Oregon Office of Economic Analysis

Both of the Oregon-specific composite leading indicators have become more of a mixed bag over the past year. Currently, our office’s Oregon Index of Leading Indicators (OILI) has essentially been flat for the past 12 months, while the University of Oregon’s Index of Economic Indicators recently turned up following nearly a year of being unchanged. Such composite leading indicator series are typically used as a green light-red light measure of the economy. They are not typically used to gauge the magnitude or strength of future economic trends, but rather whether growth is or is not expected in the coming 6-12 months.

Underlying the unchanged topline is a stark divergence between manufacturing, or goods producing, indicators and all other types. Specifically, the book-to-bill ratio for semiconductor equipment manufacturers, industrial production, manufacturing purchasing managers index, new orders for capital goods excluding aircraft, and the Oregon dollar are all negative. Additionally Oregon’s weight distance tax is slowing – possibly reflecting slowing economic activity more broadly. The one positive goods producing indicator is the average weekly hours worked for manufacturing employees in Oregon, which is holding strong at 40-41 hours per week. All told, the fact that nearly all goods producing indicators are pointing down is certainly a big worry.

However, many other indicators remain positive. In fact, labor market measures look exceptionally strong, as initial claims for unemployment insurance are at or near record lows, temporary agency employment continues to grow and withholding tax receipts out of Oregonian paychecks remains very robust. Additionally, housing permits continue to increase and the number of new businesses forming in Oregon is on the rise again. These indicators paint a brighter picture of the economy today and moving forward.

While Oregon’s composite leading indicators are not painting a clear green light today, they are also not signaling a recession is imminent either. The recent track record of Oregon’s leading indicators has been good. Both series flattened out in 2006 and began their decline in advance of the Great Recession. Similarly both Oregon series reached their nadir in March 2009, a few months before the technical end of the recession (June 2009 per NBER) and about 9 months in advance of job growth returning to Oregon. Of course past experience provides no guarantee of future performance. However, the fact that neither series is clearly declining is overall a positive signal, at least relatively.

Right now the U.S. economy is not in recession. University of Oregon professor Jeremy Piger has created a real time probability of recession model, and finds there is just a 3.8 percent chance the U.S. has entered into a recession. However, another recession will come, of that we can be sure. IHS Global Insight puts the probability of recession over the next year at 20 percent, and the Wall Street Journal consensus is at 17 percent. Hopefully Oregon’s leading indicators will give a signal in advance of the next recession, which neither is doing today.