Quarterly Economic Measures Report
Third Quarter, 1998
Executive Summary
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I. National
Economic Measures/Interest Rates/AA Bond Rates
National growth was moderate in the third quarter, suffering somewhat less
from the Asian financial crisis than some analysts previously expected.
The real gross domestic product (GDP) grew at a 3.3% annual pace over the
second quarter. This compares to a second quarter revised gain of 1.8%
annualized growth. For the most recent twelve months, GDP grew 3.4%, down
somewhat from the 5.3% pace of growth during the year ending third quarter
1997. Annual real GDP growth has ranged between 1.6% and 5.3% over the
past five years. Non-residential fixed investment decreased by
approximately a 1% annualized rate from the previous quarter. This is a
sharp contrast to the 22.2% and 12.8% annualized growth in non-residential
fixed investment during the 1st and 2nd quarter respectively. This suggests
the possibility of a future slowdown in industrial production. Both
producer and consumer investment in durables were nearly unchanged in the
third quarter after experiencing substantial increases during the first
half of the year. At the end of the second quarter there was a notable
increase in automobile consumption coming on the heels of the General
Motors strike resolution which tapered off during the third quarter.
During the second quarter the perceived threat was that the economy would
overheat, but overproduction by foreign industries and the declining value
of foreign currencies has introduced the threat of a domestic economic
slowdown. Many foreign markets for domestic goods are shrinking. An
expected raise in interest rates by the Federal Reserve Board never became
necessary, and instead monetary policy was eased in an effort to lower the
federal funds rate to around 5.25%. The prime rate dropped for the first
time in over a year from 8.5% to 8.49% while the discount rate (5.0%)
remained unchanged. Inflation remains very low. The implicit price
deflator increased at a 0.8% annual rate during the third quarter after
realizing its smallest increases in 34 years the previous two quarters
(0.8% and 0.9%) and rose only slightly in the twelve months ending third
quarter 1998 (0.9%). The third quarter Consumer Price Index rose at an
annualized rate of 1.6%. For 1997, inflation totaled 2.3%.
Interest rates for treasury bills and bonds dropped across the board during
the third quarter. One year treasury bills dropped 5.7% while 3 year
treasury bonds dropped 8.3% Thirty year home mortgage rates in Washington
state reached their lowest point in years averaging 6.98% during the third
quarter. National home mortgage rates for new homes during the third
quarter averaged slightly higher at 7.05%.
AA bond rates in late October dropped from late July totals, nearing a 30
year low. Rates decreasing between 10 to 30 basis points for non-taxable
bonds and 10 to 40 points for taxable bonds.
Industrial/Manufacturing Measures
Preliminary reports indicate that non-farm inventories were up $49.2 billion
during third quarter 1998, up from a revised $29.9 billion increase the
previous quarter. The large build up of inventories during the beginning
of the year fell sharply over the second quarter but has increased again in
the third quarter. Potentially conflicting indicators, such as the low
cost of capital, consumer uncertainty, and fear of shrinking foreign markets
for domestic goods are all likely contributors to the large fluctuations in
inventory investment.
Other indicators showed mixed results. Industrial production remained
unchanged in the third quarter, compared to the 1.7% annualized increase in
the second quarter of 1998. Industrial production declined during the month
of September after a sizable increase in August due to the rebound from
strikes that limited the output of motor vehicles and parts during the
second quarter. Capacity utilization rates fell again in the third quarter
for total industry (81.1%), as well as for manufacturing (79.7%). This
indicator continues a downward trend, with the result that it is further
under 85%, a level that many economists consider a sign that the economy
is overheating and rising inflation is imminent. Worker productivity was
up 2.3% during the third quarter, offsetting increases in the hourly costs
of labor. Among economists, the general feeling, however, is that
manufacturing production has temporarily peaked with inventories in excess
of near term consumer demand.
Income Measures
Per capita disposable income increased at an annualized rate of 1.4%
during the third quarter. For the twelve-month period ending in the
third quarter 1998, personal income rose 1.4% as well, 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 1.6% annual rate in the third quarter and 1.9%
during the twelve months ending 3Q/98. This was somewhat higher than the
1.2% rise in the previous twelve months. Bankruptcy filings fell from
third quarter 1997 in both King County (8.5%) and the Central Puget Sound
region (6.1%). Bankruptcy filings have stabilized over the past year after
rising dramatically in 1995 and 1996.
King County taxable retail sales during the second quarter 1998 rose 9.2%
over the second quarter 1997. (Second quarter 1998 is the most recent
quarter for which data is available.) At the national level retail sales
increased 4% over third quarter 1997.
Manufacturing retail sales rose a strong 12%. Contracting sales rose
sharply (25.7%), with $237 million more in sales during second quarter
1998 than second quarter 1997. Retail trade taxable sales rose 8.7%;
notable retail sales changes took place in dairy products (68%), marine
and aircraft sales which increased by $17 million (28%), drug store sales
(21%), lumber and building materials (up 16%), furniture (up 17%).
Services growth was modest (up 6%), as business services (up 14%) increased
by $52 million. Auto sales increased over second quarter 1997 by $95
million, or a 17% increase.
Seattle taxable retail sales increased somewhat, up 7% in second quarter
1998 over second quarter 1997. Contracting sales also rose sharply (28%)
while manufacturing declined (4%). Services rose only slightly (3%), while
sales of business services increased by over 16%. Retail trade rose
(up 4%), with noticeable gains in nurseries and gardens (up 27%), marine
and airplane sales (up 32%), auto sales (up 18% or $23 million), while
variety stores and apparel sales declined (over 20% each).
Employment
Area unemployment stayed relatively low in the third quarter. King County
third quarter unemployment stayed unchanged at 2.8%, the lowest unemployment
rate this decade. Unemployment rose three tenths of a percentage point in
the Central Puget Sound region, from 3.1% to 3.4%. The region's unemployment
rate is considerably lower than the national rate (4.6% seasonally adjusted).
Regional employment growth continued to be strong. In the central Puget
Sound region, employment rose 3.8% over third quarter 1997. Durable
manufacturing employment rose at a comparable rate, gaining for the
eleventh straight quarter after falling five consecutive previous quarters.
Regional wholesale trade, and utility employment increased by 5.5% over
third quarter 1997 with notable job increases in utility and durable goods
wholesaling industries. Regional services employment increased by 5.1%
over a year ago, with greater than 10% job growth in business services and
computer and data processing services industries. A majority of the
regional business services job growth occurred in King County, leading a
7.8% increase in service industry employment within the county over the
past twelve months. King County construction employment also increased at
a greater annual rate (5.8%) than total county employment for all industries
(4.4%). At the national level employment was 2.6% higher at the end of
third quarter 1998 than it was ending third quarter 1997, a net increase of
3.2 million jobs.
Construction
The single-family housing market remained strong, with housing prices
continuing to rise and houses selling quickly. Total home sales in King
County were up 8.5% from the third quarter of 1997, while total U. S.
homes sold during this period increased by over 16 percent. New home
sales in King County during third quarter 1998, however, were 17% lower
than for the third quarter of 1997, nationally new home sales were up
over 8 percent. Median prices for all King County homes sold increased a
substantial 13.1% over third quarter 1997. This sales price increase
compares with a national and western states regional median home sales
price increase of just over 6%, during the same period. The average time
a house in King County remained on the market continued to be quite low
(34 days). This figure is down slightly from the past five quarters, which
averaged between 34 and 42 days.
Other construction activity was down over the same period one year
previous. The total value of Seattle permits for non-residential
construction was 16.4% lower than third quarter 1997. Seattle residential
construction permit values increased during the third quarter to $120
million, an increase of 46% from the second quarter while representing a
decrease of .6% over third quarter 1997. Seattle residential permit
activity represented improvements to existing housing units (797 permits)
as well as (151) permits that will result in 927 new residential units. At
the national level the total value of new construction permits during third
quarter 1998 was up 7% over third quarter 1997. The value of permits for
non-residential construction was unchanged while residential construction
value was up 15.5% over this same period.
Office Market
Despite tightening credit the Downtown Seattle market remained strong.
Vacancies decreased modestly to 5.0%. The market for Class A space
relaxed slightly (3.8% vacancy), while the Class B market tightened
again (5.9% vacancy) for the fourth consecutive quarter. Absorption,
the net change in the amount of leased space, was sizable with an increase
in 251,000 square feet. Major contributors to the positive absorption
were the completion of the Quadrant Lake Union Center (to be occupied by
Adobe), a major lease by NextLink and a Washington Mututal sublease in the
Central Business District. Median Class A lease rates remained steady at
just over $27 per square foot, with some top floor space going for as much
as $40 per square foot. Office space still remains in short supply but
fear of an economic slowdown and uncertainty in real estate capital
markets have placed in question the completion of several large development
projects in the City and the Eastside. Even so, CB Commercial reports
there is nearly 1.8 million square feet of office space under construction
in the downtown market, with 4.4 million square feet planned.
Demand in Bellevue/Eastside has slowed somewhat from the previous quarter,
with positive absorption of over 126,000 square feet and the completion of
several new buildings, including the Proctor and Touchstone buildings.
Space relaxed slightly for the first time in a year to a vacancy rate of
1.8%. Class A space vacancies dropped slightly (1.6%), with median rates
dropping as well ($24.50 per square foot). The Eastside market remains
very strong, with over 3 million square feet of office space under
construction and an enormous 11.1 million square feet of planned office
construction. Microsoft alone is deliberating lease deals totaling 1.3
million square feet.
North King County vacancy rates dropped to 2.9% with absorption totaling
97,000 square feet. South King County vacancy rates decreased to 7.8%,
down from the previous quarter (9.6%). 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 third quarter, while vacancy rates remained fairly stable.
Developers are currently working to complete nearly 5 million square
feet of industrial space region-wide. The Port of Seattle Terminal 5
expansion has been completed for American President Lines, replacing
the state's second largest Superfund site with a 160 acre container
terminal. Vacancy rates declined again in Seattle Close-In (to 1.8%),
although Seattle high tech vacancy rates increased (to 3.6%). Absorption
increased to just over 346,000 square feet, with 70,000 square feet in
Lower Queen Anne being leased by Dendreon, a California high tech firm.
Kent Valley vacancy rates dropped slightly to 5.7%, as nearly 850,000
square feet of additional industrial and distribution space was leased.
This represents more industrial space absorption during the third quarter
1998 than occurred during all of 1997. The Eastside market saw a second
quarter absorption of 231,000 square feet. Eastside industrial vacancy
rates dropped slightly (4.3%) and high-tech rates tightened a fraction
from 5.4% to 5.2%.
Although it is expected that the industrial market will remain strong in
King County, there is growing concern over a general economic slowdown
that will particularly impact exports to Asia and other markets abroad.
Boeing has already begun a first round of layoffs and has indicated plans
to vacate several million square feet of company-owned office and
industrial space within the Kent Valley. Most of the current and planned
construction is taking place outside of Seattle. Kent Valley remains
busy, with 2.7million square feet under construction, and over 3.3 million
square feet planned. The Eastside market is also strong, with nearly 1.1
million square feet under construction and over 3.6 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 a dramatic 15% annual rate in the first
half of 1998. In response to increased purchases developers have completed
building over 400,000 square feet of 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 third quarter 1998 was up nearly
40% from a year earlier, while room nights increased by almost 70%. Local
room tax collections for the second quarter of 1998 were 9% higher than for
the second quarter of 1997. (Second Quarter 1998 is the most recent data
available for local room tax collections).
Job Dislocation Activity
Layoffs dropped slightly (to 736) in the second quarter 1998, and were
16.5% lower than second quarter 1997, according to reports from the Worker
Adjustment and Retraining Notification Act (WARN). High technology and
marine related employment lead layoffs with 150 and 97 job losses
respectively. Westin Hotels in Seattle let go 145 workers and Aetna US
Healthcare, also of Seattle, released 127 customer service and claims
administrators. The third quarter 1998 saw a sharp increase (to 1412) in
layoffs, led by the loss of 528 jobs at the Boeing Company and 60 jobs at
Superior Technical Resources, a King County based Boeing contractor. Other
large layoffs included 324 jobs in various other manufacturing and
production firms, as well as 330 jobs at Kao Infosystems (a Bothell
software developer) and 170 customer service/claims administration jobs
with Seattle's Providence Health Plans.
Boeing and Airline Industry Data
Boeing employment in Washington state decreased to 101,400 down from
the second quarter total of 104,000, which was the highest level since
1991. This was a 2.5% decrease from the second quarter total. Further
Boeing layoffs, however, are still expected in the future as Boeing
streamlines its production process. Boeing contractual backlogs remained
steady, ending the quarter at $120.5 billion. Commercial aircraft orders
backlog increased slightly this quarter ($92.9 billion). Backlogs for
Information, Defense and Space division, made up of elements from the former
Boeing Defense & Space Group and McDonnell Douglas Corporation, decreased
$2.4 billion to a $27.6 billion total.
Updated: January 29, 2004
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