Posted by: Josh Lehner | August 27, 2014

Economic and Revenue Forecast, September 2014

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.

The U.S. economic recovery remains intact and may finally be exhibiting signs that growth is picking up as job gains across the country are now on pace to be the strongest since 2000. Oregon’s employment growth has accelerated sharply over the past year and a half. The state is now adding jobs about one percentage point faster than the nation, a differential growth advantage Oregon typically enjoys during economic expansions.

Along with more job opportunities come more individuals in search of employment. In the past nine months, Oregon’s labor force has increased and added back nearly a quarter of the labor force losses it suffered following the financial crisis. As the labor force increases, it places upward pressure on the unemployment rate, but for a good reason. Even with the stronger job gains, the state’s unemployment rate has remained unchanged in 2014.

As the economy continues to improve, an increasing amount of attention is being paid to the Federal Reserve and future path of monetary policy. If economic slack remains, further accommodative monetary policy makes sense, since temporary support has the potential to prevent permanent damage to our productive capacity. Alternatively, if the economy is once again firing on all cylinders, monetary policymakers should turn their attention to fighting inflation rather than supporting growth. A stronger recovery, should it come to fruition, draws the economy closer to full employment and the Fed and monetary policy will take center stage.

ORBeta0914

Even with a fundamentally stronger Oregon economy, fiscal year 2014 came to a close with state government revenues having posted only middling gains over the year. The April 2014 tax filing season was not a good one for states like Oregon that depend heavily upon personal income tax revenues. Year-end personal income tax payments tied to investment income fell sharply in response to higher federal tax rates put in place during 2013. Many Oregonians cashed out capital gains and other investments in 2012 in anticipation of upcoming federal tax rate increases, leaving fewer gains to be realized for tax purposes this year.

Overall, the outlook for General Fund revenues in Oregon remains on track for now, with collections in Fiscal Year 2014 closely matching the Close of Session forecast that was used by the legislature when crafting the 2013-15 budget. Although revenues have mirrored the Close of Session forecast to date, the outlook for revenue growth during the second half of the biennium has become stronger in recent months. A more optimistic economic outlook for Fiscal Year 2015 combined with revenue increases enacted during the 2013 Special Session suggest that revenue growth will accelerate this year, raising tax collections near to the personal income tax kicker threshold.

Kicker0914

Despite increased optimism, the 2013-15 biennium is far from over, and therefore significant uncertainty remains. One more income tax filing season remains between now and the end of the biennium. As such, many risks to the outlook remain. On the upside, if equity markets continue to boom or if wage growth accelerates sharply, a short-term spike in revenues remains possible during the coming months.

The primary downside risk facing the near-term revenue forecast is the uncertain future of the nationwide economic expansion. Should contractionary monetary policy or economic weakness among our trading partners derail the U.S. economy, the strong expected growth in Oregon’s tax collections will not be realized.

Revenue growth in Oregon and other states will face considerable downward pressure over the 10-year extended forecast horizon. As the baby boom population cohort works less and spends less, traditional state tax instruments such as personal income taxes and general sales taxes will become less effective, and revenue growth will fail to match the pace seen in the past.

Posted by: Josh Lehner | August 25, 2014

Graph of the Week: Tobacco in Oregon

Ahead of Wednesday’s quarterly economic and revenue forecast release, I just wanted to post a quick graph on one source of revenue for the state: tobacco. For the past few years our friends over at the Department of Revenue, Research Division have been providing us with more detailed information based on tobacco wholesaler tax forms for non-cigarette products. Cigarettes still dominate tobacco tax revenues across the country — in Oregon cigarette taxes are about 3.5 times as large as other tobacco products last fiscal year — but cigarettes have been in long-run decline in recent decades, while other tobacco products, largely, have been growing, at least as a share of the tobacco industry. Based on this relatively new data (for us, anyway) one can see the diverging trends in tobacco products sold in the state in recent years.

ORTobacco2014The number of cigarette packs sold is down nearly 9 percent since the beginning of 2011 — and the border tax is certainly in play here but suggests that the fundamental, Oregonian decline may be larger. Taxes from cigars are relatively flat, however the trends within this category are diverging. Revenue from low priced, single use cigars (costing about $0.77 or less) are down, while revenue (and the total number) of cigars subject to the maximum tax of $0.50 are up. It is unknown how much of this change is due to product price inflation alone — meaning those lower priced cigars have increased themselves to above the cap — or some other consumer trends/switches in the marketplace.

Lastly, the number of units (cans, tins, etc) of moist snuff are up 18 percent since the start of 2011. Due to data issues, it is hard to tell exactly how smokeless tobacco use has changed over the past decade according to the DHS survey (see pg 9). The Center for Disease Control and Prevention finds that smokeless usage among Oregonians is about the same as the nation, unlike our lower smoking rate. With that being said, rates were increasing during the 2000s, and today’s rates are roughly equivalent to the late 1990s. Regardless, usage rates and certainly units sold are on a different trajectory than cigarettes. In consultation with some of my colleagues across the country, most estimate that OTP revenues – other tobacco products — will increase about 3-4 percent per year. In recent years, out office’s forecasts have been closer to 3 percent, however in light of the continued strength in moist snuff, which accounts for about 75 percent of OTP overall, we are reconsidering our baseline outlook. One issue with this revenue, not unlike other so-called sin taxes, is that usage rates are higher for younger adults (see the CDC report). With the aging of the millenials out of their college years and 20s into their 30s, how exactly these trends change over the coming decade is somewhat of an open question but has implications on the various revenue streams for the public sector.

 

Posted by: Josh Lehner | August 22, 2014

Oregon Wages, Janet Yellen and Inflation

This morning, Janet Yellen delivered her first keynote speech as Chairwoman at the Fed’s annual Jackson Hole symposium .  No real surprises in the speech, however she brought up one very interesting possibility/thought exercise which we will get to in a minute. First, the baseline for Fed policy remains that even as the headline unemployment rate continues to fall, not all is well with the economy. Significant slack remains even as measures like long-term unemployment and part-time for economic reasons are improving, they are still high. Additionally, the rate of hiring by firms and quits by workers are just now returning to levels seen during the depths of the 2001 recession. So, improvements are seen in the data and the economy is getting there, however the recovery is not yet complete. Furthermore, expectations that “next year” will be better have yet to materialize so far.

One area where most economists agree is that in order to see sustained inflation, you need stronger wage gains. So far, wages have kept up with the rate of inflation, but not much more than that. Here in Oregon the average wage, after adjusting for inflation is 1 percent higher today than just before the onset of the Great Recession. Mathematically this works out to an annualized 0.16 percent over the past six years. And that’s the average wage. Median wages are flat or down in real terms in Oregon and median household income across the country remains lower.

ORavgWage2014

This subdued wage growth is exhibit A for most arguing about the slack in the economy. A tight labor market usually results in stronger wage gains as employers have to compete for the best workers. However, when the pool of candidates from which to choose remains large (due to high levels of unemployment) then employers do not need to compete, at least not as much.

This brings me back to Yellen’s speech this morning. She brought up one interesting possibility when it comes to the slow wage gains. She notes that this “may reflect the phenomenon of pent-up wage deflation…” due to downward nominal wage rigidity. That’s a lot of economic speak in a sentence, so let me try to explain in plain English.

Businesses probably would have liked to cut workers’ pay during the recession. However given that nobody likes to see their paycheck/wage decline, business chose to cut their hours back or to layoff some workers. Additionally, given the weak economy, businesses have not had to raise wages to keep their own workers or to attract good employees, given other job opportunities have not been plentiful.

So, do we have any evidence of this? Yes. The Federal Reserve Bank of San Francisco examined wage growth a couple years ago. Here you can see what workers actually received in terms of wage changes, compared with a normal distribution. Relatively few workers saw outright wage cuts, however many more than expected saw zero percent wage growth. This is what downward nominal wage rigidity looks like in practice.

SFFedwages

Let’s return now to the Oregon average wage graph at the beginning. Notice what occurred in the early 1980s. Real average wages in Oregon dropped about 5 percent from the late 1970s to the mid 1980s. What Yellen is saying is one potential possibility is that firms across the U.S. may have preferred to respond like that to the Great Recession. Instead they have given out very small wage gains, however after years of zero to little wage gains, the relative position of firms may actually not be dissimilar. Labor costs are low, labor income as a share of the economy is low, etc, so firms have repositioned themselves without having to cut individual wages outright.

Chair Yellen’s point is that if this is true, then looking at wage growth alone may mask the amount of slack in the economy. We may be closer to full employment than we think. However, given the plethora of other data that indicates there remains slack, this is likely just a thought experiment and a good one for Friday musings. But we should continue to pay attention to these wage trends and on the bright side, if it is true, then stronger wage gains for workers should be coming in the near future, as it means economic slack is smaller than the Fed and most economists currently assume.

Posted by: Josh Lehner | August 19, 2014

County Employment in Oregon, July 2014

The Oregon Employment Department released new and revised county level employment data yesterday. While it brought good news to most counties — particularly in the form of revisions — it also highlights the uneven nature of the recovery in the state. The state’s metropolitan areas were revised upward and are now adding jobs today at nearly the same rate as back in 2006. The state’s nonmetro areas have been adding jobs for the past 2-3 years, and while the rate of growth continues to improve, it is just now about half of that experienced during the housing boom.

The first graph below illustrates these trends. In particular the non-Portland metros in Oregon have really accelerated in the past year. Growth has returned in full force to Bend, Eugene and Salem. Jackson County (Medford) is the state’s median county in terms of jobs regained so far in recovery and is growing in-line to a little bit faster than the typical county. Growth rates in Corvallis are currently low but the county is at or near an all-time high in employment and fully regained all its recessionary losses.

MetroNonmetro_0714png

Where the differences are more apparent is at the individual county level. This graph shows Great Recession job losses along the horizontal axis (how far a county fell), and then the share of all those lost jobs that have been regained as of last month on the vertical axis. By and large, the areas of the state that took an above average hit during the recession, have added back the fewest share of jobs – Deschutes being the outlier. Conversely, the areas of the state that took an average to below average hit, have regained the most jobs.

County_0714

In terms of regional economies within the state, only the Columbia Gorge and Portland MSA have fully regained their pre-recession levels of employment. Thus it is no surprise to see many of these counties at or near the 100% line. As the Willamette Valley’s growth has accelerated recently, the next tier of counties are many of the state’s metropolitan areas. The regions that continue to experience slow gains are the smaller, more rural counties of the state, particularly in Southern and Eastern Oregon. As our office began highlighting back in 2011, much of the regional disparities can be largely attributed to housing and government — two industries important for smaller and rural areas and two that have been particularly hard hit since 2007. Additionally, growth across the U.S. has been strongest among the largest metropolitan areas, however as housing and government continue to improve, more areas are participating in the recovery.

In each quarterly forecast document, our office focuses on one or two regional economies across the state. See here for the latest from each region. This quarter — released next Wednesday — we will be updating the Columbia Gorge and Central Oregon regions. Both of which are good news stories today. The Gorge has outperformed all other areas of the state and Central Oregon (Bend in particular) is currently growing extremely fast in the past two years, following 3 years of essentially no growth from 2009-2012. Stay tuned for more.

Posted by: Josh Lehner | August 14, 2014

Graph of the Week: Squaring Fed Policy

With the immediate risk of recession appearing to be small — see the WSJ Economic Forecasting Survey at 12 percent and the Philly Fed’s Survey of Professional Forecasters more like 8 percent — much discussion these days focuses on Fed policy. Most economists and financial market types expect the Federal Reserve to begin raising rates in the middle of next year. However as Tim Duy writes, the exact timing probably does not matter as much as the pace of tightening once it begins. Too slow and inflation may take off. Too fast and the economic recovery, even as weak as it has been, could be choked off. Provided the economy continues to improve and even accelerates somewhat, the Fed will need to manage its exit strategy carefully in order to balance these risks. Arguably the most important part here is the not only the continuation of the recovery but acceleration or a pick up in growth, which brings us to our Graph of the Week

The following compares the Fed’s own forecasts for nominal GDP (actually real GDP + PCE) on a 2 year ahead basis. Most forecasters, including the Fed, have performed relatively well on a 1 year ahead basis but keep calling for an improvement “next year” which has largely not materialized at the national level. Some states, such as Oregon, have seen acceleration in job growth but others have decelerated at the same time leaving U.S. growth at consistent rates.2YrNGDP_0614So what does this mean for policy and the outlook? Well, the Fed’s not alone here in believing 2015 will be better. About half of the Philly Fed survey and also the Blue Chip forecasters expected 2015 NGDP to be 5 percent or stronger, while the WSJ survey shows 60 percent of respondents think this will occur. Certainly a mild improvement like this is not out of the question, however to the extent that wage growth remains subdued and the economic data does not accelerate, it points more toward a slow pace of tightening, if/once it begins. Of course as economic conditions change, one would expect/hope policymakers react accordingly  — both to the up and downside.

Posted by: Josh Lehner | August 11, 2014

Unemployment Insurance Update, July 2014

New claims for unemployment insurance at at or near all-time lows in both Oregon and the U.S. This is encouraging in that it shows the level of job loss is currently at very low rates, and effectively as low as during the past expansions. In other words, if you have a job, the probability of losing it is very low today. Of course this does not take into account the continued high levels of the long-term unemployed, or a lower LFPR, which have been detailed previously.

UIClaims_0614

As such, the level of unemployment insurance benefits paid out is back down to pre-Great Recession levels. Unfortunately the exhaustion rate — the share of Oregonians who start receiving benefits and reach the end of program without leaving, i.e. do not find a job — is still high, although it is about half-way back.UIBenfits_0714

With relatively low levels of job loss, low levels of benefits being paid out and the expiration of the extended benefits at the beginning of the year, the recipiency rate in Oregon is now 34 percent. This means that 1 in 3 unemployed Oregonians are currently receiving benefits and 2 in 3 unemployed Oregonians are not.

UIRecRate_14q1

The reason for this is that most unemployed Oregonians today are not job losers (the vast majority of benefit recipients). Most are entrants into the labor market and therefore not eligible for benefits. This is largely a good thing. It indicates that the number of Oregonians losing jobs is lower. It also shows that more Oregonians are looking for work — about 10,000 more in the past 8 months. As the job market continues to improve, it will draw more workers back into the labor force, providing some cyclical rebound.

UnempReason0614

Of course, all of the above speak to the rate and level of job loss in Oregon, which has not been the primary economic issue for a number of years. The problem is the hiring rate. Job growth has accelerated in Oregon unlike the vast majority of the country. However, the rate of growth is still three-quarters throttle relative to historical expansions. Oregon is getting there, however we are still digging out from the Great Recession.

Mark (and Kanhaiya) are working on a migration study, which Mark will present at this year’s Oregon Economic Forum in October. There will be lots of great information not only on historical trends but also looking forward, what can the state and regional economies expect in terms of population and economic growth. One byproduct of this research is looking at worker flows within local communities. A family may move to Portland or Salem of the Coast, but that does not mean that they necessarily work in the same county they live in. There are can be substantial cross border flows both into and out of counties and communities in Oregon. What we have tried to do here is categorize counties based on these patterns.

  • Boardroom: Lots of local jobs relative to population, resulting in substantial inflow of workers from a different county
  • Melting Pot: Large commuting flows in both directions relative to population; county is both a job hub and residential community
  • Autonomous: Small commuting flows in both directions relative to population; most county residents work within the county and not many commuting in
  • Bedroom: Relatively few local jobs, resulting in substantial outflow of workers into a different county

OregonCommuteCounties

A few key takeaways from the map. Washington County has the second highest employment count in the state, however it is classified as a melting pot county. Even though Washington County, on net, has approximately the same number of local jobs as employed residents, there is substantial commuting in each direction — about 80,000 each way. Malheur County in Eastern Oregon is a boardroom county given it has more jobs than employed residents, which results in a large influx of (mostly) Idahoans. The state’s bedroom counties are largely a part of, or adjacent to larger metropolitan areas, where job opportunities may be more plentiful. In each of these counties, there is a larger number of employed residents than the number of local jobs. Lastly, 15 of the state’s 36 counties can be classified as autonomous, meaning that most residents work in their home county (about 94 percent, compared with a 75 percent statewide average). The typical autonomous county in Oregon only has gross commuting flows of 12 percent or less — meaning the if you add up the number of workers commuting in and those commuting out, as a share of the local job base, it is just 1 in 8 or 1 in 9 workers moving in either direction. This last group — Oregon’s large share of autonomous counties — distinguishes the state a bit from our neighbors, as seen below.

NWWorkerFLows

Most counties in Idaho or Washington are more of an either/or type, with relatively few that are balanced when it comes to net workers as a share of local jobs. This is a slightly different measure than used above, but a similar concept. Potentially, this indicates a few different things. Among them:

  • Population distribution, or distance between cities
  • Size of counties. Oregon is the largest of the three states (in sq miles) but also has the fewest number of counties. The average Oregon county is 40-50 percent larger than our NW neighbors.
  • Industry mix (seasonal employment; retail, health care, professional services, etc, each may have different commuting patterns)
  • Home price differential
  • Transportation infrastructure (and access)
  • Border effects
Posted by: Josh Lehner | July 30, 2014

Graph of the Week: Unemployment and Job Polarization

Many discussions on the economy revolve around employment (industries, job polarization, etc) or the unemployment rate (with some discussion on short- vs long-term unemployed) but rarely do we put these two together. This is largely due to data and sample size concerns, which can make extracting the signal from the noise challenging at the state level. With that being said, recent work from our office resulted in detailed, occupational unemployment rates — used in discussing our OED friends’ job vacancy survey — but these exact figures do need to be taken with a grain of salt, even if the general patterns are true.

The graph tries to help answer the question of who are the unemployed in Oregon. It compares the distribution of unemployed Oregonians across occupations, both short- and long-term, with the distribution of employment across occupations. These figures are akin to location quotients. Values greater than 1 indicate that workers from these occupations represent a disproportionately larger share of the unemployed than the employed. For example let’s take Food Preparation, one of the red dots. Food Prep workers account for 5.5 percent of all employed workers, however they account for nearly 12 percent of the short-term unemployed and just over 10 percent of the long-term unemployed (looking for work 6 months or longer). Using the location quotient methodology, this places the Food Prep occupation at nearly 2,2 on the graph indicating that Food Prep workers, effectively, comprise twice the amount of unemployed Oregonians relative to employed Oregonians.

OccUnempLQ_0314

There are a number of interesting patterns that stand out. Among them: traditional, blue-collar occupations are high on both short- and long-term unemployment; many occupations with high rates of employee turnover also have high short-term unemployment, which is to be expected; occupations requiring college degrees are nearly all low among the long-term unemployed and most low among short-term as well. One additional point I will make is that Construction has seen considerable improvement in recent years. It is still red, however it used to much further out. This is because employment is increasing and unemployment decreasing among these workers (a win-win, not just do to the unemployed dropping out of the labor force).

Simplifying the graph further and looking at it through the job polarization lens yields the Bonus Graph of the Week.

PolarizationLQ_0314

Here the pattern is very clear. High-wage occupations have low levels of unemployment, middle-wage occupations are about what one would expect, relative to employment, while low-wage occupations have disproportionately high levels of unemployment.

Posted by: Josh Lehner | July 28, 2014

U.S. Growth, Update on the States

Besides just stronger national growth, another way for top line U.S. job figures to improve is for more states or regions to share in the recovery. Back in December I noted that the Northeast and Midwest were growing much faster than their housing boom rates, while the South and West were lagging (in particular given low population growth and the housing bust). Expectations were that the South and West would accelerate moving forward, but in order for national figures to improve the Northeast and Midwest would need to hold onto those stronger rates of growth. So how are things looking today? Well, the acceleration has come along the West Coast and in the South but much of the Northeast and Midwest has slowed down. Map of Census Regions and Divisions.

RegGrowth0614

This leaves us with a national job growth figure that is slightly stronger so far in 2014 than in recent years but much of the movement in the U.S. employment picture is happening below the surface, down at the state and county level. As seen below, the number of states experiencing job growth of 1 or 2 or 3% hasn’t really changed. However this is due to the shifting nature of job growth across the country. The only states to see sustained acceleration in job growth (improvements of 1 percentage point or more, relative to 2011-12 rates) are Delaware, Florida, Nevada and Oregon. The latter three of which were hard hit by the housing boom and bust and as housing rebounded in 2013, growth picked up. However these states’ improvement was offset by deceleration of 1 percentage point or more in Alaska, Michigan, N Dakota and Virginia. As evidenced in the graph below, the geographic footprint of the recovery really is not broad based with just a dozen or so states experiencing job growth of 2% or more.

StateShare_0614However, the one portion seeing stronger rates of growth, and acceleration are the large metropolitan areas, see here for more details.

MetroSize2013

The questions becomes, whether or not we expect the medium, small and rural economies to pick up and whether or not the large metros can continue to grow at 2% or more in terms of employment. I think the answers are yes, and yes, from a fundamental point of view — ignoring potential macroeconomic shocks. As housing and government continue to improve (the two large weights on the recovery) this will help medium, smaller and rural economies as these industries play a disproportionately large role here, relative to bigger cities. In terms of the large metros, many of those good economic things you hear about — agglomeration effects, knowledge spillovers, clustering, etc. — happen in specific locations, which are usually bigger cities. These impacts, along with the continued urbanization of the population result in a relatively bright outlook for the country’s largest metros.

Posted by: Josh Lehner | July 24, 2014

Oregon Spider Chart, June 2014

This Graph of the Week is an update on the Oregon spider chart. See here for more on the construction of the graph which follows the pioneering work by the Atlanta Fed at the national level.

As a reminder the chart tracks progress across a wide variety of labor market indicators. As each measure improves from its recessionary trough (the red dot, 0%), the line moves outward from the center. Once the measure reaches the gray, dotted line, that indicates it has fully regained the level (or rate) last seen prior to the Great Recession.

The two sentence takeaway is: Labor market leading indicators continue to improve and over the past year employer behavior has picked up nicely. However, employee confidence and utilization measures — the feel good nature of the economy — are still just about half-way back to pre-recession levels.

OregonSpider0614

One minor tweak this round is the substitution of Marginally Attached Workers for U-6. U-6 is the combination of U-3, MAW and PT for Economic Reasons. Showing both of these additional components that make up U-6 provides a bit more detail to the underlying currents in the labor market. As such, one can see that PT for Economic Reasons has declined (improved) substantially over the past year (really the past 6 months), while those MAW have increased. We know that the decline in the unemployment rate has not been entirely for good reasons, with the labor force shrinking, some of these dropouts are likely showing up in the larger number of MAW (those who want a job but have not looked recently). So even as U-6 falls, there are both good reasons (fewer PT for Economic Reasons) and bad (more MAW).

Older Posts »

Categories

Follow

Get every new post delivered to your Inbox.

Join 284 other followers