Posted by: Josh Lehner | June 29, 2015

Oregon Severe Recession Update

Unlike the nation, unfortunately, Oregon’s Great Recession does have a modern peer: the early 1980s. Our office has documented the similarities numerous times over the years, from the unemployment rate to total jobs and from housing starts to manufacturing jobs and the like. Below are a few updates to the comparison and add in our new measure of the Total Employment Gap.

First, total employment in Oregon returned to pre-recession levels following the Great Recession 3 months ahead of the early 80s recovery, or nearly 7 years after job losses started (83 months overall today vs 86 months back in the 80s.) Similarly the unemployment rate and even the U-6 measure of labor market utilization followed very similar paths to the 1980s. In early 2015 both measures were actually a bit below their comparative figures nearly 30 years ago.

SevereUR

However, while the topline economic data are nearly identical, it does not mean everything is the same of course. In particular two, related, differences arise: population growth and labor force participation.

In both cases, population growth slowed considerably from pre-recession rates. However one very big difference emerges in the fact that Oregon lost population in both 1982 and 1983. This is the only time Oregon has lost population in the state’s modern history. Former state economist Tom Potiowsky has a great story of moving to Oregon in 1983. Following graduate school in Colorado, he accepted a job offer from Portland State. U-Haul did not charge him anything for his trailer. The outbound traffic from Oregon was so large and in such demand, the company let him bring a trailer into the state for free, since they could turn around and rent it to someone else moving out. In essence, Tom was doing the company a favor. That did not happen this time. Overall population growth has been much stronger today than back in the 1980s, both in growth rate terms and in total number of new Oregonians. From 1980 to 1987, Oregon added 59,800 individuals for an increase of 2.3% overall. From 2007 to 2014, Oregon has added 221,400 individuals for an increase of 5.9%. That’s nearly 3.7 times as many individuals for 2.6 times the growth rate.

One place such differences show up in the economic data is in the total employment gap which combines the unemployment gap, the labor force participation gap and the underemployment gap. Today, Oregon’s total employment gap is 3.5-4 percentage points higher than back in the late 1980s, even as most topline economic measures are the same.

SevereGap

The reason for the difference is the labor force participation gap, as both the unemployment and underemployment gaps are identical to the 1980s. It’s hard to pinpoint the exact nature of the differences however a few possibilities exist.

One, the fact that the state did not lose population has to play some factor given that at least some of the early 1980s population loss was due to workers leaving in search of job opportunities elsewhere. Two, the Baby Boomers are at vastly different points in their working careers today (retiring, or nearing retirement) compared with the early 80s (just finishing college or still in their 30s.) This impact on the overall labor force participation rate over time is immense. Third, the labor market simply is not as strong today as back in the mid- or late-80s.

I think all 3 possibilities play important roles here and certainly are not mutually exclusive. The nature of the business cycle this time is completely different than back in the 1980s. Not only did the Fed cut interest rates back then to revive the economy (after choking off inflation with a Fed funds rate of about 12%, mortgage rates at 18%), but the generational impact of the Boomers entering into their prime working years in the late 80s and early 90s was a considerable boon to the economy. Today we’re dealing with the exact opposite situation. The Fed was cutting interest rates heading into the crisis and has held them low since and the Boomers are exiting their prime working years.

SevereGapComp

On the somewhat bright side, the early 1980s has helped our office in our forecasting of the recovery. Since about mid-2009, Oregon jobs, income and tax revenue has largely tracked our expectations, even if the severity of the crisis caught us off-guard.

Regardless of the exact differences and unlike the nation, Oregon has seen such an economy before. Jobs and unemployment are identical today and nearly 30 years ago. However even after accounting for demographic differences, a labor force participation gap remains today. Our office expects a stronger economy, with larger wage gains to draw more workers back into the labor market over the coming year or two. All told, we expect the total employment gap to close, or for Oregon to reach full employment, in about 2 more years. Oregon is growing strongly today, however the damage from the Great Recession is still not fully healed.

Posted by: Josh Lehner | June 25, 2015

Oregon Personal Income, 2015q1

The U.S. Bureau of Economic Analysis released the latest state income estimates this week, including revisions to 2014 data. Similar to our state’s overall economy and labor market, the data show strong growth that outpaces the nation. Again, the economy is on the upswing, during which time Oregon typically grows significantly faster than the average state. So it’s no surprise to see Oregon’s personal income gains over the past year ranked second best among the 50 states. Wages grew 2nd fastest as well over the year.

PersIncTable15q1

Relative to our office’s forecast, the results are somewhat of a mixed bag. Wages were a bit above forecast, non-wage income a bit below, however in aggregate, personal income in 2015q1 was 0.15% below forecast. By far the largest error component here were transfer payments which came in nearly 1 percent below forecast. The largest shift in transfer payment patterns was in Medicaid, which grew strongly in 2014 following the rollout of the ACA (aka Obamacare) and tapered off in 2015, at least in terms of growth rates. All else effectively cancels each other out and the end result is not much different from our outlook.

As detailed last month, Oregon’s relative income measures continue to improve along with the economy. The graph below is updated to include actual 2015q1 income data and not just our office’s estimates. Oregon’s per capita income is back to pre-Great Recession levels relative to the nation (about 90-91%.) Oregon’s average wage shows even larger gains in recent years. Of course both remain below the national average.

PersInc15q1

Posted by: Josh Lehner | June 22, 2015

Saving the Kicker

Say what you will about Oregon’s unique kicker law — good, bad, indifferent — but it is enshrined in the state constitution and it is the law. When our office’s revenue forecast is off by 2% or more, everything above the forecast is returned to Oregon taxpayers (key point: including that first 2%.) We also pay the kicker out the same way we take the revenue in, based on one’s tax liability. So the more one earns, the larger one’s kicker. Our office included the following table in our presentation to the legislature to both illustrate this point and to provide estimates of what the typical taxpayer should expect, based on the latest forecast. The specific numbers will change when our office certifies the kicker in another couple of months.

KickerSize

While the above details the expected kicker across the income distribution, an interesting question is how much of it will be spent. This exact question was asked at the most recent legislative hearing and forecast release. While our office did not have a specific number at that time, we do have an estimate now based on some recent research. First, however, a bigger point that we did make at the hearing. Lower income taxpayers and households spend a higher fraction of their income than do high income households. Similarly, savings rates are much higher for high-income households than for low-income households. So giving $100 to different taxpayers at different points along the income spectrum result in different numbers in terms of spending.

One potential issue along these lines is the difference between average propensity to consume (think of savings rates vs spending rates) and the marginal propensity to consume/spend — if someone were to hand you $20 today, how much would you spend? Given that kickers occur on an infrequent basis, it’s hard to argue that taxpayers plan on receiving them in advance, or build them into their household financial plans. Milton Friedman’s permanent income hypothesis certainly plays a role here. As such, recent research on the marginal propensity to consume across the income distribution helps shed light on this question. The estimates* of spending the kicker are shown below.

KickerMPC

Such findings may be a surprise. Just 15% of the kicker is expected to be spent, at least pretty quickly. In the paper, different model results peg the figure between 10 and 20%. Of course these numbers vary across the income spectrum as well, with those in the bottom half spending about three-quarters of their kicker while those at the top spending less than 10% of theirs.

However a few additional things are worth mentioning. First, all $473 million (the final figure will differ) will be returned to taxpayers via a credit on next year’s tax return. Much of it will go towards savings and/or paying down debt, most likely. Second, given that the kicker will be a credit that results in a larger refund or a smaller final payment, and not a check in the mail around the holiday season, how does this change consumer behavior? We don’t know, but it does seem to imply a smaller spending share, particularly for those now owing a smaller final payment. For a middle-income household sending in a final payment of $150 instead of $300, how much of the $150 kicker will they spend? Behavioral economics in general suggest not much. Humans react significantly different to losses than to gains. Finally, with all that being said, much of the kicker will be eventually spent over time. This research indicates the kicker may not pack much of a punch initially, however over a longer period, the kicker will certainly be factored into household finances and spending.

* The model results in the paper do not explicitly lay out the marginal propensity to consume by quintile, but rather by various segments of the population (bottom 60%, top 20%, top 10%, etc.) The results shown in the table are my own estimates based on the published research, but made to ensure they sum to the total and published figures. As such, it is unlikely that both the bottom 20% and second 20% have the exact same MPC, however I am unable to determine the differences given the published results. This detail is unlikely to significantly impact the overall findings.

Posted by: Josh Lehner | June 18, 2015

Oregon GDP, 2014

Last week the Bureau of Economic Analysis released state level GDP estimates for 2014, along with major historical revisions going back to the 1990s. As Oregon typically does, it ranked well again in 2014, clocking in at 3.6% inflation-adjusted growth, ranking 6th best among all states. As we try to point out from time to time, Oregon’s state GDP tends to overstate our economic strength, when compared with other measures like jobs, income and the like. Of course, Oregon tends to rank well on those other measures during expansions. Less so during recessions.

What is interesting are the revisions and unfortunately we do not have a ton of detail yet on them. The BEA factored in 2 new data points/series into these estimates, including the survey of manufacturers and the 2012 economic census. BEA will release more details on these series and the revisions next month (July.) However, as of now, the revisions do not change the bigger picture story of Oregon’s strong GDP over time. It does alter the pattern and some of the specifics across the years. The first graph below shows nominal GDP (not adjusted for inflation) for each of the past 3 years releases. The big change from 2012 to 2013 was the incorporation of intellectual property products (R&D spending being a big part here), that BEA added to both the U.S. GDP and local level figures. One can see this in the big shift upward from the gray line to the blue line. The latest figures (red line) factor in those new data results.

GDP14Revisions

In terms of Oregon’s relative rankings across the states, the specific year-to-year numbers have changed, particularly 2012 and 2013. But, over this extended period from 1998 to 2014, Oregon’s GDP has averaged 1.5 percentage points faster growth than the nation each year. Even with the downward revisions to recent years, Oregon still outperforms most states over the Great Recession. Oregon ranks 3rd best in state GDP growth from 2007 to 2014, trailing North Dakota and Texas.

GDP14Ranking

Much of our GDP advantage comes from our high-technology manufacturers, which provide an extraordinary amount of value-added to their products. They also undergo major R&D investments on a fairly regular basis as well. At times, it can be helpful to separate out this high flying industry and examine everything else, as shown below. Given data availability I had to separate out all durable goods manufacturing (includes our metal makers, aerospace, etc) but the trends are clear. While state GDP performed well over the the past decade, what most firms and workers felt and saw looks a lot more like the red. In fact, other measures like employment and income look similar to the red line. It indicates that growth has accelerated in recent years.

GDP14Breakdown

All told, now that the economy is on the upswing, Oregon is once again among the fastest growing states across a host of economic measures. The economy is not fully healed yet, but provided recent rates of growth continue for another couple of years — which our forecast calls for — then Oregon should reach full employment at that time, some 9 (long) years after the onset of the Great Recession.

Posted by: Josh Lehner | June 17, 2015

Oregon Employment, May 2015

The May employment report largely indicated the labor market was unchanged last month. Relatively small job losses and an uptick in the unemployment rate are never good signs. However, noisy monthly data does have its ups and downs. So far, one bad month does not have us too concerned. Should job losses mount, then we’d be very concerned of course.

Encouragingly, the following are true. Job growth over the year is still healthy at 3 percent or so. Initial claims for unemployment insurance remain very low. Withholding out of Oregonian paychecks continues to grow. The unemployment rate remains down in the range that one could consider full employment prior to the Great Recession. Of course, we know not all is healthy and our Total Employment Gap remains a few percentage points away from something approaching normal.

However, the Oregon economy and labor market continue to improve considerably over the past couple of years. This most recent data point is not good, but so far it’s just one data point in typically noisy data. Put this all together, and a quick summary of the May jobs report probably looks like this: ¯\_(ツ)_/¯. With that being said, it did get me wondering about how often it happens that the economy loses jobs during an expansion.

JobLossesExpansion

The answer is in about once every year, or once every 12 months on average. For this calculation I focuses only on the employment changes from their lowest point in the business cycle to their highest point. These are not based on official NBER dates.

Losses were a bit more frequent in the 1990s expansion, however many of those losses were in the late 90s following the Asian Financial Crisis which hit Oregon hard. If one focuses on the early and mid-90s, the percentage falls to 8.8% (6 monthly losses out of 68 total months) which is essentially the same as the rates seen during the housing boom and today.

Posted by: Josh Lehner | June 9, 2015

Tech Talent Concentrations

Recently the Austin Technology Council released a new report on tech talent (PDF.) It focuses on the sector’s expected strong growth, a potentially emerging skills gap* between what employers say they need and the skills potential job candidates have, and also whether the supply of such workers can keep up with demand. The report is filled with good nuggets of information, including this chunk from the intro, which many folks across the country say is true, all you need to do is change the city name.

While tax incentives and ribbon cuttings tend to dominate headlines about economic development, it’s availability of skilled labor that usually drives corporate location decisions, especially for tech companies relying on highly skilled workers to drive innovation and market share. Austin’s strong economic growth and renowned quality of life are attracting people from around the U.S. and the world. But the future of Austin’s tech industry also depends on the region’s ability to prepare local residents for high-skill, high-demand job opportunities.

 

While the report benchmarks Austin to other major tech metros, that list did not include Portland. To that end, I went and examined the core 19 tech occupations, as listed in the report — computer systems analysts, software developers, programmers, etc — for the ten metros included in the report in addition to Portland and the U.S. overall. The results are shown below. Total tech employment, which includes office and sales staff for example, is obviously larger than this, but the following represents those core, fundamental occupations and skill sets. In short, Portland’s share of all jobs in tech occupations is both significantly above the national average but also significantly below the most tech-heavy metros.

TechTalentGraph2014

The group above includes some of America’s largest and most productive metropolitan areas, so it is no surprise to find that these metros are home to 1 out of every 8 U.S. jobs (12.5%.) What is somewhat surprising is the degree to which tech clusters. These same 11 metros are home to 1 out of every 4 U.S. tech jobs (25%.) That’s quite an amazing statistic.

It’s important to keep in mind, as the ATC report notes, that not all of these jobs are truly tech jobs. In Austin, about 1/3 of these are in non-tech industries (universities, government, R&D, etc). Even so, the labor/talent pool from which employers draw is the same. Tech firms must compete with non-tech firms for the same type of workers and skills. Even if your region is not tech-heavy, having a large number of such skilled workers in non-tech industries is still a boon for economic growth and innovation moving forward.

While Portland may rank a notch below the best known and largest tech hubs in the country, it is just a notch and not a giant step down. Across the 50 largest MSAs in the country, Portland’s tech concentration ranks 14th highest. The full rankings and shares are shown below. Note: Durham-Chapel Hill drops off the list.TechTalentTop50

These findings are similar to our office’s previous work examining high-tech across states, where Oregon ranked 14th highest, a step above the national average. A few key points from our previous work:

However it is important to think about what types of technology we actually have here in Oregon, compared with what other sub-sectors are concentrated more heavily in other locations. For example, we know that Oregon has a higher concentration of manufacturing high-technology with the presence of Tektronix (more historically) and Intel (more recently), and the like.

Even though Oregon does well directly on software, in this broader context of software that includes most of the other non-manufacturing sub-sectors, Oregon ranks 27th highest and below the U.S. average. On the hardware side, Oregon ranks above average and 7th highest among all states. Since the fallout of the 2001 recession, Oregon’s relative position in high-tech is largely unchanged year to year. If one dives a little deeper into the data, Oregon does rank 1st for semiconductors.

The strong growth in recent years, both nationally and here in Oregon, is dominated by the software side of the industry. Hardware is largely holding steady, but not likely to grow employment significantly in the future.

The table below details each of the 19 core occupations across the first set of major metro areas and the U.S. in terms of 2014 employment.

TechTalentTable2014

For additional Oregon information, see Employment’s report on high-tech from earlier this year, researched and written by Jill Cuyler-Cook.

*I am much more sanguine about the so-called skills gap overall, although specific industries and occupations are more prone than others, including tech. See the Computer/Math occupations, e.g.

Posted by: Josh Lehner | June 4, 2015

Video Lottery, An Update

In recent years there had been somewhat of a disconnect from broader economic gains and growth in video lottery sales, and gaming more generally across the country. Granted, gaming is a very discretionary type of spending and while the economy was improving, not all was well (see HERE or HERE e.g.)

However, video lottery sales have improved considerably in the past year and are growing at double digits today. Such gains coincide with the Oregon Lottery’s major capital improvement program which will replace the nearly 12,000 video lottery terminals (VLT) across the state and upgrade the underlying IT system. The first wave of replacements started just about a year ago and finished back in March. Essentially each retailer (the bars, delis and restaurants) now has 2 new VLTs. Over the next couple of years the other VLTs will likewise be replaced.

VideoSales053015

There is no question that a stronger economy supports higher discretionary spending as household finances are generally in much better shape today given the strong job and wage gains seen in Oregon. However, at least in terms of video lottery, the new machines have certainly acted as the catalyst for higher sales. What is interesting is that the response from players can be seen across the state. In most regions, the uptick in sales growth follows the roll out of the new VLTs.

VideoRegions15

Now, before anyone gets too excited or depressed, depending upon your view of the gaming industry, we are still living in the world where spending on video lottery is a much smaller share of income than in the recent past. Sales growth has outpaced income gains in the past year, no question. However the economic improvements in recent years have not fully translated into increased spending on video lottery. Or at least not yet. This was one of our major concerns to the outlook when researching our state by state gaming report last year. Even with the recent uptick in video lottery sales, when measured as a share of Oregonians’ personal income, it is relatively low when compared to the past 15 years.

VideoShare15q2In terms of the outlook, here’s what our office wrote in our latest forecast document.

Due to the continued fundamental improvement in the economy – jobs and income growth – along with these increased video lottery sales, the longer term forecast has been raised from the previous forecast. Growth still remains somewhat subdued relative to pre-Great Recession rates of growth.

Such an outlook does leave room for both upside and downside risks. Should the combination of a stronger economy and the new terminals unlock permanently higher sales over a longer period, instead of one-time novelty factor bump, then the forecast will need to be revised up. Possibly considerably so. However, sales growth has been lackluster to disappointing across the country. Even in brand new casinos, after a year or two of strong growth, sales start to plateau or even fall in some locations. Our office’s pessimistic scenario is video lottery growth along the lines of the adult population increase.

Posted by: Josh Lehner | June 2, 2015

Housing Permit Update, Oregon Metros

Just a quick update on new construction and housing activity.

While one hears and reads much about the current, so-called construction boom, it can be helpful to place the recent numbers in perspective. Within the Portland MSA, only one county – Multnomah – is back to pre-Great Recession levels of building activity. The others are about half-way back. It’s really difficult to call the current levels of permits and starts a boom when you examine the numbers. See here for more on new building relative to population growth. Also, stay tuned for more housing analysis in the near future.Permits_PDX2015Below is a similar chart for each of the state’s other major metropolitan areas. We have discussed the Bend population growth vs housing start issue previously. Like Portland and Bend, the other metropolitan areas are seeing lower levels of new construction in recent years, even if it is picking up a little bit.

Permits_MSA2015The bigger implications here, which the future work will focus on more, is housing affordability. As population growth accelerates — which it is and will continue to do so — and vacancy rates are low — which they are — affordability is lost. In our office’s latest economic and revenue forecast document, we added housing affordability as a risk to the outlook (see PDF p. 18.)

 

Posted by: Josh Lehner | May 28, 2015

Graph of the Week: Oregon Income and Wages

The fact that Oregon has below average income, by any conventional measure, has been well documented. See the Employment Department’s report or the library of work from ECONorthwest on the subject. Below, I simply update the standard per capita income figures and also highlight average wages. The reason being is that the two show some differing trends. Of course one thing they share in common is that Oregon is below the U.S. average.

While Oregon PCPI has rebounded in the last couple of years, it is still just back to the share of the U.S. average seen prior to the Great Recession (about 90-91%.) So there has been some improvement, and it’s good to know it does not go down forever. However, Oregon’s average wage per worker, relative to the nation, has certainly not experienced the slow erosion that overall PCPI has. The massive early 1980s recession in Oregon was a large, negative economic shock to the regional economy. It set Oregon back significantly, especially relative to other states. Even the strong boom of the 1990s was not able to fully erase the relative losses from the early 1980s. However, Oregon’s average wage today, at 92% of the U.S. average, is at its highest relative position since the early 1980s. This largely has to do with our stronger wage gains in the past couple of years. Our office’s outlook calls for this to continue for another couple of years before slowing.OregonIncome2015I think this distinction is important to keep in mind. For many households, labor income (wages) is the largest part of their income, if not the entire part. Additionally, there are a lot of factors that influence the overall PCPI measure: population growth, the type of population growth, demographics, the share of prime working age adults, the share of such adults with a job, etc. The general point being, that while Oregon’s average wage is below the U.S. average, it is not the driver of the slow erosion in the PCPI measure. That falls on some combination of non-wage income and then demographics, population growth and the share of adults with a job, or income-earning source.

Posted by: Josh Lehner | May 26, 2015

Drought, Risk to the Outlook

As the drought continues to worsen and spread, its impact — both potential and real — on the economy is a risk to the outlook, particularly at the local level. Our office included the following slide in our presentation to the Legislature at the last forecast release.

DroughtSlide

While the UC-Davis study impacts may not be particularly large at the state level in percentage terms, they do add up to a considerable sum of money in terms of lost sales and are certainly felt at the local level in California’s central valley. Here in Oregon, we unfortunately have somewhat of a similar example in the recent past, I think. To many, the 2001 recession is generally considered the fallout from the tech bubble. Places like the Bay Area, Portland, Seattle and other tech-heavy locales were especially hard hit, while many parts of the country largely skated by with not much of a true downturn, even if there was a period of general malaise. However, in Oregon we have the Klamath Basin which has had ongoing water issues for a long time, including back in 2001 when the courts stopped water deliveries to farms in the area. Of course there are other issues going on, like the national downturn, flow of migrants, being a part of the Timber Belt and its longer run trends, possibly major employers cutting back and the like. However, here we see a regional economy suffer large losses, none of which are directly tied to the specific nature of the business cycle. [Additional information/corrections on this are welcomed and encouraged.]

DroughtKlamath

Lastly, one major concern with a drought is the potential for increased wildfire damage. The past two years have seen particularly large fire costs for the state. So far the number of acres burned in early 2015 is relatively small, but the early part of the year is just a percent or three of the annual total as “peak” wildfire season is still to come.

DroughtFire

Overall, the impact to the state economy (and budget) from the drought to date is largely theoretical but remains a concern and a risk. To the extent that the drought continues, and worsens, such theoretical concerns will unfortunately turn into actual impacts.

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