Western Economic Developments
November 1998
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
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- The Twelfth District economy grew at a solid pace during the third
quarter, although growth has slowed from earlier in the year.
- Payroll employment expanded by 2.3 percent at an annual rate during
the three months ending in September, with a number of sectors posting
solid growth.
- District growth continued to outpace national growth in recent
months, although the gap between the District and the U.S. pace of expansion
narrowed.
- The District's current pace of growth represents a collection
of divergent state experiences, with some state economies growing rapidly,
while others are slowing or contracting.
- Despite slower employment growth, many District labor markets
remain tight. On average, unemployment in the District was 5.5 percent
in September, about the same as in 1997.
The Twelfth District economy grew at a solid pace during the third quarter,
although growth has slowed from earlier in the year. District nonfarm
payroll employment expanded by 2.3 percent at an annual rate during the
three months ending in September, down from the 2.9 percent pace of the
second quarter. District growth continued to outpace national growth in
recent months, although the gap between the District and the U.S. pace
of expansion narrowed. Slower growth has yet to loosen District labor
markets significantly. On average, unemployment in the District was 5.5
percent in September, just 0.1 percentage point above the average for
1997.
The construction, finance, insurance, and real estate, services, and
government sectors led the District's expansion during the third quarter,
collectively accounting for over 87 percent of all jobs added. In contrast,
employment growth among District retailers and wholesale firms slowed
in recent months, falling to 1 percent in the third quarter, a percentage
point decline over the pace during the first half of the year. District
mining and manufacturing firms shed jobs in the third quarter, as developments
in East Asia continued to damp demand for manufactured and non-manufactured
commodities.
Within the District, the pattern of growth has changed some in recent
months. In contrast to previous periods, the District's current pace of
expansion represents a collection of divergent state experiences. As measured
by growth in employment over the 12 months ending in September, Hawaii
continued to contract, three District states--Alaska, Idaho, and Oregon--expanded
more slowly than the U.S., and Utah expanded at the national pace of 2.4
percent. On the same basis, Arizona, Nevada, and Washington remained among
the five fastest growing states in the nation. Until the beginning of
this year, only Alaska and Hawaii were expanding more slowly than the
U.S., and the District regularly contained four or five of the ten fastest
growing states in the nation.
Financial Conditions
A survey of a sample of large domestically chartered banks and Japanese
branches in the District indicated little change overall in the demand
for business loans over the past three months (the beginning of August
through the end of October). However, the Japanese branches reported some
strengthening of demand due to customers turning to their bank because
of less hospitable money and capital markets. Regarding the supply of
business loans, survey respondents reported widespread tightening of terms
on such loans, mostly in August and the beginning of September. The terms
affected mainly were the maximum size of credit lines, the spreads of
loan rates over base rates, and the premia charged on riskier loans. A
less favorable or more uncertain economic outlook was the reason most
often cited for the tightening of terms.
In general, demand for commercial real estate loans was the same at the
end of October as it was in the beginning of August. However, domestic
banks tended to report tightened approval standards, smaller maximum loan
sizes, and larger spreads of loan rates over funding costs for commercial
real estate loans.
Domestic banks reported some strengthening of demand for home mortgage
loans. Overall, credit standards for approving such loans were unchanged.
Demand for consumer loans of all types at the domestic banks was basically
unchanged over the past three months, as were banks' approval standards
and terms for such loans. The domestic banks also reported no change in
their willingness to make consumer installment loans and no change in
their approval standards for credit card applications.
Although recent global economic and financial developments have slowed
economic growth throughout California, some regions have been affected
more than others. In the San Francisco Bay Area, specialization in high-tech
manufacturing and strong trade ties to East Asia have pushed employment
growth in the area below that for the state as a whole for the first time
in three years. In contrast, a more diversified Southern California economy
has remained relatively immune from the global economic turmoil, with
little deceleration in growth from last year. However, further deterioration
in international markets or substantial slowing in the domestic economy
could temper Southern California's current pace of expansion.
Changing pattern of regional growth
Until recently, job growth in the San Francisco Bay Area regularly outpaced
that of other regions in California. Figure 1 shows 12-month employment
growth for the Bay Area, Los Angeles-Long Beach and Southern California
excluding Los Angeles-Long Beach.1
Between January 1996 and November 1997, employment growth in the Bay Area
averaged 4 percent, well-above the pace of expansion in Los Angeles-Long
Beach, and slightly higher than growth in the remaining areas of Southern
California. In December of last year this pattern began to change, and
by May of this year the employment growth rate in the Bay Area had fallen
below that of Los Angeles-Long Beach.
The changing pattern of regional growth in California in part reflects
the differential impact that global economic and financial developments
have had on manufacturing employment growth in the Bay Area and Southern
California. Figure 2 compares the 12-month percent change in manufacturing
employment by region. While manufacturing has slowed in all three regions,
the deceleration has been most dramatic in the Bay Area.
Strong trade ties with East Asia and a highly specialized high-tech manufacturing
sector have left the Bay Area vulnerable to coincident weakness in both
markets, depressing the regions manufacturing sector. In contrast, more
balanced trade relationships and greater manufacturing diversity have
helped moderate the combined impact of these factors on the Southern California
economy.
Variation in regional export patterns
An indication of the relative share of exports by destination is provided
in Table 1. The table compares the share of exports shipped to various
parts of the world for three regions in California: the San Francisco
Bay Area, Los Angeles-Long Beach, and the remaining areas of Southern
California. The data come from the Bureau of Commerce Metro Area Exporter
Location Series. This series provides information on the dollar value
of export sales for Metropolitan Statistical Areas based on the location
of the exporter. Therefore, the data do not always reflect where the export
is produced and caution is warranted when using these data to describe
export patterns across regions. However, used in conjunction with other
information on the local economy these data can provide some indication
of differences in regional trade relationships.
According to these data, the San Francisco Bay Area is relatively more
reliant on East Asia as an export market than is Southern California excluding
Los Angeles-Long Beach. About 60 percent of all Bay Area exports are shipped
to East Asia. In contrast, in Southern California excluding Los Angeles-Long
Beach just over one-third of exports are shipped to countries in East
Asia. Los Angeles-Long Beach exports about the same proportion to East
Asia as the Bay Area, but the country composition differs; 50 percent
of exports from Los Angeles-Long Beach to East Asia go to Japan, compared
to 30 percent for the Bay Area.
Examining export shares to other parts of the world, the largest difference
between the Bay Area and Southern California is in trade with Latin America.
On a share basis, Los Angeles-Long Beach is more than twice as reliant
on Latin America as an export market than is the Bay Area, shipping about
11 percent of its total exports to the region. In other areas of Southern
California the ties to Latin America are even stronger; about 25 percent
of exports from these areas are shipped to Latin America. For both Los
Angeles-Long Beach and the remaining areas of Southern California, export
sales to Latin America are higher than to Canada. This is not true for
the Bay Area, where less than 5 percent of all exports go to Latin America.
These differences in export shares across California regions are particularly
striking when combined with recent export growth figures for the state.2
State exports to East Asia declined by 2.5 percent in 1997 and 17.5 percent
during the first half of 1998. Over the same periods, California exports
to Latin America increased at double digit rates, by 32.6 percent in 1997
and 22.2 percent in the first half of 1998. The combination of these export
growth figures and the regional information on export destinations suggests
that the Bay Area likely has borne a large fraction of the export decline
in California. In contrast, lower exposure to East Asia and stronger ties
with Latin America may have protected Southern California's exports from
some of the demand weakness depressing state export growth.
Variation in regional manufacturing composition
Table 2 shows the shares of manufacturing employment and the 12-month
growth rates for selected industries. The table shows that in the San
Francisco Bay Area, three industry categories dominate manufacturing employment:
industrial machinery, electrical machinery, and scientific and measurement
instruments. Together these industries, which include most of the Bay
Area's high-tech producers, account for more than 55 percent of manufacturing
employment in the region.3
As of September, 12-month employment growth among these three industries
in the Bay Area was -0.9 percent (not shown), a decline of more than 6.5
percentage points from 1997. Although growth in other Bay Area manufacturing
industries has been stronger, it has not been sufficient to offset the
dramatic slowdown in these three industries.
In contrast, in Los Angeles-Long Beach and the rest of Southern California
the combination of a more diversified manufacturing sector and rapid expansion
in key industries has helped maintain manufacturing growth in the region.
In Los Angeles-Long Beach, growth in the area's largest manufacturing
sector, apparel and textiles, has remained solid; 12-month growth as of
September was 5.3 percent.4
As the table shows, only the transportation sector in Los Angeles-Long
Beach has declined over the past 12 months. In the remaining areas of
Southern California, manufacturing employment growth remains strong. As
of September, on a 12-month basis, most sectors recorded growth in excess
of 3 percent. Even the manufacturing sectors industrial machinery and
electrical machinery have been expanding in Southern California. This
is consistent with the growth of exports from these industries to Latin
America and the mix of products produced in Southern California.5
In general, these figures suggest that the Bay Area's high-tech specialization
has left it vulnerable to recent weakness in demand for manufactured high-tech
products. In contrast, the relatively balanced composition of manufacturing
in Southern California has allowed the region to take advantage of rapid
export growth in Latin America and continued strength in the domestic
economy.
Conclusions
Diversification in both trade and manufacturing have helped Southern
California weather the global economic storm from East Asia. While Southern
California has not escaped Asia's problems unscathed, it has continued
to post solid growth. However, further deterioration in international
markets or slowing in the domestic economy could temper growth in the
region. Southern California exports a larger share of products to Latin
America, particularly Mexico. Should that economy begin to falter, the
effects in Southern California would be greater. In addition, much of
the strength of Southern California's manufacturing sector comes from
the solid expansion of the domestic economy. General slowing in the national
economy could damp growth in Southern California's manufacturing sector,
slowing total payroll employment growth in the region.
Alaska, Oregon, and Washington
Economic growth in Alaska remained weak in the third
quarter, following a flat performance during the second quarter. Alaska
added almost no new jobs during the three months ending in September,
as gains in transportation, finance, insurance, and real estate, and services
were offset by losses in construction, trade, and state and local government.
Two consecutive quarters of weak job gains have pushed annualized employment
growth for the first nine months of 1998 under 3 percent, well below the
pace of earlier in the year.
After adding jobs at a 2.5 percent pace in 1997, the Anchorage economy
has slowed this year. Annualized payroll employment growth in Anchorage
was 1.8 percent for the nine months ending in September, following two
quarters of almost no job growth. Although the slowdown has been broad-based,
weakness in key sectors such as retail trade and services has had the
largest impact. Together these sectors account for 50 percent of employment
in Anchorage and, compared to 1997, growth in each sector has slowed by
more than a percentage point in 1998.
The Oregon economy slowed further in recent months.
Total nonfarm payroll employment grew by 0.3 percent at an annual pace
during the third quarter, well below the 1.6 percent pace of the first
half of this year. Several sectors shed jobs over the past three months;
employment declined in mining, construction, manufacturing, and transportation,
communications, and public utilities. Growth slowed in the government
sector and remained flat in wholesale and retail trade. In contrast, growth
accelerated in the finance, insurance, and real estate, and services sectors
in the third quarter, but job gains in these sectors were not sufficient
to offset losses in the rest of the economy.
East Asia continues to stifle growth in Oregon's manufacturing sector.
Manufacturers in the state reduced employment at a 6 percent annual pace
in the third quarter, about twice as fast as in the second quarter. So
far this year, employment in Oregon's manufacturing sector has declined
by 4,400 jobs. Sustained weakness in manufacturing has restrained Oregon's
construction sector. Non-residential building permits have declined rapidly
this year and employment in the state's construction sector has fallen
by 4.9 percent at an annual rate during the past nine months.
Economic growth in Washington slowed in the third quarter,
largely due to substantial job losses in September. Total nonfarm payroll
employment declined by 3.5 percent at an annual rate in September, as
the construction, manufacturing, trade, services, and government sectors
shed jobs. As a result the state unemployment rate jumped to 5.1 percent,
0.4 percentage point above the August rate. Despite the September declines,
third quarter growth in most sectors remained solid; only the construction
and manufacturing sectors posted job losses over the period.
The Seattle area economy contracted during the third quarter, as modest
job gains in July and August were offset by September losses. Construction
and services posted the largest declines; both sectors contracted by more
than 1 percent between July and September, for a total loss of nearly
2,000 jobs. Within the services sector, business services, which accounts
for 30 percent of all services jobs and employs about the same number
of people as the transportation sector, declined most rapidly. Business
services employment declined by 9.7 percent at an annual rate during the
third quarter, bringing annualized growth in the sector to 4.8 percent
for 1998, 10 percentage points lower than in 1997.
Arizona's employment growth slowed in the third quarter
to a still-rapid pace of 3.7 percent at an annual rate, following a surge
of 5È percent at an annual rate in the first half of the year. These job
gains leave the September level of employment about 5 percent above a
year earlier, which makes Arizona the fastest growing state in the nation
over the past twelve months.
Strong economic growth in the state has been concentrated in service-producing
sectors. The service-producing sector accounted for 86 percent of the
roughly 70,000 jobs added to Arizona nonagricultural payrolls so far this
year. Business services and government employment have been particularly
strong. In contrast, manufacturing job growth has slowed noticeably this
year. In the third quarter, a drop of 8 percent at an annual rate in machinery
and electronic industry employment contributed noticeably to the overall
moderation of state employment growth.
The pace of economic growth in California slowed in
recent months. Payroll employment increased 2.4 percent at an annual rate
during the four months ending in October, about 0.4 percentage point less
than the pace of job growth in the first half of 1998. Labor force growth
proceeded a bit faster than employment gains, so the state unemployment
rate edged up in recent months, from 5.7 percent in July to 5.9 percent
in October. Separate data from the state unemployment insurance system
show a continued low level of initial claims through September, which
corroborates the view that the recent uptick in the state unemployment
rate primarily reflects strong labor force growth, rather than increased
layoffs.
That said, some industries in California are cutting jobs, disproportionately
impacting those subregions of the state with employment concentrations
in the downsizing industries. Most of the retrenchment is in durable goods
manufacturing industries, where overall employment fell 2.6 percent at
an annual rate in the third quarter. San Jose and other parts of the San
Francisco Bay Area are seeing much of the recent declines in computer
and electronic equipment industry jobs. A drop in aerospace industry employment
was concentrated in the Los Angeles-Long Beach metropolitan area. Los
Angeles also has lost jobs outside of manufacturing in the entertainment
industry; employment in motion picture production and services fell 8.3
percent at an annual rate in the third quarter.
Economic activity in Hawaii's private sector continued
to contract in the third quarter. Although BLS figures show total state
employment increased 4 percent at an annual rate in the third quarter,
virtually all of the reported third quarter gain was on government payrolls,
where employment was estimated to have increased 24 percent at an annual
rate in the third quarter on a seasonally-adjusted basis. Among private
sector industry groups, third quarter manufacturing employment was flat,
service industry jobs declined slightly, and construction employment dropped
sharply.
The ongoing declines in construction sector employment reflect weakness
in both residential and non-residential real estate markets. Home prices
have remained relatively weak, undermining the incentive to build single-family
residential units, and rental vacancy rates are relatively high, deterring
multifamily construction. Accordingly, residential construction permit
issuance is at very low levels this year and in the third quarter was
down about 11 percent from a year earlier. Nonresidential construction
awards also have been weak and falling; in the third quarter, nonresidential
construction awards were about 18 percent below a year earlier.
In Idaho, moderate economic growth resumed recently
following a flat second quarter. Total nonfarm payroll employment expanded
by 1.6 percent at an annual pace during the third quarter, about equal
to the growth rate during the past 12 months. Employment grew rapidly
in the transportation, communications, services, and local government
education sectors in recent months. By contrast, the pace of job loss
in manufacturing picked up to about 5 percent at an annual rate. Despite
slower measured employment growth than in previous years, the unemployment
rate has remained stable at around 5 percent this year.
Growth has slowed more in Boise than in the rest of the state; nonfarm
payroll employment in Boise grew 4.5 percent in 1997 but 0.9 percent at
an annual pace for the first nine months of this year. Although Boise
area construction employment surged in the third quarter, on net, the
area has lost 400 construction jobs so far this year, which has kept statewide
construction employment flat. Manufacturing job growth also has slowed
in the Boise area, although not as much as elsewhere in the state.
Economic growth in Nevada picked up further in the third
quarter, and the state is a close second (behind Arizona) in the national
employment growth rankings. Nonfarm payroll employment grew by 6.5 percent
at an annual pace during the third quarter, and as of September was 5.2
percent above its year-earlier level. Recent growth was strong in virtually
all major sectors, but it was particularly rapid in the construction,
state and local government, and finance, insurance, and real estate sectors.
Growth in the services sector picked up substantially in the third quarter,
as health services providers created jobs at a rapid pace and the hotel
and amusement sector regained jobs lost earlier in the year.
Third-quarter job gains in the hotel and amusement sector were concentrated
in Las Vegas during the month of September. State gaming revenues already
had picked up a bit in the second quarter, and the planned opening of
several more large hotel-casinos is expected to keep Las Vegas bustling
in coming months. In contrast, several rural counties that are dependent
on gold mining have been hurt by low gold prices this year and have suffered
double-digit declines in retail sales on a year-over-year basis.
Employment in Utah grew somewhat in recent months, following
essentially flat performance during the second quarter. Total nonfarm
payroll employment expanded by 1 percent at an annual rate during the
third quarter, and as of September it was about 2.5 percent above its
year-earlier level. The slight pick up in the third quarter was due to
a turnaround in the retail trade sector, which mostly recovered the significant
number of jobs lost during the second quarter, and also due to a further
pick up in job growth in the state and local government sector. However,
job losses in manufacturing sped up a bit in the third quarter, and, on
net, the manufacturing job tally has been essentially flat this year.
The state also lost some construction jobs in recent months, although
September construction employment was 3.2 percent above its year-earlier
level.
Slower growth has increased the state unemployment rate slightly this
year. It rose from 2.9 percent at the end of 1997 to 3.6 percent in July,
but it fell to 3.3 percent in August and September. Labor markets remain
particularly tight in the Provo area; the unemployment rate there was
2.6 percent in September. Moreover, employment in Provo has grown at its
1997 pace of 3.2 percent so far this year.
1 The San
Francisco Bay Area includes San Francisco, Oakland, San Jose, Santa Rosa,
and Vallejo-Fairfield-Napa. Southern California excluding Los Angeles-Long
Beach includes Orange County, San Diego, Riverside-San Bernardino, Santa
Barbara-Santa Maria-Lompoc, and Ventura.
2 Comparable
export growth figures are not available at the regional level.
3 In the
Bay Area, 80 percent of the employment in these three SIC categories is
in high-tech manufacturing, defined as computers and computing equipment,
telecommunications equipment, electronic components, and scientific and
measurement instruments.
4 The October
release of the Department of Finance Interim Employment Series suggests
that this number may not hold up to the March 1999 rebenchmarking. Estimates
in the Interim series show almost no employment growth in the state apparel
and textile industry in 1998.
5 For example,
less than 60 percent of the products in these industries are considered
high-tech, compared to 80 percent in the Bay Area.
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