful
business models and recently have been particularly aggressive with discount
pricing and inventory control. Thus, production and sales into indirect
distribution channels have been restrained, but aggressive pricing appears
to have helped maintain computer sales to end customers.
The shift to a leaner inventory environment eventually will be complete.
Some individual computer makers have expressed optimism that inventories
in distribution channels will approach target levels during the second
quarter.
The U.S. computer and semiconductor industries are going through some
major adjustments in early- and mid-1998. Weakened demand from Asian customers
has contributed to a broad-based slowing of growth from a very fast pace
in 1997. However, some of the recent slowdown has been at high-tech firms
that lost market share as domestic industry competitive developments unfolded.
Although ongoing ripple-effects of reduced sales in Asia might cause some
further high-tech sector weakness, the recent period of intense domestic
competitive adjustments has temporarily exaggerated the slowdown.
Joe Mattey
Alaska, Oregon, and Washington
Alaska's economy grew rapidly during the first three
months of 1998. Employment increased at an annual rate of 7.7 percent
in the first quarter as payrolls expanded or remained steady in nearly
every sector of the economy. Three months of sustained employment growth
substantially reduced the state unemployment rate, from about 7 percent
late in 1997 to just 6 percent at the end of the first quarter. The surge
in employment owes primarily to gains in manufacturing, trade, and services
which together account for 4,600 of the 5,000 jobs added during the three
months ending in March.
Although fears that developments in East Asia would derail Alaska's economic
expansion have not been realized, some industries have experienced significant
declines in demand. Loss of sales to East Asia have prompted many of Alaska's
lumber and wood products manufacturers to slow production and shed workers;
employment in the sector declined by more than 20 percent at an annual
rate during the first quarter. Some seafood processors report difficulty
booking in advance East Asian sales of the coming years crab, herring,
and salmon harvests, which might affect employment in that industry.
Economic growth in Oregon slowed during the first quarter
of 1998 to an annual rate of 1.6 percent, substantially off the 3.4 percent
pace of growth in 1997. The first quarter slowdown was broad-based, affecting
all major industrial sectors with the exception of government. The construction,
manufacturing, and trade sectors experienced the most significant slowdowns.
Employment declined at special trade construction firms, computer and
industrial machinery manufacturers, and retail trade establishments over
the period, after growing at a steady pace during most of 1997. Despite
slower job growth, Oregon's labor market tightened further; the state's
unemployment rate fell in February and remained below 5 percent in March.
Reduced exports to Asia have been holding down port traffic in Portland.
Shipments of outbound cargo have fallen significantly relative to a year
earlier. In addition, Hanjin Shipping Co., a South Korean Shipper, cancelled
a Portland-based weekly express service to China 11 days after launching
it, citing the economic downturn in Asia as the reason.
After slowing slightly during the latter half of 1997, the Washington
economy returned to a fast 3½ percent pace of growth during the first
quarter of 1998. The pickup in job growth pushed the state unemployment
rate to 4.1 percent, a decline of 0.3 percentage point since the end of
last year. The most rapid gains were in construction, transportation,
trade, and services, which collectively added over 22,000 jobs during
the three months ending in March. In contrast, employment growth in manufacturing
slowed considerably in the first quarter, primarily due to payroll reductions
in the aircraft and parts industry. Other manufacturing industries such
as paper, lumber and wood products, and food processing also shed jobs
in the first quarter.
The Port of Seattle has experienced some slowdown in outbound traffic
due to developments in East Asia, and inbound cargo volumes are up substantially.
The recent exchange rate swings in the terms of trade to favor foreign-produced
goods appear to be boosting imports from Asia. Also, last year's rail
problems at Union Pacific lines in the Southwestern U.S. reportedly have
increased importers' concerns about the ability to move cargo eastward
from Southern California ports during peak periods, apparently diverting
some inbound traffic to the Port of Seattle.
Arizona's economy continued to expand rapidly in early
1998. Payroll employment increased at about a 4‹ percent average annual
pace in the first quarter, matching the rapid rate of growth last year.
Sectorally, job growth in the state has been broad-based. Manufacturing
employment growth exceeded a 3½ percent average annual pace in the first
quarter, and even larger gains were posted in construction, trade, and
the finance, insurance and real estate sectors.The rapid employment gains
of 1997 pushed Arizona's unemployment rate down about ½ percentage point
last year to 4È percent, and in the first quarter of 1998 the state unemployment
rate remained below 4½ percent.
Other economic indicators corroborate the strength of the Arizona economy
last year. State personal income increased almost 8 percent, boosted by
rapid population growth and a 5 percent gain in per capita personal income.
Expanding household income helped boost retail sales by more than 6 percent
last year. With favorable interest rates, rapid population growth, and
strong income growth, the market for existing homes was robust in Arizona
last year. Sales of existing homes increased sharply, and home prices
also increased noticeably.
Economic growth remained solid in California in the
first quarter of 1998, although not quite as robust as in 1997. Payroll
employment increased at a 2.3 percent average annual rate in the first
quarter, down from the 3‹ percent pace of last year. Large job gains in
construction and real estate boosted state employment in both 1997 and
early 1998. However, manufacturing job growth slowed from a 3½ percent
rate in 1997 to 1½ percent at an annual rate in the first quarter of 1998.
Employment increases in the business services sector-which includes software
development-also slowed a bit in early 1998.
Rapid increases in real estate and construction activity took place in
both the Los Angeles area and San Francisco Bay Area. In both of these
major metropolitan areas, construction employment increased about 10 percent
at an annual rate in the first quarter. As of March, home sales volumes
for the state as a whole were up about 15 percent relative to a year earlier;
over this twelve month period home prices jumped 13 percent in the Bay
Area and 6 percent in the Los Angeles area. Last year, job growth was
stronger in the Bay Area than in the Los Angeles area, and this difference
also has been reflected in housing prices. However, the slowdown in job
growth in early 1998 was concentrated in the Bay Area, where manufacturing
payrolls jumped 4 percent in 1997 but only advanced at a 1 percent annual
rate in the first quarter of 1998.
Hawaii's economy continued to contract in early 1998.
Payroll employment fell about 1 percent at an annual rate in the first
quarter, after edging down in 1997. So far this year there has been a
large drop in employment in the retail and wholesale trade sectors, and
financial institutions also have reduced payrolls noticeably. At 5.8 percent
in March, Hawaii's unemployment rate remains high, although the relative
lack of jobs in the state also is leading to a contraction of the labor
force.
Tourism-related retail sales and hotel business are a major factor for
Hawaii's economy, and the recent news on this front is mixed. Data through
February show the counts of visitor arrivals from Asia and related visitor
spending down significantly. However, westbound visitor arrivals have
been picking up, providing a partial offset.
Idaho's economy continued its gradual deceleration to
a moderate growth path in recent months. Payroll employment grew by 1.6
percent at an annual pace during the first quarter, below the 2.6 percent
pace last year. Despite no net job creation in March, however, state economic
fundamentals remain sound. Employment growth has been rapid among makers
of electronic and industrial equipment around Boise. Outside of Boise,
the state's logging and lumber industry posted solid gains during the
last 6 months, after shrinking during the past several years. Moreover,
construction employment in the state surged during the first quarter,
as both residential and nonresidential awards increased substantially.
The key source of moderation in early 1998 was in the services sector.
Following sharp job losses in January, employment declined further in
February and was flat in March. The January losses were due to unusually
large post-holiday rollbacks for "temp" workers in the business services
sector and similar declines for employees at hotels and lodging places.
The engineering services sector shrank by 500 jobs due to losses at a
single large firm. The retail trade sector also suffered unusually large
end-of-season job losses in January. Although in most of the above-mentioned
sectors the January losses slowed or were offset somewhat in February
and March, each of these sectors shrank substantially on net during the
first quarter.
Nevada's economic expansion slowed a bit more in the
first quarter, although the state still ranks fourth nationally in the
rate of job growth over the past twelve months. The nonfarm payroll job
count grew 3.5 percent at an annual pace during the first quarter, down
from 3.9 percent during the second half of 1997. Job creation remained
particularly rapid in the construction and manufacturing sectors during
the first quarter, but employment in the hotel and amusement sector was
virtually flat. The state unemployment rate dropped by 1½ percentage points
between the third quarter of 1996 and the end of 1997 but subsequently
increased by ‹ percentage point to about 4½ percent currently.
News regarding the state's key tourism sector is mixed. Tourist revenues
in the Las Vegas area as a whole remained solid overall, but gaming revenues
were a bit weak on the Las Vegas Strip itself. Moreover, air passenger
traffic to Las Vegas was down, and this appears to be partly attributable
to reduced visits by East Asian tourists. In contrast, after a weak showing
in 1996 and 1997, Reno's tourist sector benefited recently from an active
ski season and posted a record number of air passenger visits in March.
Utah's rapid economic expansion remains on track. Total
payroll employment grew by 4.2 percent at an annual pace during the first
quarter, slightly above the 1997 pace. Job growth was strongest at trucking
and warehousing facilities and among makers of nondurable goods such as
food. Employment growth also surged at hotels and lodging places during
the first quarter, as hiring was strong during the busy ski season. Elsewhere,
growth in durable manufacturing employment slowed somewhat in the first
quarter, owing to job losses in primary metals and slower growth in the
transportation equipment sector.
Nonresidential construction awards increased substantially in early 1998,
as major highway, light rail, and other infrastructure projects moved
ahead. After declining as a share of personal income prior to 1996, state
government transportation expenditures have increased substantially in
recent years. Also, the state has increased expenditures for correctional
facilities.
1 Intel and National Semiconductor have not
yet announced whether the bulk of their job cutbacks will be in the Bay
Area. Otherwise, the employment reductions mentioned in this paragraph
are concentrated in the Bay Area.
2 The 57 high-tech firms were selected from
a broader group of companies tracked on Silicon Investor, an online source
of information about high-technology companies. The analysis is restricted
to companies with a recent stock market valuation in excess of $2 billion.
Also, firms which did not report revenues for the full period from 1995
to the first quarter of 1998 were excluded, as were firms classified by
Silicon Investor as members of a "Miscellaneous" group. Last, four telephone
service providers (AT&T, SBC, Worldcom and Sprint) were removed from
the "Communications" group to define a "Communications Equipment" group
which better isolates developments in that segment of the industry.
3 On a sequential basis (non-seasonally-adjusted
change relative to the previous quarter), revenues of the total group
of high-tech firms fell about 12-1/2 percent in the first-quarter of 1998.
Some, but not all, of this sequential decline likely owes to normal seasonal
patterns.
4 Some domestic manufacturers of semiconductor
memory chips are complaining about a flood of imports of low-priced memory
chips. This is the segment of the market with the largest glut of worldwide
capacity, and much of this capacity is located in countries with recent
exchange rate devaluations vis-a-vis the U.S. dollar.
5 Computer manufacturer Gateway 2000 also
uses an alternative distribution method that is responsive to changing
market conditions and keeps inventories lean.
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