Western Economic Developments
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- Total nonfarm payroll employment in the Twelfth District grew
by 2.6 percent at an annual rate from June to November, a solid pace
that was above the corresponding national growth rate of 2.0 percent.
- Due in part to an ongoing slowdown in manufacturing activity,
employment growth in most of the District slowed somewhat as the year
- Although the rate of employment growth fell in most major sectors
in the District this year, it increased in the finance, insurance, and
real estate sector and the state and local government sector.
- Residential construction activity and sales were robust this year.
However, signs of cooling are evident in nonresidential construction
activity in some areas.
Economic activity in the Twelfth District expanded at a solid pace in
recent months. On an annual basis, total nonfarm payroll employment grew
by 2.6 percent from June to November, which is above the corresponding
national growth rate of 2.0 percent. However, moderation has been the
key feature of District growth this year: the pace of job gains has been
below last year's pace of 3.7 percent, and growth during the past five
months was slower than the 3 percent rate from the first half of the year.
Among the states, California's economy has shared in the general trend
toward slower growth. However, employment growth there remains strong,
and the total job count increased by 2.7 percent for the twelve months
ending in November. Growth in most other states in the District slowed
as well, particularly since the first quarter. A notable exception is
Nevada, where the employment growth rate has been above last year's rate
and has picked up as the year has progressed.
A slowdown in manufacturing activity has been a key source of restraint
for the District's expansion this year. Employment in this sector was
flat on net for the first eleven months of the year, as first-quarter
job gains were offset by job losses that increased between the second
and third quarters. Employment growth in most other major sectors has
been slower this year than in 1997. However, growth in the finance, insurance,
and real estate sector and the state and local government sector has picked
up this year. In the latter, spending on local schools and other government
services has been bolstered by strong growth in government revenues in
Construction activity in the District has been robust in 1998, with construction
jobs growing 7.3 percent at an annual rate for the first eleven months,
only a bit below last year's pace. New home construction and sales have
been rapid in most areas, particularly in California. However, signs of
cooling are evident in regard to nonresidential construction activity
in most states.
The aggregate performance of banks in the District was affected by increased
write offs and provisions for loan loss reserves by a large California
bank this year. Excluding this bank, banks headquartered in the District
posted strong returns in the third quarter, with average return on assets
(ROA) of 1.7 percent and average return on equity (ROE) of 15.1 percent.
Excluding the same bank, banks headquartered in California showed slightly
lower but still healthy profit rates, with average ROA of 1.4 percent
and average ROE of 12.1 percent. For small banks in California, third-quarter
profitability was somewhat weaker, at 1 percent for average ROA and 10.1
percent for average ROE, down slightly from the previous quarter and the
year prior. Small banks' relatively higher operating expenses accounted
for their poorer showing relative to California banks as a whole. Compared
with small banks in the state as a whole, small banks in the Central Valley
performed significantly worse, small banks in southern California performed
somewhat worse, and small banks in northern California performed significantly
better. Average capital ratios for banks of all sizes across the District
were strong in the third quarter.
Asset quality in the District in the third quarter was good, with the
average past-due total loan ratio remaining unchanged and below the national
average. For California banks overall, the average past-due total loan
ratio was somewhat lower than in the District as a whole. In contrast,
small banks in California showed a modestly higher past-due total loan
ratio than for all banks in California, the District, and the nation as
a whole, largely due to higher past-due ratios for business loans.
Composition and Recent Growth
Nonresidential construction constitutes a sizeable portion of total construction
activity in the Twelfth District. In 1997, the nine states that form the
Twelfth District recorded nonresidential construction awards valued at
$28.5 billion, about 21 percent of the national total of $136 billion.
This level of District nonresidential construction awards was close to
the District's $35.1 billion value of residential construction awards
from last year.
The left panel of Figure 1 shows yearly indexed values for nonresidential
construction awards in the nation and the District. Total nonresidential
awards in the District fell slightly between 1992 and 1993 but expanded
by about 10 percent during each of the years 1994-97.
A breakdown of nonresidential construction awards by type of building
is available for the broader Census region defined as the West, which
includes the District states plus Colorado, Montana, New Mexico, and Wyoming.
A resurgence of office construction and rapid growth in hotel and motel
construction have been key features of growth in nonresidential construction
activity in the West. Between 1993 and 1997, office construction in the
West rose by $2.1 billion, or about 70 percent (compared to just under
a 50 percent gain for total nonresidential construction). The nation as
a whole recorded similar percentage gains. Hotel and motel construction
rose by a factor of more than three in the nation and the West region
between 1993 and 1997, leading to increased value of $1.8 billion in the
Reduced Nonresidential Projects in 1998
The right panel in Figure 1 shows that the value of nonresidential construction
awards in the District has fallen since late 1997. For the first 10 months
of 1998, the value of nonresidential construction awards was about 8 percent
below that from the corresponding period in 1997. For the nation as a
whole, nonresidential construction awards during the first 10 months of
1998 were down about 3 percent from the same period in 1997. Among states
in the District, nonresidential awards are up a bit in Alaska and Idaho,
up 25 percent ($580 million) in Arizona, and down in the remainder of
the states. The decline in planned nonresidential construction this year
has been particularly pronounced in Nevada: for the first 10 months of
1998, nonresidential awards in the state were down about $865 million,
or 32 percent, compared to the same period last year.
In California, nonresidential awards were down by about $850 million
(7.3 percent) for the first ten months of this year. However, this drop
largely was due to a reduction in planned construction of public buildings
rather than private commercial buildings. Separate data from the Construction
Industry Research Board in Southern California indicate even greater strength
in private nonresidential construction plans in the state this year. Thus,
the outlook for most types of commercial construction activity remains
favorable in California.
Prospects for Commercial Real Estate Markets
Available data on vacancy rates suggests that office market fundamentals
generally remain sound in the Twelfth District. Vacancy rates reflect
the strength of demand relative to existing supply of space and as such
provide a good indicator of current market conditions.
Figures 2-5 indicate that vacancy rates for office space have come down
substantially in most areas of the District during the past seven years.
Figure 2 shows that vacancy rates are very low in the San Francisco Bay
Area, particularly in San Francisco and San Jose. This rate appears to
have levelled off in San Francisco, and a slight increase in Sa Jose this
year is consistent with the sharp slowdown in employment growth there
combined with substantial new office construction in the last several
years. Figure 3 shows that the market for office space in Los Angeles
finally began to tighten in early 1997. Vacancy rates there had been hovering
around 20 percent for several years; they declined to 14.1 percent as
of the third quarter of this year, although they still remain well above
the national average.
Among other parts of the District, Figure 4 shows that both Portland
and Seattle have very low office vacancy rates. The rate in Portland went
up a bit in the third quarter of this year, consistent with the slower
economic growth in the area. Figure 5 shows generally low vacancy rates
in the intermountain states. However, after several years of sharp decline,
these rates have levelled off in Phoenix, risen a bit in Salt Lake City,
and risen substantially in Las Vegas.
Comprehensive data on vacancy rates for other types of property are not
readily available. However, CB Commercial data on vacancy rates for industrial
space suggest tight supply in most areas of the District, with low rates
or ongoing declines in most large metro areas in the Twelfth District.
The levelling off or increase in office vacancy rates for Portland, Phoenix,
Salt Lake City, and Las Vegas suggests the possibility of some weakening
of office market conditions in these areas. Indeed, nonresidential construction
awards have fallen substantially in Portland and especially Las Vegas
this year and have been flat in Salt Lake City. Reduced growth in building
plans will help to mitigate the risk of overbuilding in these areas. However,
nonresidential awards have risen substantially in Phoenix this year, which
will place added pressure on developers to fill new and existing space
in that area.
Recent Financial Developments
Substantial retrenchment has been evident this year in the availability
of commercial real estate financing through real estate investment trusts
(REITs) and in the markets for commercial mortgage-backed securities (CMBS).
According to the National Association of Real Estate Investment Trusts,
total returns on publicly traded REIT stocks fell 16.3 percent on an unadjusted
year-to-date basis through November, and the issuance of new REIT shares
has all but ceased since the summer. More recently, although REIT share
prices improved a bit on net during September through November, financial
market turmoil has affected debt financing through the market for CMBS.
CMBS market activity has been very restricted in recent months, as investors
have demanded high premiums, particularly on the lower grade securities
that play a key role in this market's debt structure. Financing of real
estate development projects probably has been hampered by the sharp increases
in interest rate risk spreads in August and September.
The nonresidential construction award data underlying the second panel
of Figure 1 are consistent with restraining effects arising from the recent
financial turmoil. Nonresidential construction awards for the nation fell
abruptly in September and October. For the District, nonresidential construction
awards have fallen most of the year, but the drop was very sharp in October.
Although financing is likely to recover in coming months, lags between
the arrangement of financing and the recording of actual construction
awards may imply that the full effect of the CMBS contraction and related
financial turmoil only will become evident in future months.
Planned nonresidential construction activity has fallen a bit this year
in the Twelfth District. This development does not appear to reflect substantial
weakening of commercial real estate markets in most areas. However, slower
planned commercial development in some areas, such as Portland, Salt Lake
City, and Las Vegas, may be emerging as an adjustment mechanism to avoid
overbuilding in the future. Moreover, restraining effects of recent financial
market turmoil on real estate development activity merits additional attention.
Alaska, Oregon, and Washington
Economic growth in Alaska has slowed substantially since
the first quarter. Between March and November, payroll employment grew
by less than 0.5 percent at an annual rate. The manufacturing sector recorded
the sharpest declines, shedding 1,000 jobs since the first quarter. Payrolls
in the retail and wholesale trade sector also contracted, declining by
900 jobs since March. Job growth in services, the state's largest non-government
sector, remained positive during the past seven months, but the pace of
growth slowed substantially; it fell from 6.8 percent at an annual rate
during the first quarter to 3.3 percent at an annual rate since then.
On a positive note, the state unemployment rate has been well below its
level from the end of 1997. In addition, the state recently announced
that citizens can expect Permanent Fund dividend checks worth over $1,500
this year, an increase of more than $200 over last year's payment.
Oregon's economy has cooled since the beginning of this
year. Nonfarm payroll employment grew by 1.7 percent on an annual basis
during the eight months ending in November, well below the 2.8 percent
pace of the first quarter. The slowdown was concentrated in the manufacturing
sector. After adding jobs at a 1.6 percent annual pace during the first
quarter, Oregon manufacturers cut approximately 4,600 jobs over the past
eight months, a decline of about 2.8 percent at an annual rate. In contrast,
growth in the service-producing sectors has remained solid throughout
the year, although slower than last year. Between March and November employment
in the service-producing sectors grew 3.2 percent at an annual rate.
After making a key contribution to Oregon's economic expansion in recent
years, construction employment has been close to flat in 1998. The slowdown
in construction activity is due to growing weakness in both commercial
and residential building. Sustained weakness in manufacturing activity
has caused some firms to cancel or delay building plans and damped nonresidential
construction activity. Similarly, slower job growth has tempered home
buying and home price appreciation in many areas of the state, and residential
construction permits have fallen a bit this year.
Economic growth in Washington slowed to a more moderate
pace recently following rapid gains earlier in the year. Total nonfarm
payroll employment expanded by 1.8 percent at an annual rate during the
five months ending in November, about half the pace of growth during the
first half of the year. The manufacturing sector has weakened this year,
and manufacturing employment fell by 4.8 percent at an annual rate during
the past five months. Activity also has slowed in the construction sector.
A reduction in commercial and infrastructure construction projects has
caused growth in construction payrolls to slow from about 8 percent on
an annual basis during the first half of this year to 2.4 percent during
the past five months. Washington's unemployment rate was 4.7 percent in
November, up from the low of 4.1 percent achieved earlier this year.
In the state's agricultural sector, apple growers have had a difficult
year. Apple prices were so low at the time of harvest that some growers
found it more profitable to leave the fruit unpicked than to incur harvesting
and storage costs. Low apple prices have been attributed to shrinking
demand from East Asia, increased competition from China, and overproduction
in the U.S.
Arizona's economy expanded rapidly in recent months,
following a pause in mid-summer. Growth in total payroll employment averaged
6.5 percent at an annual rate during the three months ending in November,
after little net change in July and August. During the first eleven months
of 1998, employment increased at a 4.5 percent average annual pace, which
equals last year's pace. Among major sectors, job growth in manufacturing
and business services has slowed noticeably this year, but this largely
has been offset by a pickup in construction and state and local government
The Arizona state government sector has been supported by large increases
in tax revenues this year. Households have experienced strong individual
income gains, boosting tax collections in that category. The strength
in personal income has supported high levels of consumption spending in
the state. Compared to last year, taxable sales are up about 7 percent
for the fiscal year through October.
The pace of economic growth in California was solid
in recent months, despite continued contraction in some major industries.
Total payroll employment rose 3.2 percent on an annual basis in October
and November. This is above the average growth rate for the first eleven
months of 1998, but it is below the 3.8 percent pace from last year. Faced
by declining export demand and rising import competition, durable goods
manufacturers cut employment in November. Manufacturers of computers and
electronic components have been particularly hard hit this year, and aerospace
employment has contracted. However, the pace of job creation has remained
strong in sectors other than manufacturing, and this has helped to lower
the state unemployment rate to 5.7 percent in November.
California's state and local governments have created new jobs at about
a 2.5 percent annual pace this year, a pickup from prior years that is
due in part to improved fiscal capacity. About 21,000 of the 29,000 jobs
created this year were for educators at local schools, reflecting a recent
initiative to improve the quality of public education in the state. However,
slower economic growth this year and indications that the new educational
policies are more costly than anticipated have combined to undercut some
of the momentum for additional spending initiatives. Through October,
year-to-date state government cash receipts were running about 1 percent
below forecast, and the state Legislative Analyst's Office recently concluded
that significant fiscal restraint will be needed to avoid a major budget
deficit in the 1999-2000 fiscal year.
Hawaii's economy remained weak in recent months. Although
total payroll employment grew in the third quarter, job creation largely
was confined to the government sector, which shrank noticeably in October
and November. On net, payroll employment has fallen a bit since mid-year,
and it is down by over 1 percent on an annual basis for the first eleven
months of this year. About one-third of the 6,200 jobs lost on net in
the state this year were in the construction industry. However, the bulk
of the job losses were at retail outlets, which have been hit hard by
a drop in tourism-related business. For the first nine months of 1998,
total visitor arrivals to Hawaii fell about 1.5 percent relative to the
same period a year earlier. For this year, a 3.8 percent increase in westbound
arrivals was more than offset by a 9.5 percent drop in visitors from Japan,
Southeast Asia, and other points of origin to the east of Hawaii.
Economic activity in Idaho picked up a bit in recent
months. Total nonfarm payroll employment grew 3.4 percent at an annual
rate during the five months ending in November, faster than the 1.1 percent
pace from the first half of the year. In a turnaround from earlier this
year, Idaho's services sector has grown rapidly since June, creating 4,400
jobs. Government payrolls have grown fast this year, led by job creation
at local public schools and federal government sites. Retailers had shed
jobs in recent months, but a hiring surge in November more than offset
earlier losses. Idaho's unemployment rate was 4.8 percent in November,
a bit below the average for the last several months.
Activity in the state's durable manufacturing sector has declined and
employment in this sector is down by nearly 1 percent on an annual basis
so far this year. The state's northern rural counties in particular have
been hurt by weak conditions in the markets for lumber and wood products.
In addition to uncertainty regarding timber supply, producers have faced
reduced foreign demand arising from the Asian economic crisis and depreciation
of the Canadian dollar.
Economic growth in Nevada has been rapid, and the state
is first in the national employment growth rankings. Total nonfarm payroll
employment grew by 5.4 percent during the five months ending in November,
faster than the 4.6 percent pace from the first half of the year. Growth
in recent months has been rapid in the services and finance, insurance,
and real estate sectors. The retail trade sector recovered from a weak
second quarter and created a large number of new jobs in the past five
months. Rapid job creation has helped the state to achieve a very low
unemployment rate of 3.7 percent in October and November.
Nearly a quarter of Nevada's total payroll jobs are in the hotel and
amusement sector, and most of these are in Las Vegas, where growth has
been torrid this year. The October opening of the Bellagio casino created
9,000 new jobs in Las Vegas and accounted for all of the state's net job
growth that month. In contrast, employment in Reno's hotel and amusement
sector has fallen this year, and growth there remains much slower than
in Las Vegas.
Economic growth in Utah picked up recently, although
it remains below the pace from previous years. Following flat employment
in the second quarter, payroll employment grew 1.8 percent on an annual
basis during the five months ending in November. The services sector has
bolstered state job growth in recent months, due in part to the creation
of 900 new hotel and lodging jobs in October and November. Retail employment
grew in the third quarter but fell in the last two months, and on net
it is up only slightly for the year. However, the state and local governments
have created jobs at about a 5 percent pace all year. Utah's unemployment
rate was 3.0 percent in November, very near its low point of 2.9 percent
from late 1997 and early 1998.
Recent weakness in Utah's manufacturing sector is reflected in the net
loss of 900 manufacturing jobs since the high point in May. However, strong
growth in manufacturing employment during the first quarter has held employment
in this sector up slightly for the year. Moreover, recent news has improved
the outlook for Utah's high-tech manufacturing sector, with two computer
hardware companies (Iomega and Gateway) announcing plans to open or expand
manufacturing facilities in the state.