Western Economic Developments

IN THIS ISSUE F E D E R A L R E S E R V E B A N K O F S A N F R A N C I S C O Western Economic Developments Office market slumps, housing demand remains strong in District Figure, panel B: Commercial office vacancies in selected California metropolitan areas Figure, panel A: Commercial office vacancies in selected District metropolitan areas.q.q Phoenix Honolulu Las Vegas Portland Salt Lake City.Q.Q Seattle Mirroring the pattern of weak business investment and strong consumer spending that characterized the recession, commercial real estate markets in the Twelfth District slumped in, while housing demand remained strong. District office markets weakened considerably in, with vacancy rates rising and lease rates falling in nearly all metro areas (Figure, panels A and B). The most pronounced rise in vacancy rates occurred in information technology intensive areas of the District including Portland, Phoenix, the San Francisco Bay Area, and Seattle. Between :Q and :Q, vacancy rates in Seattle rose from.% to.%. Similar increases were recorded in many Bay Area cities; in San Francisco, vacancy rates jumped from.% to.%, and in San Jose, vacancy rates rose from.% to.%. Vacancies in Portland and Phoenix also increased during this period, although the jumps were less pronounced. In other areas of the District, increases were more modest. For example, in Las Vegas and Salt Lake City, commercial office vacancies rose by. and. percentage points, respectively. Vacancies also rose in Southern California and the Central Valley. M A R C H District adds jobs in January... District export values fall in, led by high-tech... High-tech watch... STATE HIGHLIGHTS San Oakland San Francisco Jose Sacramento Fresno Los Angeles San Diego Alaska, Oregon, Washington... Arizona, California, Hawaii... Idaho, Nevada, Utah...

Consistent with the surge in office vacancies, lease prices on office space fell in in most areas of the District. Net asking lease prices per square foot fell steeply in San Francisco and San Jose between the fourth quarters of and, from $ to $ per square foot in San Francisco and from $ to $ per square foot in San Jose. Lease prices also fell sharply in Portland and Seattle. The deterioration of conditions in District office markets showed through to construction permits (see pages for state data on nonresidential construction awards). Nonresidential construction awards during the months ending in January fell relative to the same period a year earlier. District nonresidential construction awards declined by about % in, compared to about.% in the rest of the U.S. Within the District, only Hawaii reported an increase in nonresidential awards during the months ending in January relative to the same period a year earlier. Looking forward, District contacts report that commercial real estate markets have begun to stabilize and that some of the projects put on hold in likely will start up again in coming months. Data on nonresidential awards for the three months ending in January lend some support to these views, with awards increasing over the previous three months in Alaska, Hawaii, Idaho, Nevada, Utah, and Washington. Housing markets remain hot, although building stalls While demand for District office space fell in, no such decline occurred in District housing markets. Nominal price appreciation on housing remained quite rapid in. Figure shows year-over-year home price appreciation among District states in the fourth quarters of and, and on average for the fourth quarters of 99. The pace of home price appreciation in most District states in the fourth quarter of was higher than the 99 average, with appreciation rates surpassing levels in some states. California recorded the fastest pace of appreciation, driven by strong demand for housing in the Central Valley and Southern California; home prices for the state as a whole rose 9.% in, down from % in, but above the 99 average pace of growth. In the remaining Data are from the Office of Federal Housing Enterprise Oversight (OFHEO) and represent changes in prices on repeat sales of existing homes. National Association of Realtors data for median home prices for District MSAs are displayed on pages. - Figure : Change in District home prices 99 - average U.S. AK AZ CA HI ID NV OR UT WA Source: OFHEO, quarterly data on repeat sales of single-family homes. District states, price appreciation ranged from.% in Utah to 7.% in Nevada. The average rate of appreciation in for the U.S. was.9%. Although price appreciation remained strong, growth in the District housing stock, as represented by new housing permits, fell in. Residential permits fell by % in the District during the months ending in January relative to the same period a year earlier. Within the District, new construction permits dropped in Arizona, California, Hawaii, and Washington. In California, declines in residential construction occurred in both Northern and Southern California, with permits falling by % in San Francisco, % in Los Angeles-Long Beach, and 9% in Orange County. Elsewhere in the District, residential permits increased in. While the mixed data on residential real estate markets depart from the general expectation that prices and construction should move together, the housing data are consistent with the resiliency of consumer spending during this recession (responding in part to low mortgage interest rates) and the cautious supply response among residential developers evident prior to the recession. Going forward, the imbalance between demand and supply created in and the improved outlook for the economy going forward likely will induce more residential construction activity in coming quarters. Signs of a pickup already are evident in some states; residential permits grew in Alaska, California, and Utah during the three months ending in January, relative to the previous three months (see pages for state data on residential construction permits). March

District adds jobs in January Employment growth in the Twelfth District picked up in January, turning positive for the first time since August (Figure, line). Total nonagricultural job growth rose to an annual rate of.% in January, up from -.% in December and -.% in November. District employers added nearly, jobs in January. Looking over a longer period, the January job gains ended a relatively steady decline in yearover-year employment growth in the District (Figure, bars); year-over-year employment growth in January was down -.7%, about the same as the decline recorded in December. January job gains were broad-based, occurring in six of nine District states. Alaska, Idaho, and Oregon were the exceptions (Figure ). Arizona, California, and Washington, which have been hard hit by the downturn in the information technology sector, posted one-month employment gains of.%,.%, and.%, respectively, as growth in the services side of the economy offset ongoing reductions in durable manufacturing. Job growth was even more rapid in District states that slowed the most following the September terrorist attacks. January job growth in Hawaii and Nevada increased at an annual rate of.% and.%, respectively. In Hawaii and Nevada, job growth was boosted by a substantial pickup in the travel and tourism sectors, which expanded at double-digit rates in January. Nevada s hotel and amusement and air transportation sectors added, jobs in January, about % of the net number of jobs created in the state. In Hawaii, increased visitor numbers helped boost employment in the air transportation and - - - - - Figure : Employment growth by District state (annualized monthly percent change) November December January th AK AZ CA HI ID NV OR UT WA retail trade sectors; jobs in the hotel and lodging sector fell slightly in January following very rapid gains in December. Improvements in the travel and tourism sector also were apparent in Alaska, Arizona, Oregon, and Utah (due largely to the Olympics). Although the largest one-month increases were in the District s tourism-dependent states, January job gains were not limited to these sectors of the District economy. Figure shows annualized monthly employment growth in the District by sector. As the figure shows, January job gains occurred across a large number of sectors including nondurable manufacturing, retail trade, finance, insurance, and real estate (FIRE), services, and government. In contrast, construction, durable manufacturing, transportation, communications, and public utilities (TCPU), and wholesale - - - - Figure : Nonagricultural employment growth, Twelfth District -month change Annualized monthly change Jan- Mar- May- Jul- Sep- Nov- Jan- - - - - - - - Figure : District employment growth by sector (annualized monthly percent change) Total Nonfarm Construction Durable Mfg. Nondurable Mfg. TCPU Wholesale Trade Retail Trade FIRE Government Services November December January March

trade continued to shed jobs in January, although for the most part at a slightly slower pace. The pickup in employment in January supports the most recent Beige Book report that the District economy has begun to recover. Moreover, the employment gains in the District outpaced employment figures for the rest of the U.S. (Figure ), suggesting that despite the still weak IT sector, the District economy is recovering with the national economy. March =. Figure : Total nonagricultural employment, Twelfth District and rest of U.S. - - - Figure 7: Growth in total merchandise exports, Twelfth District - th AK AZ CA HI ID NV OR UT WA Source: Census FT9 Supplement (non-seasonally adjusted). 99. 99. 99. 99. 99 9. 9. th District U.S. - th District Mar- May- Jul- Sep- Nov- Jan- District export values fall in, led by high-tech The value of merchandise exports from the Twelfth District fell in, damped by global economic weakness and the continued strength of the dollar relative to other currencies. The value of District exports fell by.% in compared to, following growth of approximately % in (Figure 7). In general, the export picture worsened over the course of the year, with the largest quarterly decline occurring in the fourth quarter. Detailed data for California and Oregon suggest that the decline in District exports was concentrated in durable manufacturing. In both states, high-tech exports performed poorly. In contrast, exports of agricultural products grew in relative to. California exports of high-tech manufactured products fell approximately %, while agricultural and nondurable exports grew.% and.%, respectively. This represents a reversal from, when high-tech products grew around % while the value of agricultural exports fell by %. Data for Oregon show a similar pattern, with declines led by sharp drops in exports of computer and electronic products. Weakness also was found in transportation equipment and wood products, among other sectors. However, as with California, Oregon saw strength in agricultural exports, including food and kindred products. Data on exports by country of destination point to declines across all major trading partners. Exports from California to all countries, including to NAFTA countries, East Asia, and the European Union, fell uniformly. This contrasts with California s export profile in. In, California s exports to all destination countries grew, with exports to East Asia leading California s export growth. However, by the end of, exports to East Asia slowed to the same pace of growth as exports to other destinations. In fact, by the fourth quarter, California s export decline was steepest in exports to East Asia, followed by exports to the European Union. Japan continued to be the largest export market for Oregon, but these exports declined by.% in December relative to a year ago. Of all Oregon exports to major trading partners, only exports to Singapore and China grew in. Contributions by Mary Daly and Lily Hsueh, Financial and Regional Studies, Economic Research Department, FRBSF To subscribe to, call () 97-. This publication is available on our website http://www.frbsf.org March

High-tech Watch U.S. - th th AK AZ CA HI ID NV OR UT WA IT share of District employment and payroll Employment Payroll share Business investment in technology products by U.S. firms (percent change in quarterly values) Year-over-year - - months prior* - Dec-97 Dec-9 Dec-99 Dec- Dec- Source: Bureau of Economic Analysis. *Annualized values - - - Monthly semiconductor sales by U.S. firms (percent change in -month moving averages) months prior* Year-over-year - Jan-9 Jan-99 Jan- Jan- Jan- Source: Semiconductor Industry Association. *Annualized values Shipments of computers and related products by U.S. firms (percent change in -month moving averages) Year-over-year months prior* - - - Jan-9 Jan-99 Jan- Jan- Jan- Source: Bureau of the Census. *Annualized values - - - Shipments of communications equipment by U.S. firms (percent change in -month moving averages) Jan-9 Jan-99 Jan- Jan- Jan- Source: Bureau of the Census. months prior* Year-over-year *Annualized values - - - High-tech job growth Computer & Data Processing Services (WA) Communications Equipment (CA) Electronic Components & Accessories (CA) Computer & Office Equipment (CA, OR, WA) - Jan-9 Jan-99 Jan- Jan- Jan- March

Alaska Oregon Washington - - - WA OR Nonagricultural payroll employment by state U.S. Jan-9 Jan-99 Jan- Jan- Jan- AK 7 - - - - - - Nonagricultural payroll employment by MSA Portland-Vancouver Anchorage Seattle-Bellevue-Everett Jan-9 Jan-99 Jan- Jan- Jan- Employment by Industry Total Employed Total Employed (thousands) Change (thousands) Change Jan- -mo. a -mo. a YTD a -mo. Jan- -mo. a -mo. a YTD a -mo. "MBTLB BTIJOHUPO Total 9. -. -. -..7 Total,.. -.. -. Mining.. -.7. -7. Mining.. -.. -.9 Construction. 9.. 9. 7. Construction. -7.9 -. -7.9-9. Manufacturing. -. -7. -. -. Manufacturing 7. -. -.9 -. -9. T.C.P.U. 7.9 -. -. -. -. T.C.P.U..9 -. -. -. -. Trade 9..... Trade 9. 9.. 9. -. F.I.R.E..7-7.. -7.. F.I.R.E...... Services 7.7.... Services 7.... -. Government 79. -.. -.. Government. 9.. 9.. SFHPO OFNQMPZNFOUÁBUFTÁÉÆ Total,7.7 -. -. -. -. Mining.7. -.. -. Jan- Dec- Nov- Oct- Jan- Construction 7. -9. -7.7-9. -. Manufacturing. -. -. -. -7.9 Alaska.9.... T.C.P.U. 7.. -.. -. Oregon. 7. 7.7 7..9 Trade.. -.. -. Washington 7. 7. 7..9. F.I.R.E. 9..... Services. -. -. -. -. U.S...... Government 9. -.9 -. -.9.7 Unemployment rates are from the household employment survey; all other data are for nonagricultural payroll employment. All data are seasonally adjusted. a Annualized. March

Residential permits January Source: Bureau of the Census. Non-residential construction awards January Source: F.W. Dodge. Moving average -mo. average percent change number -mo. a -mo. a Alaska. 9.7. Oregon,7.7 -.. Washington,. -.7-9. Moving average -mo. average percent change $ millions -mo. a -mo. a Alaska.9. -9. Oregon. -.7 -.9 Washington.. -7. a Underlying data are seasonally adjusted moving averages. Metro area office vacancy rates Portland Seattle Dec-97 Dec-9 Dec-99 Dec- Dec- Sales of existing homes WA 9 7 Metro area industrial availability rates Portland OR - - - Dec-97 Dec-9 Dec-99 Dec- Dec- Source: National Association of Realtors. Seattle Dec-97 Dec-9 Dec-99 Dec- Dec- - Source: National Association of Realtors. Median home price appreciation Portland Seattle Dec-97 Dec-9 Dec-99 Dec- Dec- Export update - month $ billions Change Jan- Jan- Alaska.. -. -. 7.7 Oregon... -. -. Washington.9. -...9 Source: Census FT9 Supplement, Origin of Movement Series. March 7

Arizona California Hawaii Nonagricultural payroll employment by state Nonagricultural payroll employment by MSA AZ CA 7 Phoenix SF Bay U.S. LA-Long Beach - - - HI - Honolulu - Jan-9 Jan-99 Jan- Jan- Jan- - Jan-9 Jan-99 Jan- Jan- Jan- Employment by Industry Total Employed Total Employed (thousands) Change (thousands) Change Jan- -mo. a -mo. a YTD a -mo. Feb- -mo. a -mo. a YTD a -mo. "SJ[POB $BMJGPSOJB Total,9.7. -.7. -. Total,. -... -. Mining. -9. -.9-9. -. Mining.. -. -.. Construction. -. -.7 -. -. Construction 77..... Manufacturing 97. -. -. -. -.9 Manufacturing,. -.7 -. -. -. T.C.P.U. 7.9 -. -. -. -. T.C.P.U. 7. -. -. -.7 -. Trade.9 -. -. -.. Trade,9.7.... F.I.R.E.. -. -. -.. F.I.R.E.. -. -.9 -.. Services 7.... -. Services,7. -.. -.7 -. Government. 7.. 7.. Government,..9.7.. )BXBJJ OFNQMPZNFOUÁBUFTÁÉÆ Total 7.. -.7. -.9 Mining..... Jan- Dec- Nov- Oct- Jan- Construction. -9..9-9. -.9 Manufacturing 7. -. -. -. -.7 Arizona..... T.C.P.U.. 9. -. 9. -9. Hawaii.7..7.. Trade.. -.7. -. U.S...... F.I.R.E.. 7.. 7..9 Services..7 -..7 -. Feb- Jan- Dec- Nov- Feb- Government.....9 California.....7 Unemployment rates are from the household employment survey; all other data are for nonagricultural payroll employment. All data are seasonally adjusted. a Annualized. March

Residential permits January Source: Bureau of the Census. Non-residential construction awards January Source: F.W. Dodge. Moving average -mo. average percent change number -mo. a -mo. a Arizona,. -. -. California,7.. -. Hawaii 9.9 -. 9. Moving average -mo. average percent change $ millions -mo. a -mo. a Arizona. -.9 -. California,99. -. -9. Hawaii 9... a Underlying data are seasonally adjusted moving averages. Metro area office vacancy rates LA Honolulu Phoenix San Francisco Dec-97 Dec-9 Dec-99 Dec- Dec- Sales of existing homes HI Metro area industrial availability rates Honolulu AZ Phoenix LA - CA - Dec-97 Dec-9 Dec-99 Dec- Dec- Source: National Association of Realtors. San Francisco Dec-97 Dec-9 Dec-99 Dec- Dec- Median home price appreciation SF Bay Area LA Area Export update - month $ billions Change Jan- Jan- Arizona..7 9. -. -7. California 9.7. 9. -. -9.7 - - Honolulu Phoenix Hawaii.... -. - Dec-97 Dec-9 Dec-99 Dec- Dec- Source: National Association of Realtors. Source: Census FT9 Supplement, Origin of Movement Series. March 9

Idaho Nevada Utah Nonagricultural payroll employment by state Nonagricultural payroll employment by MSA 7 NV Las Vegas ID Boise UT U.S. - - Salt Lake City - Jan-9 Jan-99 Jan- Jan- Jan- - Jan-9 Jan-99 Jan- Jan- Jan- Employment by Industry Total Employed Total Employed (thousands) Change (thousands) Change Jan- -mo. a -mo. a YTD a -mo. Jan- -mo. a -mo. a YTD a -mo. *EBIP UBI Total 7. -.9 -. -.9. Total,79.... -.7 Mining. -.7-9. -.7 -. Mining 7.7. -.. -. Construction.9 -. -. -. -. Construction 7. -.7 -. -.7 -. Manufacturing 7.9 -. -.9 -. -.7 Manufacturing. -.7-7. -.7 -. T.C.P.U. 7. -. -. -. -.9 T.C.P.U. 9.. -.. -.9 Trade 9. -.7 -. -.7 -. Trade 9.. -.. -. F.I.R.E..7....7 F.I.R.E....7..7 Services. 7.. 7.. Services 7...9.. Government.9 7.7. 7.7. Government 9..... /FWBEB OFNQMPZNFOUÁBUFTÁÉÆ Total,.9.... Mining 9. -. -.7 -. -9. Jan- Dec- Nov- Oct- Jan- Construction 9. -.9 -. -.9. Manufacturing. -. -.7 -. -. Idaho.7.... T.C.P.U..9... -.9 Nevada..9.7.. Trade..7..7. Utah..9... F.I.R.E...... Services..9..9 -. U.S...... Government 7.7 -.7. -.7.7 Unemployment rates are from the household employment survey; all other data are for nonagricultural payroll employment. All data are seasonally adjusted. a Annualized. March

Residential permits January Moving average -mo. average percent change number -mo. a -mo. a Idaho. -.. Nevada,. -9.7. Utah,... Source: Bureau of the Census. Non-residential construction awards January Source: F.W. Dodge. Moving average -mo. average percent change $ millions -mo. a -mo. a Idaho 7.7. -. Nevada.. -.9 Utah. 9. -. a Underlying data are seasonally adjusted moving averages. Metro area office vacancy rates Las Vegas Salt Lake City Dec-97 Dec-9 Dec-99 Dec- Dec- Sales of existing homes NV Metro area industrial availability rates UT Salt Lake City Las Vegas - ID - Dec-97 Dec-9 Dec-99 Dec- Dec- Source: National Association of Realtors. Dec-97 Dec-9 Dec-99 Dec- Dec- Median home price appreciation Boise Export update - month $ billions Change Jan- Jan- Las Vegas Idaho.9.. -.7 -. Salt Lake City Nevada....9 -.9 Utah...7 9..7 - Dec-97 Dec-9 Dec-99 Dec- Dec- Source: National Association of Realtors. Source: Census FT9 Supplement, Origin of Movement Series. March

Issues Mailing Dates March March June July September October December December 7 is produced quarterly by the Financial and Regional Studies Section of the Economic Research Department of the Federal Reserve Bank of San Francisco. The publication is managed by Mary Daly and edited by Anita Todd with contributions by Fred Furlong, Lily Hsueh, Christel Magalong, and Jackie Yuen of the Economic Research Department. The analyses represent the views of the staff and do not reflect the official views of the senior bank management of the or the Federal Reserve System. is distributed by the Public Information Department, () 97-. This publication is available on our website, http://www.frbsf.org. Market Street San Francisco, California 9 Address Service Requested PRESORTED FIRST-CLASS MAIL U.S. POSTAGE PAID PERMIT NO. 7 San Francisco, CA