Carolyn Sherwood-Call

English

Research Papers in Economics

FRBSF WEEKLY LETTER
November 30, 1990
Earthquake Aftermath
On October 17, 1989 an earthquake measuring
7.1 on the Richter scale shook the Santa Cruz
and San Francisco Bay areas. Also dubbed the
"pretty big one," the Loma Prieta earthquake
killed 62 people, severed critical highway links,
and damaged or destroyed many buildings. A
year later, quake-related economic changes
appear to be relatively minor in comparison
to other economic changes. Indeed, even in
the weeks immediately following the quake,
the overall impact appeared to have been
quite modest.
For most hard-hit areas and some sectors of the
region's economy, economic aftershocks lasted
only a few months. Some other areas, however,
continue to endure hardship now. This Letter
examines the extent of economic aftershocks
in the region.
Little overall impact
The impact of the earthquake on the region's
overall pace of economic activity appears to
have been relatively modest, even in the weeks
immediately following the quake. As defined
here, the region consists of Santa Cruz, Santa
Clara, San Mateo, San Francisco, Marin,
Alameda, and Contra Costa Counties.
October 1989 employment data, the last
collected before the quake, show that employ-
ment had grown 2.3 percent since October
1988. Employment growth did slow in December,
to 1.4 percent, but annual gains throughout 1990
have consistently been close to 2 percent. Al-
though this pace represents some slowing from
the 3 to 3Y2 percent increases seen during early
1989, it actually exceeds the rate of growth con-
sistent with the pre-quake relationship between
employment growth in the Bay Area and the rest
of California (or the United States). Thus, the Bay
Area's slower growth seems to result more from
a national slowdown than the lingering effects
of the earthquake.
Brief slowing in retail trade
Weakness in retail activity accounts for most
of the sluggishness seen in employment during
December of 1989. For the region as a whole,
retail trade employment fell 0.5 percent between
December 1988 and December 1989. This de-
clinereflected large decreases of 7.2 percent in
Santa Cruz County, 4.7 percent in Santa Clara
County, and 0.5 percent in the San Francisco
metropolitan area (San Francisco, San Mateo,
and Marin counties). A drop in retail trade that
began shortly before the earthquake may have
been partly responsible for the decline in Santa
Clara County. The earthquake itself may have
caused the slide in Santa Cruz County.
Growth of 3.4 percent in Alameda and Contra
Costa Counties only partly offset the declines
elsewhere. In those two counties, the earthquake
did not seem to have affected retail trade signifi-
cantly. Anecdotal information suggests that some
suburban areas (including those in Alameda and
Contra Costa Counties) may even have benefitted
to some extent, as damaged freeways led shop-
pers to stay closer to home.
To some extent, weak retail activity in December
may simply have reflected a broader weakness
in Christmas sales due to macroeconomic factors.
The concentrated retail sales activity in the
Christmas season could have exaggerated the
impact on December figures. Data for regions
of California outside the Bay Area suggest that
December was a particularly weak month state-
wide. National employment in the retail sector
did not, however, show a similar break.
Some weakening in the fourth quarter of 1989
also is apparent in region-wide data on taxable
retail sales. While taxable sales grew 9.0 percent
between the third quarter of 1988 and the third
quarter of 1989, the annual growth rate slowed to
6.4 percent in the fourth quarter. Such a slacken-
ing is not, however, out of line with the normal
volatility from quarter to quarter.
Growth in taxable sales slowed by one-and-
a-half to three percentage points between the
third and fourth quarters of 1989 in most indi-
vidual Bay Area counties as well. However, San
Francisco and Alameda Counties recorded moreFRBSF
dramatic declines. Taxable sales shrank during
the fourth quarter in the former, after posting a
5.5 percent rise in the third quarter. The growth
rate of sales in the latter declined by over five
percentage points.
In contrast, some Bay Area counties fared better
than the region-wide average. The growth rate of
sales jumped almost three percentage points in
Marin County, and more than two percentage
points in Monterey County. Sales growth was
essentially unchanged in San Mateo County.
Somewhat surprisingly, the growth rate of sales
in Santa Cruz County posted a decline of less
than one percentage point, which is slightly
better than the region's average.
The experiences of some cities and counties
also deviated greatly from that of the entire Bay
Area. Cities with sharp declines in year-over-year
growth included (in addition to San Francisco
mentioned above) Santa Cruz, Watsonville, and
Scotts Valley, all close to the quake's epicenter, as
well as Oakland, Mountain View, and Alameda.
Although the overall effects on Bay Area retail
sales appear to have been relatively modest, the
data suggest that some communities suffered
considerable declines in the weeks immediately
after the earthquake. The earthquake hit down-
town shopping areas especially hard in a few
communities, including Santa Cruz and Oak-
land, and damaged several transportation links
between San Francisco and outlying areas.
Temporary drop in visitors
One of the concerns often voiced after the
earthquake was that the quake might hurt visitor
activity, which is an important component of the
region's economy. Visitors might stay away be-
cause of fears about weakened infrastructure and
possible future quakes. As evidence of shaken
visitor confidence, some have pointed to a de-
crease in hotel occupancy rates in San Francisco
in the first quarter of 1990 as compared with the
first quarter of 1989.
They neglect, however, a 12 percent rise in
the number of hotel rooms during 1989. That
increase could cause a falling occupancy rate
even without a decline in the number of hotel
rooms occupied. The number of occupied rooms
did drop 14 percent from the year-earlier level in
January, but it actually rose 1 and 5 percent in
February and March, respectively.
Moreover, San Francisco's hotel occupancy
figures improved substantially during the course
of the year. The 76 percent occupancy rate in
July was significantly higher than the year-earlier
level of 71 percent, and the number of hotel
rooms occupied was up by about eight percent.
The gains were particularly strong for higher-
priced hotel rooms, whose occupants are pre-
sumably likely to spend more and hence provide
more stimulus to the region's economy.
Hotel employment data for the Bay Area as a
whole show that the rate of growth slowed during
early 1990, but has resumed its pre-quake pace
since then. Growth slacked off in San Francisco
during November, December, and January. For
Alameda and Contra Costa Counties, in contrast,
November and December were particularly
strong months for growth in hotel employment.
San Jose's hotel employment has been weak
since the beginning of 1990, following strong
November and December figures. However, this
weakness is probably associated with a general
softness in the area's economy due in part to
a stagnant electronics sector, rather than
to earthquake-related effects.
Thus, the data available on visitor-related
businesses suggest that the earthquake had
a relatively short-lived adverse effect of only
a few months in most areas. In San Jose, where
data suggest that weakness continues to linger,
broader economic factors rather than disrup-
tions caused by the earthquake seem to be
responsible.
Home sales activity
Another possible impact of the earthquake
might have been a decrease in home sales ac-
tivity and housing prices as potential buyers get
"cold feet" about purchasing property in earth-
quake country. The number of homes sold did fall
in affected areas during October and November
of 1989, but the drop seems part of a general
slowdown in home sales.
Home sales had fallen in September as well.
In fact, California had been experiencing a de-
cline in the number of monthly home sales (on
a seasonally adjusted basis) for about six months
before the Loma Prieta earthquake. For some
time, there has been a general cooling in home
sales activity in coastal California, and the
earthquake did not cause any sudden change.
This suggests that the quake neither exerted an
independent effect nor precipitated the decline.
Likewise, the Bay Area's median home price
fell slightly during October, November, and
December of 1989. However, the median homeprice had fallen somewhat in September as well.
During the fourth quarter of 1989, the median
home price fell relatively more for California than
it did for the Bay Area. Thus, once again, the pat-
tern of changes suggests that the declines were
related to broader economic factors and not to
the earthquake.
The silver lining: construction activity
Early predictions of the economic impact of
the earthquake generally included a "silver
lining." The good news would be an increase
in construction activity related to repairing and
replacing quake-damaged structures. Consistent
with these predictions, construction employment
grew faster during the months following the earth-
quake. In the Bay Area, construction employment
had been growing at a two to three percent pace
during the months prior to the earthquake. Em-
ployment growth surged into the 5 to 6% percent
range during November, December, and January
before settling in at three to four-and-a-half
percent over the next six months.
This pattern contrasts sharply with that for Cal-
ifornia as a whole, where the rate of growth in
construction employment was slowing somewhat
during the summer of 1989. The slowing trend
continued throughout the pre- and post-quake
periods. By August of 1990, statewide construc-
tion employment was virtually unchanged from a
year earlier, whereas construction employment in
the Bay Area counties had grown to 2.9 percent
above its year-earlier level.
These figures suggest that the earthquake did
indeed stimulate construction activity in the Bay
Area. Moreover, because much of the funding for
construction came from outside the region, the
increased construction activity did not subtract
from other expenditures by Bay Area residents
as much as it otherwise would have. Sources of
funding included federal and state disaster assis-
tance and, to a lesser extent, insurance claims.
Not all areas benefited equally from the stimulus
of increased construction activity, however. In
particular, construction employment was rela-
tively flat in the San Jose area throughout the
period. Santa Cruz County experienced the most
dramatic gains in the post-quake period, with
double-digit gains in every month from Novem-
ber 1989 to August 1990. However, it is not clear
how much of this construction boom was due to
earthquake repairs and how much to other eco-
nomic factors. Even before the earthquake, Santa
Cruz County had been experiencing very rapid
growth in construction employment, at rates
ranging from i% percent in September 1989
to 17 percent in June 1989.
Moreover, employment data suggest that, in
the months immediately following the earth-
quake, employment in heavy construction (which
includes highway and street construction) surged
dramatically. This surge reflected such efforts as
repair of the Bay Bridge, demolition of the col-
lapsed Cypress structure in Oakland, and shoring
up of precarious highway structures elsewhere.
By the Spring of 1990, however, the stimulative
impact of these efforts seemed to be fading.
Some of the largest rebuilding projects are still
on hold, pending decisions on such issues as
where to locate the replacement for the Cypress
structure and how to rebuild or replace the
damaged Embarcadero Freeway in San
Francisco.
Conclusion
A year later, the Loma Prieta earthquake does
not appear to have significantly affected the
Santa Cruz and San Francisco Bay region's econ-
omy. For the most part, disruptions to economic
activity appear to have been short-lived. More-
over, the Bay Area received some short-term
economic stimulus from the rebuilding effort.
This stimulus appears to have been enough to
counteract the post-quake weakness in other
economic sectors.
Although the overall economic impact of the
quake appears largely to have dissipated, some
quake-related effects are still apparent. Several
highway links remain severed, creating serious
bottlenecks and changing the behavior of indi-
vidual motorists and long-haul truckers alike.
Some damaged buildings in many parts of the
region, including hard-hit downtown Santa Cruz
and the Marina district of San Francisco, have
yet to be rebuilt. Nevertheless, on balance, the
earthquake's economic aftershocks have been
relatively small.
Carolyn Sherwood-Call
Economist
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 ofthe Federal Reserve System.
Editorial comments may be addressed to the editor 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. Box 7702, San Francisco 94120.
Phone (415) 974-2246.Research Department
Federal Reserve
Bank of
San Francisco
P.O. Box 7702
San Francisco, CA 94120

Earthquake aftermath

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Earthquake aftermath

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