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FRBSF WEEKLY LETTER May 18,1990 Western Manufacturing: Bucking the Nationai Trend? Since 1983, the current economic expansion has increased manufacturing employment in the U.S. by 6.4 percent. At the same time, in the nine western states that constitute the Twelfth Federal Reserve District the number of manufacturing jobs grew by a much stronger 14.2 percent, or 392 thousand. Based on the trend rate of growth in manufacturing employment nationwide, the West would have added only 177 thousand manufacturing jobs since 1983. What accounts for the extra 215 thousand jobs not explained by the national trend? In this Letter, we examine some of the factors that may have led to the more rapid growth in western manufacturing. Labor force growth Faster labor force growth also could be responsible for some of the West's relatively stronger performance. Rapid labor force growth makes a region attractive to manufacturing firms because it provides adequate labor supply. Moreover, since labor force growth tends to be associated with population growth, a region with a more rapidly growing labor force also provides a growing market for manufactured products. The West's labor force grew 50 percent faster than the national labor force did during the 1983-89 period. This increase in the labor pool suggests manufacturing jobs in the West would have increased by 119 thousand even if the industry mix in the West were identical to that of the nation. Favorable industry mix Industry-specific factors One factor may have been the West's industry mix. Because the West ha's a higher-than-average proportion of fast-growing manufacturing sectors, it is not surprising that western manufacturing employment rose faster than the national pace. For example, because the lumber and wood products industry is relatively more important in the West, the 17 percent increase in this industry's jobs nationwide from 1983 to 1989 would be expected to boost the West's total manufacturing employment relatively more than in the rest of the country. After accounting for industry mix and labor force growth, 68 thousand of the West's added manufacturing jobs remain unexplained. These gains arose because some manufacturing sectors, such as transportation equipment and instruments, grew more rapidly in the West than did their counterparts nationally. One reason for the differential performance is that the industry categories used in this analysis are limited by the availability of consistent state-level data, and often fail to distinguish important differences within manufacturing sectors. Similarly, because primary metals and leather products are a smaller share of manufacturing employment intheWest~ declines in these indostries nationally would have had a smaller impact here during this period than in parts of the country that are more dependent on these industries. The West's favorable industry mix, however, would explain only 28 thousand of the 215 thousand additional jobs. For example, "transportation equipmene; manufacturing is dominated by auto production at thenafi6ilililevei. Iil the West,hoyvever, most of the transportation equipment produced is aircraft, missiles, and space vehicles. Consequently, it is not surprising that the strong growth in contract defense spending as well as the rapid growth in commercial aircraft orders during the 1983-89 period led to an increase in employment 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. FRBSF in transportation equipment of 28 percent in the Twelfth District, compared with a significantly smaller 18 percent increase nationally. Similarly, although primary metals provide fewer jobs in the West than is the case nationwide, strong growth in nonferrous metals in Arizona and in aluminum production in Oregon boosted primary metals employment by eight percent in the District. This gain contrasts sharply with the six percent decline in primary metals nationally (tied to weakness in steel production). Differences between the performance of specific industries in the West and the nation are not limited to problems with overly broad definitions of manufacturing sectors. For example, employment in the District's textile and apparel industries grew 28 and 18 percent, respectively, but in the nation as a whole fell two and six percent, respectively. These discrepancies are due to a number of factors, including the presence of a large, skilled immigrant population in the 'yVest, the emergence of western design centers (especially Los Angeles), and a trend toward the more casual clothing manufactured in the West. In addition to textiles and apparel, several other industries in the West had much stronger growth than did their counterparts elsewhere in the country. The District reported 11 percent employment growth in the paper products sectordouble the national average-because of growth rates ranging from 11 to 17 percent in California, Idaho, and Washington. Chemical industry employment growth of 16 and 21 percent in California and Washington, respectively, brought the District's growth in chemicals employment to 17 percent during the 1983 to 1989 period, well above the increase of five percent nationally. Moreover, strong construction activity in the West boostedstone,c1ay,aRdglassemployment 18 percent, compared to only six percent nationally. Employment in instruments manufacturing exhibited the most dramatic gains in the West, with employment doubling during the period. Nearly all of these 139 thousand new jobs were added in California and Washington, where employment rose 131 and 59 percent, respectively. In contrast, instruments employment outside the District actually declined by 54 thousand jobs. Electronics: an exception At the same time, however, a few sectors saw considerably worse conditions in the West than nationally. The electrical equipment industry, which inciudes semiconductors and other electronic components, lost 83 thousand jobs in the West between 1983 and 1989. In fact, the number of electronic component jobs fell by 96 thousand in California during this period, a loss that was only partially offset by job gains in other western states, notably Oregon (4.9 thousand) and Idaho (2.8 thousand). Outside the District, this industry gained 108 thousand jobs. The rising cost of doing business in California may account for this contrast. Other lower-cost locations for assembling electronic components, both in the U.S. and abroad, appear to be eating into California's traditional leading role in this industry. A repeat performance? In summary, then, a number of factors contributed to the West's superior performance. Rapid labor force growth, the West's favorable industry mix, and the better-than-average performance of several key sectors, including textiles, apparel, paper, transportation equipment, instruments, and stone, clay and glass, provided the impetus for strong manufacturing employment growth. Some of the factors that led to this growth in western industries during the 1983-89 period are expected to persist. For example, population and labor force projections continue to suggest faster growth in the West than nationally, thereby stimulating continued growth in western construction activity. Increased trade with the Pacific Rim and rising foreign investment in the West remain positive factors in the outlook. Moreover, large backlogs in the orders for commercial aircraft should keep that sector strong. However, continued strength in the region's manufacturing sector is not assured. Western . mantlfactur~rsface strong competition from producers in other countries and other parts of the U.S. Defense cutbacks will force many companies to change products and seek new markets. Restrictions on timber cutting in the Northwest can be expected to slow the region's forest products industries. And growing urban problems in several parts of the West, including environmental restrictions, congestion, and rising housing costs, may challenge the region's competitive edge. Ronald H. Schmidt Senior Economist Carolyn Sherwood-Call Economist DISTRICT INDICATORS (Seasonally Adjusted) 9001 89Q4 89Q3 89Q2 89Q1 88Q4 88Q3 88Q2 120.0 132.0 N/A 90.5 63.4 115.6 117.2 2488.6 90.5 62.4 113.2 115.0 2488.4 92.9 62.7 114.5 120.5 2448.9 90.1 61.8 116.5 119.7 2427.0 93.4 61.7 112.7 112.4 2330.9 96.2 60.1 111.7 111.7 2308.9 95.9 61.4 104.9 92.5 2218.3 96.6 63.4 1695.3 2623.3 130.3 1788.3 2519.4 128.1 1810.8 2541.7 123.8 1668.8 2450.6 119.5 1603.2 2417.6 123.4 1768.7 2568.5 122.4 1588.6 2461.4 120.0 1664.3 2507.5 124.3 ENERGY SPOT PRICE OF OIL, $/BARREL U.S. RIG COUNT DISTRICT RIG COUNT FUEL MINING EMPLOYMENT, 1985=100 U. S. SEISMIC CREW COUNT 21.8 909.5 56.2 79.3 126.1 20.3 1017.6 70.3 79.2 128.0 19.3 904.7 75.6 81.1 131.3 20.5 807.1 66.7 79.7 129.9 18.5 753.4 62.0 77.6 137.3 14.8 912.3 72.8 79.1 152.9 15.2 941.5 92.7 82.7 180.7 17.3 942.8 89.9 83.0 197.6 MINING MINERAL PRICES, 1986=100 METAL MINING EMPLOYMENT, 1985=100 123.3 201.3 125.5 191.0 131.8 187.9 134.3 182.7 147.4 176.1 147.7 169.4 138.2 162.4 136.3 154.3 CONSTRUCTION NONRESIDENTIAL AWARDS RESIDENTIAL PERMITS WESTERN HOUSING STARTS, THOUSANDS CONSTRUCTION EMPLOYMENT, THOUSANDS 1790.4 32741 29.8 1053.4 1427.4 33475 29.3 1026.0 1677.2 30509 35.2 1011.0 1533.3 31304 37.7 1001.0 1432.5 31065 29.6 982.2 1334.0 35414 33.0 967.4 1571.0 32858 36.3 950.6 1345.2 31526 36.8 934.4 MANUFACTURING WAGES, CALIFORNIA, $/HOUR EMPLOYMENT, THOUSANDS DURABLES, 1985=100 CONSTRUCTION DURABLES, 1985=100 AEROSPACE, 1985=100 ELECTRONICS, 1985=100 SEMICONDUCTOR ORDERS, MILLIONS $, NOT S.A. 11.3 11.3 l.~ 11.1 , I.U 11.0 iO.9 10.8 3164.5 104.1 115.1 116.7 95.3 1214.0 3151.8 103.6 111.6 116.2 94.7 1197.9 3152.7 104.0 3153.5 104.1 3148.5 104.1 3134.7 103.5 3108.2 102.8 3102.5 102.6 112.1 111.4 112.3 112.1 115.8 94.7 1166.3 115.3 95.3 1300.0 113.8 95.7 1300.0 115.1 99.7 1066.0 114.0 98.7 1222.0 113.6 97.9 1269.0 WHLS/RETAIL TRADE EMPLOYMENT, THOUSANDS RETAIL SALES, PACIFIC DISTRICT, MIL. $ 4812.2 24656 4751.6 23961 4715.2 23815 4678.9 23417 4653.0 22730 4570.5 22000 4537.3 21076 4487.2 20793 SERVICES EMPLOYMENT, THOUSANDS HEALTH CARE, 1985=100 BUSINESS SERVICES, 1985=100 HOTEL, 1985=100 RECREATION, 1985=100 5233.2 122.7 113.2 133.3 126.7 5184.6 120.5 110.0 131.6 128.3 5119.3 119.0 109.8 129.0 125.9 5059.1 117.7 109.4 127.4 125.8 5009.7 116.9 109.0 126.1 125.5 4886.4 115.7 123.6 125.0 108.9 4818.1 114.4 123.2 122.1 105.3 4758.3 113.5 122.7 120.7 105.4 FINANCE, INSUR. AND REAL ESTATE EMPLOYMENT 1265.0 1256.7 1245.2 1233.4 1228.1 1221.0 1214.3 1209.8 GOVERNMENT EMPLOYMENT, THOUSANDS FEDERAL GOVERNMENT STATE AND LOCAL 626.0 2756.4 622.5 2731.8 618.5 2700.3 624.6 2663.6 624.3 2644.8 620.7 2619.1 615.7 2595.0 612.7 2573.9 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, MILLIONS BOARD FEET NORTHWEST LUMBER INVENTORY, MIL. BOARD FEET U.S. LUMBER PRICES, 1986=100 .,.,., I 110.1 . 111.2 Data are weighted aggregates of avai lable 12th District state data and are expressed as monthly rates unless otherwise noted. District I~dicator data are constructed by FRBSF research staff from publ ic and industry sources. Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federai 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. OZl176 V:l 'OJSpUeJ:I ueS WLL X08 'O'd O)SI)UOJ:J UOS JO ~U08 aAJaSa~ IOJapa:J ~uaw~Jodaa l.pJOaSa~ Twelfth District Business Sentiment Index· PERSOIIAL INCOIlE ANNUALIZED PERCENT GROWTH RATES ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 12TH DISTRICT U.s. 8904 89Q3 89Q2 89Q1 88Q4 -8.8 11.8 4.2 9.0 20.4 13.9 8.4 10.7 11.3 14.5 4.8 8.7 12.0 -3.5 10.1 3.3 5.2 7.7 27.8 6.8 7.8 12.7 6.2 12.0 10.2 10.5 8.7 13.1 11.6 7.6 9.6 19.2 16.5 6.5 6.8 14.0 6.5 5.7 7.9 11.7 13.3 11.9 11.9 8.9 9.1 6.2 8.4 7.9 4.7 8.4 7.0 8.9 9.2 8.4 8.3 GNP Percent 100 80 60 o Worse rill Same 40 • Belter 20 o 01 02 03 04 1988 01 02 03 Q4 01 1990 1989 ·-The-irld8x iSCOiiSfiUCtiit trom asuMiy -cit-approxImately 15 bUsin8sS kiad8fS in the12th Federal Reserve District. _ _ _ICUllURAL EIlPl.O'I'llENT .-lOlIIENT RATES AVERAGE QUARTERLY DATA ANNUALIZED PERCENT GROWTH RATES ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 12TH DISTRICT U.S. * Year-to-date 9001 8904 89Q3 89Q2 89Q1 3.0 4.6 2.5 13.0 9.3 9.9 6.6 3.9 6.0 -3.1 5.2 3.1 3.4 7.0 8.9 2.4 4.0 6.0 7.0 2.3 2.1 3.5 5.9 13.3 0.5 1.8 2.6 6.2 8.9 8.6 3.2 3.7 5.0 4.3 6.8 5.7 5.4 4.0 6.6 3.9 4.8 6.5 3.8 4.0 6.4 3.9 3.0 3.7 1.8 2.9 2.1 2.9 2.4 6.0 3.3 9001 89Q4 89Q3 89Q2 89Q1 ALASKA ARIZONA CALIFORNIA HAWAII IDAHO NEVADA OREGON UTAH WASHINGTON 7.1 4.8 5.1 3.1 5.0 6.7 4.6 5.1 2.8 5.0 6.3 5.1 5.4 3.1 5.1 4.5 *.D 5.2 4.3 5.5 5.5 4.1 6.2 6.4 5.4 5.0 2.0 5.1 5.3 5.7 4.0 6.3 5.7 4.4 6.1 7.4 5.6 4.9 3.5 5.2 5.1 5.8 4.4 6.1 12TH DISTRICT 5.1 5.3 5.1 5.3 5.1 5.3 5.3 5.3 5.1 5.2 u.s. * Year-to-date *.D