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.
The economic expansion continues. However a few mounting concerns muddy the outlook with risks clearly tilted toward the downside. The good news is the nation continues to muddle through various headwinds with job growth strong enough to bring down headline unemployment and make some progress on underemployment. The strengthening labor market, better wage gains and strong household balance sheets continue to support the U.S. consumer, the only real economic bright spot in the past eighteen months.
Even so, there are a number of worrisome trends that have emerged in the data that should give forecasters pause. First, manufacturing and industrial production continues to be weak. Second, personal income growth nationwide is slowing. Third, due to slowing tax revenues, an increasing number of state revenue forecasters are missing their forecasts. Fourth, the dearth of new business investment is weighing on growth. All told, even with these concerning trends, the baseline outlook still calls for the expansion to continue. And while expansions do not die of old age – they die due to mistakes – the economy is clearly closer to the next recession than not.
While some U.S. data is slowing, Oregon’s expansion continues to see full-throttle rates of growth. Oregon is outpacing the typical state by a considerable margin today for both job and income gains. This growth differential largely comes from the state’s underlying fundamentals like its industrial structure and strong in-migration flows. Both of these trends have long-lasting impacts on the Oregon economy and help drive the state’s more volatile swings over the business cycle.
Oregon’s General Fund revenue outlook remains stable. Personal income tax collections continue to expand at a healthy pace, keeping revenues in line with what was expected when the budget was drafted. Oregon’s General Fund revenues are currently expected to end the biennium within 0.1% of the Close of Session forecast.
Personal income tax collections continue to reflect Oregon’s strong underlying labor market. Withholdings out of paychecks expanded at an 8% rate during fiscal year 2016. As such, state revenue growth in Oregon remains among the strongest in the U.S. State revenue growth would have been even more rapid in recent months if not for the payout of the personal income tax kicker generated during the 2013-15 biennium. The vast majority of kicker payments have now been made, and will no longer weigh on overall collections.
In contrast to the healthy growth seen in personal income tax collections, corporate tax collections have been falling sharply in recent months. Nationwide, corporate profits have taken a step back, largely due to rapid appreciation of the U.S. dollar and struggles among energy firms and other commodity producers. Even so, profits and corporate tax collections remain large relative to historical norms. Given the expectation that collections would return to earth, revenue declines were built into the forecast, leaving the outlook very close to the Close of Session forecast for now. Declines are expected to continue through the current fiscal year, further reducing annual revenues by around $50 million.
In addition to healthy General Fund revenue growth, Oregon Lottery sales and Estate taxes have been very strong as well. Recent collections have consistently come in above expectations.
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.
See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.