Oregon Office of Economic Analysis

Last week we talked a little bit about the happy surprise of the May 2020 employment report. Jobs are up nationally and here in Oregon, while unemployment is down at the same time. Check out that post for a few more details and some new research trying to get at the temporary vs permanent impacts of the pandemic.

Today, I wanted to follow-up with the classic economist discussion of on the one hand, while on the other hand… Bear with me.

First, keep in mind that following things are all true. The economy remains in the deepest hole on record in Oregon. However the data is turning around in May and June. The technical recession is likely over, even as the economic pain will take some time to heal. And the economy, while still in bad shape, is doing noticeably better than expected, and our office’s forecast we released last month.

The hard thing to parse right now is whether that better-than-expected data truly represents a fundamentally better, or more resilient economy, or whether it represents a sort of false dawn. And then how do each of those possibilities change, or not, our thinking about the future.

For instance, we know that the big, and relatively quick federal response has an economic impact and helped put a floor under the initial fallout. The CARES Act provided a lot of much needed support for households, workers, and firms. We know household incomes are actually up in April due to the recovery rebates and expanded unemployment insurance benefits. Retail sales bounced off the bottom in May. This Friday we get personal income and total consumer spending data for May, which are likely to show healthy readings as well. In the chart below you can see our office’s forecast for Oregon personal income and how these federal assistance payments factor in.

Three things to note here. First, in terms of the impact on the state revenue forecast, what matters is that difference between our previous outlook and our current one. The outlook is lower due to the recession. Plus you need more nuance in the types of income here to get at the taxable part, but I digress.

Second, from an economic and household perspective, notice how incomes aren’t declining. Total income in the state is expected to be essentially flat this year and next. This, too, puts a floor under the impact on business sales, given households — at least in aggregate — are expected to have steady incomes. The increases in income in April and likely May are part of these annual figures above. As you can see in the next chart, these federal payments are considerably larger than anything seen in recent cycles. The CARES Act really does help bridge the short-term gap in recent months.

However the third thing is that these federal assistance programs are temporary. The recovery rebates were a one-time deal. The expanded unemployment insurance benefits expire in a month. And the Paycheck Protection Program loans/grants to small businesses are running out as I write.

That is the key question. Will more aid to households and firms be coming? Or will they go away as scheduled? Outside of getting clarity on the virus itself, this will likely determine whether the better-than-expected data does represent a fundamentally stronger economy, or a false dawn.

On the business side of things, economists are increasingly concerned about closures and permanent damage to the economy. This has been the primary focus of our presentations and discussions lately and I wanted to share a bit of that.

The point is running a business is hard. Even in good economic times about 1 in 10 Oregon companies close every year. And we are not currently in good economic times. The trouble is at least threefold. First, seeing record high unemployment is one thing, but it will be substantially worse if there are no firms leftover on the other side of the pandemic to hire workers back. Second, the economy has already been struggling with low rates of entrepreneurship and business formation. It will take years to regain the number of lost businesses. Third, firms build these incredibly complex webs, or networks when it comes to supply chains, professional services, training workers, in addition to intellectual products and the like. Losing a firm breaks all those relationships, compounding the problems and rebuilding the networks takes additional time as well.

One additional issue to watch today is the impact on small businesses. They do not have access to the same financial or capital markets as big companies. They do not issue stock or bonds and generally rely on current revenues and whatever wealth the owner has, often times his or her home equity. Given the typical small business has 1, maybe 2 months of liquid reserves, and the PPP loans/grants were designed to last 8 weeks, it means a sizable increase in firm failures is likely unless the economy proves much stronger than expected, or more assistance is provided in the weeks and months ahead. As Fed Chairman Powell has said, we’re really trying to avoid a liquidity problem turning into a solvency problem.

This final chart is designed to try and help scope some of these risks by sector here in Oregon. On the vertical axis you see a measure getting at a drop in consumer demand, based on our office’s employment forecasts for each industry. On the horizontal axis you see the share of jobs in that sector at small businesses. The thinking goes that the industries that see a larger, or more permanent drop in demand are more likely to result in firm closures, as are the sectors with more small businesses given they are more at risk than big businesses. Every individual firm is different, and their outlooks vary considerably, but this high level scatter plot does highlight some risks.

The final thing I will add is during our forecast presentation there was an important question about what state policy can do to help. A similar question is asked in pretty much every presentation I have given lately as well. And the answer is that this is really hard. Especially for state and local governments which have balanced budget requirements, unlike the federal government. Public revenues will never be enough to fill the need in the entire economy. So what do you do with limited resources?

Today we know that bars, restaurants, barbershops, nail salons and the like have been the most impacted by the pandemic and social distancing. They needed help months ago and still do. Even with the economy reopening, restaurant industry data suggest that while consumer demand has rebounded, it has started to flatten out, likely due to fears and uncertainty over the virus.

However, should the economy remain in bad shape for an extended period of time, there remains the looming specter that larger, regional anchor employers may be at risk. Keep in mind that these firms can really be anything from a company headquarters, to a hospital, to a university, to a distribution center, or a mill. Every local and regional economy is different, but they do have one or more anchor employers. And if those close, then it doesn’t really matter how much assistance you provide to the pizza parlor, because it will continue to struggle given the loss of jobs and income in the broader economy.

Balancing the needs of the firms struggling the most today, versus some unknown future risk, given limited resources is a really, really difficult thing to do. I don’t have an answer, but this is a key consideration I know policymakers are trying to deal with today and in the months ahead.

Bottom Line: The economic data indicates a severe recession, but growth has returned. The economy is doing noticeably better than expected. That said it remains to be seen whether there is another shoe yet to drop, particularly should federal assistance to households, workers, and firms expire as scheduled this summer. Until there is clarity on the public health side of things, the primary risk to the outlook remains the amount of permanent economic damage that accumulates during the social distancing phase of the cycle. Downside risks remain, even as we hope the stronger economic readings continue and the economy learns to grow around the virus.