Quarterly Economic Measures Report
Fourth Quarter, 1997
Executive Summary
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Executive Summary
I. National
Economic Measures/Interest Rates/AA Bond Rates
National growth remained strong in the fourth quarter, with little inflation. The real gross domestic product (GDP) sped up in the fourth quarter, growing at a 4.3% annual pace. This is up from a revised 3.1% annual rate in the third quarter. For 1997, GDP grew 3.8%, up from 1996's 2.8% pace of growth. Growth increased due to a sharp rise in exports, a large increase in inventories and brisk housing sales. Annual real GDP growth has ranged between 2.0 and 3.8% the past five years.
The Federal Reserve Board has not raised its target rate for the federal funds rate since late March 1997, when they raised it 0.25 to 5.50%. The prime rate (8.5%) and discount rate (5.0%) did not change in the fourth quarter. With the threat of a slowdown from Asia spreading to the U.S., it is unlikely the Fed will raise interest rates in the near future. The Fed also is concerned about inflation, since employment costs rose significantly in the fourth quarter, so they will not likely cut rates until they are reassured inflation is under control. The fourth quarter Consumer Price Index rose at an annual rate of 1.6%, rising 1.9% during the previous twelve months. For 1997, inflation totaled 2.3%.
Interest rates for treasury bills and bonds fell sharply in the fourth quarter. Thirty year home mortgage rates in Washington state also fell sharply, averaging 7.44%. This was the lowest quarterly average rate since the fourth quarter of 1993. In the past five years, mortgage rates have ranged from 7.0% (October 1993) to over 9.4% (late 1994).
AA bond rates in late January fell from late October totals, with levels falling 30 to 35 basis points for non-taxable bonds and 50 to 65 points for taxable bonds.
Industrial/Manufacturing Measures
Non-farm inventories were up $49.7 billion in 4Q/97, up from a $38.3 billion increase the previous quarter. Companies rebuilt inventories to catch up with strong consumer demand.
Other indicators also showed a robust economy. Industrial production rose at a 7.1% annual rate in the fourth quarter; it rose 5.0% for the year. Capacity utilization rates rose in the third quarter for total industry (83.2%) as well as manufacturing (82.2%). This is the highest capacity utilization has been since the third quarter of 1995. This indicator has been revised, with the result that it is further away from 85%, a level that many economists consider a sign that the economy is overheating and rising inflation is imminent. The revisions indicate that previous estimates of capacity utilization were too high and that the threat of inflation was overstated.
Income Measures
Per capita disposable personal income rose at a brisk 3.7% annual rate in the fourth quarter, creating some concern that the economy might be overheating. Normally, this type of indicator might prod the Fed into raising interest rates, but most economists expect the economy to cool off in the first quarter of 1998. For the year, personal income rose 2.0%, somewhat higher than 1996's 1.4% gain.
I. King County
Economic Activity
The West-C CPI rose at a strong 4.6% annual rate in the fourth quarter and 2.8% for the year. This was less than 1996's 3.8% gain. Bankruptcy filings rose significantly over 4Q/96 in both King County (7.5%) and the Central Puget Sound region (7.7%). For the year, both King County (11.7%) and the region (12.8%) saw large increases in filings. Looser bankruptcy laws and easier credit are likely the reason for increases in filings over the two years.
King County taxable retail sales were robust, 9.6% higher in the third quarter of 1997 than in third quarter 1996. (Third quarter 1997 is the most recent quarter for which data is available.) Finance, insurance and real estate (FIRE) sales rose sharply (26.4%). Wholesale trade sales rose 6.7%. Retail trade taxable sales rose 11%; notable retail sales changes took place in lumber and building materials (up 17.6%), electronics and music stores (up 18%), furniture (up 11%), miscellaneous retail stores (up 14.6%) and candy/nut/confectionery products (up 53%). Services growth was healthy (up 8%), as hotel and motels rose (up 12%), with business services (up 8.5%) and other services (up 11%) also gaining. (Other services include amusement and recreation, miscellaneous repair and motion pictures). Manufacturing rose a robust 13.4%, with rapid growth in Kent (up 68%).
Seattle taxable retail sales were up 9.5% in 3Q/97 over 3Q/96. FIRE sales rose sharply (28%). Contracting sales also rose (15.6%) as did manufacturing (10%) and wholesaling (8%). Services rose more modestly (6.3%), led by other services (up 10%). Retail trade had stronger growth (up 9.5%), with noticeable gains in building materials and hardware (up 64%), candy/nut/confectionery products (up 85%), hardware stores (up 20%), nonstore retailers (up 22%) and other retail stores (up 26%). (Other retail stores include used merchandise stores, florists, newsstands and optical goods stores).
Employment
Area unemployment continued dropping to even lower levels in the fourth quarter. King County fourth quarter unemployment fell to 2.9%, the lowest unemployment rate this decade. King County unemployment beneficiaries are also fewer, down 22% from fourth quarter 1996. Unemployment sank slightly in the Central Puget Sound region, from 3.5% to 3.3%. The region's unemployment rate is still lower than the national rate (4.7% seasonally adjusted). U.S. unemployment has been dropping consistently since averaging 7.5% in 1992.
Employment growth continued to be strong. In King County, employment rose 5.8% over fourth quarter 1996. Durable manufacturing employment rose for the eighth straight quarter after falling three consecutive quarters, with employment 15% over the same time last year. This is primarily due to hiring at Boeing. Other sectors have also had healthy employment growth since fourth quarter 1996, including construction (6.4%), retail trade (5.4%) and services (5.0%).
Construction
The single-family housing market continued to strengthen, with closed home sales in King County 14% higher in 4Q/97 than in 4Q/96. Median prices (14%) rose over the same period. For the year, home sales increased (12%), as well as median prices (8.1%). The average time a house was on the market rose to 47 days, a 19% rise from the third quarter (39 days) but a 11% drop from 4Q/96 (52 days).
Other construction activity was also very strong. Seattle permit values for non-residential construction were 28% higher than 4Q/96 and 90% higher for the year. Much of the yearly increase is due to the new Mariners' stadium. Residential construction permit values declined from very high third quarter totals (42%) and from 4Q/96 (17%).
Office Market
The Downtown Seattle market remained brisk, with vacancies falling to 5.0%. Class A space tightened more (2.5% vacancy), while the Class B market remains soft (11% vacancy). Absorption, the change in the amount of leased space, was 157,548 square feet for the quarter. CB Commercial expects office construction activity to heat up; there is nearly 1.8 million square feet of office space under construction, with 3.7 million square feet planned.
Demand in Bellevue/Eastside also grew, with positive absorption of over 68,000 square feet. Space tightened, with a vacancy rate of 2.3%. Class A space is still tight (1.9%), with median rates rising to $25.00. The Eastside market remains very strong, with nearly 1.2 million square feet of office space under construction and an enormous 14.2 million square feet of planned office construction.
North King County vacancy rates rose slightly in the fourth straight quarter (5.0%). South King County vacancy rates dropped for the second straight quarter (10.8%). Tighter markets in these areas will continue to pressure the Downtown Seattle and Bellevue/Eastside markets.
Industrial Market
The King County industrial market tightened in the fourth quarter. Vacancy rates declined slightly in Seattle Close-In (to 3.1%), with Seattle high tech vacancy rates declining sharply (to 6.9%). Kent Valley vacancy rates dropped to 5.4%. The Eastside market had absorption of nearly 130,000 square feet, with industrial vacancy rates falling to 4.4% and high-tech rates rising to a low 3.8%.
CB Commercial forecasts that the industrial market will remain strong in King County. Most of the current and planned construction is taking place outside of Seattle. Kent Valley remains busy, with over 1.1 million square feet under construction, and over 6.3 million square feet planned. The Eastside market is also strong, with nearly 1.3 million square feet under construction and over 2.8 million square feet planned.
Retail Market
The Puget Sound retail market continued to strengthen in the second half of 1997, with absorption of over 2.8 million square feet. Absorption for the year was nearly 4.2 million square feet, about 27 times larger than 1996. Much of the region's absorption was in the Northend (1.1 million square feet), as the vacancy rate decreased to 4.6%. (The Northend retail market extends north from the Ship Canal through north King County, Snohomish County and the northern counties.)
The Southend continued to have healthy growth, with over 750,000 square feet of absorption and an unchanged 7.4% vacancy rate. (The Southend retail market runs from the West Seattle Bridge through south King County, as well as Pierce and Thurston Counties.)
The Bellevue/Eastside market strengthened in the fourth quarter, with absorption of almost 630,000 square feet, due partly to the opening of Redmond Town Center. There is also nearly 1.8 million square feet under construction and almost 1.6 million square feet planned. The vacancy rate rose remained low, rising a notch to 4.9%.
Downtown Seattle still has the lowest vacancy rate of any Puget Sound market, though it rose to 2.6% and absorption declined nearly 11,000 square feet. There is 725,000 square feet under construction and 170,000 square feet planned.
CB Commercial forecasts a continued strong retail market, though they say growth will not be as strong as 1997. Eastside shoppers will be drawn to strong retail centers in Woodinville, Issaquah and Redmond, though CB Commercial says downtown Bellevue will remain healthy.
Apartment Market
The Puget Sound apartment market tightened further in the second half of 1997, with vacancy rates dropping slightly from 2.1% to 2.0%, while rents rose 4.5%. The Seattle market vacancy rate declined slightly (1.2%). Seattle rents rose an average of 3.2% over the first half of 1997.
Vacancy rates fell further in South King County (1.7%) and Pierce County (4.5%). Pierce County is the only major area with a vacancy rate over 2.0%. Although the East King County vacancy rate rose slightly to 1.4%, rents rose an average of 3.3%.
CB Commercial forecasts demand to continue rising, though they expect developers to start building 5,000 units in 1998. Rents will continue to rise significantly, and downtown Seattle rents may approach lease rates for highrise office space.
Convention Information
The number of Conventions and Events for 4Q/97 was up 6% from 4Q/96, with room nights rising 28%. Preliminary local room tax collections for 4Q/97 were 5% higher than for 4Q/96.
Boeing and Airline Industry Data
Boeing employment in Washington state continued to climb, rising to 103,400 jobs. This was an 18% increase since the end of 1996. Boeing says this will likely be the peak of their employment in this cycle, as they expect to reduce the number of employees in 1998 as production becomes more efficient. Boeing contractual backlogs rose after falling two straight quarters, ending the year at $121.6 billion, a 12% increase from the third quarter. Most of the $12.8 billion increase came consisted of commercial aircraft orders ($93.8 billion). The new Information, Defense and Space division, made up of elements from the former Boeing Defense & Space Group and McDonnell Douglas Corporation, had backlogs of $27.8 billion.
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Updated: January 29, 2004
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