Western Economic Developments
August 1998
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- The Twelfth District economy grew at a strong pace during the
first half of 1998, with virtually no slowing between the first and
second quarters. However, employment growth so far this year has been
slower than last year.
- Faster growth in California and Washington during the second quarter
was offset by slowing in other states, particularly Oregon, Idaho, and
Utah.
- Construction activity remains a key source of growth for the District
economy, with substantial employment growth and high levels of activity
continuing in both the residential and nonresidential sectors.
- Reduced exports to East Asia have exerted a moderating influence
on District economic growth this year. Associated reductions in employment
growth have been concentrated in the durable manufacturing sector.
The Twelfth District economy grew at a strong pace during the first
half of this year, albeit at a slower rate than in 1997. Growth in total
nonagricultural payroll employment was 2.9 percent on an annual basis
for the period, with only a slight deceleration between the first and
second quarters. Several states--notably Alaska, Oregon, Idaho, and Utah--slowed
substantially in recent months. In contrast, after slowing between the
fourth quarter of 1997 and the first quarter of 1998, California's economy
regained some lost momentum recently. Employment growth in the state picked
up from about 2½ to 3 percent on an annual basis between the first and
second quarters. Although job growth in California remains slower than
last year, the state expanded faster than the rest of the nation during
the first half of the year.
Despite the District's slowdown from last year's 3.7 percent pace of
employment growth, unemployment rates have remained stable on average
this year. Slight unemployment increases in Oregon and Nevada have been
offset by reductions in Southern California and Arizona, and labor markets
remain tight in most parts of the District.
The key source of slower growth this year has been the durable manufacturing
sector, with export reductions arising from the East Asian financial turmoil
playing an important role. This has been keenly felt in the high-tech
manufacturing sector, although the slowdown in demand relative to supply
in that sector also is due to other factors associated with periodic swings
in this industry. Overall, durable manufacturing employment growth has
fallen from about 5 percent last year to 1.2 percent on an annual basis
for the first half of 1998.
Construction activity remains a key source of growth for the District
economy. Employment in this sector expanded by 7.1 percent at an annual
rate for the first half of the year, with a bit of slowing between the
first and second quarters. Although planned residential and nonresidential
construction has fallen back following large gains in 1997, construction
awards remain at very high levels. Moreover, employment growth in the
finance, insurance, and real estate sector has picked up substantially
this year, spurred by strong growth among real estate brokerages and nondepository
financial institutions.
Since the July 1997 currency crises that hit several East Asian countries,
economic problems in that region have spread and deepened. Because Twelfth
District states export a substantially greater share of their total output
to East Asia than does the rest of the nation, conditions in East Asia
are a key concern for the District. Data for this year indicate that the
East Asian economic situation is having the expected restraining effect
on Twelfth District and national exports, and also on their economic expansions.
Merchandise Exports
Figure 1 shows the time series pattern in total merchandise exports for
the U.S. and the Twelfth District. All export figures are in nominal terms.
District export growth has tracked national growth closely during the
past five years. The main exception is Washington (not shown); because
Washington exports are dominated by a single product (Boeing aircraft)
and therefore are not very diversified with respect to changes in general
demand and supply conditions, they have not closely tracked exports from
other areas in recent years.
The pattern in Figure 1 suggests a substantial decline in export growth
as of early 1998, at both the national and the District levels. This slowing
is relatively consistent across states in the District; however, the slowing
was less pronounced for California, where export growth during 1996-97
was less rapid than in other District states.
The export growth figures for 1995-98, along with shares of total national
exports, are presented in Table 1. Following strong export growth during
each of the years 1995-97, growth dropped off sharply in the first five
months of 1998, in the Twelfth District and the rest of the nation. The
reduction in export growth was larger for the Twelfth District than for
the rest of the U.S., although not markedly so. All District states except
Utah experienced a decline in export growth. To better gauge the role
of East Asia in the slowdown, Tables 2 and 3 provide detailed breakdowns
of merchandise export flows, by country and selected industry product
groups, for the U.S. as a whole and for California. The country groupings
used in these tables are the Asian-Pacific Economic Cooperation (APEC)
countries, the Association of Southeast Asian Nations (ASEAN), and the
Newly Industrialized Economies (NIE).
For the U.S. figure in Table 2, the slowdown in export growth in 1998
largely is attributable to the direct effects of the East Asian situation.
Although export growth to all major countries or groups except Mexico
slowed noticeably between 1997 and 1998, the most pronounced slowing occurred
for exports to the East Asian countries.
The bottom four rows of Table 2 list exports by selected industrial groups.
The industrial and electronic machinery sectors, in which exports largely
consist of computers and related high-tech products, suffered a pronounced
decline. Some of this probably is due to price declines for computing
capacity, in addition to real declines arising from reduced East Asian
and other foreign demand.
Table 3 lists detailed figures for California. Export growth in the state
did not slow between 1997 and the first quarter of 1998. Solid export
growth in California during early 1998 was due in large part to a surge
in exports to Western Europe and continued strong growth in exports to
Mexico. However, California exports to most of East Asia dropped sharply
in the first quarter of 1998 and in several cases were already weak in
1997. Moreover, although growth in California exports of industrial and
electrical machinery only slowed slightly between 1997 and early 1998,
additional tabulations (not shown) reveal a sharp drop in California exports
of these products toEast Asian destinations. For total East Asian exports,
although the percentage drop during the first quarter of 1998 was about
the same for California and the nation as a whole, the larger share of
California exports going to East Asia implies a larger restraining effect
on California growth than on national growth.
Export growth also has slowed somewhat for Washington state in early
1998. The slowdown largely is attributable to a sharp decline in the growth
of exports to Western Europe and Canada. Growth in Washington exports
to East Asia slowed only a bit in early 1998, with sharp variation across
countries due primarily to aircraft deliveries. Although aircraft exports
to East Asia have held up well so far in 1998, they are likely to decline
by sometime next year. Washington exports of other commodities already
have slowed substantially.
Employment Growth
Payroll employment growth in the Twelfth District slowed this year, from
3.7 percent in 1997 to 2.9 percent at an annual rate for the first half
of 1998. This slowing is consistent with restraining effects arising from
the East Asian situation. Given the preponderance of durable manufactured
goods in District exports to East Asia (for example, see the industry
shares in Table 3 for California), the impact of the East Asian slowdown
should be most readily observed in this sector. Figure 2 shows growth
in durable manufacturing employment for the Twelfth District and the remainder
of the nation. Growth in District durable manufacturing employment was
very rapid in 1997 but came down substantially during the last three quarters;
employment in this sector was essentially flat during the second quarter
of 1998. Growth in durable manufacturing employment also turned slightly
negative for the U.S. excluding the Twelfth District, although the drop
was less pronounced than for the District.
Among District states, the most pronounced slowing in durable manufacturing
employment growth has occurred in California and Oregon, both of which
have substantial East Asian export exposure and extensive high-tech manufacturing
sectors. Significant slowing is evident in the high-tech sectors in both
states; employment growth for other durables, such as lumber and wood
products and primary metals, also has slowed.
Although Hawaii has limited direct exposure to East Asia in terms of
merchandise exports, the state relies heavily on Japanese tourism and
related revenues. Available estimates suggest that about 10 percent of
Hawaiian output is attributable to East Asian tourism, with most coming
from Japan. The ongoing weakness in Japan's economy has been an increasing
drag on the Hawaiian economy. According to preliminary data from the Hawaii
Visitors and Convention Bureau, for the first half of 1998 total tourist
visits were down about 1 percent from the same period in 1997 (which also
was weak). Underlying this net decline is an 8 percent fall in eastbound
visits, which more than offset a 4 percent rise in westbound visits. Although
the state economy has been weak for the past 5 years, employment declines
have accelerated in 1998; losses during the first half of the year were
nearly 2 percent at an annual rate, substantially worse than essentially
flat employment during 1996-97.
Summary
Available evidence suggests that the East Asian financial crisis and
economic slowdown has exerted a direct restraining influence on the national
and District expansions. Exports to East Asia have fallen substantially
this year. The export decline in turn has damped employment growth in
the durable manufacturing sector, whose products constitute a large share
of East Asian exports. In Hawaii, weak Japanese tourism has caused additional
deterioration in the state economy this year.
Although the full impact of East Asia on national and District growth
also depends on other factors, such as rising imports of less expensive
East Asian products, the export effect is of particular importance to
the Twelfth District. Treating California exports as representative of
District exports, Tables 2 and 3 indicate that national and District exports
to East Asia have slowed by about the same amount in early 1998. Given
the substantially greater share of District output that goes to East Asia,
these figures suggest that the East Asian situation has held down District
exports by about twice as much as it has held down national exports. Consistent
with this, the slowdown in durable manufacturing employment growth has
been greater for the District than for the rest of the U.S. However, this
may be due in part to independent factors serving to hold down expansion
in the high-tech manufacturing sector. Moreover, despite the sharp decline
in exports to East Asia this year, strength in other sectors (such as
construction and real estate) has prevented East Asia from derailing the
District's expansion.
Rob Valletta
Alaska, Oregon, and Washington
The Alaskan economy slowed substantially in recent months,
after surging at the beginning of the year. Although growth in total payroll
employment was around 4 percent at an annual rate for the first half of
the year, employment was essentially flat in the second quarter, as growth
in some sectors was offset by losses in others. Most of the job losses
were confined to three sectors--manufacturing, mining, and government--which
together shed 1,700 jobs during the second quarter. In contrast, the construction,
transportation, and finance, insurance, and real estate sectors each grew
by roughly 10 percent at an annual rate during the same period, combining
to add 1,200 jobs to Alaskan payrolls.
Despite an early year surge in seafood processing employment, Alaska's
fishing industry is bracing itself for the second consecutive year of
below average salmon harvests. Small salmon returns and low and falling
fish prices are expected to reduce 1998 revenues below last year's disappointing
level, making some commercial fishing ventures unprofitable.
Oregon's economy contracted slightly in the second quarter,
with total payroll employment falling by 0.2 percent at an annual rate.
During the period, net job losses in construction, manufacturing, and
retail and wholesale trade outnumbered moderate gains in the transportation,
services, and finance, insurance, and real estate sectors. The state unemployment
rate increased 0.5 percentage points during the past three months, to
5.4 percent in June. However, despite recent weakness in several of Oregon's
key industries, earlier gains left employment up 2.3 percent relative
to a year earlier.
After growing by 3 percent in 1997, manufacturing employment in Oregon
fell slightly during the first half of 1998. Durable manufacturing employment
growth has declined the most, prompted by pronounced job losses in the
forest product and high-tech sectors. Firms in these sectors have been
hurt recently by changing domestic market conditions and ongoing economic
problems in East Asia. Temporary layoffs and permanent job cuts have become
more frequent, and firms in both sectors recently have used furlough programs
to reduce costs. Among others, Intel furloughed 1,500 workers at its Aloha
plant for eight days in July, and a number of sawmills and paper mills
in Eastern Oregon have closed for as long as a month.
Economic growth in Washington has remained strong. Total
nonfarm payroll employment grew by 4.3 percent at an annual rate during
the second quarter, which is above the first quarter pace of 3.6 percent.
The most rapid gains were in the construction, trade, services, and finance,
insurance, and real estate sectors, which together added nearly 23,000
jobs during the second quarter. Construction activity and business and
computing services were the state's main engines of growth, with employment
in these sectors expanding at double-digit rates in recent months. In
contrast, manufacturing employment remained flat in the second quarter,
as solid gains among aircraft and parts manufacturers were offset by payroll
reductions at forest product, processed food, and high-technology firms.
Despite rapid second-quarter employment growth in the aircraft manufacturing
sector, concerns about East Asia continue to temper the outlook. Boeing
plans later this year to begin reducing its workforce by 12,000 jobs nationwide,
mostly in its commercial aircraft workforce. The aircraft and parts sector
accounts for nearly 30 percent of Washington's manufacturing employment.
Arizona's economy expanded rapidly in the past year
and in recent months. Payroll employment jumped more than 6 percent at
an annual rate in May and June and increased about 5 percent during the
past 12 months. With such rapid job growth, the labor market has tightened,
and the state's unemployment rate now stands at 4 percent, down about
½ percentage point from a year earlier. Most major sectors have participated
in the rapid job growth over the past year, including manufacturing, although
manufacturing employment was flat on average during May and June. In contrast,
the construction, government, and finance, insurance, and real estate
sectors posted strong employment gains in recent months.
Separate data confirm a recent slowing in the Arizona manufacturing sector
that is being offset by strong gains in construction activity. Among purchasing
managers for major manufacturers surveyed by Arizona State University,
most reported that new factory orders in the state were flat or down in
June. In contrast, construction permits for residential and nonresidential
buildings were particularly strong near the beginning of this year and
have remained at high levels overall. Residential demand for single-family
homes is the key to the state construction sector outlook; these units
accounted for nearly three-fourths of total new construction value in
Arizona last year.
California's economy posted solid gains in recent months.
Job growth averaged about 3È percent at an annual rate in May and June,
up a bit from the first four months of the year, although preliminary
figures indicate that employment was flat in July. A large jump in construction
employment accounts for some of the second quarter pickup. During the
first half of 1998, construction employment expanded by 8.8 percent at
an annual rate, and the job count in the real estate sector grew at a
6.4 percent pace. During the same period, employment at business service
establishments and nondepository financial institutions grew by over 8
percent at an annual rate. In contrast, manufacturing employment increased
by only ½ percent at an annual rate in the first half of 1998, down about
3 percentage points from last year's growth rate.
Total employment in the state grew 2‹ percent at an annual rate in the
first half of 1998, down about 1 percentage point from the 1997 pace.
The slowdown has been concentrated in the San Francisco Bay Area, where
employment growth slipped substantially, to 1½ percent on an annual basis.
Bay Area manufacturing employment fell about 3 percent at an annual rate
in May and June, owing in part to cutbacks in the computer equipment and
aerospace industries. In contrast, Los Angeles area employment growth
accelerated to about a 3½ percent pace in the first half of this year.
Hawaii's economic contraction became more severe in
recent months. Payroll employment fell by 2.7 percent at an annual rate
during the second quarter, compared to losses of 2 percent on the same
basis during the preceding two quarters. The most rapid second-quarter
contractions occurred in the goods-producing sectors; job counts in the
construction and manufacturing sectors fell 10 and 7 percent, respectively,
on an annual basis. Weakness in the state's tourism sector has generated
additional job losses in recent months. During the second quarter, the
hotel and retail trade sectors shed jobs at annual rates of 3 percent
and 4 percent, respectively.
Idaho's economy in 1998 is on a slower growth path than
in recent years. Total nonagricultural payroll employment was virtually
flat in the second quarter of 1998, and on net it expanded by 1.1 percent
at an annual pace during the first half of the year. Both the services
and construction sectors have experienced significant cutbacks so far
this year, with construction jobs being lost despite gains in total construction
awards. In contrast, offsetting job gains were particularly rapid in the
finance and banking sectors, and all levels of government except state
government education posted strong growth.
Slowing at the state level largely is attributable to small net job losses
in Boise so far this year. Of the 2000 service jobs lost in Idaho during
the first half of 1998, 1600 were eliminated in Boise, with the business
services sector accounting for virtually all of them. Moreover, on net
1000 construction jobs have been eliminated in Boise so far this year,
more than offsetting the 400 construction jobs created elsewhere in the
state. Manufacturing job growth also has slowed around Boise, although
it remains solid. Despite slower growth, unemployment in the metro area
has remained stable at just under 4 percent.
Economic growth in Nevada picked up recently, and the
state is near the top of the national employment growth ranking. After
a strong first quarter, total nonagricultural payroll employment expanded
by 5.1 percent at an annual rate during the second quarter. Construction
jobs have grown by 13 percent at an annual rate thus far in 1998, which
represents more than a doubling of the 1997 pace. The banking and finance
sector also expanded at a torrid pace statewide during the second quarter,
and growth in all other major sectors has been strong this year. Rapid
job growth lowered the state unemployment rate by 0.5 points (to 4.3 percent)
during the last 2 months, although it remains above its low point from
last year.
The sole restraining factor for the state's expansion has been weak gaming
and tourist business in Las Vegas so far in 1998. In recent months, gross
gaming revenues have been flat to down compared to 1997, and employment
in the hotel and amusement sector in Las Vegas shrunk by 1.2 percent at
an annual rate during the first half of this year. Despite these negatives,
substantial additional expansion of the area's hotel and casino capacity
is underway.
Economic growth in Utah eased further in recent months,
although state economic fundamentals remain sound. Total payroll employment
was virtually flat during the second quarter, and growth for the first
half of the year was 2.1 percent at an annual rate, about half the 1997
growth rate. Among the positive signs, construction employment has expanded
at nearly a 5 percent pace so far this year, and state and local governments
continue to post strong job gains. However, growth in all major sectors
has slowed this year. Durable manufacturing job growth has fallen off
substantially, due in part to the net loss of 400 jobs in the electronics
sector this year.
The general slowing in the state's economy is reflected in other indicators.
After increasing by 5.5 percent in 1997, average wages in manufacturing
declined by 1.7 percent at an annual pace during the first half of 1998,
despite a state unemployment rate that continues to hover near 3 percent.
Housing price appreciation in the Salt Lake City MSA also has slowed,
from 7.9 percent annually in 1996 to 2.7 percent at an annual rate during
the first quarter of 1998.
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