Carolyn Sherwood-Call

Ronald H. Schmidt

Scott D. Gilbert

Stephen O. Dean

English

Research Papers in Economics

FRBSF WEEKLY LETTEA
November 18, 1988
The West: Slowing, But Still Strong
As 1988 comes to aclose,the economy ofthe
Twelfth Federal Reserve District remains strong.
Moreover, current trends suggest that this
strength will carry into the next year, although
employment growth probably will slow com~
pared to the growth posted in the past several
years. In this Letter, we discuss the forces causing
this slowdown and the implications of slower
growth for the major sectors of the Western
economy.
A long expansion
Since 1983, the West has enjoyed solid em-
ployment growth, averaging 3.5 percent a year.
Consequently, the unemployment rate in the
District has fallen sharply over this period, from
11.0 percent in January 1983 to 5.5 percent in
September 1988.
This low unemployment rate is making it more
difficult for employers to find workers to fill new
jobs. This puts upward pressure on wages as
employers are having to compete for workers.
Rising wages caused by the shrinking pool of
unemployed workers in the West, in turn, is
beginning to exert a restraining force on further
employment growth. Ironically, then, the ex-
pected slowdown in growth next year is partly
due to the strong employment gains made
earlier.
Patterns of labor market scarcity help to explain
some of the differences among the growth rates
anticipated in various parts of the West. Areas
that have been growing more rapidly now are
reaching constraints on growth. Although the
high wages and available jobs in fast-growing
areas continue to attract new migrants and help
to prolong growth spurts, increases in the costs of
labor and real estate eventually force firms to
seek areas with slack labor markets. For example,
western Washington and the areas around San
Francisco and Los Angeles have expanded
rapidly in recent years. Now these areas are
imposingJimits on further growth, and employers
are complaining of labor shortages. As a result,
the rate ofgrowth is rising in parts of the West
where labor is more plentiful, such as eastern
Washington, Idaho, Utah, and central California.
In fact, the pattern of growth in the District in the
next several years may well be one of "filling the
gaps:' That is, areas that have large pools of
unemployed workers will become increasingly
attractive sites for employers seeking to expand
operations. In contrast, the regions that have
grown most rapidly in the past will tend to have
slower employment growth. Nonetheless, income
in both areas should rise; in the formerly slow-
growing areas because of employment growth;
and in the previously fast-growing areas because
the proportion of skilled workers in areas with
more developed infrastructure will rise.
Trade and services
Overall trade and service activity in the West
should continue to post modest growth, although
the volume of domestic retail trade, which is
expected to grow by about three percent in
1988, may grow at a slower rate during 1989. At
the same time, continued growth in international
trade should buoy the financial firms that offer
services related to that activity, particularly in the
booming port cities of Seattle and Los Angeles.
Western banks appear to be headed for healthy
profits in 1988, and anticipate another solid year
in 1989.
Resource industries
The natural resource industries should playa
major role in this process of "fillingthe gaps:'
This year's drought generally improved condi-
tions for western farmers working irrigated land,
as sharply higher prices have more than offset
slightly lower yields. Consequently, the rural
economy now is stronger than it has been in
several years. Farmers have reduced their debt
burdens and land prices are rising. Farm exports
THE WESTERn ECOnOmy The Western Economy is a quarterly
review of economic conditions in the Twelfth Federal Reserve District. It is published in the Weekly Letter
on the third Friday of February, May, August and November.In Idaho, road building and commercial con-
struction are spreading through the state, sig-
nalling a possible broadening of economic
expansion to the more rural areas. Construction
remains weak in Utah, despite recent gains in
employment, since vacancy rates remain high.
but the level of activity remains high. The aero-
space industry has suffered somewhat from the
drop in.defense expenditures, butstrong demand
for commercial aircraft has helped to buoy the
industry. Boeing and McDonnell Douglas, based
in Seattle and Los Angeles, respectively, together
pr()duce morethan85 percent of the nation's
cOnll11ercialaircraft,and bothfirms report grow-
ing waiting lists fornew aircraft.
Alaska and Arizona both suffered from extremely
slow construction activity this past year, and a
turnaround will take time. The stock of surplus
housing will keep the market in Alaska de-
pressed. Likewise, the Arizona market is over-
built, given the recent slowdown in population
and economic growth. Finally, the spectacularly
strong construction activity in Nevada is not
likely to besustained, so some slowdown is
likely there as well.
Construction and real estate
The construction outlook reflects the broad
trends .in the region. Construction is strong in
Washington and California, where recent em-
ployment and population growth have increased
the demand for residential structures. Real estate
values have risen sharply in most of the region's
major cities, causing problems of affordability
that threaten further employment growth in those
areas. Real. estate prices also are rising in Oregon
as a consequence of its recent economic im-
provement.
Ronald H. Schmidt
Carolyn Sherwood-Call
Economists
Stepheno. Dean
ScottD. Gilbert
Research Associates
Mal'1ufa(turing . .. ...
The outlook for the mCinufacturing sector. remains
qright, Manufactl1ring empl()Ymentgrowth i,n.the
District has been close to the national pace, as
strong demand for computers and commercial
aircraft has offset weakness inqeiel1se-relatecJ
products.. Slo\Aiing national.growth is expected
to cause. aslowdown inelectroniq qomponents
sales; the ratiooforderstoshiPmeDts has been
falling.in the semiconductor industry since May,
have risen, and reduced trade barriers continue
to benefit producers of many ofthe region's
crops. However, water SuppHrg9Urrently ~He
severely depleted innlany parts of theDistritt,
and a continuation of the drought into another
year would reverse the gains farmers have made
inthe last few years.
Mostofthe region's forest prodyctsfirms, an-
ticipateanother profitable.year,;as C:0lltinued
strength in pulp and paper offsets weakening
demand for construction materials. Slowing U.S.
construction activity and.decreased demand for
logsbyJapan are. reducingdemandfor lumber
and plywood,WhUe increasedfir~daqger and
environmental restrictiopscou1.01i.mit pro-
dl)ction.
Mineral'mining hasstrengihened .•inthe West,
al1.d continuedec()nomic growthshould keep
demand strong forsilver,gold,coPPW, phos-
phate, and molybdenum. District-wide mineral
mining employmentis estimated to have grown
almostseven percentduringthe.pastyear, with
Nevada accountingfor 36percenLof the. net job
creation. Nevertheless, recent labor-saving inno-
vations in mineral extraction technology have
keptjob totals well be.low the peak levels ofthe
eady1980s.lncontrast, the energy production
industry remainsqepressed bylowoiLprices. If
oil pricesdon<;>tTebol,1llcLfrom currentlevels,oil
companies CireIikely to reduce exploration and
developmel1tbuqgets, which coulddeal.a.further
blowtothe Alask;an econorny,in particular.DISTRICT INDICATORS
(SEASONALLY ADJUSTED)
88Q3 8802 88Q1 87Q4 87Q3 8702 87Q1 86Q4
AGRICULTURE
U. S. CROP PRICES, 1985=100 110.6 104.1 102.5 100.6 99.0 99.3 95.6 95.5
DISTRICT CROP PRICES, 1985=100 112.4 93.2 98.2 103.0 99.7 102.2 97.9 91.8
FARM CASH RECEIPTS, MILLION $ N!A 2190.1 2336.4 2182.9 2129.0 2111.9 2059.4 2005.2
CATTLE ON FEED, 1985=100 96.4 95.8 94.2 95.1 94.0 85.2 82.6 81.0
CATTLE PRICES, CALIFORNIA, $!CWT. 61.8 63.4 61.6 57.8 58.0 56.4 52.4 49.4
FORESTRY
LUMBER.· PRODUCTION; MILLIONS. BOARD FEET 1508.6 1647.5 1718.1 1661;9 1687;1 1756~-1 1806.5 1822.0
NORTHWEST LUMBER INVENTORY, MIL. BOARD FEET 2459.7 2498.3 2509.1 2478.4 2606.7 2637.6 2581.1 2608.8
U. S. LUMBER PRICES, 1985=100 113.8 113.4 110.6 109.4 61.1 33.3 32.4 31.6
ENERGY
SPOT PRICE OF OIL, $!BARREL 15.5 17.3 16.7 18.7 20.4 19.3 18.2 15.3
U.S. RIG COUNT 957.8 1061.7 973.8 1002.2 1037.5 880.0 810.5 786.9
DISTRICT RIG COUNT 93.4 96.9 79.1 99.5 102.9 82.6 60.1 61.8
FUEL MINING EMPLOYMENT, 1985=100 78.8 79.3 77.2 77.9 78.2 77.6 76.0 77.1
U. S. SEISMIC CREW COUNT 187.0 201.9 199.1 189.8 181.9 173.8 157.5 152.3
MINING
MINERAL PRICES, 1985=100 148.6 153.1 152.7 147.4 130.0 120.0 106.9 103.7
METAL MINING EMPLOYMENT, 1985=100 156.7 148.8 141.4 131.8 126.8 119.7 111.7 102.6
CONSTRUCTION
NONRESIDENTIAL AWARDS, MILLION $ 1571.9 1325.0 1481.9 1599.2 1476.1 1504.2 1450.6 1405.4
RESIDENTIAL PERMITS 32725 30907 27923 28694 30783 30200 32517 41469
WESTERN HOUSING STARTS, THOUSANDS 36.7 36.8 28.5 27.9 37.6 40.1 34.3 35.5
CONSTRUCTION EMPLOYMENT, THOUSANDS 970.3 957.7 945.6 916.9 909.9 905.8 901.3 895.6
MANUFACTURING
WAGES, CALIFORNIA, $!HOUR 10.9 10.8 10.8 10.9 10.8 10.7 10.6 10.5
EMPLOYMENT, THOUSANDS 3082.8 3086.1 3086.4 3056.1 3024.7 3004.1 2991.1 2982.7
DURABLES, 1985=100 102.2 102.1 102.2 101.1 100.4 99.7 99.3 99.1
CONSTRUCTION DURABLES, 1985=100 108.1 109.7 110.8 108.4 107.6 107.4 107.1 105.9
AEROSPACE, 1985=100 115.9 115.6 115.9 114.7 113.4 112.2 111.1 109.5
ELECTRONICS, 1985=100 100.1 98.5 98.0 97.2 95.9 94.9 94.7 94.6
SEMICONDUCTOR ORDERS, MILLIONS, NOT S.A. 1222.0 1269.0 1126.2 1056.8 967.3 980.7 912.4 757.5
WHLS!RETAIL TRADE EMPLOYMENT, THOUSANDS 4542.9 4495.5 4462.2 4383.9 4347.1 4306.4 4259.6 4234.3
RETAIL SALES, PACIFIC DISTRICT, MIL. $ 20583 20559 20615 20133 19722 19531 18947 19015
SERVICES EMPLOYMENT, THOUSANDS 4725.1 4675.2 4647.6 4587.1 4533.8 4486.5 4424.1 4347.8
HEALTH CARE, 1985=100 114.5 113.4 112.7 111.4 110.1 108.7 107.7 106.0
BUSINESS SERVICES, 1985=100 120.5 119.2 118.6 115.9 115.1 113.5 111.3 109.2
HOTEL, 1985=100 119.2 117.0 116.3 114.9 112.2 110.6 108.8 106.4
RECREATION, 1985=100 107.3 108.2 109.3 108.2 106.1 106.6 105.4 103.3
FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT 1222.4 1214.7 1215.8 1209.2 1204.5 1196.2 1182.6 1169.2
GOVERNMENT EMPLOYMENT, THOUSANDS
FEDERAL GOVERNMENT 607.5 606.1 610.3 609.9 605.3 605.2 601.0 599.5
STATE AND LOCAL 2618.1 2598.0 2570.1 2551,1 2527.3 2502.3 2490.0 2479.4
Data are weighted aggregates of available 12th District state data and are expressed as monthly rates unless otherwise noted.
District Indicator data are constructed by FRBSF research staff from public and industry sources.
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 (Barbara Bennett) or to the author.•.. Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box7702,
San Francisco 94120. Phone (415) 974-2246.uo~6U!4S0m 4o~n uo6l:lJO
040PI !!omOH O!UJoJ!l0) ouoz!J~
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80
60
Twelfth District Business Sentiment Index*
(1988)
% GNP INFLATION UNEMPLOYMENT
100
~~~~~~ ~~~~~~ ~~~~~~
* The index is construoted from a survey of approximately
75 business leaders in the 12th Federal Reserve. District.
o Worse
III Same
'--'''-''''-''''-'LLLLL--L.......w:l'-''''-'''..L.l_.,J.J....L:L...L:L...L:L...L:L->.L..J GJ Better o
20
40
PERSONAL INCOME
ANNUALIZED PERCENT GROWTH RATES
88Q2 88Q1 87Q4 87Q3 87Q2
ALASKA 4.4 2.3 2.4 0.1 6.2
ARIZONA 10.3 -4.0 14.0 6.2 9.4
CALIFORNIA 10.5 1.0 12.2 6.5 10.2
HAWAII 9.1 7.5 13.5 9.2 8.6
IDAHO 10.1 10.9 -0.2 5.4 10.5
NEVADA 12.7 6.4 13.7 12.2 11.1
OREGON 7.8 7.3 8.7 6.7 9.4
UTAH 11.3 -0.3 9.3 3.4 9.4
WASHINGTON 7.8 8.9 10.3 5.5 7.7
12TH DISTRICT 10.0 2.1 11.6 6.4 9.8
U.S. 7.4 4.6 11.6 7.1 6.7
NON-AGRICULTURAL EMPLOYMENT UNEMPLOYMENT RATES
ANNUALIZED PERCENT GROWTH RATES AVERAGE QUARTERLY DATA
88Q3 88Q2 88Q1 87Q4 87Q3 88Q3 88Q2 88Q1 87Q4 87Q3
ALASKA -1.8 "5.8 1.4 4.9 -4.6 ALASKA 8.8 8.9 9.3 10.1 10.6
ARIZONA -0.2 -1.9 3.4 4.0 3.0 ARIZONA 6.5 5.7 5.6 6.0 6.1
CALIFORNIA 3.1 2.5 5.3 3.3 3.5 CALIFORNIA 5.4 5.7 5.2 5.4 5.5
HAWAII 1.5 1.6 4.7 7.4 1.9 HAWAII 3.0 2.9 3.5 3.8 3.8
1DAHO 1.6 1.0 4.4 3.2 2.9 IDAHO 5.5 6.3 7.4 7.3 7.4
NEVADA 6.4 2.2 7.5 7.0 5.9 NEVADA 5.3 5.7 6.0 6.0 6.3
OREGON 4.4 0.9 6.9 3.8 2.8 OREGON 6.1 6.1 6.0 5.7 5.8
UTAH 3.8 4.0 0.8 2.8 -0.4 UTAH 4.7 5.0 5.5 5.9 6.4
WASHINGTON 3.7 3.7 4.8 5.4 4.2 WASHINGTON 6.6 6.6 7.0 7.4 7.4
12TH DISTRICT 3.0 2.1 5.0 3.8 3.3 12TH DISTRICT 5.6 5.8 5.5 5.8 5.9
U.S. 3.3 3.6 3.8 4.0 3.3 U.S. 5.5 5.4 5.7 5.9 6.0

The West: slowing, but still strong

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The West: slowing, but still strong

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