This morning the Oregon Employment Department released the revised January employment data and preliminary February estimates. Overall these are very good numbers and are certainly encouraging. Although the unemployment rate held steady at 8.4 percent (US in February was 7.7%), the gains in the establishment survey are stronger than we have seen in recent years and even stronger than average gains during the past two expansions in Oregon (more on that in a minute).
I would like to back up here for a minute and discuss the outlook and recent economic performance. First, expectations were for a softer economy in late 2012 and into the first half of 2013. This was largely due to two factors: the waning manufacturing cycle and federal policy. As seen in the graph below, manufacturing took a step back during the summer, which would generally lead to slower growth moving forward. The graph shows new orders for nondefense capital goods, excluding aircraft, which basically looks at the pipeline for future manufacturing work after excluding two large (and sometimes volatile) groups that can distort the underlying trends: defense and aircraft. We have discussed the waning manufacturing cycle previously (with housing taking its place as a driver), and while the industry is operating at a high level, the actual growth rates have been lessening, however as seen in the last couple data points in the graph, these cuts have reversed themselves. Other manufacturing indicators such as the ISM Purchasing Managers Index which were hovering around the expansion/contraction breakeven point for all of the second half of 2012, have also picked back up in early 2013.
The other main item expected to weigh on growth was federal policy. Both the fiscal cliff negotiations which resulted in the expiration of the 2% payroll tax cut and the higher marginal tax rates on higher incomes and the potential impact of the sequester, which did come to pass.
So, how has the economy performed in recent months? Well, 2012q4 GDP came in very weak (current estimates show 0.1% gain) but early 2013 is surprising to the upside. Consumer spending and job growth in January and February are better than expected. Job growth over the two months has averaged about what the country has seen the past two years and retail sales were very strong in February.
The same is also true in Oregon. The job gains – 5,400 in January and 6,800 in February – are quite large from both a recent economic performance and from a more historical perspective. The two months combined, 12,200 jobs, are the strongest two months since November, 2005 and March, 2004 before that. If these gains do reflect the underlying economy – are not offset by losses next month, or revised away – it is certainly encouraging for both current conditions and the outlook, which does call for a pickup in growth in 2013 and 2014.
The fact that these gains in both employment and spending have occurred in the face of what many expected to be impactful tax changes, is somewhat surprising, but also good news. I am still skeptical that households have fully worked through the impact of the 2% payroll tax hike, and do expect it to impact spending this year, however so far the evidence that we have is surprising somewhat to the upside. We will certainly be keeping our eyes on these changes, particularly as we head into the May forecast which effectively sets the revenue for the 2013-15 BN.
Finally, even with the good news in recent months, the economy is not free and clear. The European situation continues to evolve over time and generally not to the good. Many European countries are back in recession (or never left) and even though the U.S. has managed growth during this, the dark scenario regarding Europe is, effectively, another financial crisis, from which the U.S. would not escape. Generally, the U.S. has not been pushed into recession due to slow growth elsewhere however when financial markets lock up and credit freezes, the U.S. economy would certainly be impacted.
On the domestic front the sequester has now gone into effect and is expected to weigh on growth moving forward. The first order impact on Oregon is expected to be somewhat muted given the relatively small federal presence in the state. As seen in the table below, based on work The Pew Center on the States did late last year, Oregon ranks low in most categories when comparing the size of the federal government to the state’s economy. Oregon ranks in the middle of the pack with regards to federal grants, however federal spending as a share of GDP, Oregon ranks 3rd to last at 2.1% compared to the national average at 5.3%. The one area where Oregon does rank higher than the average state is in terms of our workforce. Given the large federal presence in terms of land ownership in the state, higher levels of BLM and USFS workers – not to mention the BPA workers – are to be expected.