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.
A broad consensus of economic forecasters and industry leaders both in Oregon and elsewhere in the U.S. has become increasingly optimistic about the pace of the recovery. Oregon is once again a leader in terms of job gains, with the pace of statewide growth now matching the best years of the housing boom
U.S. job growth thus far in 2014 is on pace to be the strongest since 2000 and the major weights on the recovery have been lifted. To borrow a phrase from Federal Reserve Chairwoman Janet Yellen, the U.S. economy paused in early 2014, due in part to bad winter weather. However, most economic indicators have thankfully picked back up in the spring. Household balance sheets are largely back in the black, housing is poised to reaccelerate and corporations’ financial positions remain quite strong. As the nationwide expansion continues to pick up momentum over the next two to three years, the feel good nature of the recovery may finally appear.
In Oregon, the economic acceleration the state experienced in 2013 has continued into early 2014. Oregon was spared some of the weather-related problems seen elsewhere in the U.S. Statewide job growth is currently at the strongest pace since 2006. This improvement was largely expected as the two major weights on the economy lifted: housing and government. Growth statewide picked up primarily due to regions outside of the Portland Metropolitan Area joining in the recovery. In the first quarter of 2014, 4 out of 5 Oregon counties saw job gains over the year, marking the same share as during the mid-2000s expansion. Although the rate of growth for many counties remains below previous expansions, most regions of the state are experiencing gains today. As the recovery continues, the housing market regains its footing and the net in-migration the state is accustomed to picks up, economic conditions should improve across much of Oregon.
The additional job growth assumed in the June 2014 forecast will bring with it additional state tax collections in fiscal year 2015 and beyond. As such, although recent tax collections have mirrored the outlook, the revenue forecast has been revised upward somewhat as well.
The April 2014 tax filing season was not a good one for states like Oregon that depend heavily on personal income tax revenues. Year-end tax payments fell sharply across the U.S., with the typical state seeing collections fall on the order of 25% during the peak processing season. Oregon’s personal income tax collections were not immune to this weakness. Sharp declines in late April and May have fully erased early gains posted during what began as a strong 2014 season for Oregon’s tax collections.
Despite declining year-end tax collections, the outlook for personal income tax revenues in Oregon remains on track for now, with collections closely matching the Close of Session forecast that was used by the legislature when crafting the 2013-15 budget. Unlike the case in many other states that depend on personal income taxes, no large emergency budget adjustments are called for at this time.
Despite increased optimism, the 2013-15 biennium is still young, 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 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 coming months. Although the bar is set high in fiscal year 2015 with strong revenue growth expected, it would only take about $70 million in unanticipated revenue to trigger the kicker law at this point.
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.