FRBSF Economic Letter
99-02; January 15, 1999
 Economic
Letter Index
East Asia's Impact on Regional Growth in California
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The East Asian economic slowdown has reduced employment growth throughout
California, but some regions have been affected more than others. In the
San Francisco Bay Area, strong trade ties to East Asia combined with a
slowdown in the area's prominent high-tech manufacturing sector have pushed
employment growth below the state's employment growth rate for the first
time in three years. In contrast, Southern California's more diversified
economy has remained relatively immune from the global economic turmoil,
with little deceleration in growth from last year. This Economic Letter
examines these and other factors contributing to the changing pattern
of growth in California
Variation in regional export patterns
The data for measuring the destinations and product composition of state
exports are, unfortunately, not without problems. For this analysis, the
data come from the U.S. Department of Commerce Exporter Location series
and represent shares as of 1996. This source provides information on the
dollar value of export sales for Metropolitan Statistical Areas based
on the location of the exporter of record. While in most cases the location
of the exporter corresponds to the location of the producer, if a firm's
sales center (or another intermediary) processes the export, the exporter
location data will attribute the value of the transaction to the location
of the sales group, rather than to the production location (U.S. Department
of Commerce). Despite this potential for mismeasurement, a comparison
of state-level export numbers for California reveals little difference
between the Exporter Location series and the conceptually more appealing
Origin of Movement series, which records where an export begins its journey.
(Origin of movement data are not available by MSA.) Furthermore, for the
three California regions examined in this analysis--the San Francisco
Bay Area, Los Angeles-Long Beach, and the remaining areas of Southern
California including San Diego--the product composition of exports recorded
in the MSA Exporter location data is consistent with the industry employment
composition of the respective regions. For these reasons, the MSA Exporter
location data appear adequate to describe the destinations and product
composition of regional exports.
Although about 50% of California exports are shipped to destinations
in East Asia, within California export patterns vary. As Figure
1 indicates, 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% of all Bay Area exports are shipped
to East Asia. In contrast, in Southern California excluding Los Angeles-Long
Beach, just over one-third 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% of exports from Los
Angeles-Long Beach to East Asia go to Japan, compared to 30% 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.
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% of its total
exports to the region. In the other areas of Southern California the ties
to Latin America are even stronger: about 25% 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% 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
(comparable growth figures are not available at the regional level). State
exports to East Asia declined by 2.5% in 1997 and 20.6% during the first
three quarters of 1998. Over the same periods, California exports to Latin
America increased at double-digit rates, by 32.6% in 1997 and 14.9% during
the first nine months 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 exports from
some of the demand weakness depressing state export growth.
The impact of East Asia on regional growth within California also can
be examined in terms of the product composition of exports. Exporter Location
data indicate that Bay Area exports are dominated by three industries:
industrial machinery, electrical machinery, and scientific and measurement
instruments. Combined, these categories account for more than 80% of exports
from the Bay Area, compared to 33% of exports from Los Angeles-Long Beach,
and 68% of exports from other areas of Southern California. In contrast,
a larger fraction of exports from Southern California are of non-high-tech
capital goods, construction materials, and miscellaneous manufactured
commodities, ranging from furniture and fixtures to plastics and chemicals.
Combined, these products account for more than 20% of total exports from
Southern California but less than 9% of exports from the Bay Area.
Again, these differences in product composition of regional exports are
particularly notable when combined with state export growth by industry.
State exports of industrial machinery and electrical equipment (75% of
Bay Area exports) grew slightly in 1997 and declined during the first
three quarters of 1998. Moreover, exports of these products to East Asia,
the Bay Area's primary trade destination, declined by much more, about
20% during the first nine months of 1998. In contrast, exports of these
products to Latin America have increased this year. Exports of other types
of goods to Latin America also have increased; for example, exports of
non-high-tech capital goods have grown by 24% during the first nine months
of 1998 compared to the same period a year ago. Overall, the product composition
and trade relationships in Southern California make it a likely beneficiary
of the limited growth in state exports this year.
Declining exports and manufacturing employment
growth
The disproportionate exposure of the San Francisco Bay Area to the East
Asian turmoil and the high-tech slowdown together with the relative immunity
of the Southern California economy to these factors are evident in the
growth rates of the respective manufacturing sectors. Figure
2 compares the 12-month % change in manufacturing employment in the
Bay Area, Los Angeles-Long Beach, and the remainder of Southern California.
As the figure shows, weakening export demand was accompanied by slower
manufacturing employment growth in all three regions, with the decline
most dramatic in the Bay Area.
Underlying these trends are slowdowns in industries composing the bulk
of state and regional exports. In the San Francisco Bay Area, manufacturing
employment growth in the three dominant industries (industrial machinery,
electrical machinery, and scientific and measurement instruments, which
include most of the Bay Area's high-tech producers) account for more than
55% of manufacturing employment in the region. As of October, 12-month
employment growth among these three industries fell 1.9%, a decline of
more than 7.7 percentage points over the 1997 pace. Although growth in
other Bay Area manufacturing industries has been positive, it has not
been sufficient to offset the dramatic slowdown in these key industries.
In contrast, in Los Angeles-Long Beach and the rest of Southern California,
the combination of a manufacturing sector less dependent on high-tech
production and rapid expansion in other key industries has helped maintain
manufacturing growth in the region. In Los Angeles, growth in the area's
largest manufacturing sector, apparel and textiles, has remained solid:
12-month growth as of October was 5.1%. In the remaining areas of Southern
California, manufacturing employment growth remains strong. As of October
on a 12-month basis most sectors recorded growth in excess of 3%. Even
the industrial machinery and electrical machinery manufacturing sectors
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.
Changing pattern of regional growth in
California
The disproportionate effects of East Asia and the high-tech slowdown
on Bay Area manufacturing is changing the pattern of regional growth in
California. Figure 3 shows
12-month employment growth for the Bay Area, Los Angeles-Long Beach, and
Southern California excluding Los Angeles-Long Beach. Between July 1995
and November 1997, employment growth in the Bay Area averaged 4%, 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. As of October on a 12-month basis, employment growth in the Bay
Area was 2.1%, compared to 2.4% for Los Angeles-Long Beach and 3.6% for
the remaining areas of Southern California.
Conclusions
Diversification in both trade and manufacturing has 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, moving many of its economic indicators to their pre-recession
levels. In contrast, strong trade ties with East Asia and a highly concentrated
manufacturing sector have left the Bay Area vulnerable to recent global
economic developments and have damped employment growth in the region.
Although some sectors of the Bay Area economy have strengthened in recent
months, total payroll employment growth in the area remains below that
for Los Angeles-Long Beach and the other areas of Southern California,
a significant change from 1997.
Mary Daly
Economist
Reference
U.S. Department of Commerce, International Trade Administration. 1998
"Metropolitan Area Exports: An Export Performance Report on over
250 U.S. Cities."
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
to:
Research Department
Federal Reserve Bank of San Francisco
P.O. Box 7702
San Francisco, CA 94120
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