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FRBSF WEEKLY LETTER November 17, 1989 Eastward, Ho! Between 1980 and 1988, California's population grew by 20 percent, but growth varied widely within the state. The San Francisco Bay Area claimed three of the state's slowest growing counties: Marin, San Francisco, and San Mateo. None of these counties grew more than 10 percent during this eight-year period. The state's fastest-growing counties, in contrast, added population at rates at least double the statewide average. Three of California's fastest-growing large counties, EI Dorado, Riverside, and San Bernardino, lie east of large metropolitan areas. Thus, inland areas of California seem to be experiencing the most rapid growth. The logic behind this growth is compelling, both for firms and for individual households. Households find housing more affordable, and avoid the crime and smog of the big cities. Firms pay lower costs for land and labor, but still have access to large metropolitan markets. Many who live and work in these inland areas also avoid the long commutes that would be required if they worked in the larger metropolitan areas. This Letter examines the geographical patterns of population and economic growth in California. It focusses on the differences in the cost of locating in different parts of the state, drawing some implications for future patterns in the state. The conventional wisdom Many argue that the high cost of housing is stifling growth in the San Francisco and Los Angeles areas. According to this argument, high housing costs discourage new migrants from locating in these high-cost areas, motivate current residents to "cash out" and move to areas where they can get more house for their money, and force downtown workers who lack substantial down payments to head further away from the city center to find affordable homes. Thus, population growth should be slower in regions with higher home prices, and faster in regions with lower home prices. Current relative home prices in different parts of California provide fuel for this argument. Median home prices in the Central Valley and RiversideSan Bernardino areas ranged between $100,000 and $125,000 during the spring of 1989. While these prices are not low compared to prices nationally, they compare very favorably to the statewide median of close to $200,000, and to the $250,OOO-plus price tags common on homes in nearby coastal areas. A more complex relationship Other things equal, it makes sense that households would tend to locate in regions where they face lower costs. However, other things are not equal. High-cost regions have high home prices because home buyers find these regions attractive and expect their economies to continue doing well. The specific attraction is likely to differ from one person to another; it could be a combination of job opportunities, weather, cultural or sporting opportunities, and scenery. Because high home prices reflect fundamental strengths of a region and its economy, determining the extent to which high home prices are having a negative impact on the region's growth can be a difficult task. In fact, the statistical problems involved in correctly estimating the impact of housing prices on population growth are formidable. However, analysis of the simple relationship between the level of house prices and the rate of population growth in a given area may provide some indication whether the detrimental effects of high housing prices tend to outweigh the positive forces that are responsible for those high prices. If high house prices generally have had a detrimental effect on regional THE WESTERn ECOnOmy The Western Economy is a quarterly Weekly Letter review of economic conditions in the Twelfth Federal Reserve District. It is published in the on the third Friday of February, May, August and November. FRBSF growth within California, regions with high house prices should have tended to experience relatively slower population growth. During the 1950s and 1960s, there was a positive· and statistically significant relationship between housing prices and growth. That is, regions with higher housing prices in the 1950s and 1960s tended to experience more rapid growth. This relationship evaporated during the 1970s; housing prices were completely uncorrelated with population growth. Duringthe 1980s, home prices were negatively correlated with subsequent growth. That is, California counties that had higher housing prices in 1980 tended to experience slower rates of population growth between 1980 and 1989. In light of these observations, one should be careful about claiming that high housing prices always stifle population growth. Regions that are healthy economically tend to have high housing prices, but they also provide economic opportunities that attract additional residents to the area. The effect of this strength can outweigh the detrimental effects of high housing costs, as the experience of the 1950s and 1960s suggests. Thus, high housing costs in the San Francisco and Los Angeles areas should be seen as a sign of fundamental strength, even though they may lead to some slowing of growth in these areas. Business growth The same factors that might attract people to low-cost areas also might attract firms. In outlying areas, firms can benefit from proximity to the huge markets the greater San Francisco and Los Angeles areas represent, while enjoying the considerably lower costs available outside those markets. Land costs are lower and land is more available. Labor costs also are lower. Fewer traffic snarls allow easier movement of people and materials to work locations. Thus, it is not surprising that job growth in the 198Qs has been rapid in the parts of California with fast-growing populations. During the fouryear period from 1984 to 1988, employment expanded by 3.4 percent in California, but by more than six percent in EI Dorado County and in the Riverside-San Ber[1ardino area. While lower-cost regions might be expected to attract business activity in general, the attractions are likely to be greater for some kinds of firms than for others. Specifically, the lower-cost areas of the state are likely to be particularly attractive to manufacturing and back-office activities that require large amounts of space and are sensitive to labor costs. It's not surprising, therefore, that manufacturing employment in EI Dorado County and in the Riverside-San Bernardino area grew at better than a six percent annual rate between 1984 and 1988, even though manufacturing employment statewide grew at an annual rate of only one percent. A look ahead Because the differences in land and housing costs remain large between the Los Angeles and San Francisco areas and the lower-cost regions adjacent to them, further rapid growth in the lower-cost parts of the state is likely. While the Los Angeles and San Francisco areas should . continue growing, they are likely to grow more slowly than the lower-cost regions adjacent to them. An even more likely prospect is that the regional specialization of activities within the state will continue. The Los Angeles and San Francisco areas will continue to specialize in high-value activities like finance, law, and research and development that are not particularly costsensitive and require the infrastructure of these major metropolitan areas. Activities that are more cost-sensitive, such as line manufacturing and back-office business services, in contrast, are likely to experience their greatest expansion in lower-cost areas, either within California or outside its borders. These two observations suggest that Cal ifornia's Central Valley economy, in particular, will continue to grow and to diversify away from its traditional farming-oriented activities, developing a larger manufacturing and export-service base. It is worth noting, however, that growth in this inland area may bring problems as well as possibilities. As economic activity increases and land use becomes more intense, some of the advantages of the interior locations likely will be eroded. The kinds of growth control measures that have become prevalent in the San Francisco and Los Angeles areas could become more popular in the inland areas, as traffic and smog problems become more severe. Carolyn Sherwood-Call Economist DISTRICT INDICA TORS (Seasonally Adjusted) 89Q3 89Q2 89Q1 88Q4 88Q3 88Q2 88Q1 87Q4 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. 111.8 114.7 2671.1 92.1 63.0 115.2 120.7 2646.0 90.0 61.8 116.7 121.1 2565.3 93.1 61.7 112.4 112.1 2333.2 96.6 60.1 111.4 111.5 2318.2 95.9 61.4 102.4 92.6 2205.5 96.5 63.4 102.2 97.5 2365.5 94.1 61.6 100.2 104.3 2210.2 94.8 57.8 FORESTRY LUMBER PRODUCTION, MILLIONS BOARD FEET NORTHWEST LUMBER INVENTORY, MIL. BOARD FEET U.S. LUMBER PRICES, 1986=100 1815.7 2543.6 123.9 1652.4 2447.8 119.3 1575.1 2421.3 122.2 1806.2 2568.1 122.5 1547.1 2462.1 121.3 1647.5 2504.1 123.9 1718.1 2522.0 121.7 1661.9 2462.7 121.6 ENERGY SPOT PRICE OF OIL, S/BARREL U.S. RIG COUNT DISTRICT RIG COUNT FUEL MINING EMPLOYMENT, 1985=100 U.S. SEISMIC CREW COUNT 19.3 900.7 71.1 81.7 131.3 20.5 891.6 69.5 79.7 130.3 18.5 772.8 67.1 77.8 135.4 14.8 800.1 65.8 79.1 151.1 15.2 957.8 93.4 82.7 184.0 17.3 1061.7 96.9 83.4 201.9 16.7 973.8 79.1 81.4 199.1 18.8 1002.2 99.5 82.0 189.8 MINING MINERAL PRICES, 1986=100 METAL MINING EMPLOYMENT, 1985=100 129.4 179.8 136.9 176.5 150.4 174.1 146.7 166.7 135.2 161.1 136.9 154.3 136.4 146.1 138.5 137.5 CONSTRUCTION NONRESIDENTIAL AWARDS RESIDENTIAL PERMITS WESTERN HOUSING STARTS, THOUSANDS CONSTRUCTION EMPLOYMENT, THOUSANDS 1637.9 30430 35.1 1004.3 1518.7 30763 37.7 991.1 1438.0 31470 29.6 987.1 1338.0 36229 33.0 966.8 1543.1 32725 36.3 946.2 1262.6 30907 36.8 933.7 1463.8 27923 28.5 920.0 1608.1 28694 27.9 906.8 MANUFACTURING WAGES, CALIFORNIA, S/HOUR EMPLOYMENT, THOUSANDS DURABLES, 1985=100 CONSTRUCTION DURABLES, 1985=100 AEROSPACE, 1985=100 ELECTRONICS, 1985=100 SEMICONDUCTOR ORDERS, MILLIONS S, NOT S.A. 11.2 3159.0 104.3 113.1 119.1 99.6 1173.0 11.1 3156.2 104.2 112.5 118.1 99.4 1300.0 11.0 3157.4 104.3 114.1 116.8 99.9 1300.0 11.0 3136.4 103.5 112.5 115.4 100.4 1066.0 10.9 3103.5 102.7 110.0 114.2 99.1 1222.0 10.8 3101.1 102.5 111.2 113.6 97.8 1269.0 10.8 3089.2 102.3 111.4 113.6 97.0 1126.2 10.9 3056.3 101.5 110.1 112.4 95.2 1056.8 WHLS/RETAIL TRADE EMPLOYMENT, THOUSANDS RETAIL SALES, PACIFIC DISTRICT, MIL. $ 4676.5 23393 4642.6 23053 4629.5 22484 4561.3 22038 4531.2 21007 4485.8 20795 4452.5 20813 4407.5 20133 SERVICES EMPLOYMENT, THOUSANDS HEALTH CARE, 1985=100 BUSINESS SERVICES, 1985=100 HOTEL, 1985=100 RECREATION, 1985=100 4990.4 118.3 130.2 127.5 110.7 4940.8 117.1 128.4 126.2 111.6 4912.3 116.2 128.6 125.4 110.9 4862.6 115.5 127.1 125.2 108.5 4796.0 114.3 126.3 122.2 104.6 4746.6 113.3 124.7 120.3 105.8 4691.7 112.4 122.2 119.5 106.6 4640.0 111.5 119.5 118.1 108.5 FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT 1236.7 1227.5 1227.0 1220.3 1214.4 1208.9 1205.7 1202.1 GOVERNMENT EMPLOYMENT, THOUSANDS FEDERAL GOVERNMENT STATE AND LOCAL 623.8 2707.9 625.8 2664.5 627.8 2644.5 620.1 2622.1 613.9 2599.0 611.9 2576.2 613.2 2552.0 613.9 2537.9 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. Box 7702, San Francisco 94120. Phone (415) 974-2246. Ont6 V:l 'OJsPUl?J:I Ul?S lOLL xog 'O'd O)SI)UOJ~ JO UOS ~U08 aAJaSa~ IOJapa~ ~uaw~Jodaa l.pJOaSa~ Twelfth District Business Sentiment Index* PERSCIIAL INCOIIE ANNUALIZED PERCENT GROWTH RATES % 89Q2 89Q1 88Q4 88Q3 8IlQ2 ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 13.9 8.8 12.1 11.0 7.4 13.3 11.1 10.9 9.7 11.0 5.9 2.0 3.7 6.5 6.3 4.1 1.0 12.3 5.8 9.4 12.2 15.8 14.5 16.2 14.0 14.1 11.0 1.9 10.0 12.3 10.8 7.9 15.2 7.6 7.3 6.5 11.2 9.6 9.7 8.5 12.9 13.3 10.9 11.8 8.9 12TH DISTRICT U.S. 11.5 8.5 3.6 6.4 12.2 11.1 11.0 8.2 9.9 8.3 (1988-89) GNP 100 INFLATION 80 60 40 20 I5lI Worse • * Year-to-date a ~1o~.r~~q.16t..,,~r"'~~q.,~1o"."'4,'i-)S'~Oo16t.."~~,,,~~q., ~ ~ * The index is constructed from a survey of approximatety 75 business leaders in the 12th Federal Reserve District. __AGRICULlURAL EJlPLOYIlENT ANNUALIZED PERCENT GROWTH RATES 89Q3 89Q2 89Q1 88Q4 IINBIPLO\'IlENT RATES AVERAGE QUARTERLY DATA 88Q3 ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 5.3 2.0 2.7 3.5 4.6 5.5 2.4 5.4 3.1 7.3 1.3 0.7 2.7 2.4 2.6 1.7 5.3 3.9 2.8 2.0 4.3 3.7 3.3 6.4 6.5 1.3 6.1 3.6 2.8 3.1 2.9 4.7 10.5 8.2 5.2 ·6.7 0.3 0.1 3.1 2.9 4.0 7.4 4.7 3.2 2.7 ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 12TH DISTRICT U.S. 2.9 2.1 1.5 2.4 4.3 3.3 4.1 3.1 3.0 3.0 12TH DISTRICT U.S. * Year-to-date * Year-to-date 89Q3 89Q2 89Q1 88Q4 88Q3 7.6 5.8 5.0 2.0 5.1 5.3 5.3 4.0 5.8 7.5 5.1 5.5 3.2 5.2 5.2 5.4 4.4 5.7 8.5 5.8 4.8 3.6 5.5 5.5 5.5 4.3 6.0 9.0 6.2 5.0 3.2 5.5 4.3 5.1 4.1 5.7 8.8 6.8 5.3 3.0 5.5 4.9 6.0 5.1 6.3 5.1 5.2 5.4 5.3 5.1 5.2 5.1 5.3 5.6 5.5 Same rJ Better
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