Posted by: Josh Lehner | August 26, 2015

Oregon Economic and Revenue Forecast, Sept 2015

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

This economic expansion just celebrated its sixth birthday. In true-to-form fashion, the party included decent-but-not-great job gains and steady-but-subdued GDP growth. As such there are few signs from the U.S. economy that the expansion is about to end anytime soon, even if growth has been lackluster overall following the financial crisis. However, all expansions do end and the economy is more likely closer to its next recession than not. This is especially true as storm clouds are gathering offshore in the form of a stronger U.S. dollar, weaker global growth and a significant and potentially worrisome slowdown in China.

The Oregon economy is at full-throttle growth. Jobs and income are increasing as fast, if not faster than during the mid-2000s. Given demographic trends, such rates of growth are considered full-throttle. As in past expansions, Oregon has regained its traditional growth advantage relative to other states. Much of this advantage can be attributed to the state’s industrial structure and strong in-migration flows. More important are the indications that Oregon is seeing a deeper labor market recovery. Wages for the average Oregon worker are increasing quicker than in the typical state, and above the rate of inflation.

While growth rates, and the trajectory of the economy have improved considerably, Oregon is not yet fully healed from the Great Recession. The largest economic concern today is the participation gap – the difference between the share of the population with a job or looking for work and what the rate would be when operating at full strength. The improving economy is and will pull workers back into the labor force, helping to support future economic growth at the same time.

USNAIRURecession

Oregon’s General Fund revenue growth slowed at the end of fiscal year 2015, as collections of personal income taxes dried up during May and June. Income taxes withheld out of paychecks slowed sharply, and the tax filing season ended with very weak payments as well. As a result of the weakness, General Fund revenues fell short of the May 2015 forecast by $56 million, which reduces the ending balances that were set aside by budget writers in June. Oregon’s tax collections have since picked back up, growing rapidly to start off fiscal year 2016.

Although the General Fund ending balance for the 2013-15 biennium has become smaller, the associated reduction in available resources for the current biennium is largely offset by Oregon’s kicker law. With less personal income tax having been collected than was expected in May, revenues have moved closer to the kicker threshold, resulting in a smaller credit for tax filers next year.

Excluding corporate taxes, General Fund revenues exceeded the 2% kicker threshold by $111 million (0.7%), resulting in a kicker credit of $402 million. Due to actions taken by the 2011 Legislature, this kicker payment will take the form of a credit on 2015 tax returns rather than being issued as a check at the end of the year.

Kicker15

Looking ahead through the rest of the current biennium, the outlook for available General Fund and Lottery resources has remained relatively unchanged. Although downside risks are mounting, the underlying outlook for employment and income growth has remained stable, leading to a stable revenue outlook.

The revenue outlook is stable, yet uncertain. Volatility in equity markets is injecting a great deal of risk into the forecast. Oregon’s budget depends heavily on personal income tax collections tied to realizations of capital gains. These collections are extremely volatile, with revenues subject to the sometimes unpredictable behavior of investors. Although housing wealth has played a larger role in driving taxable capital gains over the last decade than in the past, earnings and losses in stock markets account for the lion’s share of movements in taxable capital gains in the typical year.

See our full website for all the forecast details. Our presentation slides for forecast release to the Legislature are below.

Posted by: Josh Lehner | August 20, 2015

Kids in the Basement, 2015 Update

Posted by: Josh Lehner | August 18, 2015

Oregon Employment, July 2015

Just a quick update on today’s employment report. See our friends over at the Employment Department for the official release.

The latest employment report for Oregon shows healthy job gains from the employer survey in July but a large increase in the unemployment rate from the household survey. What’s going on here? The first answer is always that real time survey data is noisy. It will be revised and benchmarked over the coming months. The second answer, from a purely atheoretical perspective, the unemployment rate is simply reverting to the post-Great Recession trend. The plunge in the unemployment rate in early 2015 likely overstated the improvements in the economy, even with job growth at full-throttle. The large increases in the past couple of months likely understates the improvements in the economy, even with job growth still at full-throttle.

ORUr0715

The bigger picture here is that we literally need a higher unemployment rate given the underlying dynamics we have seen in recent years with a low participation rate and the like, provided of course it is higher due to more Oregonians looking for work. Unfortunately, the labor force figures show losses in 2015 again following some good gains in 2014. With job opportunities still quite strong, it should and will pull more workers back into the labor force. That’s not really being shown in the 2015 data so far which is discouraging, particularly because we’re making good gains in the share of Oregonians with a job and our wage growth is strong. For the time being our office is still chalking much of this up to the underlying noisy data.

Our focus is right now is on the job gains, the employment-population ratio, migration flows and wage growth which all point to strong gains here in Oregon. However we do have a keen eye on the labor force participation rate, adjusting for demographic trends, although that is still quite low today and not showing the gains most other indicators are.

Posted by: Josh Lehner | August 17, 2015

Employment-Population Ratios, an Update

The employment to population ratio (EPOP) is the share of the population that has a job. To me it has one big benefit: it cuts through the whole conversation about whether the unemployment rate is truly accurate or is lower due to all those individuals who gave up looking for work, etc. Additionally, by definition, it accounts for population growth, which is something that is very important in a small western state like Oregon that sees strong migration flows.

Of course this is not to say the conversation about the labor force participation rate isn’t important — it really is — but looking at these other measures does help shed some light on the state of the economy. There is no one metric to rule them all.

Much like the U.S. overall, Oregon’s total EPOP has been trending down for the past 15 years or so. Oregon’s underlying data is based on a relatively small sample and is thus more noisy than the U.S. but the trends are clear. One big difference in recent years is the fact that Oregon’s EPOP is lower than in the average state. Much of this weakness is among the older population groups (55+) which could be a bad thing (fewer job opportunities for older workers) and/or a neutral thing (migrating retirees weighing on the metric even if it’s not a fundamental economic issue) or potentially a noisy data thing. Regardless, Oregon’s overall EPOP is lower. EPOPall0615

Given Oregon’s strong migration flows — both among the young and the retirees — focusing on just the so-called prime working age population is important. Here, Oregon’s patterns are nearly identical to the U.S. as a whole. There was about a five percentage point decline due to the Great Recession and so far the economy has recovered about 2 percentage points. In other words, this gauge of the labor market is just 40 percent recovered from pre-recession readings. As detailed previously, job growth is certainly strong enough to keep up with population growth and the influx of new workers, as such the EPOP for prime working age adults is increasing. However, there remains a long way to go to reach rates seen back during the mid-2000s. This is one reason in particular our office is more optimistic than most on the labor force participation rate, especially among this group (see here for a more detailed analysis). A stronger economy will pull workers back in.

EPOPprime0615

To the extent that Oregon’s lower EPOP overall is due to demographics and retiree migrants (very likely) then it is much less a concern that Oregon ranks below the typical state. With the aging Baby Boomers, EPOP (along with participation rates) will continue to decline moving forward. This is why I prefer to look at the prime working age population and the trends within this group. With the large Millennial  cohort mostly in their 20s, a stronger economy bodes well for both their near-term careers (finding a job) and longer-term careers (gaining experience and getting raises). This uptick in employed workers is good news for the economy, particularly among the youngest groups. As we will discuss later this week, some Millennials are even moving out of their parents’ basements and living on their own.

Posted by: Josh Lehner | August 14, 2015

Oregon Exports 2015: Terms of Trade

I know it was supposed to be a two part export series, but I think a quick follow-up is in order. Think of it as an extra special bonus post. This post has to do with the so-called terms of trade, or exchange rates. Over the past 18 months or so both the U.S. dollar and the Oregon trade-weighted dollar (focusing just on our top 15 export destination countries and adjusting for inflation across countries) have appreciated about 18 percent. Much of this increase is in the past year, starting right around when the price of oil plunged.

OregonDollar0715

The basic story here, as I mentioned to OPB, is this:

“We have a strong U.S. dollar that makes Oregon products and U.S. made products more expensive to foreign buyers,” said Lehner.

“It also makes the products from foreign countries cheaper for us, so we see some more imports. And so that kind of is going to weigh on our export outlook,” said Lehner.

The dollar indexes shown above were before the recent Chinese yuan depreciation this past week. The U.S. dollar strengthened further following that event, the Oregon dollar even more so given our stronger ties to China. Folks that are much smarter than me had some good commentary on the Chinese devaluation. See Neil Irwin at the NYT for a broader perspective and Univ. of Wisconsin professor Menzie Chinn, to name two.

One other place the strong dollar will show up, beyond stronger imports and weaker exports, is in the financial earnings for multinational corporations. While foreign earnings (those made from goods sold outside of the U.S.) do not necessarily need to be brought back into the U.S., the businesses do need to report on how much they made outside the U.S. In calculating those foreign sales back into USD, the numbers appear somewhat smaller due to the strong dollar.

Posted by: Josh Lehner | August 13, 2015

Oregon Exports 2015: Destination Countries

Given that Oregon remains an agricultural and manufacturing hub, and our strategic location along the Pacific Rim, it is no real surprise to see strong exports from the state. In 2014, Oregon exported nearly $21 billion worth of products and through the first half of 2015, the state is on pace to match that figure. Measuring exports relative to the size of the economy, Oregon consistently ranks well across all states. Yesterday we explored Oregon exports by industry. Today we will examine the state’s top destination markets.

Exports by Destination Country

The vast majority of Oregon exports (80%) are destined for one of the 21 countries along the Pacific Rim that are members of the Asia-Pacific Economic Cooperation (APEC) including each of Oregon’s five largest individual markets: Canada, China, Japan, Korea and Malaysia. Prior to the Great Recession these five countries received 50 percent of all Oregon exports, however in the past six years, that figure is now 60 percent, with much of the additional growth coming from products destined to China.

Only two other states in recent years have a larger share of their exports heading to China than does Oregon at just over 20 percent: Alaska (lots of seafood, 27%) and Washington (aerospace, 22%). Oregon is not dissimilar in the fact that over the past decade 58 percent of all Oregon exports heading to China are computer and electronic products. Given the state’s technology producers’ global presence and major investments in China in particular, such a pattern is not unexpected. Encouragingly non-computer and electronic product exports have increased in recent years as well. Agriculture, chemicals and machinery have seen strong gains, and until recently wood products (mostly logs) as well.

ExportInd15q2Canada – Oregon’s second largest export market – is similar in that exports are dominated by one large sector but all other industries are seeing gains. In Canada’s case heavy manufacturing exports (machinery, metals and transportation equipment) account for over 40 percent of the total. A large portion of these exports are tied to the mining industry, which has been hit especially hard over the past year with falling oil prices. As such Oregon’s heavy manufacturing exports have declined nearly 30 percent from 2014q2 to 2015q2. Other major export sectors, like agriculture, chemicals and wood products remain relatively robust albeit slowing, likely due to the country’s overall economic performance. Largely due to the low energy prices, Canada’s economy is facing a deteriorating outlook in the near term relative to the recent history, as energy producers have been hit hard by low oil prices even as all other businesses and households gain from the lower prices.

Nearly all Oregon exports to Malaysia (3rd largest destination market) are computer and electronic products. Trade with Korea and Japan is more balanced across industries, with particularly strong agricultural exports. This includes a sizable share of of our soft wheat sold to Asian consumers.

Outlook for Exports

There is an interesting dichotomy to Oregon exports and discussing their impact on the state and outlook for the future. The fact that much of Oregon’s exports are tied to a specific industry (high-tech) or an industry-sector connection (mining) is a double-edged sword. It leaves overall exports less prone to the business cycle but more exposed to individual industries and their patterns, which can be both beneficial and detrimental, depending.

TradingPartnersEx

However other products and markets outside of these examples are more tied to global demand. Unfortunately the outlook for global growth is slower in the coming years than in the recent past. The International Monetary Fund (IMF) is forecasting a relative slowing in nearly all of Oregon’s major export markets. While Oregon’s non-tech, non-mining related exports are growing in size and scope, foreign consumers are facing a likely slowdown. Such an outlook is largely not a worry to the broader U.S. economic expansion, however it may have greater impacts on Oregon-specific industries and firms. Less-than-fun fact: the only time during a modern economic expansion that Oregon grew slower than the U.S. was following the Asian financial crisis in the late 1990s as our ties to the region weighed on our growth, both broadly but specifically high-tech manufacturing.

In particular, a slowing global economy may impact some of the state’s larger firms expecting strong consumer demand from the emerging middle class in many Asian countries. The IMF expects global growth to strengthen after a couple years of relatively weaker growth. Longer term, the vast majority of Oregon’s top export markets are expected to grow considerably faster than is the U.S. or Oregon. Increasing exports to these growing economies is and will be a benefit for stronger growth here at home.

Posted by: Josh Lehner | August 12, 2015

Oregon Exports 2015: Industries

Given that Oregon remains an agricultural and manufacturing hub, and our strategic location along the Pacific Rim, it is no real surprise to see strong exports from the state. In 2014, Oregon exported nearly $21 billion worth of products and through the first half of 2015, the state is on pace to match that figure. Measuring exports relative to the size of the economy, Oregon consistently ranks well across all states. What follows is a brief overview of Oregon exports by industry and tomorrow we will examine the state’s top destination markets.

Exports by Industry

Exports are generally measured by their dollar value, not their bulk. As such, Oregon’s high-technology producers – semiconductors in particular – dominate statewide figures, accounting for over 40 percent of Oregon exports in the past 15-20 years. These products, while generally lightweight and shipped around the world to assembly plants via air, are extremely valuable. They are the “brains” behind many of our electronic products. They are also somewhat different from other types of exports in the sense that they are not influenced so much by any one country’s consumer demand but rather the global technology market and the life cycle for each successive generation of products.

One cannot discuss Oregon exports without discussing the impact of the state’s technology products, however given their relatively different pattern, focusing on all other industries can be enlightening.

ExportsInd15q2

Much of the growth in Oregon exports in recent years has been in heavy manufacturing – machinery, metals and transportation equipment. While the metals and machinery are holding strong in recent quarters, transportation equipment is declining. Many of these products are destined for Canadian markets, more on this tomorrow.

Agricultural and food products are down in the past two quarters, mostly due to lower commodity prices globally although West Coast labor disputes along with the Port of Portland losing container service may be impacting the numbers as well. Furniture exports are growing, even as the broader wood products sector is stable. Exports from other industries or sectors of the economy have seen strong, but stable since the Great Recession.

Posted by: Josh Lehner | August 5, 2015

State Labor Market Slack and Wages

Traditional analysis and models indicate the economy is essentially at full employment, given the unemployment rate — currently at 5.3% — is in the range of previous estimates of the so-called natural rate, or NAIRU. Historically the Fed, including its models, agrees. However given the severity of the Great Recession, this time really does appear to be different when it comes to labor market slack, at least so far.

Unfortunately such slack really is an unknown figure but economists keep trying to estimate it. For example, the Federal Reserve created the Labor Market Conditions Index and Tim Duy regularly cites the Yellen Charts highlighting various measures of slack. In this same vein, the Total Employment Gap used by Andrew Levin, previously at the IMF (see HERE), now at Dartmouth (see his latest with co-author Danny Blanchflower for monetary policy implications), is particularly useful and applicable. It incorporates not only the cyclical unemployment gap but also estimates of the labor force participation gap (which takes out the impact of aging) and the underemployment gap (involuntary part-time work), into one easy to use and understand metric. What I have done is use this framework to apply the Total Employment Gap concept to each state over the past decade. Given state level data availability, I took some small liberties with the methodology to ensure compatibility. You can download the methodology and individual state estimates below.

EmpGap15q2

The results show that, like the nation, the typical state today has no cyclical unemployment gap. In 24 of the 50 states, the headline unemployment rate is back down to its full employment rate. However, when examining the Total Employment Gap, just 9 states are at full employment today. Another 10 are within 1 percentage point, but 20 states (40% of all states) remain 2 percentage points or more away. The reason being that there remain large labor force participation gaps and underemployment gaps in most states. Tweaks to the methodology yield similar results, plus or minus a state or two.

EmpGapStates15q2

Finally, the Total Employment Gap may shed some additional light on wage gains, or lack thereof, across the country. There is a highly significant relationship between a state’s total employment gap and its wage gains in 2014 (t-stat of -4.84, looking at QCEW average wages, not hourly earnings data.) The explanatory power may not be extremely large, however the total employment gap is a better fit than using the unemployment rate alone. As such, the evidence does line up with the theory that in tighter labor markets firms must compete more on price (wages) to attract and retain the best workers. These findings hold up in recent year as well (2012 and 2013.)

WageGap1

Such scatter plots and regressions, while good for analysis, can be messy. A more visually appealing version of the same data is shown below; it groups the states by their total employment gap in 2014 and averages their wage gains within each group.

WageGap2

Overall, progress is being made across the country, no question. As the labor market continues to improve, stronger wage gains will come. Even if some of us were fooled by the ECI recently. However just a handful of individual state labor markets can be considered at full employment today. More than twice as many are at least 2 percentage points away. Most encouraging (at least through the latest BLS benchmark), the labor force participation rate was seeing substantial gains in some of the hardest hit states. Oregon is one such state and while our economy has never had more jobs overall and our unemployment rate is back down to 5.5%, our office’s forecast calls for the Total Employment Gap to be eliminated only by mid-2017, or some 9 years after the onset of the Great Recession.

Download the methodology and individual state Total Employment Gap estimates. State Employment Gap 2015 (PDF)

Posted by: Josh Lehner | July 29, 2015

Oregon Labor Force Participation

Along with the latest employment report came the news that Oregon’s labor force participation rate fell to at least a four decade low. We have good data going back to 1976 and June’s LFPR of 60.3% is the lowest in this data. However, much of the decline in the past 15 years was expected. Given that LFPR includes all Oregonians 16 years and older, aging Baby Boomers were always going to pull the measure down.

The graph below shows the actual LFPR in red compared with a demographically-adjusted LFPR which takes participation rates in 2000 (arguably the last time the U.S. economy was operating at full capacity) and then adjusts for demographic changes. As such the gray line is a reasonable approximation for what the LFPR in Oregon would be if the economy was firing on all cylinders. What truly matters for the health of the economy is the difference between the red and gray lines. This is the so-called participation gap our office uses in the Total Employment Gap. This gap is what I am most worried about economically as the expansion continues. To what extent will this gap close? I also highlight the last benchmarked data point (the most recently revised data, essentially.) Data since then shows the LFPR plummeting further. With the Oregon economy on the upswing and job growth at full-throttle, it’s hard for me to see such large declines in the LFPR. We shall see what revisions bring next year…

LFPR0615

Since about two-thirds to three-quarters of the LFPR decline since 2000 is due to changes and trends among the youngest and oldest populations, I want to focus on just the so-called prime working age folks, those between ages 25 and 54 years old. Participation rates are down among this group, which is the biggest potential issue in terms of future growth as fewer workers generally equals lower productive capacity overall. The chart below shows the relative changes for this population and the reason they’re not in the labor force over the past decade or so. This also adjusts for demographics, so even though there are more 25-34 year olds today with the Millennials, they are enrolled in higher education at an even higher degree. I have ordered the reasons why these Oregonians are not in the labor force from most likely to least likely to return, from left to right.

NILFChange

The results here are a mixed bag, not surprisingly. The youngest group (25-34) has seen less LFPR for reasons that are fairly easy to reverse: school, weak economy and staying at home with the kids (an overall upward trend as our office’s report showed.) Changes among the oldest group (45-54) appear to be harder to reverse, although a stronger economy can and will pull some of these workers back into the labor force. Side note on the ill or disabled group, this reflects survey responses not actual disability claims and awards. If you look at age-adjusted SSDI there was an uptick during the Great Recession but history has shown it is not likely to be a permanent trend. The 35-44 year old group lies somewhere in between the others, although certainly skewing more toward the easy to reverse end with more discouraged workers and an increase in staying at home with the kids. Not that transitioning back into the workforce is easy, but provided the right opportunity exists — and it should in a stronger labor market — these individuals will at least be tempted to return.

All told the bulk of the LFPR decline is due to basic demographics. As such it is expected to continue to fall over the coming decade as well. What truly matters is the participation gap. This does mean that at least some of the LFPR decline is economic-related and should be cyclical to a certain extent.

In terms of the outlook there are three reasonable scenarios. First, the truly pessimistic scenario is that all of the LFPR decline is permanent. The economic-related decline is now structural and not cyclical due to the initial lackluster recovery. Those Oregonians who dropped out of the labor force will not return in the future. Our office does not believe this will happen, but, unfortunately, it does remain a distinct possibility. Second, a somewhat pessimistic yet reasonable view would be that Oregon does not see any uptick in the LFPR. Rather it moves sidewise during the expansion, similar to the 2005-08 period. Under such a scenario, the participation gap will narrow and maybe even close however not quickly. Finally, our office’s baseline is that Oregon will see another percentage point or so increase in the LFPR, following the gains in 2014. A stronger economy with more plentiful and better paying jobs will pull workers back into the labor force, at least somewhat. Not enough to overcome the aging demographics, but some of those prime working age adults will return.

For more see the Oregon Employment Department’s report on LFPR.

Posted by: Josh Lehner | July 27, 2015

Oregon Household Formation, 2015

Just an update on household formation in Oregon. This is particularly of importance for the housing market, as each new household needs a place to live. With vacancy rates low for both rental and ownership properties — particularly in Bend and Portland — strong growth in the number of households translates directly into new home construction (be it single family or multifamily.) Beyond household formation, by all accounts overall population growth is continuing to pick up as well. Much of this due to migration flows returning but clearly births are picking up as well, with a sample size of 1 :) .

HHFormation0515

And yes, I do worry about the pace of home construction relative to demand, particularly from a housing affordability perspective. See the recent post on home prices across the 50 largest MSAs, or the four part series on housing in Portland. Also, see this post for a more complete discussion on household formation in Oregon.

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