Here is something we haven’t posted in a number of months, but is our staple recession comparison for Oregon. This graph shows job loss in the state for every post-WWII recession in terms of the percentage of jobs lost. When the line returns back to the 0% level, that indicates the state has regained all the lost jobs from the recession and the horizontal axis indicates how long it takes to return to the previous peak level of employment. Data goes through January 2013 and incorporates the latest benchmark revisions from the Employment Department (and BLS).
Just as the generally positive and encouraging economic news continues to roll in – particularly in the face of federal tax and fiscal policy – this graph really brings home the point of how much further we still have to go. Sure, we’re continually adding jobs and seeing wages grow and the unemployment rate tick down, albeit slowly, but today in Oregon, a little over 5 years since employment peaked at the end of 2007, the level of employment in the state remains a bit over 5 percentage points lower. It is now at the same relative level as seen during the early 1980s recession. That recession, at least for Oregon, was our real Great Recession as the state lost over 12 percent of its employment, the unemployment rate crested at 12.1 percent and the timber industry was hit hard, back when there were around 80,000 direct wood products manufacturing jobs, and the whole industry underwent a major restructuring.
It took a bit more than 7 years for the state to regain all of those lost jobs in the 1980s and if you were to overlay our office’s latest forecast on top of this graph, it would follow a similar path moving forward. We now expect that Oregon will not regain all of its lost jobs until the summer of 2015. Our overall outlook for a slow growth hasn’t really changed too much in recent years, although the exact return to peak data has fluctuated within about a year or so. (Relatively small differences in assumed growth rates do compound over time) For example, here is a post from early 2010 – actually this blog’s first real post – indicating our belief that the return to peak date would be more like 6 years, however by the end of 2010 our forecasts had called for even slower growth coming out and returning to peak at around 7 years.
So now why are we more optimistic moving forward? In a word, housing. Housing is clearly on the upswing and as Calculated Risk likes to point out all the time, it is the best leading indicator of the economy that we have. Beyond housing, as detailed more thoroughly the other day, household debt is coming more in-line with income, indicating household balance sheets are being repaired, which will support spending and economic growth moving forward. One significant headwind – or at least one item everyone thought would be a significant headwind – was the expiration of the 2% payroll tax cut.
Most workers are now taking home 2% less in each paycheck, and expectations were that it would squeeze household budgets further resulting in lower spending and/or lower savings rate. Well, so far at least, this doesn’t seem to be happening. The February retail sales report was released the other day and indicated continued increases in sales, above expectations. As that leaked Wal-Mart memo discussion mentioned, due to the last minute nature of federal tax policy changes at the start of the new year, the IRS delayed processing returns early in the year so they could get their systems updated and ready to go with the recently passed laws. The IRS (and Oregon for that matter) are now processing as usual and personal income tax refunds are being processed and sent back to taxpayers as expected. Both of these items do have an influence on personal income and therefore consumer spending, at least in terms of the timing of spending.
Oregon obviously does not have a sales tax, so therefore we cannot track local spending in real time like other states can, however we do have video lottery which in a sense acts in a similar manner. Video lottery is a form of discretionary spending and recent sales data can be seen below. I will have a full report and post about the Lottery outlook next week however given both the payroll tax expiration and the stronger February retail sales, I thought this graph nicely showed both items in Oregon.
Following the tax cut expiration, there was a clear decline in discretionary spending in the state, however as the tax returns are now being processed as usual, the refunds – which come early in the tax season, the big payments come late in the tax season – are supporting income and consumer spending and we do see an uptick in video lottery sales on a year-over-year basis. Our latest Lottery forecast does have a negative quarter built in for this Jan-Mar period with slow growth through the remainder of 2013, so this pattern was not wholly unexpected. I think most economists have been surprised by the strength of consumer spending in recent months in the face of the 2% expiration. I do not believe that households have fully worked through these issues, however recent sales data nationally, in neighboring western states and in this lottery data is encouraging from a big picture level. Also the impact of rising housing wealth does have a positive impact on consumers, their balance sheets and spending patterns, so with home values on the clear upswing this certainly helps today.
Is it possible that the majority of households have finally got their balance sheets back in order and are willing and able to spend even in the face of what was thought to be a sizable headwind? I don’t know but it is beginning to appear that we’re at least close. However, none of these data include the impacts of the federal sequestration which are only now beginning to be implemented. That impact is another item/issue to watch in the coming months to gauge the strength of the economy.