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FRBSF WEEKLY LETTER May 17, 1991 Recession and the West How has the Twelfth District fared during the current recession? In California, the economy has weakened along with the nation, losing jobs in both manufacturing and construction. In addition, California was hit with some unusual shocks, including the drought, the year-end freeze, and a $12.6 billion state budget shortfall that threatens to force higher taxes and worker furloughs. The bad news is reflected in the April unemployment rate for California, which stood at 7.4 percent. Looking only at California, however, gives a misleading picture of the overall economic health of the Twelfth District. In several of the other eight states that make up the District, the evidence seems to be that the national recession has passed them by so far. This Letter reviews the strong economic performance of the Twelfth District states outside of California (called, for convenience, the "western" states). It then considers the sources of this strong performance, and places it in the context of previous recessions. Growth in the West Prior to the current recession, the western states registered employment growth rates that were among the strongest in the nation. Since the onset of the national slowdown in July 1990, employment growth has slowed in several western states; but in general, their economies have continued to expand. As of March, employment in the nation has dropped at a 2.0 percent annual rate since July, while western job growth has ranged from lows of 0.9 and 1.3 percent in Hawaii and Arizona, respectively, to robust rates of 3.1, 4.6, and 5.7 percent in Nevada, Utah, and Idaho. Why are these states bucking the national trend? No single explanation applies to all of them, but examining the components of job growth relative to national trends is revealing. First, since July, TI Ir I n~ 1 1 employment in the construction sector has contracted nationally at a 12.3 percent annual rate, but in several western states, it has grown significantly, especially Idaho (17.5 percent), Oregon (5.6 percent), Utah (6.9 percent), and Washington (3.6 percent). But not all western states have fared well. Construction employment contracted in Arizona (-7.6 percent). Nevada also saw a decline in construction employment at 3.7 percent annual rate, but this follows a three-year construction boom that was fueled by casino development; still, construction jobs remain a high proportion of total employment. These construction "boom lets" in part reflect relatively low vacancy rates and expanding populations in these states. While not sustainable indefinitely, they have helped support the regional economies during the national downturn. Continued expansion in the service sector is another source of growth for western states. Service sector jobs have expanded at a 3.6 percent annual rate since July, compared with 1.8 percent growth nationally. States with particularly strong expansion in service jobs include Oregon (4.3 percent), Idaho (5.2 percent), Utah (7.4 percent), and Washington (5.4 percent). This sector traditionally is less cyclical than manufacturing or construction. Moreover, the share of jobs in the service sector in western states is growing and should improve the resilience of western economies. As expected, manufacturing activity, traditionally the most cyclical of sectors, has been adversely affected in several western states. Slowdowns have occurred in aerospace and electronics, reflecting reduced defense spending, and in the wood products sector, reflecting the national slowdown in construction and limits in logging. The hardest hit western states are Hawaii, Oregon, and Arizona, where manufacturing jobs have fallen at 3.5, 5.8, and 2.5 percent annual .rr.,.rR" ",..,....,..,.,..,....,..."...,.. W~,:) I t:1 I I t:LUI lUI I IV 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. FRBSF rates, respectively, since July. These declines compare with a national contraction of 5.9 percent, however, and mask some strong spots. Even though aerospace has been hurt nationwide by defense cutbacks, Boeing in Washington has large orders for commercial aircraft that are helping support that state's economy through the national decline. In some other western states, the manufacturing sector actually has expanded. Manufacturing jobs have grown at 6.4, 3.4, and 3.6 percent rates in Idaho, Nevada, and Utah, respectively. Some reports suggest that this growth is at least partly attributable to the expansion of facilities headquartered in higher cost states, such as California. In general, continued expansion in service jobs, combined with less weakness than seen nationally in the construction and manufacturing sectors, helps account for the relative strength of many western states. Should we be surprised by the relative health of western economies? Do these states always perform better during national downturns? We now turn to some historical evidence of how western states perform during recessions. Evidence from past recessions Since 1950, the National Bureau of Economic Research has identified the peaks and troughs of seven recessions. (The onset of the current recession was just identified as July 1990.) To examine western performance, an analysis of monthly employment data (seasonally adjusted) shows how the movements from peak to trough in western states compare to the national experience. The resu Its of this analysis suggest that western states often do outperform the nation during recessions, but not always. In the two most recent episodes-the short recession of January 1980-July 1980 and the severe downturn of July 1981-November 1982 -the performance of Twelfth District states mirrored that of the nation. Nationwide, employment contracted 1.4 and 2.9 percent in the two downturns. California performed slightly better (with 0.5 and 2.8 percent contractions), while the other Twelfth District states performed somewhat worse (with 1.4 and 3.3 percent contractions). !n al! recessions prior to the 1980s, however, the western states (taken as a group) outperformed the nation. The best relative performance occurred in the mid-1970s when employment nationwide contracted by 1.8 percent between November 1973 and March 1975, but expanded 2.8 percent in the western states. One source of this relatively good performance during business downturns is that Twelfth District states historically have been less reliant on the cyclical manufacturing sector; within the District, the western states rely less on manufacturing than California. At the start of the July 1953-May 1954 recession, for example, manufacturing jobs comprised 35.8 percent of all jobs outside of the District, compared to 27.6 percent in California and 24.0 percent in the western states. The manufacturing share of national employment has shrunk dramatically since that time, but western states continue to have a relatively small share. As of July 1990, manufacturing accounted for 17.8 percent of the jobs outside of the Twelfth District. California had a comparable share of 16.4 percent. For the western states, however, manufacturing employment accounted for only 13.7 percent of all jobs. Even within manufacturing, however, job losses in California and the other western states were less severe than in the nation during six of the seven recessions studied (the exception is December 1969-November 1970). One explanation for this relative strength is that manufacturing in the West is less reliant on the highly cycl ical auto and steel industries than is the Midwest, for example. Conclusion The western states have exhibited resilience during national economic downturns and have outperformed the nation in five of the last seven recessions. The performance of the region in the current downturn is no exception. One factor helping to insulate the western states from a downturn is the comparatively small size of its manufacturing sector. Nonmanufacturing industries typically have been more immune to downturns, while manufacturing tends to have wide swings. Moreover, even within manufacturing, the western states fare better by being less reliant on the most cyclical industries, such as the steel and auto industries. A word of caution, however: While the western economies are resilient during downturns they are not immune from them. In only one of the previous seven recessions did the region avoid employment losses from peak to trough, making the current continued employment growth the exception rather than the rule. Brian A. Cromwell Economist DISTRICT INDICATORS (Seasonally Adjusted) 91Q1 90Q4 90Q3 90Q2 90Q1 89Q4 89Q3 89Q2 115.1 AGRICULTURE U.s. CROP PRICES, 1985=100 DISTRICT CROP PRICES f 1985=100 FARM CASH RECEIPTS, MILLION $ CATTLE ON· FEED f 1985=100 CATTLE PRICES, CALIFORNIA, $!CWT. 113.8 113.5 117.0 118.3 118.4 114.7 113.4 106.3 109.9 113.5 112.4 129.9 115.9 115.7 122.3 2425.3 2424.1 2504.2 2457.1 2432.3 2534.2 2425.5 2511.8 93.5 85.4 88.0 89.9 90.1 91.0 92.5 90.3 64.0 63.9 65.9 66.6 63.6 62.4 62.7 61.8 FORESTRY LUMBER PRODUCTION, MILLIONS BOARD FEET 1410.1 1358.2 1564.3 1669.3 1767.2 1795.0 1787.9 1732.8 NORTHWEST LUMBER· INVENTORY, MIL. BOARD FEET 2365.7 2321. 4 2495.0 2621.6 2606.7 2529.3 2533.3 2445.3 112.7 120.0 130.6 132.3 129.6 128.0 124.1 119.9 U.S. LUMBER PRICES, 1986=100 ENERGY SPOT PRICE OF OIL, $!BARREL U.S. RIG COUNT DISTRICT RIG COUNT FUEL MINING EMPLOYMENT, 1985=100 U.S. SEISMIC CREW COUNT 22.1 32.1 26.2 17.8 21.8 20.3 19.3 20.5 980.7 1084.1 994.1 1038.2 921.7 1002.3 878.2 828.7 75.8 73.6 74.4 72.8 56.8 69.2 73.4 68.5 75.5 73.8 73.9 73.9 75.5 75.2 75.8 76.8 118.7 120.2 122.3 128.4 127.2 128.5 129.8 129.9 MINING MINERAL PRICES, 1986=100 107.6 111. 9 129.7 127.6 123.7 125.4 128.3 136.4 METAL MINING EMPLOYMENT, 1985=100 192.6 198.0 197.4 199.2 196.6 193.9 190.8 184.5 1521. 7 1411. 4 1557.5 1585.5 1726.2 1469.9 1655.5 1519.8 17576 18219 22860 26468 31871 32866 30774 31851 15.5 18.6 29.1 31.2 30.7 29.3 35.2 37.7 1040.8 1043.0 1058.2 1068.5 1066.8 1044.5 1018.6 1005.4 CONSTRUCTION NONRESIDENTIAL AWARDS RESIDENTIAL PERMITS WESTERN HOUSING STARTS, THOUSANDS CONSTRUCTION EMPLOYMENT, THOUSANDS MANUFACTURING WAGES, CALIFORNIA, $!HOUR EMPLOYMENT, THOUSANDS DURABLES, 1985=100 CONSTRUCTION DURABLES I 1985=100 AEROSPACE, 1985=100 ELECTRONICS, 1985=100 SEMICONDUCTOR ORDERS, MILLIONS $, NOT S.A. WHLS/RETAIL TRADE EMPLOYMENT, THOUSANDS RETAIL SALES, PACIFIC DISTRICT, MIL. $ SERVICES EMPLOYMENT, THOUSANDS 11. 7 11.7 11.6 11.4 11.3 11. 3 11.2 11.1 3082.8 3097.7 3124.8 3143.6 3158.3 3160.4 3164.4 3153.3 98.5 99.7 101. 3 102.2 103.0 103.6 104.0 103.8 103.3 104.3 108.0 110.1 112.0 112.5 113.1 111.4 110.8 113.1 115.3 117.7 118.3 117.5 116.3 115.1 92.2 92.4 92.7 93.1 93.8 93.9 94.0 94.7 1247.3 1151.4 1192.2 1309.7 1227.7 1197.9 1166.3 1300.0 4843.1 4823.7 4827.2 4805.6 4773.0 4752.6 4723.6 4679.8 24511 25138 25195 24979 24720 23992 23883 23390 5090.4 5552.1 5509.4 5474.7 5400.7 5320.3 5261.6 5191. 0 HEALTH CARE, 1985=100 128.5 127.6 125.7 124.1 122.7 122.0 120.3 118.6 BUSINESS SERVICES, 1985=100 118.6 115.7 115.7 116.1 115.0 111.7 110.0 108.8 HOTEL, 1985=100 138.3 139.7 136.3 135.0 133.4 131.9 129.4 127.0 RECREATION, 1985=100 141.1 142.0 138.1 135.8 133.1 135.8 130.7 124.4 1274.5 1270.2 1269.7 1264.6 1256.2 1250.8 1242.2 1231. 9 FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT GOVERNMENT EMPLOYMENT, THOUSANDS FEDERAL GOVERNMENT STATE AND LOCAL 620.4 616.7 636.4 655.0 629.0 624.6 624.2 622.1 2860.7 2833.1 2825.9 2777.9 2755.8 2724.0 2694.6 2664.2 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 neY-'/s!etter 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. OU176 \') 'OJSpUl!J:I Ul!S lOLL xog ·O·d O)SPUOJ:::J UOS JO aAJaSa~ ~U08 IOJapa:::J ~uaw~Jodaa l.pJOaSa~ PERSONAL INCOME ANNUALIZED PERCENT GROWTH RATES Twelfth District Business Sentiment Index' GNP Percent 100 ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 12TH DISTRICT U.S. 9QQ4 9003 90Q2 9001 89Q4 -0.1 3.2 2.4 6.4 9.9 8.6 5.5 6.7 8.0 6.3 3.3 6.5 11.1 0.2 13.1 5.8 8.4 7.3 9.9 10.2 4.4 9.7 5.5 6.8 8.1 8.7 5.1 6.5 7.1 14.9 9.0 18.2 11.5 8.3 9.5 13.1 -10.7 6.5 2.3 7.5 17.8 6.1 13.3 10.6 10.7 3.6 3.3 6.5 5.3 5.5 5.6 13.4 9.7 4.4 6.6 80 o Recession 60 ~ Slower Growth 40 III Same • Faster Growth 20 o Ql Q2 Q3 1989 Q4 Q1 Q2 Q3 1990 Q4 Q1 Q2 1991 • The index is constructed from a survey of approximately 75 business leaders in the12th Federal Reserve District. NON-AGRICULTURAL EMPLOYMENT ANNUALIZED PERCENT GROWTH RATES ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 12TH DISTRICT U. S. * Year-to-date 91Q1 9QQ4 9QQ3 9QQ2 9001 7.8 1.9 0.5 0.6 6.4 0.7 3.4 4.3 3.8 -0.9 0.8 -2.0 3.3 4.5 6.6 0.7 5.5 2.8 -2.7 4.9 1.4 1.3 3.9 7.6 1.4 2.3 3.5 7.9 4.1 2.7 6.1 6.0 4.2 3.1 5.1 3.3 10.0 1.1 2.3 1.9 6.9 8.4 3.7 4.2 5.2 1.5 -2.4 -0.3 -1.6 2.1 0.4 3.2 2.3 3.0 2.6 UNEMPLOYMENT RATES AVERAGE QUARTERLY DATA 91Q1 9QQ4 9QQ3 9QQ2 9001 ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 7.4 5.3 7.4 2.6 6.1 5.6 6.1 4.3 6.2 7.1 5.5 6.5 2.7 6.0 5.7 5.9 4.3 5.3 6.8 5.3 5.5 2.7 5.8 4.9 5.6 4.2 4.4 7.0 5.5 5.2 2.5 5.9 4.9 5.2 4.4 4.6 7.2 5.1 5.1 3.0 5.3 4.5 5.3 4.2 5.1 12TH DISTRICT U.S. 6.7 6.5 6.1 5.9 5.3 5.6 5.1 5.3 5.1 5.3 * Year-to-date
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