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.
As the nationwide economic expansion enters its sixth year, signs continue to emerge that growth will improve relative to the lackluster rates seen during the recovery to date. Much of the improvement seen in the economic landscape thus far was expected, and can be traced to the housing rebound and improvements in state and local government budgets. In recent months, the increasingly optimistic outlook among forecasters and economists is largely attributable to the resolution of the budget impasse in Washington D.C. and the continuation of the strong manufacturing cycle.
The federal budget passed in late 2013 reduces the near-term fiscal drag by half relative to the cuts called for by the sequester plan that had been in place at the time. The budget deal also alleviated some of the uncertainty surrounding the policy environment that was dampening private investment activity. Combined with the strong manufacturing sector, the overall forecast remains relatively bright. Both new manufacturing orders and actual deliveries remain near all-time highs. Bad weather in early 2014 has grounded some manufacturing indicators in the most recent period. However, this will likely prove temporary.
In Oregon, the economy has already experienced an acceleration in job growth in 2013. Similar to the U.S. as a whole, this was largely due to improvement in housing and the public sector. As a result, more regions of the state began adding jobs. The question then becomes: Can the state expect a further increase in the rate of growth?
The likely answer is yes. Early in recovery, the Portland metropolitan area was responsible for nearly all jobs gained statewide. This changed in 2013. Portland continued to add jobs at a steady and healthy rate, however other areas including Bend and Medford began adding jobs as well. In the past few months, Bend and Medford have slowed as the nationwide housing rebound stalled as these metros are among the most heavily influenced by an influx of migrants and housing activity. Statewide growth did not decelerate along with these two areas however, since private sector job gains in the Salem area accelerated strongly to pick up the slack. However, not all regions of the state are on board yet. In particular, Eugene has further room for growth, as do many of the state’s more rural areas. Looking forward growth is likely to pick up a bit further, into the 40,000 jobs per year range, or an annual growth rate of 2.4 percent in 2015
Despite the improved economic outlook, expectations for General Fund revenue growth have remained largely unchanged since the December 2013 quarterly forecast. The additional job growth reflected in the March 2014 forecast will bring with it substantial state tax collections. However, these additional revenues are expected to be largely offset by the impact of recent tax collections, which have been coming in well below expectations.
Despite rising stock market and housing prices, the outlook for taxable investment income remains subdued in the near term. Many Oregonians cashed out capital gains in 2012 in anticipation of federal tax rate increases, leaving fewer gains to be realized for tax purposes going forward. However, if equity markets are able to hold on to much of their recent appreciation, personal income tax payments will grow rapidly once again in April 2015.
Although the revenue outlook remains on track, the 2013-15 biennium is still young, and therefore significant uncertainty remains. Two income tax filing seasons remain between now and the end of the biennium. As such, many risks to the outlook remain. On the upside, if asset markets continue to boom or if Oregon’s traditionally strong migration trends and labor force growth reappear, a short-term spike in revenues remains possible during the 2013-15 budget period. At this point, it would take only about $100 million in unanticipated revenue to trigger the kicker law.
A copy of our presentation slides to the Legislature are below.