News Release

November 23, 1998
Contact: Mary Daly (415) 974-3186

Slower Growth in California: The Role of Manufacturing

In recent years, robust growth in manufacturing employment has helped California expand more rapidly than the rest of the nation. However, the financial crisis in East Asia--combined with general imbalances in supply and demand in some high-tech sectors--has dampened growth in California's manufacturing sector.

In the November 27 Economic Letter (98-36), San Francisco Fed Economist Mary Daly reviews the relationship between East Asian developments and the high-tech slowdown, examining its impact on total employment growth in California.

Daly notes that manufacturing employment growth in California has declined steadily since the third quarter of 1997, a period when most other sectors of the state's economy were expanding. "After growing by 3.8% in 1997, payroll employment in California has expanded by 2.5% at an annual rate over the first eight months of this year, more than a percentage point below last year's pace. Although a number of sectors in the state's economy have decelerated, the bulk of the downturn owes to large and ongoing declines in manufacturing employment growth," she explains. In fact, "the slowdown in manufacturing has shaved nearly 0.5 percentage point off growth in the state."

The author attributes part of this recent slowdown in manufacturing to two factors: California's exposure to developments in East Asia and slowing in the high-tech sector. "California merchandise exports represent about 11% of state gross state produce (GSP), and nearly 50% of those exports are shipped to countries in East Asia," Daly writes. "Exacerbating California's vulnerability to East Asia is the fact that state exports are dominated by three industry categories: industrial machinery and equipment, electronic and electrical equipment, and instruments and related products," which collectively total more than 60% of California's exports to East Asia. As a result, "÷ongoing weakness in many Asian nations has significantly damped demand for these exports÷.[aggravating] a more general imbalance in supply and demand growth in the industry."

California's employment growth in the manufacturing sector has decelerated as East Asian developments and the high-tech slowdown have softened product demand. While Daly's research indicates that all manufacturing sectors--both durable and non-durable--recently slowed, "the deceleration in high-tech was particularly large," and "÷durable manufacturing accounts for a larger share of the total slowing than its employment share would predict."

In conclusion, Daly analyzes the state's regional growth effects. "The disproportionate slowdown in high-tech is changing the regional pattern of growth in the state. Employment growth in the San Francisco Bay Area fell from 4.4% between August 1996 and August 1997 to 2.4% over the 12 subsequent months," she explains. "This slackening in the Bay Area reflects its high-tech specialization and strong ties to East Asia. In contrast, growth in Southern California has accelerated," Daly concludes, "÷equalizing growth across California, although overall growth is slower than last year."