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San Francisco Regional Outlook - Fourth Quarter 1998
Region's Economic and Banking Conditions
The Region's Economy Is Still Generally Healthy; However, the Effects of the Asian Crisis Are Evident
High-Tech Slowdown--Asia's crisis has diminished the earnings of a number of leading Silicon Valley high-tech firms; simultaneously, a number of manufacturers are reporting layoffs and plant closings. The slowdown is also affecting high-tech firms with operations in Arizona, California, Idaho, Oregon, Utah, and Washington. Some analysts are already reporting a softening in San Jose's hot housing and commercial real estate markets, as high-tech employers curtail plant expansions and lay off workers.
Aerospace Concerns Mount--Slowing sales, cancellations of aircraft orders, and severe problems among Asian air carriers, including the September bankruptcy of Philippine Airlines, are expected to slow the Region's key aerospace sector in the year ahead. Washington and California account for most of the Region's aerospace jobs.
Agricultural Exports Are Lagging--Many of the Region's states export a significant volume of agricultural products to Asia. The Asian crisis has particularly hurt the Pacific Northwest's wheat farmers, California's fruit and vegetable producers, and Washington's apple growers. The farm sector in Montana and Wyoming has been hurt by falling prices for wheat and livestock.
Falling Energy Prices--Falling oil prices, mostly driven by the events in Asia, have hit the Region's major energy-producing states. State government oil revenues are expected to decline in Alaska and Wyoming in particular.
Across the Region, Economic Conditions Vary Widely
One indication of the impact the Asian crisis is having on the Region's economy is the breadth of the gradual slowing. Ten of the Region's 11 states reported slower job growth in the 12-month period ending August 1998 than in the same period in 1997. The Region's growth rate for the 12-month period ending August 1998 was 3.1 percent, below the 3.5 percent growth rate for the previous year but still higher than that of the nation, which added jobs at a 2.7 percent rate.
Top Performers--Arizona, Nevada, and Washington remained among the nation's five fastest growing states, adding jobs at rates of 3.7 percent or better over the past 12 months. Arizona recorded strong growth across the board. The Asian effect seems to be more important in Nevada and Washington. Nevada reported slower growth in tourism and gaming, the state's major industry. In Washington, manufacturing job growth slowed dramatically, although most other sectors remained strong.
Strong Growth--California, Utah, and Oregon added jobs moderately faster than the nation as a whole, but all three grew more slowly in the 12-month period ending August 1998 than in the previous 12-month period. Over the past year, each of these states has recorded a sharp decline in the growth rate of manufacturing jobs, probably because of the Asian crisis.
Trailing the Nation--Alaska and Idaho continued to trail the nation in job growth--Alaska and Idaho added jobs at 2.0 percent and 1.8 percent annual rates, respectively, over the 12 months ending August 1998. Alaska's job growth rate has remained relatively stable despite mixed performance across sectors. Energy, construction, and transportation jobs are up, while job conditions are weak in manufacturing and the government sector. Idaho's job growth has dropped sharply over the past 12 months as the service job growth rate has fallen by more than half, to 2.0 percent.
Weakness Continues--Wyoming, Montana, and Hawaii continue to lag far behind the rest of the Region in job growth. Over the 12-month period ending August 1998, Wyoming and Montana added jobs at less than a 1 percent annual rate, about half their rate in the previous 12 months. Hawaii, which continues to suffer from a protracted recession, lost 1.2 percent of its jobs during the 12-month period ending August 1998. The state has ranked last in the nation in job growth over the past two years.
Insured Financial Institutions Post Record Earnings
Despite the slower job growth in most states, insured financial institutions throughout the Region (except in Hawaii and Montana) report excellent performance as of June 30, 1998. They posted a collective return on assets (ROA) of 1.34 percent and a return on equity of 14.72 percent through the second quarter of 1998, well above the national returns of 1.22 percent and 14.34 percent, respectively. These excellent earnings are the result of noninterest income growth and low provisions for loan losses. The ratio of loans 30 or more days past due and loans on nonaccrual fell to 1.79 percent of total loans--the lowest ratio in over a decade and well below the nation's 2.07 percent ratio. Reported capital ratios for the Region remain strong: At 7.71 percent, they are on par with the average industry ratio of 7.72 percent. The strong performance reported by insured institutions is in part attributable to the strong national and regional economies.
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