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 and a copy of our presentation slides.
Inflationary economic booms have not traditionally ended well, meaning not without a recession. As such it is easy to be pessimistic about the outlook for the economy. Economic developments like last year’s goods recession, and the banking turmoil earlier this year add more fear to the outlook. However, a near-term recession is far from a slam dunk. The reasons include some nascent signs that inflation is cooling and the Federal Reserve is looking to pause its interest rate increases which limits the potential for overtightening. Furthermore, the economy is showing some signs of renewed strength as housing and manufacturing stabilize, and income growth is again outpacing inflation. All of these indicate a sudden stop in the economy in the short-term is unlikely. Part of forecasting is not just identifying the dynamics, but also the timing.
Our office’s baseline forecast calls for the economic soft landing and continued expansion. To be sure, recession risks remain very real, but given the current economic dynamics, those recession risks are likely a 2024 or beyond story. Even so, Oregon’s economy will slow noticeably in the upcoming 2023-25 biennium, however for good reasons. The recovery from the pandemic has been faster, and more inclusive than any in recent memory. With the economy operating at or near full employment, underlying gains in the labor market will be closely tied to demographics and population growth. To maintain even stronger economic growth in the years ahead Oregon will need to see faster population gains, and/or rely on business investment and capital to increase productivity. This cycle has been different in the sense Oregon ranks in the middle of the pack economically with income and productivity outpacing the typical state while jobs and population lag, the opposite pattern of decades past.
Available resources are expected to be up sharply relative to what was assumed in the March 2023 forecast, both in the near term and over the extended horizon. The upward revision in the outlook is based both on a stronger than expected tax filing season, as well as methodological changes made in light of fundamental shifts seen in recent years.
The tax filing season once again outstripped expectations, albeit modest ones. Revenue gains have cooled some, but it is clear that Oregon’s tax sources have become more effective than they were pre-pandemic.
One major factor has been the current inflationary environment. The vast majority of Oregon’s taxes are not adjusted to inflation and rise along with prices. With demand outstripping supply, businesses and consumers are paying premiums for their needs. This has translated into a wide range of taxable business and labor income, which has moved many filers into higher tax brackets. The new Corporate Activity Tax, Vehicle Privilege Tax, alcohol, and tobacco taxes have risen with inflation as well.
Inflationary dynamics have not been captured well by Oregon’s revenue models, given that this sort of environment has not existed since years before computerized models have. Oregon’s revenue models have also been refined to better account for fixed tax brackets and federal tax reform.
Qualitatively, there is not much difference between the updated revenue outlook, and what was predicted in March. After unsustainably high revenue collections over the past two years, tax revenues are expected to come back to earth over the next biennium, before returning to healthy growth thereafter.
Quantitatively, small differences in trajectory matter a lot, and compound over time. Taken together, the outlook for personal and corporate income taxes has risen by $1.5 to $2 billion over the forecast horizon due to the updated model methodology. The 2021-23 personal kicker is now estimated to be $5.5 billion, and the corporate kicker is now estimated to be $1.8 billion.
See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.
Mark McMullen
Josh Lehner
Oregon Office of Economic Analysis 
Josh – Thanks for the May report. I was wondering if you have looked at comparative productivity measures for Oregon and, say, competitive states? My unscientific impression is that our work force may be lagging, for example, central state economies. This is implicit in the GDP and, perhaps, not measured; however, there are policy actions which can improve output efficiency. Just a thought after reading your report.
Don
By: don@donmazziotti.com on May 17, 2023
at 11:08 AM
Thanks Don. It’s a good point. Two things. First, the states that tend to have higher labor force participation rates are in the Midwest (not exclusively, but generally true) so if we are going the slower growth/no migration route, our rates might perk up but probably due to bad reasons. Second, for GDP we put a big old footnote in the middle of the document. About 1/3 of Oregon’s GDP outperformance during the pandemic has been in food service and accommodations, which is also the same sector where Oregon’s employment lags the nation the most. I think that GDP will be revised down. Whether or not the other sectors get revised down I don’t know. This fall the BEA will release their so-called comprehensive revisions to state estimates. They do this every 5 years, as opposed to small revisions every quarter. So we shall see if Oregon is right in the middle of the pack GDP-wise after the big revisions, or if we are still outpacing the typical state. But you’re right, we will look at the industry composition to see the relative strengths. And we can do that across states as well.
By: Josh Lehner on May 18, 2023
at 7:57 AM