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FRBSF

WEEKLY LETTER

August 19, 1988

Drought

and the West

This summer, a severe drought has gripped much
of the nation, bringing less-than-normal rainfall
and higher-than-normal temperatures. In the
West, the effects of the drought have been less
severe than those in other parts of the country,
largely because much of the West relies on reservoirs for summer water. Nonetheless, water shortages and rationing are prevalent in some areas, as
two consecutive dry winters have left reservoirs
seriously depleted.
On balance, most farmers in the West should
make it through the summer of 1988 with little or
no damage, and some may even benefit from the
higher prices that result from reduced agricultural
production in other parts of the country. Some
cattle ranchers are likely to suffer this year, however, and another dry winter would cause more
widespread problems. Over the longer term, the
region's future will depend in part on how water
supply issues are resolved.

Drought conditions
In much of the West, winter snows in the mountains are the primary source of water. The spring
runoff from these snows suppl ies a vast network
of reservoirs and rivers, providing water for the
summers, when measurable rainfall is unusual.
In the coastal areas of Washington and Oregon,
where precipitation is more abundant and scattered more evenly throughout the year, the water
holding systems are relatively less extensive.
From the fall of 1986 through the spring of 1988
precipitation throughout the West was significantly below normal. As a result, reservoirs became seriously depleted. In western Washington
and Oregon, the shortage became critical, with
the threatened loss of some of this area's fruit
trees. Fortunately, plentiful spring rains in the
coastal areas of the Northwest replenished these
reservoirs. In other parts of the West, however,
low reservoir levels continue to be a source of
serious concern. Reservoirs in California, for ex-

ample, currently contain only 65 percent of
normal reserves, inducing some urban water districts in the San Francisco and Los Angeles areas
to institute water rationing.

Agricultural impacts
Even though water levels in reservoirs are below
normal capacity, western farmers continue to receive adequate water supplies this season. Consequently, western agricultural production may
not suffer serious cutbacks, while enjoying the 40
percent boost in feed grain and hay prices associated with diminished midwestern production.
In any event, most western crop production is in
specialty crops, fruits, and vegetables that should
be largely unaffected by the drought. If precipitation is low next winter, however, a critical shortage would develop and crop losses could be
severe.
For cattle ranchers, in contrast, the immediate
problems are more serious. The dry weather has
reduced the usefulness of substantial areas of
western pasture land as a source of nourishment
for cattle. At the same time, higher grain prices
have driven up feed costs. Since ranchers
throughout the nation are having trouble feeding
their herds at the current high feed costs, many
are selling earlier than they otherwise would.
The resulting six percent drop in the price of beef
cattle between May and June, together with high
feed costs, is making it difficult for ranchers to
turn a profit. In parts of the West where pasture
conditions are adequate, ranchers may profit by
holding cattle off the market until the widelyanticipated shortage develops next year and
prices are higher.

Long-range implications
The current water shortage underscores the fundamentally arid nature of the climate in much of
the West. Clearly, resolution of the problems of
water supply will affect the region's future substantially. As urban areas become more populous,

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.

FABSF
and the residential demand for water increases,
conflicting demands on the region's scarce water
resources will mount. For example, during the
past few years, growing demand for water in Arizona's cities has led to "water ranching:' Urban
water districts are buying farmland in order to
obtain the water rights associated with the land.

rulings have opened the door for sales of water
rights, and urban users place a higher value on
each gallon of water than farmers do. Consequently, as urban areas continue to grow, water
sales are likely to become more common. Thus,
the way in which the long-term water supply issues are resolved will shape future growth in the
West.

In California as well, the transfer of water rights
from agricultural to urban water districts is becoming a more feasible option. Recent court

Carolyn Sherwood-Call
Economist

District Economic Conditions
Overall, the economy of the Twelfth Federal
Reserve District continued to grow through the
second quarter of 1988. Problems in some states,
however, dropped the pace of employment
growth in the West to 2 percent, 1.3 percentage
points below that of the nation.

Continued growth across most industries in California and Washington and new strength in Utah
were the economic bright spots in the second
quarter. Growing export markets boosted manufacturing in these states. In California, manufacturing and service sector employment gains of
2.3 and 4.5 percent, respectively, in june offset
slow employment growth early in the second
quarter. Washington posted robust employment
growth of 3.5 percent, thanks to strong demand
for commercial aircraft and expansion in the construction sector. The addition of manufacturing
and service jobs led Utah to an unemployment
rate of 4.8 percent in june. Business services
were a major source of strength in Utah, posting
a 10 percent gain in employment over last year.
Within Utah's manufacturing industry, primary
metals, computers, space and defense, chemicals
and petroleum, and textiles registered employment gains from a year ago.
Other states in the West posted slower growth in
the second quarter. Trouble spots differed greatly.
After a solid first quarter, employment growth in
Oregon slowed to 0.9 percent because a series of
strikes and the mild winter, which pushed second-quarter logging employment growth into
the first quarter, led to the loss of normal second

J

quarter growth in lumber jobs. In Idaho, employment gains in manufacturing early in the quarter were partially erased in june, causing a 3.3
percentage point slowdown from first quarter
growth. job losses in Nevada's service sector
dampened the effects of continued strength in
the mining industry which has increased employment 30 percent in the last year. In Hawaii, 5
percent growth in service sector employment offset declines in manufacturing.
Troubles in industries that are doing well nationwide slowed employment growth in some western states. In Alaska, lower-than-usual seasonal
hiring in the manufacturing sector overshadowed
employment gains in the mining and service industries. However, the slowdown in manufacturing ih Alaska appears to have abated in June
as seafood processing plants added workers for
the salmon season. Arizona, in a reversal of previous strong growth, actually lost jobs at a 1.6
percent rate because of continued losses of construction and service jobs and declines in manufacturing employment growth.
Growth in the District is expected to continue at
a healthy pace,·although employment growth
may lag that of the nation slightly. Export growth
should spur manufacturi.ng and trade in the West,
but emerging capacity constraints in California,
Oregon, and Washington could limit the rate of
expansion.

Stephen o. Dean
Research Associate

DISTRICT INDICATORS
(SEASONALLY ADJUSTED)
88Q2

88Q1

87Q4

87Q3

87Q2

87Q1

86Q4

86Q3

AGRICULTURE
U. S. CROP PRICES, 1985=100
DISTRICT CROP PRICES, 1985=100
FARM CASH RECEIPTS, MILLION S
CATTLE ON FEED, 1985=100
CATTLE PRICES, CALIFORNIA, S/CWT.

95.4
97.2
98.7
95.6
103.9 102.4 100.5
99.9
92.0
92.0
97.3
92.8
97.7 103.2 100.3 100.5
2287.3 2265.0 1986.5 2160.8 2132.4 2029.3 1945.8 1826.0
83.7
82.1
81.0
85.2
92.8
93.5
95.1
94.3
47.5
49.4
56.4
52.4
61.6
57.8
58.0
63.2

FORESTRY
LUMBER PRODUCTION, MILLIONS BOARD FEET
NORTHWEST LUMBER INVENTORY, MIL. BOARD FEET
U.S. LUMBER PRICES, 1985=100

1685.8 1729.9 1762.6 1760.8 1770.2 1796.8 1822.0 1659.1
2516.8 2507.8 2477.2 2609.5 2639.3 2578.3 2606.8 2527.1
101.5 102.1
113.4 110.6 109.4 111.8 107.2 104.1

ENERGY
SPOT PRICE OF OIL, S/BARREL
U.S. RIG COUNT
DISTRICT RIG COUNT
FUEL MINING EMPLOYMENT, 1985=100
U.S. SEISMIC CREW COUNT

17.3
1061.7
96.9
79.1
201.9

MINING
MINERAL PRICES, 1985=100
METAL MINING EMPLOYMENT, 1985=100

148.8
147.3

20.4
16.7
18.7
973.8 1002.2 1037.5
79.1
99.5 102.9
77.2
77.9
78.2
199.1
189.8 181.9

19.3
880.0
82.6
77.6
173.8

18.2
810.5
60.1
76.0
157.5

15.3
786.9
61.8
77.1
152.3

13.8
751.2
62.1
77.4
151.4

130.1
126.8

119.2
119.7

108.1
111.7

104.8
102.6

102.8
96.8

155.0
141.4

149.1
131.8

CONSTRUCTION
NONRESIDENTIAL AWARDS
RESIDENTIAL PERMITS
WESTERN HOUSING STARTS, THOUSANDS
CONSTRUCTION EMPLOYMENT, THOUSANDS

1318.5 1467.5 1595 .6 1492.6 1504.2 1450.6 1405.4 1452.0
30907 27923 28694 30783 30200 32517 41469 36123
40.6
40.1
34.3
35.5
37.6
37.0
28.5
27.9
956.6 945.6 916.9 909.9 905.8 901.3 895.6 872.3

MANUFACTURING
WAGES, CALIFORNIA, S/HOUR
EMPLOYMENT, THOUSANDS
DURABLES, 1985=100
CONSTRUCTION DURABLES, 1985=100
AEROSPACE, 1985=100
ELECTRONICS, 1985=100
SEMICONDUCTOR ORDERS, MILLIONS, NOT S.A.

10.4
10.5
10.7
10.6
10.8
10.8
10.9
10.8
3087.5 3086.4 3056.1 3024.7 3004.1 2991.1 2982.7 2950.3
98.8
99.3
99.1
100.4
99.7
102.1
102.2 101.1
105.9 102.9
109.7 110.8 108.4 107.6 107.4 107.1
109.5 108.9
115.7 115.9 114.7 113.4 112.2 111.1
94.4
94.6
94.9
94.7
98.1
95.9
98.0
97.2
1269.0 1126.2 1056.8 967.3 980.7 912.4 757.5 688.3

WHLS/RETAIL TRADE EMPLOYMENT, THOUSANDS
RETAIL SALES, PACIFIC DISTRICT, MIL. $

4494.4 4462.2
20389 20615

SERVICES EMPLOYMENT, THOUSANDS
HEALTH CARE, 1985=100
BUSINESS SERVICES, 1985=100
HOTEL, 1985=100
RECREATION, 1985=100

4674.8 4647.6 4587.1 4533.8 4486.5 4424.1 4347.8 4291.4
113.4 112.7 111.4 110.1
108.7 107.7 106.0 105.0
119.2 118.6 115.9 115.1
113.5 111.3 109.2 107.3
117.0 116.3 114.9 112.2 110.6 108.8 106.4 105.0
108.1
106.6 105.4 103.3 103.8
109.3 108.2 106.1

FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT

1213.6 1215.8 1209.2 1204.5 1196.2 1182.6 1169.2 1157.5

GOVERNMENT EMPLOYMENT, THOUSANDS
FEDERAL GOVERNMENT
STATE AND LOCAL

606.0 610.3 609.9 605.3 605.2 601.0 599.5 596.5
2596.4 2570.1 2551.1 2527.3 2502.3 2490.0 2479.4 2466.5

4383.9 4347.1 4306.4 4259.6 4234.3 4211.6
18947 19015 18895
20133 19722 19531

Data are weighted aggregates of available 12th District states 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
publkations can be obtainedjrom the Publk Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.

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TWELFTH DISTRICT BUSINESS SENTIMENT INDEX*
(1988)
%

88Q1

87Q4 87Q3

-4.2

NEVADA
OREGON
UTAH
WASHINGTON

3.1 -0.5
4.9 11.2 6.3
3.9 10.2
5.9
2.5 12.2 8.5
9.4 -0.3 11.8

8.3
7.7
0.1
6.8

8.8 10.4
8.6 7.6
7.7 2.9
9.8
6.4

87Q2 87Q1
---- ----

INFLATION

GNP

U.S.

4.4 9.8
4.6 11.6

6.1
7.1

5.2 -10.7

80

6.8
6.6

5.8
9.7

60

6.2
4.2

5.0
1.0

40

8.0
4.9
7.2

6.7
3.5
2.6

20

4.8

-2.5

0

6.3
6.7

7.0

*The index is constructed from a survey of approximately

8.8

75 business leaders in the 12th Federal Reserve District.

~Be11er

_Same
IllIlll8lLJorse

ALASKA
ARIZONA
CALIFORNIA
HAWAll
IDAHO
NEVADA
OREGON
UTAH
WASHINGTON
12TH DISTRICT
U.S.

j

-5.9
-1.6

MA J J

MA J J

UNEMPLOYMENT RATES

NON-AGRICULTURAL EMPLOYMENT
ANNUALIZED PERCENT GROWTH RATES
88Q2

UNEMPLOYMENT

100

MA J J
12TH DISTRICT

~U08

~uew~Jodea
PERSONAL INCOME
ANNUALIZED PERCENT GROWTH RATES

CALIFORNIA
HAWAll
IDAHO

UOS

's'n

11YW UYH )llna

ALASKA
ARIZONA

o~sol~

aAJasa\:;j

lIW~Bd

OIYd

OpOMIU

ouoz!J~

AVERAGE QUARTERLY DATA

88Q1

87Q4 87Q3 87Q2

88Q2

1.4

88Q1

87Q4

87Q3

87Q2

3.4
5.3
4.7

4.9 -4.6 -1.1
4.0 3.0
2.0

8.9
5.7

3.3
7.4

3.2
3.5

4.4
7.5
6.9
0.8
4.8

3.2
7.0
5.9
3.8 2.8
2.8 -0.4
5.4 4.2

4.0
6.9
3.9
1.2
4.1

5.7
2.9
6.5

6.5

9.3 10.1 10.6 11.2
6.1
6.3
5.6 6.0
5.4
5.5
5.9
5.2
3.8
3.8
4.0
3.5
7.4
7.4
7.3
8.2
6.3
6.5
6.0 6.0
5.7
5.8
6.1
6.0
5.9
6.4
6.6
5.5
7.4
7.0
7.4
7.7

2.0
3.3

5.0
3.8

3.8
4.0

3.7
3.2

5.7
5.4

5.5
5.7

2.4
1.6
1.1
1.5
0.9

3.5
1.9
2.9

3.3
3.3

3.9
2.6

5.7
6.1
5.0

5.8
5.9

5.9
6.0

6.2
6.2