Oregon Office of Economic Analysis

While it is still too soon to know the full extent of the economic fallout, I thought it may be helpful to sketch out how our office is currently thinking about the outlook. Last week I was on OPB’s Think Out Loud and the following builds off of the conversation I had with Dave Miller. I want to hit on a few main topics including the nature of the shock and the severity of the recession, in addition to a couple of the more plausible paths to recovery.

Nature of the Shock and Severity of Recession

The U.S. has seen a sudden stop in economic activity. We will likely set some bad economic records in the weeks and months ahead given the severity and swiftness of the transition to being in recession. The unemployment rate will basically double and in some places triple overnight. From there it could rise further depending upon how events unfold. This initial drop in activity is due to the impacts of social distancing and the various shelter in place policies being put in around the country. Here in Oregon our Stay Home, Save Lives executive order directly affects sectors that employ about 1 out of every 5 private sector jobs. That said we know all industries are impacted by the drop in demand, changes in staffing patterns and working from home, knock-on effects across supply chains, and the like.

Historically Oregon is more volatile than the U.S. for two primary reasons. First is our industrial structure and larger goods-producing industries like natural resources and manufacturing. The second are migration flows. Both are pro-cyclical meaning they lead to more severe recessions in Oregon but also stronger growth in expansions. Over the entire business cycle, Oregon tends to come out ahead.

Well, what about today? Is there reason to believe this time is different? Yes and no. This initial shock to the economy is different than recent recessions. This initial shock is primarily to consumer services, travel, leisure and hospitality, plus the impacts on mining and the energy sector with low oil prices. Here, Oregon tends to rank average or even below average. Unlike the Great Recession where the initial shock was housing, or the dotcom bust where tech manufacturers suffered the most, Oregon is not overly reliant upon the initial sectors hit hardest by COVID-19. Beyond those sectors, other items to keep in mind in terms of the severity of the local or regional recession are demographics and older populations, in addition to reliance upon investment-related income and the wealth effects on spending with asset markets down.

So at first blush, the severity of the recession here in Oregon looks to be about what it is nationwide. Some places within the state do have older populations (mostly rural), a higher reliance on travel and tourism (central, coast, gorge), and a larger share of investment-related income (central, southern). But from a big picture perspective, the nature of the 2020 recession does not at first look appear to hit Oregon harder than the rest of the country, for a change.

That said, the deeper the recession, the longer it persists, or the weaker the initial recovery, the more likely our office believes Oregon could be impacted to a larger degree. This would in part be due to the goods-producing losses that are more likely to come with a deeper or more prolonged loss of consumer demand or longer-lasting supply chain disruptions. However the bigger impact will come from less migration and slower population growth.

Today nobody is moving. Migration flows this year will be quite low, particularly should the sheltering in place style policies remain in effect throughout the summer moving months. This would impact the southern and western states the most. While people still generally move to Oregon in good times and bad, this is a bit different. Migration is the key issue our office is watching over the medium-term. That said we do know that as the health situation improves, restrictions are lifted, and job opportunities return, migration flows will too.

Outlook

It is clear that the economic fallout we are seeing is a direct result of the public health situation and global pandemic. Certainly once the health situation improves the economy will come back. Now, the economy can come back earlier than that due to the policy response and federal disaster assistance (it’s not stimulus). Announcing health policies and plans can similarly have an impact, letting people know that testing is increasing, that the curve is flattening, that different treatments and vaccines are being tested and the like. This can provide confidence and make us less fearful.

So far the policy response has been faster and stronger than during the Great Recession. The Federal Reserve has cut interest rates and reinstated a number of lending programs to keep the financial system intact, to prevent a credit crunch that would worsen the situation. Importantly it now looks like Congress has settled on a disaster relief bill. This includes programs and spending packages to provide assistance to the health care industry, businesses more broadly, households, and also a little bit to state and local governments. While some of the numbers look big — ~$2 trillion overall — all of this really is a short-term band aid to keep firms and families afloat for a couple months at best as we limit economic activity in order to improve the public health situation.

Some very quick math on the federal rebates to households — $1,200 per adult, $500 per child — shows that while they will provide a needed financial respite they will not cover all the needs. For the Oregon households that do receive the checks, the rebates will replace somewhere around half a month of income. This means that for 90% of Oregonian households the rebates will cover rent or the mortgage payment for one month. When you start adding in other necessities (utilities and groceries average $300-400 per month each, or more) or the possibilities of a drawn out period of sheltering in place, it is easy to see how the rebates don’t truly fix household finances, even if they do help.

Probably the key policies included in the federal package are assistance to businesses and also the expansion of the unemployment insurance program for workers. By expanding UI to cover more people who were previously ineligible for the program, loosen other requirements and administrative rules, and increase the payments by an additional $600 per week on top of the regular payment, unemployment insurance will be more significant for household finances than the one-time rebates, and also more targeted to those most impacted.

In terms of the outlook and recovery, there are myriad scenarios one could envision. We need to factor in improvements (or not) in the health situation, the potential seasonality of the virus, how likely treatments are to work, how quickly a vaccine can be developed, the prospects for herd immunity and the like. That said, in my mind, most of these scenarios generally fall into two buckets when it comes to the economic outlook, as I discussed with Dave on Think Out Loud.

V-Shape Recovery

The more optimistic scenario, and I don’t mean this as pie in the sky, but a very real plausible assumption and scenario, [is that] as soon as things start to bottom out and get better — caseloads are flattening — the economy can come roaring back. It’s not like overnight the entire leisure and hospitality industry is unviable. It is unviable today because we are social distancing ourselves, and we’re closing it down except for take out, so hundreds of thousands [of workers are] being laid off, but the expectations are temporary. We are still going to go out to eat further down the road. There is a very real scenario where the economy comes roaring back later this year, and so if you look over the course of 12-18 months [probably more like 24 months] the economy will look like we expected it to be, it’s just the path we took is something unprecedented.

U-Shape Recovery

The other more likely scenario is where that health situation doesn’t improve in the short-term. Maybe the caseloads slow down and we flatten the curve a little bit, but maybe treatments or vaccines prove more difficult than expectations, and so we kind of operate at a quasi-depressed level for some extended period of time. Now the economy would grow, people would come back to work [some] but we cannot completely shut down society for an indefinite period of time. We’re taking the hard medicine now of fully shutting down some of these public gatherings to help the health care sector and slow the spread of the virus. In China they’re coming back, we’re seeing some better data. They’re still at a relatively depressed level compared with where they were prior to the [Chinese] New Year, but they’re growing again. Saying we’re going to permanently decline and never grow again, that’s not a reasonable assumption.

Overall it is plausible we experience a strong rebound in economic activity later this year, but it is also plausible we see a period of prolonged weakness if the public health crisis does not abate. As Bill Conerly, an economic consultant and member of the Governor’s Council of Economic Advisors, recently said, if you tell him how the health situation plays out, he can tell you how the economy will respond and recovery.

Two recommended links for more thinking along these lines.

Bill Conerly’s recent economic outlook: Video here, Article here

Jim Hamilton over at Econbrowser has some good thoughts as well