Posted by: Josh Lehner | May 21, 2015

Graph of the Week: Oregon Population

The fact that Oregon receives a large influx of migrants in any given year is well known. In both good times and bad, Americans choose to move to Oregon. However, this influx tends to be concentrated in both young and old individuals or households. Think 20- and 30-somethings (the so-called Young and Restless) and retirees. Not only do these trends impact the state’s demography (and geography) but also many of our economic measures like the labor force force participation rate and per capita personal income, to name two. It is also a big part of the Timber Belt story.

OregonPop8115

Such trends and changes are important to keep in mind when thinking about and analyzing the state. What are the impacts such generations, or cohorts, have on Oregon? What does it mean for crime rates, health care needs, and apartments? Specifically regarding per capita personal income as a measure of well-being, a topic I will return to next week, it’s important to point out that both of these groups (the young and restless, and retirees) are not in their peak earning years, which can weigh on the overall measure as well, in addition to broader economic trends in the state.

In terms of the outlook, our office’s forecast calls for these trends to continue. Migration flows have already accelerated in recent years and the number of migrants is nearly back to housing boom era figures, but not quite yet. As such, Oregon will see above average population gains, concentrated particularly among the younger and older age groups. Lastly, as seen in the graph above, Oregon already is a bit older than the typical state (median age 39 vs 37.6 nationwide) and even with strong in-migration among the younger households, this relative position is unlikely to change substantially in the next handful of years.

Posted by: Josh Lehner | May 19, 2015

Behind the May Revenue Forecast

The labor market is the key to the May 2015 economic and revenue forecast. In particular, wages are the lynchpin in the outlook. That’s really about it, at least in terms of relative changes from previous forecasts.

As discussed back in March, Oregon job growth has been above forecast for the past 6 months or so but our office had been considering such growth to be as good as it gets this expansion. More importantly for both Oregonians and state coffers, not only were jobs above forecast but so too were wages, including average wages per worker. Incorporating some of this strength, back in our office’s March outlook we made the upcoming 2015-17 biennium just as strong as the best two years of the housing boom. Such an outlook could not be considered conservative. However given the ongoing strength in the data, along with increased business sentiment and optimism from our advisors — across a wide range of industries and ideologies — we revised the outlook up even further in May.

Right now, our office’s forecast is the strongest and rosiest its been in quite some time. In fact I would call this the first and so far the only rosy outlook since I arrived, just before the bottom fell out back in 2008. Total wage growth of 7% or more per year surpasses growth seen during the housing boom, however with lower inflation today, it’s larger in real terms. This works out to 4% average wage gains per year (roughly 2% inflation, 2% real wage gains) for Oregon workers. This is considerably higher than gains seen in the past 15 years, but still lower than the 1990s when both inflation and productivity growth were stronger than they are now. These changes translate into the hundreds of millions of dollars in available resources for the Legislature, the Governor and budget writers. Absent the wage changes, available resources in 2015-17 would be effectively unchanged over the past few forecast cycles.

WageChange0515There is no question that such an outlook is full blown economic growth, particularly considering demographic trends. It makes our office a little nervous and a bit uncomfortable calling for such growth, however it is our best guess of what the next two years will look like. While we feel strongly over the medium to longer-run that growth will be slower than in past expansions, it certainly does not rule out a year or three of good growth. The difference today is that those years of good growth have been revised up to nearly great growth.

On the upside, recent weights on the economy have clearly lifted (household debt, housing, and government) which bodes well for growth. Furthermore, business and consumer sentiment is at or near the best levels seen since before the Great Recession. While sentiment can be fickle and change overnight, to the extent that business’ feel more confident and increase their plans to hire and invest more, it really does create a stronger economy when they follow through with such plans. Our office agrees with such an outlook, but for the first time in awhile, not all economic indicators are rosy. In particular the weakness from the manufacturing industry is troubling, as are retail sales (even excluding gasoline) and the stronger U.S. dollar. However, as we write in the forecast, “despite a few bad national indicators, it does not look as though the wheels are about to fall off the economic recovery anytime soon.”

Posted by: Josh Lehner | May 14, 2015

Economic and Revenue Forecast, May 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.

The national economy continues to strengthen, however for the first time in a while, not every economic indicator is rosy. In particular the manufacturing sector has clearly softened in recent months. Much of the slowdown can be directly attributed to the oil and gas industry, where substantially lower energy prices have reduced new investment and employment. While such impacts were expected in the near-term, weakness in consumer spending was not. To a large degree, consumers are saving much of their gasoline-related windfall, resulting in slower sales growth than expected.

Given the ongoing strengthening in the labor market, nascent signs of wage growth picking up and the recent weights on the economy being eliminated, this recent slowdown in consumer spending is expected to be mostly a timing issue. Moving forward consumers will not only have the financial wherewithal, but also the belief and confidence to increase their purchases to match the underlying improvement in the economy.

Unlike the nation that is growing at a modest pace, Oregon’s economy is experiencing full-throttle growth today. 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 the labor force is growing.

While growth rates, and the trajectory of the economy have improved considerably, Oregon is not yet fully healed from the Great Recession. The state’s labor market is nearly two-thirds of the way back to pre-recession levels and should reach full employment over the course of the upcoming 2015-17 biennium. After which time, net growth rates are likely to slow significantly over the longer horizon as the Baby Boomers fully age into their retirement years.

Employment0515

Growth in Oregon’s General Fund revenues has been very rapid this fiscal year, rivalling the gains seen during the technology and housing booms. Gains have been broad-based across Oregon’s primary revenue instruments, due both to a healthy job market as well as to solid growth in taxable investments and business income. Even lottery sales, which have been relatively dormant for years, are now expanding at a solid clip.

As expected, the personal income tax filing season turned out to be a big one for revenue collections due to large gains in reported business profits and investment income. Realizations of capital gains nearly doubled on the year. While the big April filing season was expected, the full impact of Oregon’s rapid job gains and wage growth was not. As a result of booming labor-related income tax collections, it is now highly likely that a personal income tax kicker payment will be triggered at the end of the biennium.

The May 2015 outlook assumes that revenues included in the personal income tax kicker base will exceed the kicker threshold by $182 million at the end of the biennium. Should this outlook hold true, a personal income tax kicker of $473 million will be generated. 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.

Despite the larger expected kicker payment, the May revenue outlook now calls for a significant increase in available resources for the upcoming biennium. Widespread optimism is now being voiced by a diverse chorus of local businesspeople and economic forecasters. This optimism has been translated into increased expectations for job growth and taxable wage gains. The March 2015 forecast was an aggressive one, calling for job gains over the upcoming biennium matching the best two years of the housing boom. Even so, business sentiment in Oregon has become so bullish that a strong majority among our office’s advisory group members pushed for significantly more growth to be added over and above what was assumed in the March forecast.

Although the May 2015 forecast provides more wiggle room for budget writers, none of the additional revenue called for in the outlook has come in the door to date. Business sentiment is fickle, and can sour overnight. With such a large amount of downside risk facing the near-term revenue outlook, well-stocked reserve funds are a must. Despite a few bad national indicators, it does not look as though the wheels are about to fall of the economic recovery anytime soon. If Oregon’s businesses and households are as confident about the future as they say they are, their combined hiring and spending should go a long way toward ensuring that their bullish expectations come true.

Wages0515

Oregon’s population growth has accelerated in recent years and 2014’s growth ranked 13th fastest in the nation. Based on the current forecast, Oregon’s population will reach 4.35 million in the year 2022 with an annual rate of growth of 1.16 percent between 2014 and 2022. Such growth rates are below historical expansions when Oregon’s population regularly increased closer to 2 percent, or more.

Oregon’s economic condition heavily influences the state’s population growth. Its economy determines the ability to retain the existing work force as well as attract job seekers from national and international labor markets.

As the baby-boom generation ages into retirement, the relative share of the Oregon population in their prime working years will continue to shrink. This important demographic group will continue to grow in number, but as a share it will erode, placing downward pressure on economic and revenue growth rates moving forward.

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

Posted by: Josh Lehner | May 8, 2015

Graph of the Week: Oil Initial Claims

For this edition of the Graph of the Week, I am stealing Tim Duy’s idea. Just as the oil and gas boom of the past decade has impacted certain local and regional economies, places like North Dakota and Texas among others, the plunge in oil prices in the past year is doing the same, but in reverse. Nationally, mining industry jobs are down some 50,000 since the start of the year and both North Dakota and Texas lost jobs in March. As such, we are starting to see the broader economic impact of the oil price decline appear in the data. Besides rig counts, industrial production or even manufacturers’ new orders, measures like initial claims for unemployment insurance have surged in some oil-dependent states.

UIClaims0415

While not good news in the near-term for these regional economies, as Tim has pointed out and previous work from the Federal Reserve Bank of Atlanta has shown, the economic costs of the oil price declines are upfront, while the boosts are longer term. In fact, the Atlanta Fed work showed that it wasn’t until 2015q2 in their modeling that lower energy prices would provide a boost to GDP, on net. While the soft economic data to start the year spreads further than oil and gas-related declines, most economists’ baseline outlooks call for not only continued growth, but some acceleration as well.

Posted by: Josh Lehner | May 7, 2015

State Labor Markets, Sneak Peek

As promised, here is our second sneak peek at upcoming research, following the first on our Oregon Start-Up Breweries report the other day.

Even though Oregon, and the nation, have fully regained the total number of jobs lost during the Great Recession, the economy is not fully healthy today. Given population and productivity gains, however meager, and the fact that part of the decline in the unemployment rate is due to overall lower labor force participation rates, there is still considerable room before our office would say Oregon’s economy is at full employment.

This is one reason our office has used broader measures of the economy and labor market. My favorite is the Total Employment Gap, first developed by Andrew Levin at the IMF, and now a professor at Dartmouth. I have taken his national work and applied to the state level across the country. I have also looked at job polarization across states in recent years as well. These concepts and trends are closely related, particularly to the downside (job losses in recession.)

All told, Oregon’s labor market today is about 60 percent recovered from the depths of the Great Recession to where we were at the start of it. With a 5.4 percent unemployment rate, Oregon very likely has no cyclical unemployment left, however our labor force participation rate remains a few percentage points below our office’s demographically-adjusted full employment rate. Unlike many other states, Oregon’s underemployment gap is actually declining since the worst of the crisis (4th largest decline) but it still exists.

Even with this relatively good news, Oregon’s Total Employment Gap remains above the typical state. This partially reflects the fact that Oregon never fully healed from the tech recession in the early 2000s, so we were starting from a worse position. It also reflects the severity of the recession in the state. Oregon was among the 10 states with the largest employment losses. Even with strong growth in recent years, particularly the past 1-2 years, it takes time to make up the lost ground. The biggest concern is how much permanent damage the Great Recession causes. A stronger economy can, will and is pulling folks back into the labor force.

EmpGapPolar_Oregon

 

Lastly, Oregon suffered larger losses among the so-called middle-wage or middle-skill jobs than the typical state. As our office’s report pointed out, Oregon’s labor market is polarizing at roughly the same rate as the nation, or typical state. However during, and immediately after recessions, these trends are exacerbated. On the brighter side, Oregon has seen significantly above average growth in high-wage, and/or cognitive non-routine occupations, while the growth in low-wage, and/or manual non-routine jobs is about average. The fears that we are seeing only a low-wage, bad job recovery are overblown. The fears that middle-wage jobs are being lost forever is slightly overblown, see our middle-wage job outlook for more on why.

Posted by: Josh Lehner | May 5, 2015

Oregon Start-Up Breweries, Sneak Peek

While we’re busy working on next week’s economic and revenue forecast, I have two sneak peeks this week that preview some of our upcoming research. First up is our forthcoming report on Oregon start-up breweries. Not only does Oregon lead the nation in craft beer consumption (20% of all beer sold in Oregon is craft, the U.S. is 11%) but the vast majority of the growth in local sales is driven by new breweries and their products. While the state’s legacy breweries have seen increased sales, much of their growth in recent years is outside of Oregon (either in other states or internationally.) These industry trends are certainly encouraging and also in stark contrast to new business formation and entrepreneurship at large.

BreweriesProduction

The report also covers the typical growth path for start-up breweries in Oregon, including a few case studies, the fact breweries are value-added manufacturing and a so-called traded sector industry, breweries’ geographic footprint across Oregon, avenues for future growth, and a cursory look at a potential craft beer bubble. In the meantime, do read this great Thrillist article on the future of craft beer that includes/features Oregon State professor Patrick Emerson (you know him from The Oregon Economics Blog, and/or Beeronomics.) It’s a really well-done article that hits on a lot of points that are likely to emerge moving forward.

One of the key takeaways from the article, the broader craft beer discussion and our research, is that so far there are no signs that any potential bubble is bursting. Whether one is inflating or not is open for discussion, however at some point the craft beer market will hit its saturation point. Then one should expect to see more price competition, mergers and acquisitions and business failures. Contrary to many people’s perceptions, Oregon has seen brewery failures in the past decade, see Brian Yaeger’s take on closures. While many are quite small, these failures do include some long-standing and/or sizable ones (Roots Organic, Rogue’s Eugene Public House and Track Town Brewery, e.g.) However, so far Oregon breweries fail at rates that are three or four times lower than businesses overall in the state. BreweryFailuresWhile we expect the number of failures to increase in the future — mostly because there are three times as many breweries today than a decade ago — the industry, and broader alcohol cluster, is doing quite well here in Oregon. To the extent that Oregon is and will continue to develop a growing cluster of firms, products, knowledge and talent, it will further economic growth in the state.

Posted by: Josh Lehner | April 28, 2015

The Timber Belt

This work originally came out of the Destination Oregon talk Mark gave at the Oregon Economic Forum back in the fall. We use this material regularly in our public talks and I was recently involved in conversations about the impact of these trends and wanted to make sure it was available on the blog as well.

You have heard of the Rust Belt and likely of the Corn Belt, or the old Farm Belt. However you may not have heard of the Timber Belt. It comprises the swath of nonmetro areas from Northern California up through much of Oregon and Washington. This region of the country historically relied upon its natural resources (timber) and manufacturing (wood products and paper mills, e.g.) for its employment base.

Like the Rust Belt and the Corn Belt, the Timber Belt suffered a tremendous negative economic shock starting in the 1980s. However, unlike the others, the Timber Belt has responded not by losing population in search of better economic opportunities. In the Timber Belt, people keep moving in. This is unique. It is also an advantage.

TimberBelt12

In terms of the economic hit the Timber Belt experienced, it started with the early 1980s recession. At that time many of the mills in the region were at the end of their life cycle. The severe recession with sky high interest rates hurt the demand of new construction and wood products more broadly. As the recovery took hold, industry consolidation occurred and some mills retooled with new investment, however not all did. Furthermore, the wood products market had increased competition with lumber from British Columbia and U.S. southern pine. All told, the industry output recovered but not all the jobs returned. All of this was largely before the environmental restrictions which have seen the numbers fall significantly further. See here for more on the history of wood products in Oregon.

Similar stories can be told of manufacturing industries across the country and particularly in the Rust Belt. Automation and technological change, coupled with globalization have reduced the demand of manufacturing labor, even as output continues to increase. In such locations the economy has generally, to borrow a phrase from Brad DeLong, rebalanced downward with population losses. Given the local economy was in bad shape, households relocated elsewhere in search of better opportunities. What makes Oregon and the Timber Belt unique in this regard is that people keep moving into the area.

Such gains impact a whole host of data and different economic measures. Everything from labor force participation rates and demand for public services to per capita income and home prices. Not all is rosy or perfect, however there is something very positive to be said for thousands of individuals actively choosing to move to your state every year. Relative housing costs and employment opportunities do matter, particularly at different points in the business cycle, however in good times and bad, Americans are moving Oregon. And certainly not just to Portland and the state’s other major cities. Rural Oregon, like the nonmetro Timber Belt more broadly, sees the influx as well, particularly coastal, central, and/or southern counties in our state.

Posted by: Josh Lehner | April 23, 2015

Job Growth Quality, Oregon Edition

Just a quick update on the quality of Oregon’s job growth in recent years. This continues our office’s work on job polarization — the fact that much of the job growth is concentrated in both the high- and low-end of the wage spectrum. As discussed before, the best way to examine job polarization is looking at occupational data. Recently we examined national trends and the following is an Oregon analog.

So far in recovery Oregon has seen polarized job growth, just like the nation however our growth differs in the fact that a) it is stronger overall b) our middle- and low-wage growth is actually a bit slower than the nation and c) our high-wage growth is substantially stronger than the average state. The high-wage gains are largest in management occupations (likely influenced by headquarter operations) but also strong in computer and math, business and finance, and architecture and engineering. Oregon’s “good polarization” growth — the combination of high- and middle-wage jobs — is the 12th strongest across all states. See the map in the national post for more.

ORpolarization14While occupational data is best for examining job polarization, it can be useful to look at individual industry trends as well to see the breadth and scope of the jobs being created. The following shows job growth in Oregon by major industry from January 2010 through March 2015. The industries are ordered from left to right based on their average wage according to the 2014 QCEW data. Here, one can see that across industries, Oregon has seen some broad-based gains but growth is stronger in industries with both above- and below-average pay.

ORJobsRecovery0315

While focusing on gains in recovery is more important for understanding the economy and trends today, it is also helpful to take a step back and look at the bigger picture over the business cycle. Below is the same style of graph by industry, however we start from the onset of the Great Recession.

ORJobsGreatRec0315

One of the interesting items in this last graph is the fact that your eyes can be deceiving. Today Oregon has about 20,000 more jobs than back in late 2007, however, visually it’s hard to tell that given only 4 of the 13 industries are currently at an all-time high. The bigger picture trends — winners and losers over the business cycle(s) — have long-lasting and far-reaching impacts on the economy and labor market. These are easiest to see in the manufacturing and goods producing industries (timber/forest sector) of course as the economy has and is transitioning more and more to services. Additionally, see here for our office’s outlook for middle-wage jobs more broadly.

Posted by: Josh Lehner | April 21, 2015

As Good as it Gets?

There is no question that Oregon’s labor market has accelerated considerably in the past couple of years. The million dollar question is — or in this case potentially hundreds of millions of dollars in General Fund revenue — “Is this as good as it gets for the Oregon economy?” At least in terms of growth rates? Followed quickly by “How long does it last?” These are the questions we will be discussing with our advisors this week in our meetings, ahead of our next forecast (May 14th release.)

OREmpWageGrowth15q1

Clearly the pace of growth has picked up and is as good as, if not better than, what Oregon experienced during them mid-2000s. However that does not mean all is well with the economy, even if the trajectory has improved considerably. It takes time to dig out from something as severe as the Great Recession. That’s why our office has worked on additional measures like the Economic Recovery Scorecard, the Total Employment Gap, and job polarization (e.g. HERE, HERE, HERE.)

With that being said, our office’s primary focus is the economic and revenue forecast for the state which focuses on the aggregate figures (total jobs, total wages, overall cigarette and tobacco sales, etc.) From this top-line vantage point, Oregon’s growth is doing well. While we expect strong growth to continue in the near-term, such growth is already built into our baseline forecast. The key question is whether or not we and our advisors think growth will be a bit stronger, or potentially a bit weaker, that what we already have built into the outlook.

We cannot discount the real possibility that in a few years’ time, we will look back on today as the peak of the business cycle in terms of growth rates. So this may really be as good as it gets, even as the recovery still has legs to run before the next recession.

Posted by: Josh Lehner | April 15, 2015

Graph of the Week: Tax Day 2015

Happy tax tax everyone. While we realize it’s not most people’s favorite time of year in this regard, it is a very important part of our office’s work and for revenues that provide public services in general. Personal income taxes account for 87 percent of the 2013-15 biennium’s General Fund, according to our latest forecast.

Even though it is tax day, it does take our friends over at the Department of Revenue a few additional weeks to process the flood of returns, estimated at about 1.6 million this year. As of this week, DOR has received and processed about 63 percent of these returns. However, as seen below in this edition of the Graph of the Week, we have seen just about 26 percent the final payments for this tax season. Higher income folks generally have more complicated returns, that take longer to first obtain all the required financial documents and then to complete and file the return. As such there is still a tremendous amount of uncertainty regarding the actual amount of revenue this year.

ORPayments041315

As you can see by the forecast line, our office is expecting a big April — growth on the magnitude of 26% year-over-year for the quarter in these final payments. So far both the flows of payments coming in and refunds going out the door suggest our office’s forecast is still largely on track. We will be meeting with our advisory groups over the next two weeks to discuss the economic and revenue outlook. Our next quarterly forecast, which effectively sets the 2015-17 biennium’s revenue amount and the kicker threshold, is set for release on Thursday, May 14th.

 

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