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FRBSF

WEEKLY LETTER

Number 91-28, August 16, 1991

Aerospace

Downtuin
The Twelfth Federal Reserve District, which
includes nine western states, accounts for 44
percent of U.S. aerospace employment. And, like
the nation, this District has seen employment in
the sector drop 9 percent since reaching a peak
in January of 1990. This translates to a loss of
about 35,000 jobs in the Twelfth District.
The primary reason for this downturn is the
end of the military buildup that lasted through
most of the 1980s. Between fiscal year (FY) 1985,
when the value of prime contract awards issued
by the Department of Defense (DOD) peaked,
and FY 1990, the latest year for which complete
data are available, the value of these awards
nationally fell 33 percent on an inflationadjusted basis. The decline was even more dramatic in California and Washington, the West's
most important states for aerospace production,
reaching 35 percent in California and 41 percent
in Washington.
While the aerospace industry has suffered from
significant cuts in defense spending, it has found
a bright spot in commercial aircraft. Despite the
current recession, and a resulting slowdown in
new orders, commercial aircraft producers have
huge backlogs of orders. For example, at the end
of the second quarter, Boeing had unfilled orders
for 1,753 aircraft on its books, representing four
years of production at current manufacturing
rates. Although a few airlines have canceled
deliveries of ordered planes due to their own
financial problems, other carriers are stepping
in to buy them. This suggests that Boeing probably can keep busy producing commercial aircraft
for a few more years, even if the size of its backlog declines.

This Letter analyzes the current downturn in
western aerospace activity and provides some
historical perspective by describing previous
aerospace downturns in California and
Washington.
California bears the brunt
The divergence between the commercial and
defense sides of the aerospace business in the
current environment helps explain why California has lost fully 33,000 of the 35,000 aerospace
jobs lost in the District since January 1990. Thus,
the percentage decline in aerospace jobs has
been much larger in California, at 13 percent,
than the 9 percent decline seen District-wide.
Contract defense work is more important to
California's aerospace industry than it is to
Washington's. During each year of the 1980s,
the average value of DOD prime contract awards
received per aerospace worker was two and a
half to four times larger for California than for
Washington. For example, during FY 1982, Washington's aerospace industry received an average
of $37,600 in DOD prime contract awards for
each aerospace worker, while in California the
industry received an average of $110,700 in
contract awards for each worker. These figures
suggest that aerospace producers in California
were much more vulnerable to federal defense
cutbacks than their counterparts in Washington
were.

In addition, commercial aircraft production
has fared better in Washington than in California
during recent years, largely because of specific
characteristics of the companies involved. Boeing, which dominates Washington's aerospace
industry, is exceptionally secure financially.

THE WESTERn ECOnOmy

The Western Economy is a quarteriy
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.

FRBSF
Moreover, as its current $3 billion expansion
program in the Puget Sound area attests, Boeing
is committed to maintaining much of its production capacity in Washington. In contrast, the
companies that produce commercial aircraft in
California are also heavily involved in defense
contract work. They face financial pressures as
their defense volumes shrink and as their profit
margins bear intense scrutiny from Congress. As
a result, these companies find it difficult to invest
in designing new commercial aircraft, and they
also face pressures to improve productivity
among existing workers rather than hire additional workers. Furthermore, some companies
with operations in California are cutting back
on production in the state (both civilian and
defense) and expanding their facilities elsewhere.

Past aerospace cycles
Job losses in the aerospace industry are nothing
new. This is the third sustained period of falling
aerospace employment for the Twelfth District since 1971. The mid-1970s was a particularly
painful period for western aerospace producers.
The end of the war in Vietnam led to a reduction
in defense spending, with the inflation-adjusted
value of prime DOD contract awards down 9
percent between FYs 1972 and 1976. At the
same time, the general recession reduced sales
of civilian aircraft by 25 percent between 1974
and 1977. The combination of civilian and defense problems led both Washington and California to suffer sharp job losses in their aerospace
industries, of 20 and 17 percent, respectively.
The aerospace downturn in the early 1980s
was somewhat less severe, as national aerospace
employment fell 7 percent between January
1981 and November 1983. But it hit commercial
aircraft producers very hard. On an inflationadjusted basis, the value of sales of civilian aircraft fell 54 percent between 1980 and 1984.
Meanwhile, the defense buildup of the 1980s
was beginning, insulating defense contract production from the recession. Indeed, the inflationadjusted value of contract defense awards rose
by 54 percent between FYs 1980 and 1984.

Largely because of the overwhelmingly commercial orientation of the downturn of the early
1980s, Washington suffered disproportionately
more than California did. While California lost
a relatively modest 6 percent of its aerospace
manufacturing jobs between January 1981 and
November 1983, aerospace employment in
Washington plunged by 23 percent, making the
early 1980s even harder on Washington's aerospace industry than the mid-1970s had been.

Conclusions
This Letter has reviewed the performance of
western aerospace industries during the current
aerospace downturn, as well as other downturns
during the past twenty years. This look at the
evidence suggests that, so far, the job losses experienced by the industry in the current cycle
have not been particularly severe by historical
standards. A decline of 9 percent is certainly
significant and worthy of concern, but at this
point, it is still not as bad as the 10 percent decline in District aerospace unemployment seen
in 1974-1976 or the 17 percent drop between
1981 and 1983.
Since the defense side of the business is in worse
shape than the commercial side, California's industry is suffering significant job losses, while
aerospace employment in Washington is relatively stable. Aerospace employment in Washington currently is only 1 percent below its January
1990 level, far better than the 20 to 23 percent
declines Washington saw in the two earlier
downturns. As long as Boeing's large stock of
orders for commercial aircraft remains on the
books, Washington should continue to avoid
the worst of the aerospace industry's troubles.
In contrast, the impact of defense cutbacks may
continue to be felt for some time in California.
But it is worth keeping these developments in
perspective. California's current weakness is
broad-based, and probably closely associated
with the national recession. As long as California's population continues to grow at rates well
above the national average, the state's longerterm outlook remains relatively bright.

Carolyn Sherwood-Call
Economist

MONETARY POLICY OBJECTIVES FOR 1991
On July 16, Federal Reserve Board Chairman Alan Greenspan presented a mid-year report to the Congress on
the Federal Reserve's monetary poiicy objectives for the remainder of 1991. The report reviews economic and
financial developments in 1991 and presents the economic outlook heading into 1992. For single or multiple
copies of the report, write to the Public Information Department, Federal Reserve Bank of San Francisco, P.O.
Box 7702, San Francisco, CA 94120, or phone (415) 974-2246.

DISTRICT INDICATORS
(Seasonally Adjusted)

91Q2

91Q1

90Q4

90Q3

116.8

114.1

113.8

134.8

106.8

110.0

N/A

2630.1

94.1
62.8

90Q2

90Ql

89Q4

89Q3

117.0

118.1

118.5

115.0

113.3

112.9

112.3

130.4

116.1

115.2

2424.1

2504.2

2457.1

2432.3

2534.2

2425.5

93.3

85.6

87.8

89.9

90.0

91.2

92.4

64.5

63.9

65.9

66.6

63.6

62.4

62.7

AGRICULTURE

u.s.

CROP PRICES,

1985=100

DISTRICT CROP PRICES,

1985=100

FARM CASH RECEIPTS, MILLION $
CATTLE ON FEED,

1985=100

CATTLE PRICES, CALIFORNIA, $/CWT.
FORESTRY
LUMBER PRODUCTION,

BOARD FEET

U.S. LUMBER PRICES, 1986=100

1522.6

1397.3

1347.0

1550.9

1654.3

1751.9

1795.0

1787.9

2322.9

2361. 4

2325.1

2493.3

2620.7

2604.2

2533.6

2532.0

139.3

MILLIONS BOARD FEET

NORTHWEST LUMBER INVENTORY, MIL.

112.7

120.0

130.6

132.3

129.6

128.0

124.1

ENERGY

SPOT PRICE OF OIL,

u.s ..

20.8

32.1

26.2

17.8

21.8

20.3

19.3

980.7

1084.1

994.1

1038.2

921. 7

1002.3

878.2
73.4

82.5

74.4

72.8

56.8

69.2

73.9

73.9

75.5

75.2

75.8

117.9

120.2

122.3

128.4

127.2

128.5

129.8

109.4

107.6

111.9

129.7

127.6

123.7

125.4

128.3

185.3

192 .9

198.0

197.4

199.2

196.6

193.9

190.8

1499.6

1521. 7

1411.4

1557.5

1585.5

1726.2

1469.9

1655.5

17576

18219

22860

26468

31871

32866

30774

26.0

15.6

18.6

29.1

31.2

30.7

29.3

35.2

1019.0

SEISMIC CREW COUNT

73.6
73.8

110.2

1985=100

75.5

20675

FUEL MINING EMPLOYMENT,

75.8

73.3

DISTRICT RIG COUNT

u.s.

22.1

909.8

$/BARREL

RIG COUNT

1041.7

1043.0

1058.2

1068.5

1066.8

1044.5

1018.6

MINING

MINERAL PRICES,

1986=100
1985=100

METAL MINING EMPLOYMENT,

CONSTRUCTION
NONRES IDENTIAL AWARDS

RESIDENTIAL PERMITS
WESTERN HOUSING STARTS, THOUSANDS
CONSTRUCTION EMPLOYMENT I

THOUSANDS

!o'_l\..~UFACTURING

WAGES, CALIFORNIA,

$/HOUR

11.8

1985=100

DURABLES,

THOUSANDS

PACIFIC DISTRICT I

MIL.

S

SERVICES EMPLOYMENT, THOUSANDS
HEALTH CARE I

1985=100

BUSINESS SERVICES I
HOTEL,

1985=100

1985=100

RECREATION,

11.3

11.3

11.2

3143.6

3158.3

3160.4

3164.4

1985=100

FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT

98.4

99.7

101. 3

102.2

103.0

103.6

104.0

103.2

104.3

108.0

110.1

112.0

112.5

113.1

110.8

113.1

115.3

117.7

118.3

117.5

116.3

91.2

SEMICONDUCTOR ORDERS, MILLIONS $, NOT S.A.

RETAIL SALES I

11.4

3124.8

108.3

1985=100

WHLS/RETAIL TRADE EMPLOYMENT I

11.6

3097.7

97.0

1985=100

ELECTRONICS,

11. 7

3081. 4

100.9

CONSTRUCTION DURABLES, 1985=100
AEROSPACE,

11.8

3036.7

EMPLOYMENT, THOUSANDS

92.2

92.4

92.7

93.1

93.8

93.9

94.0

1372.4

1247.3

1151.4

1192.2

1309.7

1227.7

1197.9

1166.3

4810.7

4836.9

4823.7

4827.2

4805.6

4773.0

4752.6

4723.6

25179

24412

25138

25195

24979

24720

23992

23883

5573.3

5547.7

5509.4

5474.7

5400.7

5320.3

5261.6

5191.0

129.2

128.4

127.6

125.7

124.1

122.7

122.0

120.3

119.2

118.6

115.7

115.7

116.1

115.0

111. 7

110.0

137.6

138.2

139.7

136.3

135.0

133.4

131.9

129.4

140.5

141. 0

142.0

138.1

135.8

133.1

135.8

130.7

1271. 9

1274.5

1270.2

1269.7

1264.6

1256.2

1250.8

1242.2

GOVERNMENT EMPLOYMENT, THOUSANDS
FEDERAL GOVERNMENT
STATE AND LOCAL

615.2

619.8

616.7

636.4

655.0

629.0

624.6

624.2

2879>1

2860.7

2833.1

2825.9

2777.9

2755.8

2724.0

2694.6

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 (Judith Goff) 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.

OUl>6 \I:) 'OJSpueJ:I ueS
lOLL

X09

'O'd

O)SI)UOJ:J UOS

JO

~U08

al\JaSa~ IOJapa:J

~uew~Jodea
PERSONAL INCOME
ANNUALIZED PERCENT GROWTH RATES

4)JOeSe8

Twelfth District Business Sentiment Index'
GNP
Percent

91Q1

9OQ4

9OQ3

9OQ2

9OQ1

ALASKA
ARIZONA
CALIFORNIA
HAWAII
IDAHO'
NEVADA
OREGON
UTAH
WASHINGTON

7.4
4.5
1.2
1.3
0.3
3.0
1.9
5.2
1.0

6.0
3.0
5.3
8.0
11.3
5.2
6.3
7.1
8.0

6.0
7.4
6.4
11.3
0.4
12.9
6.2
8.5
7.7

9.7
5.7
4.5
9.1
5.2
7.3
8.2
8.9
5.2

7.7
7.6
14.9
9.6
18.2
11.3
8.5
9.3
12.9

12TH DISTRICT
U.S.

1.6
1.2

5.7
4.1

6.8
5.2

5.2
5.6

13.4
9.9

* Year-te-date

80

o Recession

60

~ Slower Growth

o Same

40

•

20

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
1989
1990
1991
• The index is constructed from a survey of approximately 75 business leaders
inthe12lh Federal Reserve District

NON-AGRICULTURAL EMPLOYMENT
ANNUALIZED PERCENT GROWTH RATES

91Q2
ALASKA
.ARIZONA
CALIFORNIA
HAWAII
IDAHO
NEVADA
OREGON
UTAH
WASHINGiON
12TH DISTRICT
U.S.

* Year-te-date

91Q1

9OQ4

9OQ3

7.6
1.9
0.5
0.5
6.4
0.4
3.5
4.3

-0.9
0.8
-2.0
3.3
4.5
6.6
0.7
5.5

-2.7
4.9
1.4
1.3
3.9
7.6
1.4
2.3

7.9
4.1
2.7
6.1
6.0
4.2
3.1
5.1

-2.4

C>.,

~.o

3.5

-1.4
-1.2

1.5
-2.3

-0.3
-1.4

2.1
-0.2

91Q2

9OQ2

-0.1
-0.3
-1.5
0.2
-D.5
-3.9
-2.4
2.8

UNEMPLOYMENT RATES
AVERAGE QUARTERLY DATA

91Q1

9OQ4

9OQ3

9OQ2

7.3
4.6
7.8
2.6
6.4
5.9
5.8
4.6

7.4
5.3
7.4
2.6
6.1
5.6
6.1
4.3

7.0
5.5
6.5
2.7
6.2
5.7
5.9
4.3

6.6
5.3
5.6
2.7
6.0
4.9
5.6
4.2

6.9
5.5
5.3
2.5
6.0
4.9
5.2
4.4

3.3

ALASKA
ARIZONA
CALIFORNIA
HAWAII
IDAHO
NEVADA
OREGON
UTAH
WASHIHGiOH

6.3

6.2

5.3

4.4

4.6

3.2
1.9

12TH DISTRICT
U.S.

6.9
6.8

6.7
6.5

6.1
5.9

5.3
5.6

5.1
5.3

* Year-te-date

Faster Growth