San Francisco Regional Outlook - Second Quarter 1998
Strong Economic Growth Is
Expected to Continue in the San Francisco Region despite
Potential Fallout from the Asian Crisis
The San Francisco Region added jobs at a rapid 3.6 percent
pace in 1997, much faster than the nation's
2.7 percent growth rate.
The Asian crisis is likely to have a more significant effect
on the San Francisco Region than on most other parts of the nation;
still, most forecasters do not expect it to be a major stumbling
block in 1998. Its impact on the various states and industries will
not be uniform; effects on high tech, aerospace, and tourism could
be sizable for some states.
The 1998 outlook for most of the Region's states remains
positive, with another year of robust expansion projected, although
at somewhat reduced growth rates.
San Francisco Region Continued to Lead the Nation in
The San Francisco Region's economic performance, driven by a
surging California economy and generally rapid growth throughout
much of the Region, was robust in 1997. The Region led the nation
in job growth rates for the third consecutive year in 1997, adding
815,000 jobs (seasonally adjusted) between December 1996 and
December 1997, a 3.6 percent rate of increase. Arizona, Nevada,
Utah, California, Oregon, and Washington were among the
nation's 13 fastest growing states; all exceeded the nation's 2.7
percent job growth rate, as shown in Chart 1. The
expansion was generally reflected in strong banking industry
performance as well. The Region posted a return on assets (ROA) of
1.19 percent in 1997, the highest in at least a decade, and matched
the performance for the nation (see Current Regional Banking
Despite the strong performance of the Region and the banking
industry as a group, there are still risks ahead. The greatest risk
on the horizon in 1998 is the crisis in Asia, which has the
potential to weaken the entire San Francisco Region. The initial
effects of the Asian crisis likely will be felt in key
sectors--manufacturing, export services, and agriculture--and may
be concentrated in several states. The Asian crisis is not the only
risk facing the Region. Alaska, for example, faces the risk that
low oil prices will slow its economy.
The major currency devaluations suffered by a number of the Asian
Tiger economies in 1997 force them to make serious economic
adjustments that will dramatically slow their economies. The crisis
is most often associated with the "Asian 10" group,
henceforth referred to as "Asia": China, Hong Kong,
Indonesia, Japan, Malaysia, the Philippines, Singapore, South
Korea, Taiwan, and Thailand. Asia's economic turmoil could affect
the Region's economy in 1998 in many ways, including:
reduced Asian demand for U.S. exports;
lower prices on Asian goods, which may weaken the market share
of U.S. manufacturers in both domestic and international markets;
reduced spending in the United States by Asian visitors; and
lower prices in Asia, which may attract more U.S. visitors and
slow tourism in the United States and Hawaii.
Crisis May Have a Proportionately Larger Impact on the San
The ill effects of the Asian crisis have particular relevance for
the San Francisco Region. International Trade Administration
Exporter Location data for 1996 indicate that about 52 percent of
the Region's merchandise exports were shipped to Asia; elsewhere in
the nation the comparable figure was 22 percent. The Region's
largest export markets are shown in Chart 2. The
Region also may have a higher share of service exports, including business,
personal, and transportation and trade services; however, the
following analysis focuses on merchandise export exposure, which
for most states is much larger and for which statistics are
A disproportionate number of metropolitan areas in this Region are
heavily dependent on merchandise exports; San Jose leads the nation
in exports for metropolitan areas. Los Angeles, Seattle, Portland,
San Francisco, Orange County, Phoenix, Oakland, and San Diego are
among the top 20 metropolitan export centers. Ports in these areas
may be affected by changes in both export and import volumes.
Not only are the Region's exports heavily weighted toward Asia, but
in 1996 over three-quarters of the dollar volume of all exports
fell in three categories of goods--high technology, aerospace, and
agriculture. All three of these export categories are vulnerable to
cutbacks in Asian sales. The Region's merchandise export
composition is shown in Chart 3.
Finally, as illustrated in Chart 4, the ill effects
will not be evenly distributed across the states in the Region.
Four states rank among the top five nationally in merchandise
exports relative to gross state product (GSP): Washington, Oregon,
California, and Arizona. Nationally, 1996 exports to Asia
represented about 2.5 percent of gross domestic product; as a
percentage of the total economy this may appear small. However, the
share of exports to GSP in these four states and in selected
industries is much higher than for the nation and may represent a
significant share of economic activity. Some key areas of exposure
for the Region, by state and industrial sector, are as follows:
High-tech exports to Asia are about 3.5 percent of GSP in
Arizona and California, and about 2 percent in Idaho and Oregon.
Aerospace exports to Asia are over 4 percent of Washington's
GSP but have slipped to under 1 percent of California's GSP.
Agricultural exports to Asia from Oregon and Washington are
about 3.5 and 1.5 percent of state GSP, respectively.
Tourism is the major industry in both Nevada and Hawaii; Hawaii
is especially dependent on Asian travelers.
Are There Mitigating Circumstances?
Several factors, including the strong national economy, moderate
interest rates, and low prices for oil and Asian imports, are
expected to help sustain the Region's expansion. Consequently, most
forecasters believe that the Asian crisis will lower the Region's
growth rate but will not cause a significant downturn. Still,
considerable uncertainty remains about the ultimate size of the
impact and when will it be felt. At the industry level, the crisis
may dampen the growth of the Region's booming high-tech and
commercial aircraft industries. Some agricultural exports, like
Alaskan seafood, Idaho potatoes, and fruits and vegetables, also
may be hurt (see Current Regional
Implications: Banks should be aware of the uncertainties
created by the Asian crisis when evaluating the financial health of
their market area and their borrowers. Because the Asian crisis, at
least initially, will hit selected states and key industries, the
paragraphs that follow briefly examine each state's vulnerability
to the crisis and its outlook for 1998. States are presented in
order of their projected exposure to the Asian crisis.
Washington Has the Highest Exposure but a Positive
Washington's economy depends heavily on exports of aerospace,
timber and wood products, and agricultural goods to Asia. As shown
in Chart 4, exports to these countries represented about 9 percent
of Washington's GSP, compared with about 2.5 percent for the
nation. As a share of GSP, Washington's exposure is the highest in
the nation. Thus, there is potential for considerable disruption to
Washington's export-based economy, especially if Asian airlines
cancel a significant number of orders for commercial aircraft.
Fortunately, Boeing has a huge backlog of orders, and these
long-term purchases often may just be postponed.
The state of Washington's 1997 Labor Market and Economic
Report projects "modestly slower growth in 1998 but
basically a continuation of present trends." Job growth is
expected to increase about 3.5 percent in 1998, keeping the state
among the fastest growing in the nation.
Oregon Looks for Continued Growth but Needs to Watch the
State analysts issued a warning about Oregon's vulnerability to the
crisis in Asia, noting that it "will almost certainly have a
disproportionate impact on the state because of the region's
importance as an export market and as a source of foreign direct
investment." Exports to Asia represent nearly 7 percent of
GSP, the second-highest share in the nation. Risk is concentrated
in agriculture, high technology, and lumber and wood products.
Like Washington, Oregon's economy is expected to grow more slowly
in 1998. The 1998 Oregon Economic and Revenue Forecast
projects that employment will grow 2.5 percent in 1998, down from
3.4 percent in 1997 when the state ranked tenth nationally in job
growth. Manufacturing, as well as construction, showed signs of
slowing in the second half of 1997, which is consistent with this
California's 1998 Outlook Is Upbeat, but High Tech Needs
The Asian crisis is expected to have an impact on California's
high-tech sector and to a lesser extent the state's agricultural
industry, but the crisis probably will not affect the state's
four-year-old expansion. Still, California, especially the Silicon
Valley, is much more vulnerable to the crisis than the nation as a
whole. High-tech exports to Asia accounted for about one-third of
California's $99 billion in merchandise export sales in 1996. Asian
exports are about 5.5 percent of GSP, third highest in the nation.
Analysts will be watching for signs of declining sales of computers
and electronic equipment or reduced profitability at high-tech
firms. Analysts also will want to monitor changes in the farm
sector (see Current Regional Banking
Despite the Asian situation, California's employment growth in 1998
is expected to exceed the national growth rate while slowing to a
2.5 to 3 percent growth range. The strong national economy and a
booming service sector in California are expected to continue to
help boost the California recovery, much as they did in 1997 when
the state added jobs at a 3.8 percent rate.
Arizona Is the Fastest Growing State
Arizona's dependence on exports to Asia as a share of GSP ranks
fifth nationally, at over 4 percent. Moreover, exposure is highly
concentrated: over 80 percent of the state's exports to Asia are
high-tech products, which increases the state's risk from a
Arizona's economy has been growing rapidly; in 1997 it overtook
Nevada as the nation's fastest growing state in terms of job
growth. Moreover, employment growth was well balanced across the
economy as it added 4.5 percent more jobs in 1997. The Arizona
Department of Commerce estimates that 1998 employment growth
will be 3.3 percent, the slowest rate of growth since 1992.
Nonetheless, Arizona would remain among the fastest growing states
in the nation.
Asian Situation Clouds the Outlook for Hawaii and the
Hawaii's primary exposure to the Asian crisis lies in its main
industry, tourism, rather than in exports to Asia. Asian tourists
make up a large share of the state's visitors, and Japan accounts
for nearly one-third of all visitors and more than one-third of all
spending. The yen's depreciation has reduced Japanese spending in
Hawaii. While the other Asian Ten nations account for only about 5
percent of visitors, their numbers and spending are expected to be
sharply curtailed as a result of the severe devaluation of their
currencies in 1997, which further contributes to the weak outlook
Most analysts expect the state's economy to remain stagnant in
1998. In the 1990s, the Hawaiian economy appears to have been
driven more by the weak performance of Japan than by the expanding
U.S. economy. In 1998, international forces and the continued weak
Japanese economy should again curtail tourism, as well as foreign
investment, especially in real estate. Furthermore, banking
industry performance in the state likely will continue to reflect
the stagnant economy.
In recent years the Pacific Island Territories of American Samoa,
the Federated States of Micronesia, and Guam have benefited from
the rapid growth in Asia and have focused much of their economic
development and export strategies on their links with Asia. While
that may be a sound long-term strategy, it will create challenges
in 1998 since the devaluations have made these three areas less
competitive in attracting tourists from Asia and in generating
export sales to Asia. Banks in these three territories reported
increases in problem loan ratios in 1997; at year-end, ratios for
all three areas were 6.50 percent or more of total loans.
Alaska's Guarded Outlook Hinges on Oil
Although Alaska's exports are modest, according to the Export
Location data series, other series suggest that the state's
exposure may be significantly larger. In both cases exports are
heavily weighted toward natural resources--oil, lumber and wood
products, and seafood--destined for Asia, especially Japan and
South Korea. State economists expect Japan and South Korea to
continue to demand sizable quantities of oil and timber, minimizing
the potential impact on export sales. By contrast, Alaskan seafood
exporters should face additional downward pressure on prices in
1998 as Asian consumers find prices for Asian fish products much
more attractive than for Alaskan fish.
A larger concern for the Alaskan economy is oil prices, which fell
to a nine-year low in March. Alaska's economy is unusual in that
its economic performance depends more on conditions in the energy
markets than on national economic conditions. Its 1997 performance
reflected the weakness in energy prices; the state added jobs at a
very slow pace--only 1.3 percent in 1997. On the positive side,
state economists now expect that oil production will be "flat
rather than plummeting" over the next four or five years. The
improved forecast also should benefit the state government, which
depends heavily on oil tax revenues.
Moderate Expansion Continues in Idaho
The Idaho economy is not heavily dependent on exports to Asia.
However, almost 36 percent of that state's small volume of exports
are high-tech goods destined for Asia. Agricultural products, many
of which are tied to the state's large potato crop, also are
exported to Asia. Nonetheless, total farm exports to Asia account
for less than 11 percent of the state's exports. State forecasters
expect both high-tech and food product demand to soften in 1998 as
a result of the Asian situation.
Idaho's Department of Financial Management (January 1998)
forecasts a 2.5 percent employment growth in 1998, similar to that
of 1997 when the state added jobs at a 2.6 percent rate. The
department foresees weakness in lumber and wood products, as well
as federal government employment. The state's construction boom
also appears to be over.
Strong Growth Is Expected in Utah in 1998
As is the case in Idaho, exports are less important to Utah's
economy than they are to the Region as a whole. Moreover, exposure
is not concentrated in any one industry or sector. High-tech goods
are the state's leading export, but only 15 percent of them are
high-tech products destined for Asia.
State forecasters expect that Utah will continue to expand in 1998;
they also expect the slowing trend of recent years to continue.
Utah added jobs at a 4 percent rate in 1997, the fifth fastest rate
in the nation, but the slowest growth rate for the state since
1991. The 1998 Economic Report of the Governor projects
robust growth for employment, at 3.6 percent. Still, the report
cites several factors that justify the prediction of slower growth:
lower net in-migration, reduced housing affordability and
residential construction, improved conditions in other state
economies, slower export growth, tight labor market conditions, and
expected higher downtown office vacancy rates.
Nevada Will Have Rapid Growth but Higher Risks
Nevada's exposure to the Asian crisis arises mostly through its
heavy dependence on gaming and tourism, which account for about
one-third of the state's employment. While Asia may not be a major
issue for Nevada (except through its impact on gaming and tourism),
other risks are of concern to the banking industry.
Nevada's booming economy is slowing; it added jobs at a 4.3 percent
annual rate in 1997, only about half as fast as in 1996 when it
added jobs at an extraordinary 7.7 percent rate. Nevada's huge
gaming and tourism industry appears to have weakened somewhat in
1997, while construction job growth slowed dramatically.
Construction of new hotel rooms is outpacing the number of
visitors, and commercial office vacancy rates have climbed well
above the national average. Finally, Nevada's new banks and
community banks both have a high exposure to construction and
commercial real estate loans, as discussed in previous issues of
Despite this high-risk profile, most forecasters expect the state's
economy to continue to add jobs at a 4 to 6 percent rate in 1998;
the consensus published by the Western Blue Chip Economic
Forecast (January/February 1998) was a 5.4 percent rate of job
growth for the year.
Montana and Wyoming Should Have Moderate to Weak
Neither Montana nor Wyoming is likely to be significantly affected
by a decline in exports to Asia. Both states' export sectors are
only a tiny share of GSP, and exports to Asia are below the
national average. The only major difference between the two is in
the type of exports destined for Asia. Montana's exports to Asia
are mainly high-tech goods, while Wyoming's are primarily
Montana's economy likely will continue to record moderate to slow
growth during 1998. The economy clearly has slowed over the past
several years; its 1997 employment growth rate, 2.1 percent, was
the slowest since before the 1990-1991 recession. Weak personal
income growth, a rising unemployment rate, and softness in housing
all contribute to the weak prognosis.
Likewise, Wyoming's outlook for 1998 is for continued weakness,
especially in its large natural resources sector. The state has
been hurt by falling energy prices and declining energy production;
its construction sector also contracted in 1997 as the building
Implications: A review of the exposure of the individual
states in the Region to Asia, their current performance, and their
outlook for 1998 suggests that the Region in aggregate likely will
be only moderately affected by the Asian situation. In general,
states with large manufacturing sectors are growing rapidly and are
expected to continue to expand faster than the nation in 1998;
however, most are expected to slow somewhat as a result of a mix of
factors, including weaker exports to Asia. Despite this concern,
strong economic growth in these states may give the Region's
banking institutions the opportunity for another good year in 1998,
although insured institutions in these states should carefully
monitor the health of borrowers that depend on high technology,
aerospace, farm products, or other trade that may be affected by
the Asian crisis.
Unlike Hawaii, most of the states with weaker economies will not be
affected directly by the Asian crisis. Still, any additional
softening could expose lenders to potential asset quality problems.
Furthermore, continued weak economic conditions in Hawaii and the
Pacific Island Territories could result in additional deterioration
in the performance of some community banks and thrifts (see Current Regional Banking