Posted by: Josh Lehner | September 24, 2014

Housing Market Update

Just a quick, partial update on the ownership side of the housing market. Still planning on releasing a more thorough look in the next month, including the rental side as well.

The number of homes sold across the U.S. was up and the highest in six years, according to the latest data released this morning. That’s good. While the overall housing market, particularly on the ownership and construction side of things, stalled out in the past year or two, it may be picking up again. The good news is that examining the fundamentals within the housing market yields even more favorable news.

First, with rising home prices, and more improtantly rising home equity, the share of homes sold for a loss is falling. During the depths of the housing and foreclosure crisis, 1 in every 2 homes sold in Bend or Medford was sold for a loss. In Oregon overall and the U.S. (not shown) it peaked at about 1 in every 3 homes. These figures have improve considerably in the past 2 years, along with the housing recovery. Today the figures are about 1/3 to 1/2 smaller than their peak shares.


Another good sign that the market is finding some semblance of balance is the sales to list price ratio. This indicates a couple of things. First, it means buyers are generally pricing the homes right, in terms of attracting buyers. Second, this does also reflect stronger competition for homes. Given the low inventory on the market, bidding wars have been more commonplace in recent years, with homes being sold above asking price in sought-after areas or neighborhoods.


Lastly, price appreciation is beginning to slow. Overall that’s also good. The cyclical rebound in home prices appears to be over or about over in many locations. Prices today are, more or less, back to historical trends if you were to cut through the boom and bust nature of the past decade. As such, our office’s forecast continues to call for home price gains in the coming years to be more in-line with overall inflation.


The fundamentals underlying the ownership side of housing appear to be getting back in balance, given recent trends. Not back to pre-recession levels, but back in some equilibrium, which is at a lower level so far. Inventory is rising, albeit slowly. With underwater homes becoming fewer in number, expect inventory to climb. As the economy continues to recover, with more employed individuals, household formation will likewise continue to pick up. Home prices are set to rise further, however the very strong appreciation rates are likely behind us. However that does not rule out a near-term price correction in some markets, where prices may have risen a little too fast, too quickly. Overall, just as the economy is getting there, so too is the housing market.

Posted by: Josh Lehner | September 23, 2014

Central Oregon, Sept 2014 Edition

This post continues with our regular series on the regions within Oregon. For more, see the regional tab at the top of the page.

Central Oregon, situated in the hub of the state, has experienced tremendous population growth in recent decades, helping drive the regional economy.


These gains are not only tied to housing and related industries – which are strong in Central Oregon – but also a much higher rate of self-employment. In a region that has generally had an unemployment rate higher than the state and nation, in addition to a lower labor force participation rate, self-employment, either by choice or by necessity, can go a long way.


Like much of the state, Central Oregon has experienced two severe recessions: the early 80s and the Great Recession. Although the housing bust in the area is the second worst regional downturn in recorded Oregon history (post WWII), trailing only the early 80s downturn in Coos Bay. The good news is following three years of zero job growth from 2009-2011, employment in Central Oregon has increased at nearly a 5 percent rate since.


Some of this growth is fueled by a return of population growth, in particular domestic in-migration, and the increased housing activity that goes along with it. The region is home to about 5 percent of the state’s population but last year it built 16 percent of the state’s single family homes. Given the lack of new construction during the Great Recession and initial part of the recovery, even in a location such as Bend, existing inventory is very low. As population growth has returned, so too has the need and demand for more homes.

CentralPopConstThe region’s demographics skew slightly older. Deschutes and Jefferson have above average shares of under 18 year olds. However all 3 counties have above average shares of the population 65 and older, which is at least partly due to retirement aged in-migrants moving to Central Oregon.

Finally, the top 10 industries in Central Oregon are shown below. These are location quotients for 2013 and measure the relative concentration of these industries.

CentralLQ2013For more on the region, see the Oregon Employment Department’s website for Region 10 and the extensive list of recent articles by regional economist, Damon Runberg. For more on our office’s regional coverage in Oregon, please see here.

Posted by: Josh Lehner | September 16, 2014

August Employment, 2014

A couple of notes about today’s employment release.

1) Unemployment Rate.

As with nearly all measures, the unemployment rate is not perfect. The biggest issue with it is that the unemployment rate can go up for good reasons and go down for bad reasons. Today’s job report is an example of the former. The labor force is growing, as more people are looking for work. This is good news as it signals that more people are moving to Oregon and/or more Oregonians are being drawn back into the workforce as job opportunities increase. However, such changes do keep the unemployment rate high, even if the the underlying economy is improving. These dynamics, including the labor force response, are something our office has been discussing quite a bit this year.


2) Monthly Employment Estimates.

Economic data is noisy. Particularly real time monthly estimates. While less interesting, the real story is usually in the revisions, particularly now that our friends at the Employment Department are doing quarterly benchmarking as well. For example, the June employment estimate was initially said to be -4,300 jobs. This was revised to -3,000 the following month when July was initially estimated to be a gain of just 200 jobs. This was revised today to show a gain of 1,300. Each month was a swing of more than 1,000. Both happen to be swings in the positive direction, however you can find negative swings in recent years as well.

So, focusing purely on that initial employment change can be problematic, some times very problematic. However, we still use it as an indicator of the underlying economy. Our office uses the benchmarked employment data as the backbone of a lot of our models, but the most recent monthly data is used more as an indicator. Not unlike a lot of the other leading and coincident indicators available, either from our office of the University of Oregon. As we write in each of our forecast documents, our offices uses four main sources for jobs data: payroll employment, household survey, monthly withholding tax receipts and the quarterly census of employment and wages. Generally, all tell a similar story however when one does not, it helps to place it in the broader context of the other indicators available.

The greatest benefit of the CES (monthly establishment survey) is its timeliness, however it can be subject to substantial revisions. In fact, if you go back and look at the past 2 years of benchmarked data, the 95% confidence interval around that initial monthly employment change is +/- 7,000 jobs. That means in August, Oregon’s employment changed somewhere between a gain of 10,000 or a loss of 4,000. Or to put it differently, there was about a 1 in 6 chance that Oregon actually lost jobs in August instead of the reported 2,900 gain.

Again, that does not mean one should ignore the monthly estimates, but do take them with a grain of salt. Combining them with the other available measures helps place the trajectory of the economy in perspective.

With that being said, however, one monthly estimate that you can freely ignore is the state level ADP report. As seen below, since ADP began releasing state level employment estimates on a monthly basis in April 2013, their ability to predict what the official BLS estimates will be is pretty minimal.


Posted by: Josh Lehner | September 15, 2014

Columbia Gorge, Sept 2014 Edition

This post continues with our regular series on the regions within Oregon. For more, see the regional tab at the top of the page.

The mighty Columbia River, second largest in the U.S., borders the Gorge to the North and divides Oregon and Washington. However, the true regional economy bridges the river and the two states. While the job base, with strong concentrations in agriculture – in particular fruits like cherries and pears – is divided on both sides of the river, much of the economic activity, retail sales and leisure and hospitality is primarily conducted on the Oregon side of the Gorge.


A region of strength throughout the Great Recession, the Columbia Gorge outperformed both the state and nation in terms of job losses and recovery.


This economic performance can be tied, at least partially, to three major factors. First, higher commodity prices and good harvests have supported the strong agricultural sector. Second, the regions energy industry has been both a growth driver early in recession with the construction of wind farms, and stabilizing factor with the hydroelectric dams. The region is home to over 4 percent of the entire country’s wind and hydro energy capacity and 60 percent of Oregon’s. Third, the emergence and growth of the unmanned aerial vehicle industry has benefited the region on both sides of the river.


As our office has discussed previously, the border tax effect is real and the Oregon-Washington differences provide a natural experiment, particularly among sin taxes. The border tax effect is particularly pronounced in the Columbia Gorge given that much of the population and most stores and restaurants are on the Oregon side of the river. As such, even though personal income trends are nearly identical on either side of the Columbia, retail sales per capita are 5 times larger in Oregon than in Washington in the region. In total, retail sales are over 8 times larger, however the population base is larger as well in Oregon.


The region’s demographics are fairly balanced relative to the state. However the relative share of children under 18 years old is higher, driven by Hood River, while Wasco matches the state average. The working age population is smaller with the retirement age population larger.

Finally, the top 10 industries in the Gorge are shown below. These are location quotients for 2013 and measure the relative concentration of these industries.

GorgeLQ2013For more on the region, see the Oregon Employment Department’s website for Region 9 and the extensive list of recent articles by regional economist, Dallas Fridley. For more on our office’s regional coverage in Oregon, please see here.


Posted by: Josh Lehner | September 10, 2014

Industry Structure and Growth

There are a number of ways to achieve economic growth. Increases in productivity is one. Firms can invest in new capital, helping drive gains. The existing workforce can become better educated (including non-degree programs). Increases in the overall size of the economy is another. Population growth can pick up, helping to drive workforce increases and business sales with more consumers. Higher start-up rates increase the number of firms and innovation. Businesses can move to the area, due to clusters and/or recruitment efforts. Or, the local industrial mix can be beneficial with the sectors doing well having high concentrations locally. Our office has been exploring these various growth avenues to get a better handle on the state’s economy moving forward, and they are certainly not mutually exclusive. Mark and Kanhaiya will have more on population/migration next month, for example. What follows today, however, is a look at Oregon’s industrial structure and expected job growth over the next decade.

The biggest takeaway is that the coming decade will be both a challenge and an opportunity for the Oregon economy. As touched on previously, two of Oregon’s economic pillars — the forest sector and hardware side of high-tech — are not expected to be job growth leaders in the years ahead. Now, to be sure, Oregon has numerous strengths, both from an industrial perspective and other aspects related to business costs, labor force, geographic location, and the like. However, much of our growth moving forward will come from industries in which Oregon has a somewhat smaller concentration.

The graph below takes Oregon’s traded sector[1] industries and compares the expected employment growth with the relative industry concentration in the state. The growth rates are taken from Oregon Employment Department’s 10 year projections [2]. Given Oregon’s large manufacturing base (and traded sector more broadly) there are more green bars than orange bars because Oregon has more above average industries than the typical state.


First, as stated above, Oregon’s strongest concentrations are in the forest sector and high-tech manufacturing. These industries (dark green) are expected to grow less quickly than many others moving forward. Since the data are for 2012-2022, from today’s employment, these industries are not expected to grow very much further as most of the growth has already been realized or will be this year or next.

The good news are the other green bars. This does include some wood products, but much of the growth is driven by increases in management of companies, food and beverage manufacturing, published software along with gains in crop production and nurseries. It’s a bit of a mix but all of these industries in Oregon are at least 25 percent larger, in a relative sense, than they are nationwide. Many are much larger than that. It is certainly good news that many industries in which Oregon has a high concentration in are expected to do well and outperform other industries moving forward. This pattern of growth will provide a fundamental boost to Oregon’s growth.

The real challenges and opportunities are coming in the orange bars. These industries, like consulting services, computer system design (custom software), financial investments, and scientific R&D, are expected to grow much faster than the typical industry. However, Oregon has a low concentration in these industries today. To the extent that we are behind the curve, so to speak, than the state may not fully realize these gains if they rely more on clusters and concentrations of similar firms that may already exist elsewhere in the country. With that being said, expectations are for these industries to grow quickly here as well, particularly the industries tied to high-tech. While Oregon’s historical strengths have been on the hardware, or manufacturing side of high-tech, the software side is currently driving growth and will likely do so moving forward.

All told, it is somewhat of a mixed bag in terms of Oregon’s industrial structure and expected growth. Many industries in which Oregon has a relatively smaller concentration, will grow quickly in the future. Some of Oregon’s largest industries will grow less quickly. With that being said, there is lots of good news for the state’s economy, and the good news likely outweighs near-term concerns. However, keeping these facts and trends in mind is important. Furthermore, add on top of this the growth in consumer services (or the non-traded sector) which is tied a bit more to population growth, which is picking up as well.


[1] For the specifics of which industries are and are not included and in which categories, please see the attached Excel file. One can reasonably argue which specific industries should and should not be included here and I am open to hearing your thoughts. However, after a number of iterations of this analysis with myriad industries included or excluded, the fundamental, underlying results still stand. This includes both traded and non-traded sectors. The following file can also be used as a rough, working definition of traded sector industries — something I have been unable to find readily available. DOWNLOAD FILE: EmpProjectionsLQ

[2] The employment growth is based on the Oregon Employment Department’s 10 year projections for 2012-2022 (PDF). OED uses our office’s forecast as a base, however they do modify the outlook based on a more detailed look at the 4 and 6 digit NAICS level. OED furthermore produces occupational projections at the regional level as well. Overall the industry projections, as used above, have the same general characteristics, or flavor, as our office’s baseline forecast, even as specifics do vary from industry to industry.

Our office would like to thank OED for their help in providing their detailed data for our use. Our office would also like to thank Business Oregon for their discussion surrounding traded-sector industries.

Posted by: Josh Lehner | September 4, 2014

Changing of the Guard

Oregon remains a natural resource and manufacturing state, which along with our strong migration patterns, are really the two distinctive features that sets the state apart from most others. However the nature of our goods producing industries has changed over the past 40 years. Previously our office has detailed historical trends in both the wood products industry and the high-technology industry. What follows below the fold is a short summary from our latest economic and revenue forecast of how these longer-run trends have effectively offset one another from a top line, statewide perspective. Of course, at a regional level these trends are not offsetting as the geographic footprint and impact of the industries is not the same.



Click here for more.

Posted by: Josh Lehner | September 2, 2014

Graph of the Week: Oregon Manufacturing

Our latest economic and revenue forecast, released last week, featured a section on the historical changes underlying Oregon’s manufacturing and resource industries. It is somewhat timely both for the interest in the state’s manufacturing sector, including relatively recent legislation and agreements, but also given the Labor Day holiday and changing nature of the economy in recent decades. It also brings us this edition of the Graph of the Week, while previewing some additional material still to come.

The large size of Oregon’s manufacturing and resource industries are what set the state apart, relative to others. Over Oregon’s history, such a large degree of exposure to these industries has proven to be both a blessing as well as a curse. Manufacturing and resource industries are highly productive and generate a great deal of ancillary economic activity. At the same time, production in these industries can be volatile and are under tremendous long-run pressures for the competitive forces of globalization and technological change.

With nearly 180,000 workers, Oregon’s manufacturers employ no more people today than they did in 1970. Over this period, the industry’s share of statewide employment has fallen from nearly 1 in 3 to 1 in 10 today. While these job losses have been extreme, they pale in comparison to losses in other states. Aside from a few brief periods, Oregon’s manufacturing payrolls have outperformed those in other regions during both good times and bad. In recent years, Oregon’s relatively modern mix of manufacturers have shield the state somewhat from the large cuts seen among old-line manufactures in the Midwest and South.


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.


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.


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.


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.


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.

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