The labor market is the key to the May 2015 economic and revenue forecast. In particular, wages are the lynchpin in the outlook. That’s really about it, at least in terms of relative changes from previous forecasts.
As discussed back in March, Oregon job growth has been above forecast for the past 6 months or so but our office had been considering such growth to be as good as it gets this expansion. More importantly for both Oregonians and state coffers, not only were jobs above forecast but so too were wages, including average wages per worker. Incorporating some of this strength, back in our office’s March outlook we made the upcoming 2015-17 biennium just as strong as the best two years of the housing boom. Such an outlook could not be considered conservative. However given the ongoing strength in the data, along with increased business sentiment and optimism from our advisors — across a wide range of industries and ideologies — we revised the outlook up even further in May.
Right now, our office’s forecast is the strongest and rosiest its been in quite some time. In fact I would call this the first and so far the only rosy outlook since I arrived, just before the bottom fell out back in 2008. Total wage growth of 7% or more per year surpasses growth seen during the housing boom, however with lower inflation today, it’s larger in real terms. This works out to 4% average wage gains per year (roughly 2% inflation, 2% real wage gains) for Oregon workers. This is considerably higher than gains seen in the past 15 years, but still lower than the 1990s when both inflation and productivity growth were stronger than they are now. These changes translate into the hundreds of millions of dollars in available resources for the Legislature, the Governor and budget writers. Absent the wage changes, available resources in 2015-17 would be effectively unchanged over the past few forecast cycles.
There is no question that such an outlook is full blown economic growth, particularly considering demographic trends. It makes our office a little nervous and a bit uncomfortable calling for such growth, however it is our best guess of what the next two years will look like. While we feel strongly over the medium to longer-run that growth will be slower than in past expansions, it certainly does not rule out a year or three of good growth. The difference today is that those years of good growth have been revised up to nearly great growth.
On the upside, recent weights on the economy have clearly lifted (household debt, housing, and government) which bodes well for growth. Furthermore, business and consumer sentiment is at or near the best levels seen since before the Great Recession. While sentiment can be fickle and change overnight, to the extent that business’ feel more confident and increase their plans to hire and invest more, it really does create a stronger economy when they follow through with such plans. Our office agrees with such an outlook, but for the first time in awhile, not all economic indicators are rosy. In particular the weakness from the manufacturing industry is troubling, as are retail sales (even excluding gasoline) and the stronger U.S. dollar. However, as we write in the forecast, “despite a few bad national indicators, it does not look as though the wheels are about to fall off the economic recovery anytime soon.”