Oregon Office of Economic Analysis

While a lot of our planned discussions with our advisors over the next two weeks will surround Oregon’s more volatile economy and migration trends, at the end of the day, given our office’s primary functions, we focus on jobs and income and how they translate into state revenues.

In recent months, job growth has not only accelerated relative to the recent past, but it currently running above forecast as well. The graph below shows our May 2013 employment forecast, which was the Close of Session outlook upon which the Legislature built the 2013-15 budget. Actual job gains largely tracked the outlook for the first six months, however growth in the most recent six months is stronger than expectations. Today employment in Oregon is about 7,200 jobs above our forecast (0.4%). Do we expect this stronger growth to persist? Is it sustainable? How strong will the expansion be overall? These are the questions we are working on answering.

Given we are above forecast, what can we learn, if anything, from our errors? Is it a sea level change where growth across the board is stronger or is there any particular industry or industries driving the growth? What follows below are industry level forecast errors over the past year. Keep in mind that these are not job gains or losses, but job gains or losses relative to expectations.

A few notes. First, for many of the large sectors of the economy like manufacturing, professional and business services, health, leisure and hospitality and government, the forecasts were actually quite good. Job gains were just a bit above expectations, but only a little and not a cause for concern or major rethink of the outlook based on tracking alone (whether we believe the future to be stronger is a separate issue).

The largest errors were generally housing and related industries, defined here as construction, wood products, logging, home improvement stores and real estate agents (the bulk of the more detailed housing and related industries). Today these industries account for about 9 percent of Oregon jobs, however they account for 89 percent of our forecast error. That’s a lot of strength coming from one sector of the economy and one our office clearly underestimated a year ago. As the Employment Department highlighted, construction is now growing at double-digit rates and the more detailed housing and related industries was over 8 percent year-over-year in December, or about 3 times the overall employment growth rate in Oregon.

Overall, for many of Oregon’s industries, the outlook remains on track however we underestimated the strength of housing jobs in the past year. What is a bit peculiar about this is that we know the housing rebound stalled out in the past 6-9 months, however the jobs did not. For this reason, I keep coming back to this graph.

Now, this is just a ratio and not an iron law. There is good reason to think that in recent years we are in a different place in terms of construction than previous decades. In particular, with a larger share of multi-family projects, with increase remodeling/repair work and the like, we can be at a higher ratio of workers per housing start and do not necessarily have to be back down at a ratio of 3 or 4. However, is is still hard to not look at this ratio today and see that construction firms may be hiring at stronger rates than the level of new construction activity would suggest.

In terms of the outlook, there are three primary questions around the employment forecast. First, does the stronger job growth in recent months indicate that the expansion is fundamentally stronger than expectations? Second, given the composition of that stronger growth — being tied to one sector — mean anything in terms of its sustainability or is it more of a one-time boost? Third, moving forward are expectations even stronger than in years past, regardless of tracking issues, and if the U.S. economy accelerates, as many expect, will Oregon likewise take another step up as well? As we approach the next forecast, we hope to have at least some answers to these questions.