Federal Reserve District, 12th ; Economic conditions - West (U.S.)

Kristin L. Hotti

Randall J. Pozdena

English

Research Papers in Economics

FRBSF WEEKLY LETTER
February 15, 1985
The Western Regional Economy
Like the national economy, the western economy
enjoyed broad-based, although uneven, expan-
sion in the second year ofthe recovery. Economic
developments in the Twelfth District, as in the
natiOn, were driven rnainly by growth in con-
sumer spending and business investment. Highly
expansionary fiscal policy, together with its ef-
fects on interest rates and the U.S. dollar, shaped
the pattern ofdevelopments in the District, as did
the boom in high-technology capital spending.
Differences in economic performance among the
western states could be traced to an important
extentto differences in their economic makeup.
States with industries that relied heavily on gov-
ernmentorders orthat were part ofthe high-tech-
nology sector generally fared well, whereas states
with industries significantly hurt by high interest
rates and the strong dollaroften suffered by com-
parison. Also following the national pattern,
rapid economic growth in the beginning of 1984
slowed to a more sustainable pace in the second
halfofthe year.
Overall measures ofrecovery
In keeping with its size and economic diversity,
the West as a whole enjoyed an unemployment
rate roughly equal to that ofthe nation. There was
considerable diversity in unemployment rates
among western states, buteven so, all butone of
the nine states in the Twelfth District had unem-
ployment rates at year-end belowtheir 1983
average rates. (See chart 1.) The lowest rate atthe
end ofthe year was enjoyed by Arizona with 4.4
percent unemployment, while Alaska registered
the highest rate at 9.6 percent.
Employmentgrowth also varied widely across the
states in the District. The most rapid employment
gains were made in Utah and Arizona with
annual growth rates of9.6 and 8.1 percent
respectively. In contrast, employmentcontinued
to grow sluggishly in Oregon and Washington.
Growth in housing activity, another important
barometerofregional conditions, also varied
across states although it improved in most instan-
ces over 1983. The numberofhousing permits
issued increased most rapidly in Arizona and
California and registered the slowest growth in
Oregon and Idaho.
Sources ofstrength
As in 1983, the prominence ofthe aerospace
and electronics industries in the region added
vigorto the recovery in the West. (See chart 2.)
Both increased consumer spending and increased
defense spending have buoyed the demand for
these sectors' products. California, which
received 23 percent ofall prime defense con-
tracts in 1984, benefited mostfrom the continued
strength ofdefense spending. Employment in the
aerospace industry in California rose by 7.2 per-
cent in 1984, and employment in the electronics
industries also i.ncreased sharply. The economies
ofOregon, Utah and Washington received boosts
from aerospace and electronics manufacturing
activity as well. In fact, the strength ofthese sec-
tors was crucial in offsetting some ofthe con-
tinued weakness in the importantforest products
industry ofthe Pacific Northwest region.
As was true forthe nation as a whole, the general
increase in consumer and business spending
early last year also was a source ofstrength in the
western economy. Employment inthe services
and trade industries rose an average 5.0 percent
from mid-1983 toJune 1984 and was particularly
importantto the economiesofArizona, Utah and
California. In Hawaii, for example, increases in
tourism helped to offset the effects ofthe
depressed pineapple and sugar industries.
Rapid rates ofspending on consumer durables
and new housing in the first halfof 1984 also
were sources ofstrength in the western econ-
omy. In Arizona, construction activity was a
particularly importantcontributorto the state's
employmentgrowth, which ranked as the most
rapid in the nation in 1984. Toward year-end,
however, key indicators such as automobile
sales and housing starts signalled that the slow-
down observed nationallywas occurring in the
West as well.
The boom in business capital spending nation-
wide duringthis recovery also is reflected in the
District's economic performance. DistrictwideFRBSF
employmentgains of2.5 percent in manufactur-
ing were registered over the first halfofthe year, a
rate only slightly belowthat of 1983, and nonres-
idential construction activity continued at high
levels throughout 1984, particularly in Hawaii,
Idaho and Nevada.
Areas of weakness
Despite the generally good health ofthe western
economy, there were some markedly weak areas.
Agriculture, for example, suffered from the com-
bined effects ofcontinued high interest rates, the
international strength ofthe dollar, and domestic
and worldwide gluts in the markets for some
products. Although interest rates declined toward
the end of 1984, many western farmers were
having difficultywith debt burdens they had
accumulated overthe past several years. The
Federal Land Bank reported the highest rate of
farm loan delinquencies in California in thirty
years, and as many as 15 percentofCalifornia
farmers leftthe industry in the past year. Weak
foreign markets and the continued strength ofthe
dollaroverseas sharply reduced the demand for
manyofthe West's key agricultural products. The
value ofCalifornia farm exports in 1984 fell to
$3.0 billion from $3.3 billion in 1982 and $4.2
billion in 1981.
Farm problems have been compounded by
unusually large harvests for some crops, most
notably, raisins, grapes and almonds. The com-
bination ofweak demand and abundant supply
ofsome crops depressed net farm income in
mostofthe states in the District. In California,
the deterioration in agriculture has caused as
much as a 40-percentdecline in certain agricul-
turalland prices. In Idaho and Utah, however,
net farm income weathered the difficulteco-
nomic conditions and posted increases in 1984.
The wood products industry in the West also has
remained weak. Although home construction
and other uses ofwood products have grown
significantly sinee the 1981-1982 recession,
product prices remain depressed because of
weak export markets. Special regional circum-
stances also limitthe recovery ofthis industry.
Pacific Northwest producers face higher stump-
age, laborand transportation costs than produ-
cers in the southeastern United States. They also
suffer stiffer competition from Canadian produ-
cers as a resuItofthe increased weakness ofthe
Canadian dollar. As a result ofthese competitive
disadvantages, production ofsome wood prod-
ucts at the end of 1984 remained below the
levels of 1979.
The weakness in the wood products industry
significantly detracted from the economic per-
formance ofOregon and Washington in 1984.
Despite strength in other industries in these
states, the overall performance in both was lack-
luster. Oregon and Washington had the second
and third highest unemployment rates in the
Twelfth Districtand the slowest overall growth
in employmentduring the year.
The mining industry, concentrated mostly in the
intermountain states and Nevada, also was affec-
ted by low prices and foreign competition. The
decline in inflation overthe past two years has
sharply reduced the demand forthe "inflation-
hedge" metals, gold and silver. The subsequent
fall in their prices has made much gold and silver
mining in the West uneconomical. Copper min-
ing continued to be plagued by weak world
demand aggravated by a decline in international
competitiveness due to the strong dollar.
Despite the weakness in both miningand forest
products, the economies ofthe intermountain
states have been among the best performing in
the District. In Utah, forexample, the dampening
effects ofthese weak sectors were more than
offset by broad-based strength in the manufac-
turing and service industries and the general
stimulus provided bydefense expenditures. In-
deed, Utah enjoyed the third highest rate ofem-
ploymentgrowth in the nation duringthe first half
of 1984.
The weakening ofthe OPEC cartel and the decline
in world demand for oiI are majorcauses ofthe
continued poor performance ofthe Alaskan
economy. Alaska depends strongly on oil rev-
enues, to the extent that each one dollardecline
in the priceofa barrel ofcrude oiI resuIts ina
declineofabout $150 million in state revenues.
For the state as a whole, employmentgrowth in
1984 remained above national and District aver-
ages, and the unemployment rate, although still
very high, remained stable in 1984. However,
employmentwill grow more slowlyduring 1985
than in recent years because ofdeclining state
revenues.Percent
December 1982 ~
December 1984.•
14
12
10
8
6
4
Chart 1
Unemployment
Percent
U.s.
12th District •
Chart 2
Aerospace
20
15
10
5
0 Aerospace Electronics
2
0 c
~
~ 5: fu'
I ~
Z 0 C [ On ~
~ ~ ~. g- i i
~
0 @
~.
~ •.
II 0
Outlook
Because the western economy is highly diversi-
fied, its overall performance next year should
reflect that ofthe nation. Recovery should there-
fore continue, albeit at a slower pace. Some signs
ofa slowdown were evident before the end of
1984, butthey did not indicate that the District's
economy was heading toward a recession. This
interpretation is reinforced by healthy Christmas
retail sales activity and continuing declines in
unemployment rates at year-end.
The decline in short-term and long-term interest
rates thatoccurred in the second halfof 1984 wiII
stimulate spending in the interest-rate sensitive
sectors ofconsumerdurables and housing. A
strong revival in housing demand would be par-
ticularly welcome in the Pacific Northwest
because itwould provide the necessary basis
for a broad and sturdy recovery there. Recent
passage offederal legislation affectingtimber
contracts on public lands also should help by
reducing the average cost ofharvested timber.
Disbursements from existing defense contract
commitments should strengthen the aerospace
and electronics industries through 1986. Other
high technology industries also can be expected
to growthrough the next two years. But the U.S.
dollar's continued high value in foreign exchange
markets will threaten to erode even the overseas
demand for electronics products, and eventually
cause some jobs in these industries to be moved
to other countries.
Agriculture also should be healthier in 1985 as
the lower level of interest rates stemming from
declines in the latter halfof 1984 help relieve the
currentdebt burden on farming operations.
Export demand for agricultural products would
recover ifforeign currencies regained some of
their strength in relation to the u.s. dollar.
Whetherthis occurs will depend importantlyon
the outcome ofefforts to reduce the federal budget
deficit. In any event, 1985 will.be acritical year
for western farmers generally and California
farmers in particular, as many farms already are
in poorfinancial condition.
The economy ofthe Twelfth Districtshould
remain one ofthe mostdynamic in the U.s. econ-
omy in 1985. Unlike much ofthe country, the
western region does notdepend on older, more
vulnerable heavy industry. Rather, itharbors the
largest concentration of high technology
enterprise in the world and a diversityofother
manufacturing, agricultural and raw materials
industries. Such diversity gives the West the
capacity to continue to growthrough 1985.
Randall J. Pozdena and Kristin L. Hotti
Opinionsexpressed in this newsletterdo not necessarily reflect theviews of the managementof the Federal Reserve Bank ofSan
Francisco, orofthe Board ofGovernorsofthe Federal Reserve System.
Editorialcommentsmay beaddressedtotheeditor(GregoryTong) ortotheauthor....FreecopiesofFederal Reserve publications
can beobtainedfrom the Public Information Department, Federal Reserve Bankof San Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 974-2246.UO~6U!Y50m YO~n uo6~)JO OpOA0U
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
SelectedAssets and Liabilities
Large Commercial Banks
Amount
Outstanding
01/30/85
Change
from
01/23/85
Change from 02/01/85
Dollar Percent7
Loans, Leases and Investments1 2 187,204 5 11,852 6.7
Loans and Leases1 6 169,077 - 12 13,891 8.9
Commercial and Industrial 51,998 17 5,843 12.6
Real estate 62,025 28 2,616 4.4
Loans to Individuals 32,479 111 5,719 21.4
Leases 5,276 7 238 4.7
U.S. Treasury and Agency Securities2 11,036 22 - 1,205 - 9.8
Other Securities2 7,091 - 4 - 832 - 10.5
Total Deposits 192,237 494 6,919 3.7
Demand Deposits 44,037 726 57 .1
Demand Deposits Adjusted3 29,077 488 27 .1
OtherTransaction Balances4 12,464 - 78 404 3.3
Total Non-Transaction Balances6 135,736 - 154 6,462 4.9
MoneyMarket Deposit
Accounts-Total 43,335 370 3,553 8.9
Time Deposits in Amounts of
$100,000 or more 39,373 - 250 1,138 2.9
Other Liabilities for Borrowed MoneyS 21,449 742 1,817 9.2
Two WeekAverages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+)/Deficiency(-)
Borrowings
Netfree reserves (+)/Net borrowed(-)
Period ended
01/28/85
123
57
66
Period ended
01/14/85
21
22
°
1 Includes loss reserves, unearned income, excludes interbank-loans
2 Excludes trading account securities
3 Excludes U.S. government and depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephonetransfers
S Includes borrowingvia FRB, TI&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percent change

The Western regional economy

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The Western regional economy

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