Quarterly Economic Measures Report
Second Quarter, 1998
Executive Summary
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I. National
Economic Measures/Interest Rates/AA Bond Rates
National growth tapered somewhat in the second quarter, providing mild support for predictions of a slowdown due to the Asian financial crisis. The real gross domestic product (GDP) grew at a 1.4% annual pace over the second quarter. This compares to a first quarter revised gain of 5.5% annualized growth. Non-residential fixed investment increased at approximately half (11.4% annualized) the rate it had in the previous quarter. For the most recent twelve months, GDP grew 3.5%, down a whole point from the 4.5% pace of growth during the year ending second quarter 1997. Annual real GDP growth has ranged between 2.0% and 3.8% over the past five years.
The Federal Reserve Board has not raised its target rate for the federal funds rate since late March 1997, when it was increased by 25 basis points to 5.50%. The prime rate (8.5%) and discount rate (5.0%) have not changed in the past year. Inflation has continued to remain very low. The implicit price deflator increased at a scant 0.9% annual rate during the second quarter, after realizing its smallest increase in 34 years the previous quarter (0.8%), and rose only slightly (1%) in the twelve months ending second quarter 1998. The second quarter Consumer Price Index expanded at an annual rate of 2.2%, rising 1.7% during the previous twelve months. For calender year 1997, inflation as measured by the CPI was pegged at 2.3%.
Consistent with the low level of inflation, interest rates for Treasury bills and bonds increased only slightly in the second quarter. Thirty year home mortgage rates in Washington state actually fell during this time, averaging 7.15%. This was the lowest quarterly average rate in the past five years. In that period, mortgage rates have ranged from 7.0% (October 1993) to over 9.4% (late 1994).
AA bond rates in late July also dropped from late April totals, with levels decreasing between 10 to 20 basis points for non-taxable bonds and 25 to 40 points for taxable bonds.
Industrial/Manufacturing Measures
Preliminary reports indicate that non-farm inventories were up only $36.6 billion during second quarter 1998, down considerably from a revised $85.9 billion increase the previous quarter. The large build up of inventories last quarter could not be sustained in the face of modest consumer demand.
Other indicators showed mixed results. Industrial production increased at an 2.6% annual rate in the second quarter, up from the 1.3% rate in the first quarter of 1998. Industrial production declined, however, in the month of June due mainly to the strike at General Motors that limited the output of motor vehicles and parts, weakness in other industries were evident. In the case of durable manufacturing for the most part it was only the high tech sectors (industrial machinery including computers, and electrical machinery) that posted gains in June. The strike and industrial slowdowns also influenced capacity utilization rates, which fell in the second quarter for total industry (82.1%), as well as for manufacturing (80.9%).
Income Measures
Previous estimates of first quarter per capita disposable personal income have been revised downward, alleviating some concern that the economy might be overheating. Per capita disposable income increased at an annualized rate of just under 1% during the second quarter, againreflecting the impact of the GM strike. For the twelve month period ending in the second quarter 1998, personal income rose 1.5%, the lowest twelve month gain since the period ending December 1996 (1.1%).
I. King County
Economic Activity
The West CPI-U rose at a 2.0% annual rate in the second quarter and 1.8% during the twelve months ending 2Q/98. This was somewhat less than the 2.3% rise in the previous twelve months. Bankruptcy filings fell from second quarter 1997 in both King County (9.8%) and the Central Puget Sound region (6.1%). Bankruptcy filings have stabilized the past year after rising dramatically in 1995 and 1996.
Employment
Area employment growth continued to be strong in the second quarter. Employment increased in the central Puget Sound region by 3.2% over second quarter 1997. Durable manufacturing employment rose marginally (at a 2% annual rate), gaining for the tenth straight quarter after falling five consecutive previous quarters.
As employment expanded, area unemployment continued to decline. King County second quarter unemployment fell to 2.8%, the lowest unemployment rate this decade. Unemployment also declined in the Central Puget Sound region, decreasing from 3.4% in the first quarter 1998 to 3.1% in the second quarter. The unemployment rates in both the region and King County are considerably lower than the national rate of 4.5% seasonally adjusted. U.S. unemployment increased slightly in June after dropping consistently since averaging 7.5% in 1992.
Construction
The single-family housing market remained quite strong, as housing prices continued to rise and units continued to sell quickly. Median prices increased a substantial 12.5% over second quarter 1997. The average time a house stayed on the market declined to 34 days, down slightly from the past four quarters, when sales time ranged between 39 and 42 days.
Non-residential construction activity was fairly stable. The total value of Seattle permits for non-residential construction was 4.9% above second quarter 1997. Seattle residential construction permit values dropped slightly to $82 million, a decrease of 12% from the first quarter, although second quarter 1998 values increased 54% over those in second quarter 1997. Seattle residential permit activity was spread between improvements to existing housing units (817 permits) as well as 171 permits for new construction that will result in 570 new residential units.
Office Market
The Downtown Seattle market remained brisk, in spite of the vacancy rate rising modestly to 5.2%. The market for Class A space relaxed just slightly (3.2% vacancy), while the Class B market tightened (6.5% vacancy). Absorption, the change in the amount of leased space, was relatively low at just over 29,000 square feet. Tenant clearances due to renovations at Smith Tower contributed to the flat rate of absorption. In spite of the increased vacencies and lackluster absorption, median Class A lease rates edged up 14% annually to $27 per square foot, with some top floor space going for as much as $40 per square foot. In response to low vacancies and high demand, CB Commercial expects office construction activity to heat up; there is nearly 1.8 million square feet of office space under construction in the downtown market and 4.4 million square feet planned.
Demand in Bellevue/Eastside continued at robust pace as evidenced by second quarter absorption of over 260,000 square feet and a miniscule vacancy rate in the face of completion of six new buildings. Space tightened even further in the second quarter to an extraordinarily low vacancy rate of 1.5%. Class A space is extremely tight (1.1%), with median rates rising again to$26.00 per square foot. The Eastside market is very hot, with nearly 1.9 million square feet of office space under construction and an enormous 13.1 million square feet of planned office construction. Microsoft alone is negotiating lease deals totaling 1.3 million square feet.
North King County vacancy rates dropped to 4.3% after a couple quarters of rising vacancies. South King County vacancy rates increased to 9.6%, up from the previous quarter (8.6%). Fairly tight markets in these areas will continue to pressure the Downtown Seattle and Bellevue/Eastside markets.
Industrial Market
Overall the King County industrial market witnessed considerable activity in the second quarter, although there were signs of cooling. While vacancy rates declined slightly in Seattle Close-In (to 2.3%) and Seattle high tech vacancy rates again dropping sharply (to 1.6%),. absorption, declined to just over 170,000 square feet. Kent Valley vacancy rates rose slightly to 6.4%, as nearly one million new square feet of industrial space was introduced into the market. Vacancy rates for high-tech space more than doubled over first quarter rates to 14.8%. Absorption slowed to 84,000 square feet. The Eastside market rebounded from last quarter's lowest absorption in a year (22,000 square feet) and saw a second quarter absorption of nearly 730,000 square feet. Eastside industrial vacancy rates rose slightly (4.8%) and high-tech rates jumped from 3.8% to 5.4%.
CB Commercial forecasts that the King County industrial market will remain strong. Most of the current and planned construction is taking place outside of Seattle. Kent Valley remains busy, with 1.6 million square feet under construction, and over 4.6 million square feet planned. The Eastside market is also strong, with nearly 390,000 square feet under construction and over 4.4 million square feet planned.
Retail Market
A combination of increases in personal income (stemming from new high-wage aerospace and software employment) and home-buying activity sent the region's durable-goods purchases up an annual rate of 15% in the first quarter of 1998. In response to increased purchases, developers have completed over 400,000 square feet of new retail space so far this year, with another 1.6 million on the way. Much of this space is being developed in the Seattle and Bellevue markets in the form of mixed-use buildings. Vacancy rates remain largely unchanged from the end of 1997 and range from 2.7% in the downtown Seattle market, 6% in the Bellevue/Eastside market, to 7.6% in the Southend market (South King, Pierce, and Thurston Counties).
Apartment Market
Sales of apartment buildings have passed the $500 million mark within King, Pierce, and Snohomish Counties for the first half of 1998, establishing a record pace that will potentially reach $1 billion by year's end. Apartments sold for an average of $67,000 per unit with the downtown Seattle Harbor House condominium conversion topping the chart at $163,600 per unit. Apartment rental rates in the Seattle area increased by 4% during the first half of 1998. Apartment vacancy rates remained exceptionally low throughout the Puget Sound Region with vacancy rates in all King and Snohomish markets below 2% and an apartment vacancy rate of 3.3% within Pierce County.
Convention Information
The number of Conventions and Events for second quarter 1998 was virtually unchanged from a year earlier, although room nights declined by 6%. Local room tax collections for the first quarter of 1998 were 6% higher than for the first quarter of 1997. (First Quarter 1998 is the most recent data available for local room tax collections).
Job Dislocation Activity
Job dislocation reports for the second quarter of 1998 were unavailable at the time of printing. Below is a summary of first quarter activity, as reported through the Worker Adjustment and Retraining Notification Act (WARN).
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Updated: January 29, 2004
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