Western Economic Developments
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- The level of economic activity in the District remained very high
through May, and labor markets remained very tight in most areas.
- Job growth in the District was strong in early 1998, but not as
fast as the torrid 1997 pace.
- Employment growth has slowed this year in California, Oregon,
and Utah and in recent months has edged down in Idaho, Alaska, and Hawaii.
- Rapid growth has continued in Arizona and Nevada, and Washington
state employment growth has picked up since last year.
- Overall consumer price inflation in the West continued to slow
through early 1998, but there has been some pickup in regional wage
inflation and emerging evidence of underlying price pressures in some
The Twelfth District economy continued to expand at a relatively fast
rate through the Spring of 1998, although not as quickly as last year's
very rapid pace. Employment on nonfarm payrolls increased at an average
annual rate of 3 percent in April and May, which is similar to the first-quarter
pace, but down about ‹ percentage point relative to the very rapid growth
rate of 1997. The District unemployment rate is low relative to its long-run
average but no longer is falling noticeably. Last year, job growth far
outstripped the sizeable rate of expansion in the labor force, and the
District unemployment rate fell about 1 percentage point to 5.4 percent
in December. At 5.3 percent in May, the District unemployment rate was
little changed in recent months.
Much of this pattern owes to developments in California, where job growth
jumped to a 3‹ percent pace in 1997 but slowed to slightly less than a
3 percent annualized rate in early 1998. Also, California's unemployment
rate fell more than ‹ percentage point last year but has not fallen much
further so far this year.
Elsewhere, job growth remained particularly strong in recent months in
Arizona, Nevada, and Washington but slowed noticeably in Oregon and Utah.
Payroll job counts fell slightly in Idaho, Alaska, and Hawaii.
In Arizona, employment continued to increase at about a 4½ percent pace
in early 1998, making Arizona the fastest-growing state in the nation
over the twelve months ending in May. Nevada payrolls have increased at
about a 4 percent annual rate so far in 1998, similar to the state's growth
rate in the second half of 1997; Nevada is the third-fastest growing state
in the nation over the twelve months ending in May. For Washington, the
roughly 4 percent rate of job growth so far this year represents about
a 1½ percentage point acceleration relative to the pace in the second
half of 1997.
Sectorally, rapid job growth continued at District construction and services
firms in early 1998. Also, employment in the finance, insurance, and real
estate sector has picked up. However, manufacturing job growth has been
only about 1È percent at an annual rate so far this year, down about 2½
percentage points relative to the 1997 pace.
District banks' profitability remained strong in the first quarter of
1998, with weighted-average return on assets (ROA) and return on equity
(ROE) showing improvement over the first quarter of 1997. Banks headquartered
in the District reported ROA of 1.42 percent, higher than the national
average of 1.27 percent. ROE of District banks was 13.81 percent, slightly
below the national average of 14.80 percent.
Small bank profitability also remained strong, with first-quarter 1998
ROA of 1.38 percent and ROE of 12.61 percent, about equal to the national
averages for small banks. However, in California the profitability of
small banks still lagged the national average.
Asset quality of District banks was about unchanged from last quarter.
The average ratio of past-due and non-accrual loans to total loans stood
at 1.99 percent in the first quarter of 1998. Following the national trend
of declining credit card loan delinquencies, the average ratio of past-due
and non-accrual credit card loans in District banks fell to 4.28 percent
from 4.50 percent a year ago.
Commercial loans outstanding at District banks continued to increase
at a robust rate in the first quarter. In contrast, consumer loans continued
to decline, largely due to the previous tightening of standards for making
credit card loans by District banks.
Separate data from the May 1998 Senior Loan Officer Opinion Survey on
Bank Lending Practices, which covers changes over the previous three months,
indicated some tightening of credit standards and terms for business loans
by selected types of banks. A number of branches and agencies of Japanese
banks in the District reported tightening of C&I lending, citing "a deterioration
in the parent bank's current or expected capital position," "a less favorable
economic outlook" and "reduced tolerance for risk" as "important" to "very
important" reasons. Some District banks reported increased requests for
loans to finance imports or exports from firms located in emerging East
Asian economies affected by the economic problems in the region. However,
reporting banks generally indicated less willingness to provide such loans
since the outbreak of economic difficulties in Asia last year.
Overall consumer price inflation in the West continued to slow through
early 1998, but there has been some pickup in regional wage inflation
and emerging evidence of underlying price pressures. The consumer price
inflation rate in the U.S. West remained within the 2 percent to 3 percent
range in 1993 through 1997, down from a previous peak inflation rate of
5½ percent in 1990. More recently, in early 1998 the measure of overall
inflation for the region slowed a bit further to about a 1‹ percent pace
(chart 1, upper panel). However, other indicators suggest that some of
the good news on overall consumer prices owes to transitory factors which
likely will hold down the growth rate in regional cost-of-living only
temporarily. Also, the District economy is at high levels of utilization
for many resources, and pressures for accelerating inflation are evident
in some markets. Labor and housing markets are particularly tight and
show some signs of a pickup in regional wages and prices.
Regional Consumer Price Developments
Most of the recent slowing in the CPI All-items inflation rate for the
West owed to a drop in the commodities inflation rate to near zero in
early 1998 (chart 1, middle panel)1. Prices
of energy commodities fell sharply in the first four months of 1998, largely
owing to a large drop in the price of crude oil on world markets. Also,
prices of commodities other than food and energy were virtually unchanged
between early 1997 and early 1998, held down by a decline in prices of
There has been no progress in reducing service price inflation recently.
Prices of services continued to increase at about a 3 percent rate in
early 1998, which is similar to the 1997 pace and slightly above the service
price inflation rate for 1996. The slight pickup in service price inflation
over the past year and one-half owes to more rapid increases in housing
shelter costs (chart 2). In contrast, the inflation rate for prices of
services except rent of shelter dropped back a bit in early 1998; most
of this slowing owed to energy and medical services prices.
Among District major metropolitan areas, the most rapid growth in housing
costs was in the San Francisco Bay Area, and shelter costs appear to be
accelerating in other areas. Housing shelter costs in San Francisco jumped
in early 1998 to a level about 7 percent above a year earlier. In the
Los Angeles Area, housing costs accelerated about ‹ percentage point this
year to a 2½ percent rate. The early 1998 CPI estimates for other District
cities are not yet available, but separate data from the National Association
of Realtors on changes in median home prices are positively correlated
with the CPI housing cost measures and show that housing price increases
in major District cities generally were large in the first quarter. Last
year in both Portland and Seattle the CPI housing shelter cost measure
accelerated to about a 4 percent pace (chart 2, lower panel).
The recent pickup in housing costs in District cities reflects a tightening
of housing market conditions. With relatively low interest rates and strong
population, job, and income growth in most of the West, the demand for
owner-occupied housing has increased rapidly. The rate of expansion in
supply has not been able to keep up with the shift out in demand, so prices
have increased rapidly and vacancy rates have fallen. For example, the
Census Bureau estimates that homeowner vacancy rates for the San Francisco
area fell from a peak of 3 percent in 1990 to ½ percent in 1997. Los Angeles
and San Diego homeowner vacancy rates also have fallen noticeably from
peaks above 2½ percent to less than 1½ percent last year.
Markets for rental housing also generally have tightened. According to
the Census Bureau, the San Francisco rental housing vacancy rate fell
to 1‹ percent in 1997, down from a peak of about 6 percent in 1993. Rental
vacancies also fell sharply to a low level (3½ percent) in Seattle last
Other indicators also point to high and increasing levels of resource
utilization in most District cities. For example, local unemployment rates
have fallen below 3 percent in Seattle, below 3½ percent in the San Francisco
Bay Area and San Diego, and below 4 percent in Portland. In the Los Angeles
Area, where rapid economic growth has emerged only recently, the unemployment
rate has fallen more than one percentage point over the past year but
still is above 5½ percent. For the most part, those metropolitan areas
with the highest levels of resource utilization are experiencing the highest
rates of wage and price inflation. Overall consumer prices increased at
about a 3½ percent rate in 1997 in Seattle, Portland, and San Francisco,
and this relatively rapid rate of inflation has been sustained recently
in San Francisco, the only one of these cities with 1998 data available
(table 1). In contrast, consumer prices increased less than 2 percent
last year in Los Angeles, Honolulu, and Anchorage, where real estate and
labor markets have been less tight.
Regional Labor Cost Trends
The rate of increase in labor costs in the West has accelerated in recent
years. The Employer Cost Index (ECI) shows that the total compensation
cost per worker in the private sector in the West increased 3.8 percent
over the four quarters ending in March, 1998, which is a pickup of about
1 percentage point relative to the 1995 pace (chart 3). Almost all of
the acceleration in total compensation has been in the wages and salaries
component, which now is increasing at about a 4 percent pace. Also, reforms
in the health care industry and the workers' compensation insurance system
helped reduce the rate of growth in employee benefits costs in the 1990
to 1995 period, but more recently benefits costs containment has ceased
to be a source of lower labor cost inflation.
Although subregional detail is not available for the ECI, another labor
cost indicator--the average hourly earnings of production workers in selected
industry groups--confirms the ongoing pickup in wage inflation in the
West and suggests that the pickup is broad-based across states in the
District. For those District states with estimates of average hourly earnings
available for workers in construction, manufacturing, and wholesale and
retail trade, wages increased in the first four months of 1998 to a level
3½ percent above a year earlier (chart 4, upper panel). This is a pickup
of about 1È percentage points relative to the 1995 pace. The pickup in
wage inflation since 1995 is particularly evident for the states in the
Pacific Northwest and Intermountain regions of the District (chart 4,
lower panel). In California, wages in construction, manufacturing, and
trade have picked up only slightly to a 2‹ percent current pace.
Summary and Conclusion
The overall rate of consumer price inflation in the West has remained
moderate since 1993 and recently slowed further. However, some of the
good news on overall consumer prices owes to factors, such as declines
in the price of oil and of other imported commodities, which appear unlikely
to yield a permanent dividend of lower inflation. While there is some
slack abroad and pockets of weakness in the domestic manufacturing sector,
the overall District economy is at high levels of utilization for more
localized resources such as labor and real estate. Accordingly, regional
wages have accelerated, and consumer price indices for local services
such as housing shelter have picked up.
Alaska, Oregon, and Washington
The Alaskan economy slowed in April and May, after growing
rapidly during the first quarter. Most of the slowdown was attributable
to employment declines in the manufacturing sector, which shed 2,300 jobs
in the past two months. The mining and government sectors also lost jobs.
In contrast, all other sectors of Alaska's economy expanded. The transportation
and services sectors posted rapid growth, adding 1,600 new jobs in April
and May, bolstering more moderate expansions in construction and retail
trade. Despite the recent pause, Alaska's payroll employment growth for
the year remains strong, at 4.3 percent at an annual rate for the first
five months of 1998.
Alaska's real estate and construction industry has gained strength in
recent months. Low interest rates and growing strength in the international
air cargo sector have helped to strengthen the real estate market in the
Anchorage area. In Fairbanks, increased tourist traffic, both final destination
and stopover traffic, has generated new hotel construction.
Economic growth in Oregon slowed in April and May, falling
to an annual rate of 1.3 percent, off the 2.8 percent pace of growth in
the first quarter. Slower job growth has served to loosen the state's
tight labor market; the state unemployment rate rose to 5.2 percent in
May, 0.3 percentage point higher than in March. While the slowdown in
Oregon has been broad-based, manufacturing and non-residential construction
have shown the most weakness. Much of the decline in growth in these sectors
is attributable to ongoing problems in East Asia, which have damped export
demand for manufactured products and stalled plans for business expansion
and new plant development.
One area of manufacturing that has not slowed is food processing. Despite
weakening product demand from East Asia, a primary export market, Oregon's
food processing sector is adding jobs at double digit rates. In addition,
at a time when many manufacturing businesses are delaying expansion plans,
the food processing sector is adding capacity. For example, Reser's Fine
Food Inc. of Beaverton, a food-processing plant, announced plans to build
a $15 million, 100,000-sq. ft. plant to process refrigerated potatoes
at the Port of Pasco. When it opens in 1999, the plant is expected to
employ about 100 full-time staff.
Washington's economy continued to grow at a strong pace
in recent months. Total nonfarm payroll employment increased at an annualized
rate of nearly 5 percent in April and May. Almost all major sectors added
jobs in these months. The construction, finance, insurance, and real estate,
and services sectors posted the most rapid growth in recent months, adding
jobs at annualized rates of approximately 11.0, 9.5, and 9.0 percent,
Although most sectors of Washington's economy are posting healthy expansions,
the agricultural sector continues to struggle against weakened demand
and low prices associated with developments in global markets. East Asia
continues to exact a toll on apple and pear producers; 1998 apple and
pear exports to Asia are down 40 percent compared with 1997 volumes. Wheat
growers also are experiencing difficult times. Sluggish demand reportedly
has reduced wheat prices below the cost of production for many Washington
farmers, and potential export sanctions against Pakistan and India, Washington's
biggest wheat market, could aggravate the profitability problem.
Arizona's economy continued to expand rapidly in April
and May. Payroll employment increased at about a 4 percent average annual
rate in these two months, following a gain of 4‹ percent at an annual
rate in the first quarter. Among major sectors, the most rapid increases
have been in construction and finance, insurance, and real estate; the
pace of job growth in these sectors has exceeded 6 percent at an annual
rate so far in 1998. Construction-related manufacturing industries also
are doing well; for example, the stone, clay and glass industry added
jobs at about a 6 percent annual pace in the first five months of 1998.
The pickup in construction activity also is evident in other indicators.
Permits for residential construction have moved up noticeably in recent
months. Also, nonresidential construction contract awards were strong
in the first quarter.
In the first five months of 1998, Arizona's unemployment rate stabilized
at a low level of about 4 percent, after falling about 1È percentage points
in 1997. In Phoenix, which has a current unemployment rate of 2.7 percent,
the job market is even tighter than in the remainder of the state.
Strong economic growth continued in California in April
and May. The state's nonfarm payrolls expanded at a 3 percent average
annual rate in those two months, following about a 2½ percent rate of
increase in the first quarter. For the first five months of 1998 as a
whole, California employment has increased at a 2‹ percent annual rate,
down about 1 percentage point relative to the very rapid 1997 pace. Reflecting
the currently strong, but slower growth, the state unemployment rate edged
down from 6 percent in December to 5.8 percent in May, after falling about
0.8 percentage point over the course of 1997. Construction and manufacturing,
two sectors which contributed a lot to 1997 growth, have slowed so far
this year. Construction payrolls jumped about 11 percent last year and
have increased about 6½ percent at an annual rate in the first five months
of 1997. Manufacturing job growth has slipped to about a ‹ percent annual
pace so far this year, following a 3½ percent gain last year.
The slowing of manufacturing job growth is particularly evident in the
San Francisco Bay Area, where large 1997 increases in high-tech computer
and electronics employment were not sustained in early 1998. However,
construction job growth has picked up this year in the Bay Area. Much
of the slowdown in state construction employment job growth in early 1998
was in the Central Valley. Overall employment growth in the Central Valley
slowed to about a 1 percent annual pace in the first few months of the
year, as all major sectors weakened. Also, this agricultural region's
unemployment rate is holding steady at the high level of about 9½ percent.
Hawaii is the only state in the nation which consistently
is losing jobs, and the declines continued through May. Employment fell
about 1È percent at an annual rate in the two months ending in May, following
a similar-sized decline in the first quarter and an even larger drop in
the final quarter of last year. Recent job losses have been particularly
large in the wholesale and retail trade, air transportation, and finance,
insurance, and real estate industries. Hotels also have been cutting back
employment, and manufacturing payrolls have fallen about 4 percent at
an annual rate in the first five months of the year.
Arrivals of visitors to Hawaii in the first four months of this year
were down 0.4 percent relative to a year earlier. In April, arrivals of
visitors from Japan were off 2 percent from a year earlier, whereas arrivals
from other Asia-Pacific countries were down 22 percent.
Idaho's economy paused in recent months but appears
to remain on a moderate growth path. Small net job losses during April
and May pulled total payroll employment growth down to 1.1 percent at
an annual pace thus far in 1998. After a strong January and February,
the manufacturing sector lost jobs during the next three months. Manufacturing
job growth remains positive thus far in 1998, however, spurred in part
by rapid net growth among electronic equipment makers. Job growth also
has been very strong in the finance, insurance, and real estate sectors.
In contrast, the services sector has shrunk this year, with job losses
concentrated among providers of business, health, and engineering and
Despite recent payroll employment losses, the state unemployment rate
fell to 4.7 percent in May, the lowest since June, 1969. The Boise area
lost jobs during the first four months of 1998, but labor markets remain
tighter there than elsewhere in the state; the seasonally adjusted unemployment
rate has been hovering between 3½ and 4 percent. Real estate markets also
are tight in Boise, with very low commercial vacancy rates recorded recently
for the downtown area.
Nevada's economy has settled onto a strong growth path.
Payroll employment grew 3.9 percent at an annual rate during April and
May, slightly below the growth rate during 1997 but equal to the first
quarter 1998 pace. The expansion has been broad based, with all major
sectors except the government growing by over 3 percent at an annual pace
thus far in 1998. Manufacturing employment grew rapidly in the first quarter
but slowed substantially during April and May. Job growth has been strong
among providers of personal, business, and professional services. However,
employment in the hotel and amusement sector has been essentially flat,
thereby holding net growth in the services sector below its rate from
Construction has been the fastest-growing sector this year. After expanding
by 5.1 percent in 1997, job growth has been at nearly twice that pace
thus far in 1998. Both residential and nonresidential building permits
trended upward during the first four months of 1998, with a particularly
sharp increase in the number of new residential permits.
In Utah, economic growth slowed in recent months. After
expanding just over 1 percent at an annual pace during April and May,
yearly growth in payroll employment stood at 2.9 percent as of May, the
slowest pace since October 1992. However, job growth remains rapid in
the construction sector, with a pick up in recent months producing a growth
rate close to last year's pace of nearly 8 percent. Growth in government
employment has been very strong, spurred by gains among the state and
local governments. In contrast, growth in services sector employment has
fallen in recent months, as a slowdown in the health services sector more
than offset a rapid employment acceleration in the hotel and lodging sector.
Growth during the first four months of this year was slower in Salt Lake
City, where two-thirds of the state's jobs are located, than in the rest
of the state. Key reasons include job losses in the finance, insurance,
and real estate sector, and slow growth in government employment there.
Although labor markets remain very tight in the Salt Lake City area, the
unemployment rate has come up slightly, from 2.7 percent at the end of
last year to 3.1 percent in April.
1 The BLS CPI figures for the West pertain
to the Census definition of this region, which includes Montana, Wyoming,
Colorado, and New Mexico in addition to the nine Twelfth district states.