San Francisco Regional Outlook - Fourth Quarter 1998
After years of strong economic and job growth, consumers in
the San Francisco Region face increasing uncertainty and are reporting a
moderation in confidence.
A significant downturn in consumer confidence could weaken
consumer spending, a key factor in the Region's strong growth.
Although growth in personal bankruptcy filings is moderating,
credit card banks in the Region continue to report accelerating credit
card charge-off rates.
The profitability and asset quality of the Region's subprime
lending specialists should be evaluated over the entire business cycle,
not just during the current economic expansion.
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
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.