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FRBSF . WEEKLY

LETTER

February 6, 1987

The Western Region in 1986
During 1986,the overall rate of economic
growth in the Twelfth Federal Reserve District
(Alaska, Arizona, California, Hawaii, Idaho,
Nevada, Oregon, Utah, and Washington)
slowed from its 1985 pace, but growth rates differed considerably among the western states.
Arizona and Nevada were two of the fastest
growing states in the country, while the economies of Alaska and Idaho were among the weakest in the nation.
For the District, nonagricultural wage and salary
employment grew 2.4 percent between December 1985 and December 1986, almost identical
to the 2.5 percent pace registered nationally.
Arizona and Nevada had two of the fastest
employment growth rates in the nation, at 4.2
and 4.8 percent, respectively. California, which
accounts for about two-thirds of all Twelfth District employment, experienced 2.4 percent
employment growth, while Hawaii, Oregon, and
Washington also registered growth between 2
and 3 percent. In Utah, employment grew only
1.2 percent, and Idaho's employment fell an
estimated 1.7 percent while Alaska's fell 5.1
percent.
As was true nationally, the economic forces with
the most important effects on the West's performance were fairly robust consumer spending,
lower interest rates, and lower oil prices. They
affected the economic well-being of different
parts of the District differently because of the
various mixtures of industries among the western
states. Thus, while forest products and residential construction activity benefited from lower
interest rates during 1986, oil and energy companies suffered fromthe sharp drop in oil prices
that occurred early in the year.
Trade and services

Consumer spending is important in determining
the overall pace of western growth because
trade and service activity together account for
almost 50 percent of total employment in the
western states. In 1986, consumer spending
gave a major boost to the western economy,
even though it grew more slowly than its frenetic

1985 pace. Indeed; the three major service-·
oriented sectors (wholesale and retail trade; services; and finance, insurance, and real estate)
each registered employment growth at a pace
one-and-a-half times that of total wage and salary employment. Moreover, these were the only
sectors to outpace overall job growth by a significantmargin. The extent to which consumer
spending will continue to spur growth in 1987 is
open to question. Concerns about rising consumerdebtlevels lead some to expect a further
weakening of consumer spending growth this
year.
One component of the service sector that
received considerable attention last year was
tourism. Last year, the reduced value of the dollar, fears of terrorism abroad, and Expo '86 in
Vancouver were expected to provide a banner
year for visitor industries, particularly those in
the Pacific Northwest. Data on airport traffic and
hotel vacancies suggest that the summer season
was a prosperous one, although the season nevertheless may have been somewhat disappointing for those who relied on widely circulated
forecasts that were exceptionally optimistic.
Construction

The pattern of western construction activity generallyfollowed the national trend. Single-family
homebuilding boomed during the spring and
summer as interest rates fell. Building slowed a
bit after the summer, butstill maintained a
healthy pace as interest rates stabilized late in
the year. If mortgage interest rates continue at
their current low levels, single-family constructionactivityshould remain robust.
Multifamily residential.construction was sluggish
because many areas in the West have high
vacancy rates. Now that tax reform has removed.
the tax advantages of building otherwise
unprofitable projects, there is even less incentive
to build multifamily housing; Combined, these
factors should continue to dampen multifamily
construction activity this year.

FRBSF
Nonresidential construction activity likewise
slowed during 1986. In the West, as in the
nation, the markets for office space in most metropolitan areas are substantially overbuilt, with
vacancy rates averaging close to 20 percent. As
was true for multifamily residential construction,
a significant proportion of the existing over~
capacity was built by limited partnerships for tax
shelter purposes. Thus, when the tax reform act
substantially reduced the tax advantages of such
investments, the amount of office construction
dropped sharply.
Although the markets for retail and commercial
space have not been hit as hard as the office
market, the overall value of nonresidential construction awards issued during the first eleven
months of the year in the Twelfth District during
1986 fell 1.5 percent below its 1985 level. The
combined effects of overbuilding and tax reform
should cause nonresidential construction activity
to decline further in 1987.
Manufacturing

Manufacturing industries have been weak during
the past year, although less so in the West than
in the rest of the nation. Global competition in
some traditional markets led workers to make
wage concessions and firms to make substantial
investments in more efficient plant and equipment. Despite the reduced foreign exchange
value of the
dollar, which was expected to
improve domestic producers' positions relative
to their foreign competitors, improvement in the
trade balance was almost nonexistent during
1986. Not until the end of the year did the lower
value of the dollar and cost reductions by
domestic firms appear to bring about some
improvement in export volumes.

u.s.

Events in other manufacturing industries were
not dominated by the dollar's value. For example, the aerospace industry boomed because of
exceptionally strong demand from both the
commercial aircraft sector and government
defense contracts. Orders for aircraft continue
strong and bode well for the commercial side of
the aerospace industry, but the tight federal budget, aswell as COncern about the level of
defense spending generally and the feasibilityof
the Strategic Defense Initiative ("Star Wars") in
particular, may slow government contract
awards in 1987. Nevertheless, even if the vol-

ume of contract awards were to drop, production in the affected firms would not slow until
late 1987 or 1988 since only a fraction of the
typical multi-year contract award is spent during
the initial year of the award.
Although many observers had expected the high
technology and semiconductor industries to
recover from their slump during 1986, the
recovery, for the most part, failed tomaterialize.
However, recent reports of improved demand
for personal computers offer some hope to semiconductor makers, and a trade ruling against
Japanese semiconductor producers may make
producers more competitive on world markets. These developments notwithstanding,
domestic producers must continue monitoring
costs and aggressively pursuing research and
development possibilities if they are to regain
their previous strength.

u.s.

Forest products

The forest products indLJstries are much better
off now than they were last year at this time
because of reductions in interest rates and the
value of the
dollar. Measures to cut costs
and enhance efficiency implemented during the
industry's five-year downslide set the stage for
an upturn when, at last, economic conditions
improved. In addition, although the
dollar
remains highly valued compared to the Canadian dollar,
producers gained relative to
Canadian producers because of the prolonged
Canadian lumber strike and the imposition of a
15 percent export tax on Canadian lumber
exported to the
Due to these developments,
both lumber output and exports from the Pacific
Northwest grew in 1986.

u.s

u.s.

u.s.

u.s.

Nevertheless, employment and wage levels at
Northwest mills remained substantially below
the levels they reached during the early 1980s,
and the economies of many lumber producing
areas in Oregon, Washington, and Idaho remain
troubled. Given the profound changes the industry has seen during the past few years, a return
to the employment levels of the late 1970s
appears unlikely even under the best ofcircumstances. The prospects for forest products in
1987 hinge to a large extent on the levels of
interest rates and the dollar, and the disposition
of trade disputes with the Pacific Northwest's
major competitor, Canada.

Nonagricultural Employment Growth
in the West
Percentage Change
(Dec. to Dec.)

8

1985

6
1986
4
2
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-2
-4

Agriculture
Agricultural producers in the West have not
escaped the adversity associated with deflation
in farm prices, an increased world supply of
agricultural products, and interest rates that
remain high relative to inflation. Their losses
have been sizable, but western farmers tended
to fare better than farmers in the Midwest and
about the same as the national average.
Some farmers may never recover from their
problems, but producers of some western crops
appear to have weathered the crisis and now
face a reasonably bright future. In particular, the
producers of grapes and tree nuts face a better
outlook due to expanded markets (including the
new wine cooler market for grapes) and
improved competitiveness in world markets. In
addition, the West's diverse output and flexible
land use should continue to insulate western
producers from the harshest blows of agricultural problems.

Energy and mining
The sharp drop in oil prices that occurred early
in 1986 helped western consumers but created
dramatic problems for the District's oil-producing regions. The rig count for the Twelfth District's oil-producing states (Alaska, California,
and Utah) fell 45 percent between December

1985 and December 1986. This compares with
a slightly larger 51 percent national decline.
Mining employment, much of which is oilrelated, fell 14 percent between November 1985
and November 1986 - a smaller decline than
the 18 percent seen nationally. The Twelfth District's major oil-producing states, Alaska and
California, registered mining employment losses
of 20 and 16 percent, respectively.
While u.s. oil production fell by 5 percent
between. December J 985 and December 1986
oil output rose 7 percent in Alaska. Alaska's pr~­
duction is less responsive to short-run price
changes because the high cost of oil recovery
there requires firms to make long-range investment commitments.
The dramatic effects of oil-related problems in
Alaska showed up in stalled construction activity
and in a crisis in the state's budget because of
the importance of oil money in funding both. As
a result of weakness in oil, government, and
construction activity, December employment in
Alaska stood 5.1 percent below its year-earlier
level.
California's oil industry, much of which is concentrated in Kern County, is more responsive to
short-run market conditions because it consists
of many small, independent oil producers. As a
result, oil production fell by 9 percent in California during 1986, while Kern County mining
employment fell by about a third.

Summary
During 1986, economic growth slowed in the
Twelfth District as it did nationwide. Lower
interest rates stimulated residential construction
and forest products activities, while continued
strong consumer spending in most parts of the
District boosted trade and service-related
activities. The sharp reduction in oil prices that
occurred during the springhurtoil-producing
regions dramatically. The reduced foreign
exchange value of the dollar did not help u.s.
producers as much as most analysts expected in
1986, but more substantial. improvement is
expected during 1987. Overall, the outlook for
1987 is good, but depends to a large extent on
the course of oil prices, the U.5. dollar, and
interest rates.

Carolyn Sherwood-Call

Opini?ns expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San
Fr~nCl.sco, or of the Board of Governors of the Federal Reserve System.
Edltonal co,:"ments may be ad~ressed to the editor (Gregory Tong) or to the author .... Free copies of Federal Reserve publications
can be obtamed from the Public Information Department, Federal Reserve Bank of San Francisco P.O. Box 7702 San Francisco
94120. Phone (415) 974.2246.
. , .
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Loans, Leases and Investments 1 2
Loans and Leases 1 6
Commercial and Industrial
Real estate
Loans to Individuals
Leases
U.S. Treasury and Agency Securities 2
Other Secu rities 2
Total Deposits
Demand Deposits
Demand Deposits Adjusted 3
Other Transaction Balances4
Total Non-Transaction Balances 6
Money Market Deposit
Accounts-Total
Time Deposits in Amounts of
$100,000 or more
Other Liabilities for Borrowed MoneyS
Two Week Averages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+ )/Deficiency (-)
Borrowings
Net free reserves (+ )/Net borrowed( -)

Amount
Outstanding

Change
from

1/14/87
206,841
186,131
54,835
67,099
39,041
5,593
13,569
7,142
209,835
54,799
50,559
19,857
135,179

1/7/87
859
949
689
94
247
8
116
24
- 4,988
- 4,516
9,922
426
46

45,955
32,469
27,876

Change from 1/15/86
Dollar
Percentl

-

-

-

-

3,670
2,391
2,145
1,028
409
121
2,742
1,463
5,589
3,887
4,424
4,491
2,788

1.8
1.3
4.0
1.5
1.0
- 2.1
25.3
- 17.0
2.7
7.6
9.5
29.2
- 2.0

41

0.0

5,693
1,801

- 14.9
6.9

1,040
291
1,589

-

Period ended

Period ended

1/12/87

12/29/86

1
3
1

10,277
11
10,266

1 Includes loss reserves, unearned income, excludes interbank loans
2

Excludes trading account securities

u.s.

3 Excludes
government and depository institution deposits and cash items
4 ATS, NOW, Super NOW and savings accounts with telephone transfers

S Includes borrowing via FRB, TT&L notes, Fed Funds, RPs and other sources
6 Includes items not shown separately
7 Annualized percent change