On Friday, March 7th I will be part of a panel at the Portland City Club on Equal Pay, Income Inequality and the Minimum Wage. In keeping with our office’s nonpartisan, independent position, I will not be advocating for or against any particular policy position. However I will provide information and facts on where Oregon stands in terms of these topics. What follows is the background information I compiled to support my prepared remarks. Warning: This is lengthy and is designed to be more of a reference piece, so I have put the rest below the fold.
The latest employment report is out and most importantly the annual benchmark revision has been released and shows more jobs added in 2013 than originally thought. This is right inline with our forecast, but is good and better news than the preliminary data indicated. As Employment’s Nick Beleiciks wrote a couple months back: Finally some real growth. As our office is wont to do, now for some graphs!
This first graph is an update comparing recessions in Oregon’s post-WWII history. We’re now just a little bit better than the recovery coming out of the early 1980s recession, but just barely. Based on our office’s latest forecast, Oregon is now just about 1 year away from regaining all of the recessionary job losses. We’re getting there.
In terms of the number of jobs being added, right now the state is at three-quarters throttle. The just more than 40,000 annual pace is effectively on par with the gains seen last decade but a notch below the 1990s gains. The improvement in the pace of recovery in 2013 is clearly evident in the graph as more regions of the state came online. We’re getting there.
While the number of jobs being added is picking up, so too is the growth rate. We’re up to a 2.7% pace in January, over the past year. In a historical context this is still a subdued rate of growth, but we’re up to about a three-quarters throttle rate here as well. We’re getting there.
Right now our baseline forecast calls for about this same rate of growth over the next couple of years. It’s a big improvement over the growth seen during the early stages of recovery but not as strong as the typical expansion in Oregon. Are we too pessimistic? Can job growth reach 3-4%? If even more regions of the state improve (Lane County in particular), and there is a stronger cyclical rate of growth due to, say, household deleveraging is complete and/or corporations invest more, absolutely. However, slow growth coming out a financial crisis is the norm and the demographic trends moving forward will weigh considerably on growth rates as the Baby Boomers retire en masse. Our office is optimistic about the outlook, we just believe these larger forces will hold us back from the full, typical expansion rates of growth. And yes, overall we are getting there.
The housing recovery has clearly stalled out in the past 6 months or so. Permits, starts and sales have all leveled off– or worse. The most likely culprits are the continued strong home price appreciation coupled with the run-up in mortgage rates making financing more difficult as would-be buyers experienced sticker shock. The bad weather has certainly not helped either but only impacts the past couple of months. While in the big picture, as Calculated Risk notes this slowdown is expected to prove temporary, it has clear economic implications, in particular at the regional level in the hardest hit housing metropolitan areas. The 50 worst housing bust metros were rebounding faster than average so far in recovery — including Bend and Medford here in Oregon — but we only have good data at the local level through last June, when things were still rosy.
In terms of housing activity, new permits were growing fastest in these same metros up until last summer when permits decelerated more quickly than the nation overall. Sure, permits can be more noisy but they do eventually translate into actual new construction and economic activity, which is fundamentally what we care about. This slowdown is likely the byproduct of rapidly declining affordability and is more pronounced in the 50 worst housing metros. Not coincidentally, the bulk of these metros are in the West, where recent information from Toll Brothers says they saw the largest declines.
To the extent that construction and related activity falters, and slows down economic growth, that’s when it becomes a much bigger concern. Just as the return of housing boosted our regional economies in 2012 and early 2013, the housing stall has effectively stopped these local recoveries . Should this pattern replicated across the country — at it likely is — and the housing stall persists, it will weigh on the economic outlook provided one pillar of growth in the next few years is a strong housing recovery.
Thankfully, in the big picture this slowdown is likely to prove temporary. The market should settle as buyers become accustomed to higher interest rates — which should also slow price gains, holding affordability somewhat steady — and increased demand resumes from both a stronger economy (more jobs and income) and a pickup in household formation as demographics are in our favor.
The biggest takeaway here is that while our office has long been talking about rural and regional economic recoveries as housing and government turnaround — and we’re certainly seeing that — there are still downside risks involved. The housing recovery should still be multi-year in nature, but there has clearly been at least one hiccup so far and maybe more bumps along the way.
Click here to download the slides in PDF: HousingStall
 Given that the Oregon Employment Department does quarterly benchmarking, this data is more trustworthy. Once BLS revises all metro data in March, many of the housing metros are likely to follow a somewhat similar path.
Posted in Employment, Housing, State Comparisons | Tags: affordability, economic recovery, Employment, Expansion, gains, Growth, hardest hit housing metros, Housing, housing affordability, housing bubble, housing bust, housing forecast, housing market stalls, housing outlook, housing recovery, housing starts forecast, job gains, Metro, metros, Oregon, Permits, Prices, Recovery, starts, Total Nonfarm, U.S., United States
One of the major drivers so far in recovery has been Professional and Business Services as discussed previously. This sector is also expected to outpace all others over the coming decade according to our office’s forecast, plus it carries a lot of weight in the economy as it accounts for 12 percent of all Oregon jobs. Within this employment supersector, the underlying driving force has been Professional and Technical Services — see the Bonus Graph of the Week — which pays nearly 50 percent above the statewide average at $65,000. Needless to say, this industry is a cornerstone to the economic outlook and the Oregon economy moving forward. There’s just one potential problem. In terms of relative size, Oregon’s Professional and Technical Service employment is 20-25% smaller than the national average.
So why does Oregon lag in terms of the relative size of Professional and Technical Services? The following graph shows location quotients by detailed industry for Oregon relative to the nation. A value of 1 means the local employment in that industry is of comparable size to the U.S. average. Oregon has strong employment in the blue bar industries, average concentration in the grey industries and below average employment in the orange industries.
The reason Oregon is below average overall is that many of the orange industries happen to be the largest subsectors; in particular legal, accounting, engineering and computer systems. Oregon strengths in graphic design, veterinary, environmental consulting, architectural and market research are not large enough to offset the relative weakness in those orange industries. Is this a problem for the outlook? By and large, probably not. Many of the orange industries can also be thought of as Big City activities and while Portland ranks as the 24th largest metro, it is not really that big of city. Plus Oregon has a lower share of population in urban areas than the U.S. average. This certainly impacts our industrial structure as seen below.
Pile on top of this that the outlook for the legal industry is not so robust as employment is largely stable or declining with slow growth moving forward and if LSAT test takers are a leading indicator, fewer potential workers in the future. This is not to harp on the legal industry — far from it — but given this larger industry is a reason Oregon lags, it is important to examine to see if this will slow the state down moving forward. The one large subsector that is potentially worrisome, to me at least, is computer system and related, which includes a sizable portion of the state’s software employment. Here, Oregon’s relative employment concentration is 40 percent below the U.S. average. This should be a very high growth industry moving forward — and it already is, look at that growth, 47% since 2007! — but the state is starting from a lower relative base. This is also a growth driver in the High-Tech cluster as well.
Overall, while the top line look at the state’s industrial structure for a large industry like professional services may be a little worrisome, once you dig down into the weeds, the picture does brighten. I do think the state (and the region) is pretty well structured for growth moving forward, which is something I’ve been working on and will publish in the next couple of weeks.
Bonus Graph of the Week
This post will not tell you whether renting or owning is a better financial or lifestyle choice for you, however it will inform you of recent population trends in Oregon. Much like the rest of the nation — as discussed by the National Association of Realtors’ Chief Economist — Oregon has seen the population living in their own homes level off while the population in rental markets has increased strongly in recent years. There are a variety of factors at work here: first prices rose to such a degree people were priced out of the market, in recent years financing has become more difficult to obtain, foreclosures force some previous owners into the rental market, possibly multi-family preference for the younger generations, a lackluster economy which is not providing enough jobs and income for enough people to really afford to purchase homes, and the like.
What the strong growth in the population in rental properties has done is bring the overall rental share back above it’s longer run average, but more inline with the shares seen during the 1990s. It is hard to say what the appropriate rental vs ownership share should be, however in the 90s it was consistently 32-36%. At the the peak of the housing boom, the rental share dipped to 30%, which means there were an “extra” 100-200,000 Oregonians living in ownership properties than would have been the case based on the shares seen in the 1990s.
Growth rates over time clearly show these trends. It is also important to point out that the rental share and rental population increases more in tough economic times, likely due to the combination of the Fed raising interest rates (in previous cycles, but not today) and job loss and lower income making financing difficult.
In terms of the outlook for housing, it certainly remains bright. I think most agree the share of multi-family moving forward will be higher than it has been over the past few decades but single family (and ownership) will make a strong return in the next couple of years. Remember: demographics are actually in housing’s favor in the near term which also bodes well for overall economic growth.
The latest inflation data for Oregon is now available, covering the second half of 2013. One interesting item to note is that while U.S. inflation remains very low (and falling), the Portland-Salem numbers picked up to end the year. The gap between the local and national figures is about as large as it has ever been. Oregon inflation closely follows national trends over the extended horizon, however these quirks and different movements do happen from time to time. Part of the reason is that local inflation exhibits some pro-cyclical movements, as does the state’s economy. That is, Oregon tends to grow more quickly than the average state in expansions and fall further in recessions. Moving forward, expectations are for these two series to converge again in terms of the longer run trajectories. Another potential reason for the diverge is simply small sample sizes for the local data relative to the nation, making our underlying series more volatile.
What follows are updates to our standard inflation graphs including a look at the underlying components of inflation (with updated weights!). This first set of graphs are for the CPI-U which covers all urban consumers — about 88% of the U.S. population.
Without further detailed information (which is not available) it is unknown precisely which portions are driving the divergence between Oregon and U.S. inflation figures. However at the larger component level, it is clearly Transportation (mostly car prices and gas prices), Food & Beverage (both at home and out to eat), Education & Communication (mostly tuition and home phone/internet prices) and Recreation (cable tv, admissions/fees, gyms). Another key factor is rising housing prices (both to buy and rent), which account for about 40 percent of the overall CPI, and are increasing faster in Oregon than nationwide.
CPI-W does not differ dramatically from CPI-U. They measure the same products for prices, but the relative weights between components is different due to different consumption patterns. As such, the broader trends shown above in CPI-U are evident in the CPI-W data as well.
One of Oregon’s economic strengths is the fact that in good times and in bad, people want to live in the state and move here. In particular, the state is able to attract working age, generally educated, individuals and households which increases both the size of the workforce and, in theory, the quality of the workers as well. With an ample supply of skilled labor, Oregon is also an attractive location for firms.
The concern is that in recent years, Oregon’s labor force as fallen . Not just the labor force participation rate like elsewhere across the country , but the actual number of Oregonians with a job or looking for work. With fewer individuals in the labor market, this potentially reduces longer run growth, hurting the state’s economy. Is this trend likely to persist or will it improve?
The good news is it will likely improve and turn around in 2014 and/or 2015. As job opportunities continue to improve, more Oregonians will be drawn into the labor market. The growth rate differential between job growth and labor force growth today is as bad as it has ever been, with a gap of approximately four percentage points. Job growth has historically led labor force growth in Oregon, with a one or two year lead time. This general pattern  was seen following both the severe early 1980s recession in the state and following the dotcom recession in the early 2000s. Today, the state is one year into this improved job growth rate, and the unemployment rate is only about a percentage point higher than normal. As such, expectations are for the labor force to stop declining in the near future, as the economic expansion continues, and workers become harder to find leading to wage gains. The labor force will begin growing again by the end of 2014 or early 2015, based on these historic relationships.
Additional factors influencing the labor force are related to population growth, migration and demographics. Despite staying in the workforce longer than past generations, many aging Baby Boomers are retiring, thus pulling down the labor force. Millenials and young Oregonians, are aging into their prime working years, thus adding to the labor force. A continued influx of migrants should likewise boost the state’s labor force moving forward. Net migration plummeted by more than 30,000 migrants per year during the Great Recession, to a pace of approximately 7,000 per year in 2010 and 2011. In 2013, net migration into Oregon picked up to more than 22,000 migrants. This influx of households into the state is expected to strengthen as the economic recovery continues, further supporting labor force growth in the coming years.
This post has been adapted from the March 2014 Quarterly Economic and Revenue Forecast document released on February 12, 2014. The full document is available on our office’s main website.
 Much of this decline is confined to the past year, for which the data is yet to be officially revised by the Bureau of Labor Statistics. Revisions will be released in March, 2014. While the revisions may be an improvement over the currently published data, they are unlikely to reveal outright labor force growth.
 The vast majority of which can be explained by demographics, as the Baby Boomers age into their retirement years, and young Oregonians attending school more. These trends explain approximately three-quarters, or more, of the labor force participation rate decline.
 In consultation with the University of Oregon, an impulse response function of employment and labor force growth finds that an increase in job growth corresponds with a rise in the labor force. Correspondingly a rise in the labor force, does result in stronger employment, however the relationship is not as strong and has a longer lag time.
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.
As the nationwide economic expansion enters its sixth year, signs continue to emerge that growth will improve relative to the lackluster rates seen during the recovery to date. Much of the improvement seen in the economic landscape thus far was expected, and can be traced to the housing rebound and improvements in state and local government budgets. In recent months, the increasingly optimistic outlook among forecasters and economists is largely attributable to the resolution of the budget impasse in Washington D.C. and the continuation of the strong manufacturing cycle.
The federal budget passed in late 2013 reduces the near-term fiscal drag by half relative to the cuts called for by the sequester plan that had been in place at the time. The budget deal also alleviated some of the uncertainty surrounding the policy environment that was dampening private investment activity. Combined with the strong manufacturing sector, the overall forecast remains relatively bright. Both new manufacturing orders and actual deliveries remain near all-time highs. Bad weather in early 2014 has grounded some manufacturing indicators in the most recent period. However, this will likely prove temporary.
In Oregon, the economy has already experienced an acceleration in job growth in 2013. Similar to the U.S. as a whole, this was largely due to improvement in housing and the public sector. As a result, more regions of the state began adding jobs. The question then becomes: Can the state expect a further increase in the rate of growth?
The likely answer is yes. Early in recovery, the Portland metropolitan area was responsible for nearly all jobs gained statewide. This changed in 2013. Portland continued to add jobs at a steady and healthy rate, however other areas including Bend and Medford began adding jobs as well. In the past few months, Bend and Medford have slowed as the nationwide housing rebound stalled as these metros are among the most heavily influenced by an influx of migrants and housing activity. Statewide growth did not decelerate along with these two areas however, since private sector job gains in the Salem area accelerated strongly to pick up the slack. However, not all regions of the state are on board yet. In particular, Eugene has further room for growth, as do many of the state’s more rural areas. Looking forward growth is likely to pick up a bit further, into the 40,000 jobs per year range, or an annual growth rate of 2.4 percent in 2015
Despite the improved economic outlook, expectations for General Fund revenue growth have remained largely unchanged since the December 2013 quarterly forecast. The additional job growth reflected in the March 2014 forecast will bring with it substantial state tax collections. However, these additional revenues are expected to be largely offset by the impact of recent tax collections, which have been coming in well below expectations.
Despite rising stock market and housing prices, the outlook for taxable investment income remains subdued in the near term. Many Oregonians cashed out capital gains in 2012 in anticipation of federal tax rate increases, leaving fewer gains to be realized for tax purposes going forward. However, if equity markets are able to hold on to much of their recent appreciation, personal income tax payments will grow rapidly once again in April 2015.
Although the revenue outlook remains on track, the 2013-15 biennium is still young, and therefore significant uncertainty remains. Two income tax filing seasons remain between now and the end of the biennium. As such, many risks to the outlook remain. On the upside, if asset markets continue to boom or if Oregon’s traditionally strong migration trends and labor force growth reappear, a short-term spike in revenues remains possible during the 2013-15 budget period. At this point, it would take only about $100 million in unanticipated revenue to trigger the kicker law.
A copy of our presentation slides to the Legislature are below.
Just as we took stock of the recovery across Oregon’s regions the other day, it can be useful to track recovery with other regional economies. Last time we checked in on employment in Oregon and Washington, the recession and recovery in Portland and Seattle were nearly identical. The largest difference was the fact that Washington’s medium sized cities and rural areas did not experience as deep a recession as Oregon’s did and Washington’s were growing back in 2011 and 2012. Today, the opposite is true of areas outside each state’s largest metro. Growth has slowed in Washington’s medium sized metros and rural areas while it has picked up strongly in Oregon’s — particularly Bend and Medford, although Salem has joined the party as well. Seattle has pulled away from Portland’s growth path in the past year — and has one of the lowest unemployment rates for large cities. However, Portland’s growth has been steady and strong. The Portland Metro will likely regain all their recessionary job losses in the next couple of months. As Tim Duy has recently highlighted, Portland’s recession and recovery has been right in the middle of other cities with population about the same size (1.8 – 3.5 million).