Posted by: Josh Lehner | March 31, 2015

Strong Job Growth and Forecaster Bias

The good economic news continues to roll in. “[Oregon is] getting close to full-throttle economic growth,” as I recently told the Seattle Times. The reasons are the strong job gains and accompanying decline in the unemployment rate in the past few months. Furthermore, wage growth is stronger locally as well and migration trends have returned. As these economic gains continue to spread out across the state and across industries, Oregon’s recovery has turned into a nearly full-blown expansion. Ahead of our forecast advisory meetings, I just wanted to highlight a few thoughts on the recent numbers and one big issue our office is wrestling with.

First, these graphs help put the recent job numbers in comparison to past cycles. In absolute terms, 55,000 jobs over the past year is just about as strong has Oregon has ever added jobs in expansion. It has taken a few years of steady acceleration to reach this point, however job growth today is quite strong. Of course in percentage terms, growth rates are lower today because the economy and overall population is larger. However, given demographic trends, job growth of just over 3 percent is not only on par with the housing boom, but effectively full-throttle growth.


This is all good news for the Oregon economy. However, the data flow — to the extent that it’s accurate — is better than our office’s forecast. This is important, not just for selfish reasons that we want to be right, but because the upcoming forecast sets the revenue number for the 2015-17 biennium (and the kicker.) We need to get a handle on the underlying economy, so we can produce the best forecast possible.

There is also a fine line for forecasters between “sticking to your guns” and “rooting for your forecast.” Our office needs to make sure we come down on the right side of that line. In recent years, our office has not fundamentally altered the outlook and luckily we has also largely been accurate. As we approach the May forecast, with job numbers better than expected, what do we do with the outlook? It may or may not be too simplistic to simply answer “raise the forecast.” What if the stronger job growth is just a blip — notice the up and down cycle in growth rates even at the top of the housing boom — or worse yet, what if they are revised away? At the industry level, when does the manufacturing cycle end? These are the questions we will try to answer in our advisory meetings and have big implications.


Which brings me to the last point. There usually are a few funky aspects to the job reports in real time. This is certainly not the Employment Department’s fault, and it is not even BLS’ fault really (they’re the ones doing the survey and crunching the numbers.) It is just the nature of survey data and trying to weight it properly to reflect the whole economy. Doing this on a monthly basis, in real time is challenging. That’s why our office relies much more on the larger but less timely QCEW data, along with the monthly withholdings out of Oregonian paychecks, and we wait for the revisions to the monthly employment data. Case in point being the goofy seasonal factors last year — see June and December in particular. After revisions, those data make a lot more sense today. However one can identify these issues in real time. Our office has not put the latest job numbers through its paces just yet, but can spot a potential issue with the latest unemployment rate figures.JobGrowthURDropFeb15Over the past two months, Oregon’s unemployment rate has dropped 0.9 percentage points. Never before in Oregon’s recorded history has the unemployment rate declined by this large of a degree. Also, the latest, annual revisions to this data series went through Dec ’14. Most likely it is not a coincidence that the outlier data points also happen to be the ones that have not been benchmarked or revised. This, like the seasonal factors before, speak to underlying data issues, not the underlying economy.

To bring this full circle, it is possible that Oregon did experience record job growth a couple months ago and now record declines in the unemployment rate. That is a possibility and has a non-zero probability. However, it is also possible that the underlying data is very good, as it has been in the past year or so, but maybe not quite record good. It serves no one well for our office to not change the forecast because we are rooting for our current outlook. And, we are certainly not opposed to raising the forecast — again, our job is to be right, whatever the outlook — but we want to make sure it is for sustainable, economic reasons. Not purely because the last couple of months of data is above forecast. To be sure, there are clear signs for both near-term optimism and longer-term pessimism for the economy. I will post some thoughts on these issues as our advisory meetings get closer.

Posted by: Josh Lehner | March 25, 2015

Update on Job Polarization

This is an update on job polarization in the U.S. and across states, based on the new occupational data BLS just released on Wednesday. It is important to point out that the process of job polarization is best seen through the occupational lens, not via industries as some other studies use. The reason being is that technological change impacts specific job types and responsibilities, which cut across all industries. Possibly the best example is office and administrative support workers. No office today resembles Mad Men. The ratio of workers to admin support staff has never been larger than it is today. Of course this is not to say that today’s admin workers are not valuable, it’s just that with technological change they’ve never been more efficient and productive. They are able to carry out the workload of multiple employees a generation ago. Nearly all firms hire admin workers, so examining trends by industry would miss such a fundamental shift in employment and job polarization.

By and large, 2014 continued the same general trends with growth disproportionately concentrated among the high- and low-wage occupations. As I wrote previously, “this, by definition, is job polarization.” USPolarization1014

The good news is that middle-wage jobs are starting to make a comeback. 2014 was the best year for these jobs since 2005, both in the absolute number of gains and in terms of growth rates. Much of the improvement can be tied to construction workers, however 8 of the 11 broad occupational groups within middle-wage jobs picked up in 2014, including teachers and admin support, while production and transportation remained strong. While economists debate the semantics of the manufacturing renaissance, production employment is clearly on the mend.

That being said, middle-wage jobs still trail the top and bottom. Specifically, while high- and low-wage jobs have fully regained their recessionary losses and never been more plentiful, middle-wage jobs have regained just 43 percent of their losses and remain 4.6 percent below their peak levels. A majority of Americans are still employed in these occupations (62 percent), and while middle-wage jobs will continue to increase in aggregate, their share of the labor market is shrinking. See here for more on the middle-wage job outlook.

GrowthbyWageUS0514It can be important to point out that education, at least in the form of a 4 year degree or higher, is not the be-all and end-all of a good paying job. Yes, a college degree is one’s best or clearest path to a high-wage occupation, however there is substantial variation within these groups when it comes to both educational attainment and wages. Construction workers and installation, maintenance and repair workers earn the same amount as community service workers and teachers, even as formal education requirements or norms could not be more different. The reason is that both types are skilled workers, however in one set, the training takes place on the job while in the other, the training takes place in the classroom. See the addendum for further educational attainment breakouts.


Lastly, the map below compares states in terms of “good polarization,” which I define to be high- and middle-wage job growth. This leaves to the side low-wage jobs, which most analysts and policymakers do not focus on in terms of broader economic development. The top two quintiles are above the U.S. average while the bottom three quintiles are below the U.S. average.

GoodPolarizationMap1014I will have more on state-by-state job polarization in the near future. See the Federal Reserve Bank of New York and/or our office’s previous report on job polarization in Oregon for a good start on state level analysis, for those interested.

Addendum: Educational Attainment by Occupation


Posted by: Josh Lehner | March 23, 2015

Portland Housing Update. Are things OK?

The Portland Business Journal ran a special edition on residential real estate in last week’s print edition. I was asked for my thoughts on the market, which are similar to our previous work, and reproduced below. If you can get a copy, there are additional comments and insights from local economists and housing industry experts.

First, prices are booming and and the median sale price, as reported by RMLS, is effectively back to an all-time high. Rents have never been higher. However these gains are driven by the fact that housing demand and household formation have returned to normal but the number of homes for sale or rent, both existing and new, have not. From this high level perspective it’s simple supply and demand. Demand is up considerably from the depths of the Great Recession while housing inventory is not. That’s a clear recipe for rising prices.


While new construction today is substantially higher than a few years ago, the actual number of housing permits issued in 2013 and 2014 is only roughly in-line with population gains to the region. Portland is not currently overbuilding relative to demand. In fact, even with decent numbers in the past two years, the region still likely has a housing shortfall due to many years of underbuilding with the Great Recession, bad economy and tight credit conditions for both buyers and developers.


To me, housing affordability is the biggest issue today. We need to ensure that we have enough homes, townhomes, apartments and the like to meet the demands and needs of our growing population. And we need these housing units to be relatively affordable, so that households do not have to squeeze their budgets to such a degree that it impacts their ability to meet their non-housing needs. Worst case scenario would be that housing costs become too high, pushing residents out of the region to more affordable areas. Housing affordability issues apply across the income spectrum, not just to those at the lowest levels.

In particular, it is interesting to see how low interest rates impact housing affordability. Right now home prices relative to incomes are about two-thirds of the way back to the bubble era and considerably higher than in decades past. However, due to low interest rates the financing costs of carrying a mortgage and property taxes remains low and in-line with the 1990s or early 2000s. It’s this bottom line look of actual monthly (or annual) ownership costs that buyers ultimately care about, both relative to income and relative to their expectations of home price appreciation. I am interested to see how home prices react, or don’t, to higher interest rates should the Federal Reserve start to raise them later this year, as expected.

HousingAffordabilityAs the housing market continues its slow march toward normalization, I expect to see the same patterns as in recent years but a little less pronounced. Population growth and housing demand should remain strong, along with a much stronger economy. While the combination of new rental apartments and more new home listings have yet to put a noticeable dent in price growth, I expect that to change in the next year or two. Prices will moderate.


Posted by: Josh Lehner | March 19, 2015

Bend is Booming

I will have more regional coverage in the next few weeks, but for today I just wanted to highlight the strength of recovery taking place in Bend and Deschutes County. Simply put, Bend is booming. Just like it always does in expansion. 6 percent job growth has been the typical growth rate in each of the past 4 recoveries and expansions.

What is fascinating is that Bend almost beat the state out of the Great Recession hole, even with suffering nearly twice the job losses. In the office, Mark and I were spitballing a year or two ago, trying to extrapolate these trends and guess whether or not Bend would recover first. It was close and in actuality, Bend ends up just a hair behind, but closing the gap quickly.

BendEmploymentWhile we weren’t expecting 6+ percent job growth, in all honesty, we were expecting places like Bend and Medford to come back strongly as the recovery continued and migration flows in particular returned. Medford hasn’t come back quite as strong, but Bend certainly has.

What’s interesting here is that population growth in Central Oregon more broadly is back to a pretty typical year, but housing starts haven’t quite yet. This result, much like in other popular metro areas (Portland, Seattle, et al.) has driven home prices higher. Home price data from both FHFA and Zillow show prices are, amazingly, about halfway back to bubble era levels. That’s not to say it’s another bubble, this is more or less simple supply and demand at work.


Once again, Bend is leading the state in growth and booming. Stay tuned for more regional work in the near future.

Posted by: Josh Lehner | March 13, 2015

Start-Ups and New Business Formation

While the plethora of new high-technology firms draws the media headlines, you may or may not know that entrepreneurship overall and start-ups in both Oregon and nationwide have been declining for a long time. The Great Recession exacerbated these trends, which have yet to rebound so far in recovery. Researchers have been trying to tackle the reasons for these changes in the past decade and have yet to reach a definitive consensus. This is a big topic with many facets and tangents to explore. What follows is an initial, wide ranging look from an Oregon perspective. Scroll through the slides at the end for a more complete look.

Click to read the new report

Posted by: Josh Lehner | March 10, 2015

In the News: La Center Casino

The Columbian is reporting that the Cowlitz Tribe now has a reservation in La Center, Wash. after a decade-long legal battle. I do not know enough about the legal process, taking land in trust, potential challenges and the like to comment on the specifics of it. However, from a state revenue perspective the impact on Oregon video lottery sales is likely to be similar to the previously proposed Wood Village, Ore. casino. Of course the Wood Village proposals were voted down decidedly by Oregonians (68% No in 2010, 72% No in 2012) but Oregonians do not get to vote on the La Center casino, obviously. Three points for now.

First, the Portland market is one of the largest untapped gambling markets in the U.S. in terms of casinos. The nearest casino is Spirit Mountain, about an hour and fifteen minutes from downtown Portland, while the Indian Head Casino near Madras is about two hours away. Given the various proposals over the years, there is a clear desire on behalf of casino owners and operators to get as close as possible to Portland to gain a lion’s share of the gaming dollars. Of course that does not mean Portland is devoid of gaming today. The State see significant video lottery sales in the region, in addition to the various (illegal) card rooms and so-called gray machines.

Two, how will a casino just on the northern edge of the country’s 24th largest metropolitan area impact video lottery sales? At this time, it’s hard to say. Proponents of the Wood Village casino estimated the impact would be a loss of 6 or 7 percent (if memory serves, no documentation), which is smaller than the opponents estimate of about 17 percent. While La Center may be a bit further away geographically from Oregonians, the share of video lottery sales within an hour’s drive time of the site is nearly identical to the Wood Village site. The data is a little old (FY2011) and I am using zip code averages here, but the patterns today are very similar, of course.

LotterySalesCasinoSitesFinally, the gaming industry is intensely competitive. Be it new machines, online gaming, illegal operations or brand new casinos nearby, existing facilities are constantly under attack from other venues and opportunities for customer’s discretionary spending. Beyond the general trends in sales across the country, there is one item that really stood out in our office’s report on the gaming industry. While a brand new casino can do well for a year or three, sales do slow and even decline. At least in part due to more competition and also the novelty factor of something being new going away. Our report highlighted Pennsylvania where even brand new casinos in big metropolitan areas like Philadelphia and Pittsburgh have seen this pattern. Expectations would be for similar trends in sales for a new casino in the Portland MSA.


This will certainly be a big topic of discussion in our upcoming forecast meetings with Lottery and our advisory groups. Should the La Center casino be built, it will certainly have an impact on our forecast. How big and the exact timing of the impact are still TBD.

Posted by: Josh Lehner | March 6, 2015

Graph of the Week: Estate Taxes

Death and taxes, right? Literally, in this case. In all seriousness, Oregon’s estate and inheritance tax is one that our office has trouble with in recent years. We did not initially build in a large enough drop in revenues due to the housing market collapse (many households that are impacted by the estate tax still have a sizable portion of their wealth tied up in the home itself.) In recent months our office has been having errors in the other direction as revenues are coming in above forecast (although still below the previous Close of Session outlook.)


There are two big, competing issues for the outlook in this case, which is something we routinely discuss with our revenue advisory committee. On one hand is the fundamental growth in underlying asset prices (home, equities, etc.) couple with an aging population. This strongly suggest estate tax revenues will grow briskly over the coming decade or two. However on the other hand, our advisors point that accountants and estate planners are much better today at planning and managing around these life events, inheritances and the like. From this view, expectations are that revenues will be relatively constant moving forward, or show little growth. This is not because estates are less valuable and not because people are not paying taxes, but because households are better able to manage the tax implications of larger estates. For the record, our office has a moderate growth outlook for estate tax collections moving forward, which reflects both of these competing trends.

Posted by: Josh Lehner | March 3, 2015

Populations in Need: Poverty and SNAP

Oregon’s underlying economy is more volatile than the typical state. We do worse in downturns (larger job losses, higher unemployment, higher populations in need of assistance) but we also do better in expansions. The good news is that the economy spends a lot more years in expansion than it does in recession and on net, Oregon comes out ahead of the typical state over an extended period. The 2000s are somewhat of an exception given that the decade was book-ended by recessions that hit Oregon harder than most places given our concentration in high-tech manufacturing and the housing bubble. Nevertheless, Oregon today is growing significantly faster than the typical state and making up lost ground. We’ve closed about 2/3rds of the employment gap between Oregon and the typical state, and not quite half of the poverty rate gap, although we’re making progress there as well.

Today the Census Bureau released a new report on Supplemental Nutrition Assistance Program (SNAP) use for 2013. As has been the case for quite some time now, Oregon ranks really high in terms of the program’s use. While SNAP usage is certainly a measure of the state of the economy and the size of the population in need of assistance, it’s also subject to administrative/bureaucratic/governmental policy decisions that impact eligibility or redetermination of benefits and the like. Our office (Mark) chairs a DHS/OHA forecast oversight committee and in discussions with our counterparts in those agencies, this is certainly something that has come up. For lack of better words and these are my words, Oregon is successful in not only enrolling eligible individuals in SNAP but also keeping them enrolled while eligible. This may or may not be the case in other states. One big potential issue is administrative/paperwork issues that can make it more or less challenging for individuals to stay enrolled in the program. E.g. throw up a bunch of administrative hurdles and participation in the program can fall. I cannot confirm this occurs elsewhere, however one easy comparison I like to make is the relationship between the poverty rate and the SNAP rate.

SNAP2013StateIt’s clear that Oregon is an outlier. While the state is tied with Mississippi for the highest SNAP usage rate, Oregon has the 19th highest poverty rate. The other states with similar poverty rates as Oregon (16-17%) have an average SNAP rate of just 13.9 percent compared with Oregon’s 19.8 percent. Portland is in a similar situation relative to the other largest metros in the country.

SNAP2013MSAWhile it is certainly harder to say what the optimal level of benefits should be in the bigger picture, Oregon does appear to be successful at providing SNAP benefits to those in need. Overall there should be a clear relationship between poverty and SNAP given the broad eligibility requirements, and there is. However with subsets of the population and various ifs and ors in the specifics of eligibility across states and the administrative requirements of participants, differences do materialize.

Posted by: Josh Lehner | February 27, 2015

Tax Structure and Volatility

During each of the past two recessions, Oregon’s general fund revenues dropped twice as much as in the typical state. In fact only Alaska and its reliance on oil (see: oil prices) saw considerably larger losses each time. Similar states to Oregon in terms of its economy and/or tax structure, like California, Connecticut, Idaho and Massachusetts, likewise see large revenue swings along with the business cycle. No other states have seen similar or worse revenue swings than these.

So it came as a surprise when a recent Pew report on state revenues found that Oregon’s tax system is not, in fact, that much more volatile than the typical state. However, past experiences have shown that both Oregon’s economy and tax system are indeed volatile. The differences arise at least partially in the methodology and calculations. For example, Pew examines each revenue source individually instead of comparing state general funds. Here, one can see a very large issue in that Oregon’s personal income tax really is not that much more volatile than the typical state, however our reliance on the tax makes our overall general fund volatile. More on this below. Making accurate state comparisons is always challenging since each one taxes certain items or activities at different rates and the like. However, similar to a previous Pew report, the specifics of the analysis do impact the interpretation for Oregon.CensusGFgrowth

As shown above, Oregon’s overall tax structure (using the same data over the same time period as Pew) is more volatile than the typical state. The one surprising finding in the Pew report that does turn out to be true however, is that Oregon’s personal income tax revenue is not much more volatile than the typical state. Initially I thought that would not be the case, particularly given the state’s economy is more volatile. However, it is true. So how then is Oregon’s overall volatility higher? It has to do with our reliance on the income tax; no other state comes close. Additionally, many of the states that have higher revenue volatility overall rely on severance taxes and/or are energy producers.CensusGFVolatilityPITSo this means Oregon needs to institute a sales tax, right? Well, maybe. If you want to shift the tax burden from income to consumption, then yes. Or if the primary goal is revenue stability, then yes. Work from the Legislative Revenue Office has shown that diversifying the tax base (i.e. put in a sales tax, lower income taxes) does result in more stable year-to-year fluctuations. While our office has no official position on the tax system (we are tasked with forecasting revenues), we do try to provide some broader points for discussion.

First is the issue of risk versus return. Previously we dove deep into comparing Oregon’s income tax with Washington’s sales tax. Those results still stand. In the typical year, income taxes generate more revenue than do sales taxes. (Of course some see this as a drawback, not a benefit.) However with a greater return does come more volatility and year-to-year fluctuations. This creates challenges not only for forecasters, but more importantly it creates management issues for the Governor and Legislature trying to draft budgets and provide services.

Second there is the broader issue of an eroding tax base, something our office previously discussed as well. With an aging demography and with a larger share of purchases shifting from goods to services (which are not generally taxed to the same degree) both income and sales tax effectiveness is and will continue to erode. Grandma has less current income in retirement than during her working years, which generates less income tax revenue. So she spends less overall (lower sales taxes) and what she does spend money on is largely not taxed (e.g. food and medical care.) Even as both major tax instruments face pressure over the extended horizon, sales taxes began eroding first due to the shift in consumption from goods to services and online sales, and sales taxes have certainly eroded further in the past decade.

CensusPITSalesCompNone of this is to say that instituting a sales tax is bad policy by itself. There are some really big benefits as well, such as exporting the tax to visitors. Rather, our office tries to bring a broader discussion to light and for individuals and interest groups to realize some of the trade-offs that would occur.

Posted by: Josh Lehner | February 19, 2015

Economic and Revenue Forecast, March 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.

With each passing month, it is becoming more evident that the U.S. economy is finally emerging from the aftermath of the Great Recession and financial crisis. In particular, the labor market is reaching near-boom levels of job growth. Such gains are not only strong enough to keep up with population growth but are also drawing more workers into the labor force, as these individuals seek out one of the now-plentiful job openings. The combination of job growth acceleration, solid economic output and the impact from substantially lower energy prices has the typical economic forecaster more optimistic today than any other time in recent years. Taking stock of 2014 reveals a surprisingly solid economic year. 2015 is expected to be even better. While the longer-term growth prospects of the economy remain below previous expansions, primarily due to the aging workforce, it does not rule out a year or three of good growth in the near term.

While the nation’s labor market acceleration began only recently, Oregon’s recovery picked up considerably in 2013. The stronger pace of growth was maintained throughout 2014 and is expected to continue this year and next before demographics weigh on longer-run growth. Today, Oregon still lags the typical state relative to pre-Great Recession levels. However Oregon has regained its traditional growth advantage in expansion and is making up lost ground. More importantly, signs of a deeper labor market recovery are evident in the state. Unlike in the nation as a whole, strong job growth is bringing real wage gains to Oregon. Not only is the labor force growing with more Oregonians looking for work, but the labor force participation rate itself increased throughout 2014. The key question is whether or not Oregon can take another step up in growth, to rates seen during the typical Oregon expansion. All told, Oregon is approximately halfway back to full employment with the current pace of improvement considerably faster than the nation as a whole.


Oregon’s General Fund revenues have grown at a rapid pace in recent months driven by a healthy job market together with solid growth in taxable investments and business income. In particular, advance payments of 2014 personal income taxes have been very strong in recent weeks, outstripping the December forecast. These large advanced tax payments suggest that taxpayers expect to face large tax liabilities when they file in April.

Despite strong recent collections, overall General Fund revenues still closely match the Close of Session forecast that was used by the legislature when crafting the 2013-15 state budget. Although revenues have mirrored the Close of Session forecast to date, the end of the biennium is likely to be stronger than was expected when the budget was built. An increasingly strong outlook for April 2015 tax payments, combined with revenue increases enacted during the 2013 Special Session, together suggest that 2013-15 biennial tax collections will wind up near or above the 2% personal income tax kicker threshold.

The March 2015 outlook assumes that revenues included in the personal income tax kicker base will exceed the kicker threshold by $59 million at the end of the biennium. Should this outlook hold true, a personal income tax kicker of $349 million will be issued. Due to actions taken by the 2011 Legislature, this potential 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.

Although a kicker payment is now the most likely outcome, there remains the distinct possibility that the kicker will not be triggered during the current biennium. There is still around $4 billion of kicker-related revenue yet to come before the biennium ends in June. If these collections fall just 2% below expectations, the kicker threshold will not be reached.

If the March 2015 outlook comes to pass, and a kicker is triggered, it will not fundamentally change the task faced by legislative budget writers during the current session. Most of the reduction in 2015-17 income tax collections due to the kicker will be offset by larger balances heading into the biennium together with improved prospects for the regional economy over the next two years.



For the full document, slides and forecast data please see our main website or view our presentation to the Legislature below.

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