Posted by: Josh Lehner | February 27, 2019

Economic and Revenue Forecast, March 2019

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 U.S. economy experienced strong economic growth in 2018. Unemployment remains near historic lows even as participation rates rise. Wage growth continues to pick up along with employment rates. The economy will set a new record for length of expansion this summer at ten years old. The next recession is not yet seen in the data. The outlook calls for ongoing, but slowing growth this year and next. The fading federal fiscal stimulus and business investment slowdown take the wind out of the sails, as does the impact of past interest rate increases. The key to the near-term forecast is the Federal Reserve and the U.S. consumer.

Right now the Fed is reassessing the economy given somewhat weaker U.S. data and ongoing international issues like trade tensions and slowing in China and Europe. Concerns over the U.S. consumer are higher today due to weak sales data at the end of 2018 and somewhat higher delinquency rates. However, given the ongoing, robust labor market gains, consumer spending is likely to hold up and is the key driver to growth in 2019.

Oregon’s economy continues to hit the sweet spot. Job growth has tapered more than expected over the past year, but remains strong enough to hold the unemployment rate near historic lows. Local wage growth outpaces national figures due to the strong labor market. With more Oregonians working more hours and for higher pay, household incomes are reaching historic highs on an inflation-adjusted basis. Even as disparities remain, these gains are seen by all ages and racial or ethnic groups across the state. The feel good part of the economy is here.

With a little more than four months left in the 2017-19 biennium, Oregon’s General Fund revenue picture remains uncertain.  Given Oregon’s dependence upon personal income tax revenues, the jury will remain out until the bulk of payments are received and processed in April and May.

The tax filing season has just begun. Refunds got off to a slow start and the average refund is 11% lower so far this year, in part due to no kicker being paid out. Most year-end tax payments won’t arrive for at least another month. Although April surprises are commonplace, this year’s outlook is particularly uncertain. Federal tax law changes, volatile equity markets, a nationwide dearth in recent estimated payments and strong growth in withholdings are all acting to muddy the outlook this tax season.

Corporate collections have surged to an all-time high in recent months, due in part to temporary factors. Repatriation of foreign earnings required by the new federal tax law have increased collections by around $100 million.  However, the temporary repatriated earnings alone cannot explain the full increase in corporate collections, suggesting that some of the change may be persist going forward.  Federal tax law changes have likely expanded the corporate tax base in Oregon, which will lead to additional revenues in the years ahead.

While the revenue forecast is relatively unchanged in the currently 2017-19 biennium, our office is forecasting both a personal and corporate kicker. The personal kicker is projected to be $748 million which will be paid out on tax returns in early 2020. The corporate kicker, which is dedicated to education spending in the upcoming biennium, is currently estimated at $353 million. Given tax season has just begun, these figures could change by May 15th, the final forecast for the legislative session.

Heading into the next biennium, uncertainty about the performance of the regional economy will become paramount.  Growth will certainly slow to a sustainable rate in the coming years, but the path taken is unknown.  Capacity constraints, an aging workforce, monetary policy drags and fading fiscal stimulus will all act to put a lid on growth a couple of years down the road.  However, the exact timing and steepness of this deceleration is difficult to predict, leading to a wide range of possible revenue outcomes for the 2019-21 budget period.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.


Responses

  1. […] Source: Economic and Revenue Forecast, March 2019 | Oregon Office of Economic Analysis […]

  2. Hi Josh,

    I wonder if the economy won’t get a further boost because of the new tax laws and over lower taxes. Because a lot of the taxes weren’t finalized until late I bet many people don’t know the full benefit they will get from the changes. There may be a positive surprise waiting for them when they do their taxes.

    Just saying, I’m not sure many business people have that factored in yet. I’ve followed it closely, been to classes and seminars and am still holding my breath to see how my taxes turn out. This may replace the fading federal fiscal stimulus.

    -Eric Wagner

    • Hi Eric,

      Thanks for the comments and insights. The tax cuts boost growth in 2018 and 2019 before being a mathematical drag on growth starting in 2020. You’re right that the cuts weren’t fully in place for all of 2018 and the big spending increases haven’t fully gone out the door yet either. But we’re not cutting taxes further, so the impact is waning.

      It is still early in the tax season but returns so far show a pattern of lower taxes owed (of course) but also smaller refunds because less was withheld throughout that year. That means workers saw bigger paychecks every month even if most didn’t realize it. They spent that and it helped the economy. There is nothing wrong with this and in fact economists would argue that’s what you should do policy wise (similar to the payroll tax cut a handful of years ago). But a smaller refund today means less consumer spending boost because they spent it over the course of the year.

      On the corporate side, business investment slowed over the course of 2018. Will know more next week when more data is released. The jury is still out in their long term impact on the economy. But all the major forecasters and policy shops do not expect a supply side boost over the long term. Maybe 0.1% GDP or so. That’s good news! But not a game changer. Now, it could have larger impacts, but they are not built into any ones forecasts today.

      If you’re interested, we covered the tax implications in more depth a year ago in the March 2018 forecast

      Best,
      Josh.

  3. […] new report from the Oregon Office of Economic Analysis shows job growth has tapered over the past year but is still strong enough to keep the jobless […]


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