Western Economic Developments
January 1996
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- The California economy showed signs of a pick up near year-end 1995
and is expanding faster than the national economy. In addition to the
widely reported recent job gains in the state, California also has experienced
noticeable increases in state government tax revenues.
- Rapid expansion continued in Arizona, Nevada, Oregon, and Utah. These
District states are among the six fastest-growing U.S. states, along
with the Southwestern states of New Mexico and Texas.
- Most District states benefitted from rapid growth in overall exports
in 1995. Exports from states which traditionally ship to rapidly-growing
Asian markets increased particularly fast, but the prominence of high-technology
manufacturing industries in the West also helps explain the region s
relatively strong export performance.
- Total loans outstanding at a sample of large District banks increased
in the fourth quarter. Large California banks posted slightly larger
fourth-quarter gains than those operating elsewhere, despite a slight
drop in California loans in December.
The District economy showed some vigor near year-end 1995. District
payroll employment increased 3.3 percent at an annual rate in November
and likely posted a moderate gain in December, when California employment
increased about 2 percent and a large number of workers in Washington
state returned from a strike at Boeing. Although no official statistics
are available yet, business contacts report moderate gains in retail sales
for most western states. Labor markets and the consumer sector appear
to have been quite strong near year-end in Arizona, Nevada, Oregon, and
Utah the four District states which rank among the top six U.S. states
in terms of annual job growth through November. Moderate-paced expansions
continued in California, Idaho, and Washington states. In contrast, the
economies of Alaska and Hawaii remained stagnant in recent months.
Many sectors have contributed to the recent District job growth. Of
the roughly 56,000 jobs added to District payrolls in November, 26,000
were in the services sector, and employment in wholesale and retail trade
increased by 17,000 jobs. Government sector jobs also have edged up in
recent months, and excluding the striking Boeing workers manufacturing
has managed to post small gains. Moreover, District construction employment
continues to expand rapidly, fueled by the building of additional manufacturing
plants and housing in many of the fast-growing states.
Export growth is an ongoing source of strength for the regional economy.
For California and many other states in the District, exports grew rapidly
in 1995, exceeding the healthy pace of overall U.S. export growth. However,
a decline in exports from Washington state held overall District export
growth below the average for the United States last year (table 1, chart
1).
For the western states with high export growth, analysts generally point
to two factors contributing to strong export performance: the proximity
to the rapidly growing markets in Asia and the prominence of the high-tech
sectors in the West. Data on the composition of overall U.S. and Twelfth
District state exports confirms the importance of these factors.
For the U.S. as a whole, the relatively fast growth of exports in 1995
does owe partly to increased trade with Newly Industrialized Countries
(NICs) in Asia Hong Kong, Korea, Singapore and Taiwan to which exports
in the first three quarters of last year increased 23.3 percent at an
annual rate relative to the full year of 1994 (table 2). However, the
impact of this growth on overall exports was limited because only about
11.6 percent of U.S. exports go to the NICs, whereas almost one-fourth
of U.S. exports go to Canada and another roughly 30 percent are shipped
to major Western European countries or Japan. Exports to Canada and Europe
increased at about a 10 percent annual rate in 1995. Relatively fast growth
of exports to Japan also helped offset the roughly 10 percent decline
in exports to Mexico.
In terms of the commodity composition, U.S. export trade is
dominated by capital goods and industrial supplies and materials, both
of which have been increasing rapidly. Among capital goods, rapid increases
in exports of high-technology items have been partly offset by declining
aircraft exports. On an end-use basis (not shown), exports of aircraft,
engines and parts fell 17 percent in the first three quarters of 1995,
whereas exports of computers, accessories and telecommunications equipment
increased nearly 20 percent, and semiconductor exports jumped 35 percent.
On an industry sector (SIC) basis (table 2, memo items), the declining
aircraft exports are primarily responsible for the 2.7 percent decline
in exports of the overall transportation equipment group, which also includes
autos. Increasing exports of high-technology equipment have boosted exports
of the industrial machinery and computing equipment, electrical machinery,
and instruments industry groups.
The data on California exports suggest that proximity to Asia is important
for the state. In 1994, California had a larger share of its exports destined
for NICs and Japan than did the overall United States, and in 1995 exports
from California to these Asian countries grew about as fast as overall
U.S. exports to these countries (table 2). Thus, the relatively fast growth
of exports to those markets benefitted California more than the rest of
the U.S. as a whole.
The composition of exports from California also suggests that prominence
of high-tech sectors has been important. California has a larger share
of its exports in the fast-growing instruments and machinery industry
groups than does the overall U.S. Thus, the rapid growth of high-technology
equipment exports also contributed substantially to the growth of California
exports in 1995 and helps explain California s relatively strong export
performance.
The characterization of other western states as purveyors of high-technology
machinery and equipment, particularly to Asian markets, largely rings
true. Similar to California, about 25 percent of exports from the District,
excluding California and Washington, are of electrical machinery. With
regard to where exports are shipped from the remainder of the District,
about 40 percent goes to Japan or NICs, which is a bit higher than the
California proportion for these areas and well above the U.S. average.
Also, exports from these other states did increase somewhat faster than
overall U.S. exports in the first three quarters of 1995. Export growth
accelerated in 1995 for Oregon, Utah, and Alaska and remained in double-digit
figures for Arizona, Idaho, and Nevada.
Not surprisingly, for Washington state the commodity-composition of
exports is dominated by aircraft and other transportation equipment (at
57 percent). While the state exhibits somewhat higher shares of trade
with Japan and the NICs than the U.S. average, weakness in aircraft shipments
last year led to the 6.3 percent decline in overall state exports in 1995.
That decline came on the heels of large declines in 1993 and 1994 (chart
1). This pattern reflects the decline in aircraft deliveries by Boeing
to foreign customers. Looking ahead, developments in Washington state
are unlikely to be such a significant drag on District export performance.
Magnitude of Other Factors
The country composition of U.S. export trade cannot fully explain relative
regional export performance. For example, at times the growth of exports
to Asia from California has exceeded the U.S. pace of growth of exports
to Asia. Similarly, California exports to Mexico did not decrease as fast
as overall U.S. exports to Mexico last year. Industry mix likely explains
part of this divergence, but other factors--such as the role of maquiladoras
in the Mexico case--also have been important.
To investigate the extent to which the export performance of California
and other District states has been explained by the commodity-composition
or country-composition of U.S. export growth, we have calculated two corresponding
predictors of state export growth and compared them with actual state
export growth (chart 2). First, to predict exports based on commodity-composition
(dotted line), we take the 1994 state commodity-composition of exports
as a given for all years; state exports are then extrapolated by the time-series
of rates of change in national exports for each major commodity (2-digit
SIC) group. Similarly, the dashed by country line shows the appropriate
state-specific weighted average of growth rates in U.S. exports to each
of the country groups listed in table 2.
For California, the actual 1995 growth rate is best-explained by the
country-composition of U.S. export growth, but the commodity-composition
of U.S. exports also implies rapid growth in exports from California.
However, over the longer span of time shown in the chart, the errors in
explaining actual California export growth have been relatively large
in many years, with actual California export growth generally exceeding
the predicted rates based on either commodity or country composition.
Similarly, the rapid recent growth of exports from District states except
California and Washington is better-explained by the country composition
of U.S. export growth, particularly the pick-up in exports to Asia, than
by what is being exported. Also, the errors in explaining other District
states export growth have been relatively large in many years, with actual
export growth generally exceeding both types of predicted rates. California
and other District states (except Washington) have the advantages of an
export mix that is tilted toward fast-growing destinations and types of
goods and also have exhibited a tendency to capture a larger-than-average
share of U.S. export growth within these fast-growing markets. Thus, export
performance in Twelfth District states provides some reason for optimism
about the regional economic outlook.
Data from a sample of large banks indicate that, after taking into account
loan sales and securitizations, District loans outstanding contracted
in December. However, as in November, the volatile consumer loan sector
in Nevada, influenced by credit card lending, accounted for almost all
of the drop-off. In the District outside of California and Nevada, total
loans grew at about a 6.2 percent annual rate in December. Fourth quarter
growth overall, at 5.4 percent, was up slightly from the 4.5 percent pace
set in the third quarter, but significantly below the first quarter peak
of 16.4 percent.
Among large California banks, total loans outstanding contracted at
a 1.5 percent annual rate in December, after taking into account loan
sales and securitizations. This was the first cutback since November 1994.
Contractions in consumer and real estate loans contributed to the overall
cutback. Fourth quarter growth overall, at 7.6 percent, was down somewhat
from the 11 percent pace set in the third quarter and significantly below
the second quarter peak of 19.1 percent.
Job growth in Alaska paused in recent months. Nonfarm
payroll employment was little changed during October and November, after
rising at a 2.6 percent annual rate during the third quarter. The state
s resource-based industries were especially sluggish. Pulp mills, lumber
processors and the oil industry have all reduced employment levels. Among
the state s primary activities, only tourism flourished in November, boosting
hotel service jobs and supporting retail trade.
The federal, state and local government sectors each reduced employment
during the latter half of 1995. However, the cutbacks at the state level
were not as severe as at other levels of government, despite the pressure
on the state budget from declining oil-related revenues. This pressure
is likely to continue, as state analysts project only slight near-term
increases in state oil revenue.
Oregon's economy posted further gains in November,
with the number of jobs now up 3.7 percent from a year earlier. Only the
government sector trimmed payrolls in November. Manufacturing, wholesale
and retail trade, and the transportation sectors all showed strong gains
in November, while the pace of growth slowed in the service and financial
sectors. Construction employment has trended up, and there was a sharp
recent rise in both non-residential construction awards and residential
construction permits.
Contacts report that Oregon's merchants posted sizeable Christmas holiday
retail sales increases compared to last year. In addition to the underlying
strength of the consumer sector in the state, spending this holiday season
reportedly was buoyed by the disbursement on November 1st of tax rebate
checks from the state government. The rebates amounted to about $115 per
recipient. Earlier strong growth in income tax receipts triggered the
rebate, and state government income tax withholding reportedly continued
to increase rapidly through the fourth quarter.
Economic activity in Washington state apparently remained
subdued through most of December, owing to the direct and indirect effects
of the just-ended strike at Boeing Aircraft and earlier reductions in
aerospace employment. Outside of aerospace, labor demand has been strong,
with the most rapid employment gains in the trade and service sectors.
Growth also has been strong in selected manufacturing industries, such
as electronic equipment, industrial machinery and plastic products.
The Boeing machinists ended their strike in mid-December, after nearly
10 weeks off the job. The return of the machinists to work and receipt
of an up-front pay increase reportedly gave a boost to retail sales during
the last week of the Christmas shopping season. Nevertheless, overall
retail sales reportedly were disappointing.
In coming years, the aerospace business appears less likely to hold
down the state economy significantly. Boeing reportedly plans to deliver
more planes in 1996 than in 1995. The vast majority of new orders in 1995
came from foreign customers. However, the longer-term outlook for Boeing
rests on expectations of a pickup in domestic orders, given the age profile
of current fleets. In the most recent round of competition for domestic
business, Boeing won a large order from General Electric Leasing.
Arizona continued to post substantial employment gains
in recent months. The average pace of job growth in October and November
was about 4 percent at an annual rate, about the same as the strong third-quarter
pace. More than half of the most recent job gains have been in the services
sector, but construction, manufacturing, and the trade sectors also have
posted notable increases.
As reported in First Interstate Bank s Arizona Review, state retail
sales in the first ten months of 1995 increased 7.6 percent relative to
the same period a year earlier, and November and December retail sales
likely remained more than 5 percent above a year earlier. Activity in
the Phoenix area was boosted by increases in air passenger traffic this
year. Looking ahead, however, travel-related revenues are expected to
be held down slightly by the elimination of 16 Southwest Airlines flights
from its Phoenix schedules.
California's economy is accelerating a bit and growing
faster than the national economy. The payroll survey showed a 1.9 percent
at an annual rate state employment gain in December, following an upward-revised
November increase of 2.4 percent. For the fourth quarter as a whole, employment
growth was 2 percent at an annual rate, slightly higher than in the third
quarter and well above the first-half pace reported in the survey. (The
alternative interim employment series also shows a recent pickup from
the first half pace but places the overall annual California job gains
through December at a higher 2-1/4 percent.) Recent job gains have been
large in the services and trade sectors, and construction employment continued
to expand rapidly. In the midst of this apparent pickup in labor demand
in some sectors and regions, job loss in other areas increased in recent
months, keeping the state unemployment rate relatively high.
Other economic indicators are consistent with moderate overall growth
in the state economy near year-end. State sales tax receipts in December
were almost 5 percent above a year earlier, and payroll withholding tax
receipts also were strong last month. Selected retailers in some areas
of the state particularly San Diego reported sizeable gains in holiday
season sales relative to last year. However, retail sales in other areas
of Southern and Central California reportedly were weak, and the federal
government shutdown of parks and visa offices disrupted visitor buying
in some tourist areas.
Economic activity in Hawaii remained at a relatively
low level near year-end, despite a reported strong flow of tourist visitors.
Payroll employment was unchanged in November at a level 1.7 percent below
a year earlier. The state unemployment rate was little changed toward
the end of 1995 from a 1994 average of 6 percent, which is the highest
unemployment rate in Hawaii since 1983. Retail trade employment in Hawaii
held steady last year, but jobs were lost in every other major sector.
Most of the roughly 4,000 jobs lost in the government sector last year
were cut from state government payrolls, reflecting a lagged adjustment
to the prolonged period of contraction in private sector activity in the
state.
Construction employment fell almost 6 percent in 1995, following similar-sized
declines in 1993 and 1994. Much of the ongoing weakness is in non-residential
building, but the residential sector also is down.
Although Idaho's overall growth in 1995 moderated relative
to 1994, the state economy was strong near the end of 1995. A November
surge in payroll jobs was led by large increases in trade and services
employment. Construction employment also jumped in November, offsetting
an October decline. Manufacturing employment has edged up, on balance,
in recent months, after declining earlier in the year.
Other indicators of recent and prospective economic activity in Idaho
are mixed. The household survey shows increases in overall Idaho employment
in recent months, but the state unemployment rate was reported to have
increased to 5.6 percent in November from 5.1 percent in September and
October, as estimated labor force growth outstripped the household employment
gains. Non-residential construction contract awards recently have remained
well below the pace of earlier in the year, but residential construction
permit issuance has increased in recent months. Unofficial reports on
the pace of holiday season retail sales also were mixed.
Nevada continues to be the fastest-growing state in
the country. State yearly job growth as of November was 6 percent, with
annualized growth averaging near 8.5 percent during September through
November. State manufacturing employment growth is 4.6 percent yearly,
which is substantially slower than in 1992-94 but compares favorably with
the manufacturing employment decline in the U.S. as a whole. Annualized
monthly growth in construction employment averaged near 35 percent during
July through October, with only slight cooling to 22 percent growth in
November. The strength in residential building is apparent in residential
permit issuance figures, and nonresidential construction awards also have
increased substantially, owing, in part, to resort expansions in the Reno
area. Substantial increases in construction awards during October and
November suggest continued strength in this sector.
Other indicators also suggest substantial economic strength in the state.
The unemployment rate averaged 4.9 percent in October and November. The
retail sector added a large number of workers to its payrolls early in
the holiday season, and subsequent holiday retail sales were reported
to be even stronger than expected by some observers.
Utah's labor market remains tight, as indicated by
the remarkably low November unemployment rate of 2.8 percent. Employment
jumped 6.3 percent at an annual rate in November, after little change
in September and October, bringing the 12-month employment growth rate
to 5.2 percent. The November growth was led by sharp increases in manufacturing,
trade, and financial sector employment. Solid expansion in the construction
sector is likely to continue; non-residential construction awards have
been at high levels and increased lately relative to mid-summer, and residential
permit issuance has continued to climb.
Retail sales were reported as moderate-to-strong during the holiday
season. The underlying strength of the local economy was masked somewhat
by a slow start for the skiing industry, owing to warm, dry weather. However,
snow-making capabilities and non-refundable airfares reportedly helped
to mitigate the weather-related reduction in tourist revenue, and several
small storms in late December and January have substantially improved
ski conditions recently.
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