Posted by: Josh Lehner | May 27, 2021

How Frothy is the Housing Market?

Housing has been going gangbusters over the past year. However supply constraints and rising costs have slowed the market in the last month or two. Where we go from here is an interesting outcome and while we could/should be at an inflection point, it is tough to get a good read on exactly what is happening. This post tries to make sense of the current lay of the land.

First, there are clear, strong drivers for homeownership today due to the nature of the cycle where the job losses are heavily concentrated among low-wage workers, record low interest rates during the pandemic, and the demographic tailwind of the Millennials aging into their 30s and 40s.

Second, the sticker price for homes sold is up 15-20% in the Portland region since the start of the pandemic. However due to the drop in interest rates, this hasn’t had a material impact on affordability — measured as monthly housing expense as a share of income — until just recently. Record low interest rates at the end of 2020 allowed household budgets to stretch further in terms of home prices while keeping the monthly payment steady. Interest rates fell by one percentage point from late 2019 to late 2020, going from 3.7% to 2.7%. A one percent decline in rates offsets roughly a 13 percent increase in purchase price, while maintaining the same monthly mortgage payment. This means if a household was looking to buy a $400,000 home pre-pandemic, they could afford a $450,000 home during the pandemic. A $500,000 budget became a $565,000 budget, and so on.

You can see the offsetting impact of lower interest rates on higher home prices in our office’s affordability tracker. For all of 2020, affordability essentially moved sideways. Affordability did not worsen. However so far in 2021 that is now starting to change. Interest rates have ticked up from those record lows at the end of 2020 and are settling in around 3% or so recently. This increase of 30 or 40 basis points is not immaterial! And with ongoing price appreciation and higher interest rates, the monthly payment as a share of income is now up a 2-3 percentage points just in the past couple of months. This is at the upper range of normal from an historical perspective, but not yet way out of line.

A complicating factor here is we do not actually know what underlying income growth is for the typical family today. Real-time national estimates for median household income dropped a little bit during the recession and have grown slowly in the past 6-9 months. I am using that income pattern underneath the numbers shown in the chart above for the affordability calculations. However it’s hard to know how accurate those are and we really need to wait for the lagged Census data to confirm or deny. We do know that wage gains have continued apace for those who kept their jobs throughout the pandemic. If underlying family incomes continued to grow in the past year like they were pre-pandemic (~5% annually) then the current state of housing affordability does look a bit different. Instead of being at the upper end of the normal range, current affordability at today’s prices and interest rates is right in line with the historical average. Mathematically that means we could see another 8% price appreciation from here and then be at the upper end of the historical range.

Note I am excluding the impact of the recovery rebates on family incomes. They certainly can help with a larger down payment or other costs, but the bank won’t give you a larger loan due to a one-time rebate. Also note the income used here is median family income and not median household income. The reason is most homeowners are families (72%) with married-couple families accounting for the bulk of that (60% of all homeowners).

Now, given the sticker price of housing is so much higher today, there is increased chatter that the housing market may be in another bubble. While identifying bubbles in real time is challenging, there is no question that the current market is substantially different than the one from the mid-2000s.

In particular, even if buyers are overextending themselves a bit in part due to the belief home prices only go up, the macroeconomic implications today are much less dire. The credit quality of new mortgage loans has never been stronger. Any fallout from the housing market will not have the same spillover into the broader economy or financial system. Additionally today’s market is supply constrained where much of the mid-2000s was tied to speculative pricing and not underlying imbalances in supply and demand.

Even so, one key metric to watch on the bubble front is the differences in housing costs for owning and renting. At a fundamental level, housing is all about having a roof over your head. Households make the best choice for themselves given the various options and costs. But ultimately these costs for owning and renting should move together over time, which is what you see in the historical data even if they do differ at various points in time.

Today, the traditional price to rent ratios are through the roof. This can be a bit disconcerting. But those measures all use the sticker price of home sales and not the underlying monthly housing cost which is sensitive to interest rate changes. If we switch to using the monthly expense and compare with rents, we see a much more stable relationship. That said, given the run up in ownership costs and the somewhat slower rent increases, the price to rent ratio is getting near the upper end of the historical range, albeit a long way from where it was during the actual bubble.

Note that I am using Owners’ Equivalent Rent from the CPI data as the rent inflation measure. If you don’t like OER, and some do not, I have also used the Zillow rent index as a different measure and it shows nearly the exact same pattern in the past 7+ years.

What is the outlook from here?

Inventory remains very low. The adjustments are much more likely to come on the demand side than on the supply side. When ownership costs rise like this and affordability worsens, demand traditionally slows and price appreciation does too. We saw this back in 2018-19 when interest rates rose. A similar pattern is likely underway today. Weekly applications for mortgages have slowed and anecdotal information from builders indicates the cost increases and supply chain delays are starting to weigh on demand some. These are all happening within the past handful of weeks, and aren’t yet part of the broader housing market narrative.

Now, on the supply side, new single family construction activity is the strongest its been since the mid-2000s. It should stay at these higher levels, even with the supply chain constraints. National reports indicate builders are starting to throttle back on new sales due to the uncertain building material prices, and the fact they need to catch up on actually building all the homes they sold recently. As such the headline new construction numbers may soften in the months ahead, even as the underlying fundamentals remain strong. Additionally, the share of current homeowners saying now is a good time to sell is also back to high rates. It is possible existing home inventory will pick up, helping with the overall supply of homes for sale. Of course the problem for homeowners today is if they sell, they need to find somewhere else to live.

Now, these big market adjustments take time. They are not instantaneous in part because every one of us has a slightly different situation in terms of need, income, etc. It is possible, especially given the strong underlying drivers of housing demand, that the adjustment process takes longer than usual, or longer than you might think. Should this occur, and affordability worsens further, and the price to rent ratio diverges more, then, and really only then can the discussion turn to whether another bubble is forming. However today that is far from clear. No doubt the sticker price of homes has risen considerably during the pandemic. However these gains to date are pretty easily explained by higher incomes, strong demographics, and low interest rates.

Finally, one of the main reasons we care so much about affordability is how it relates to population growth and in-migration. Oregon’s ability to grow at a faster pace than most other states is largely about our ability to attract young, working-age migrants who allow local businesses to hire and expand are faster rates. Affordability has been at the top of the list of concerns our office has had in the past decade. Usually it’s not so much that worsening affordability pushes people to pack up and leave so much as it is more of an initial repellent where people looking to move choose to move somewhere else to begin with due to affordability and availability challenges.

For more on the overall housing market, see our office’s latest economic and revenue forecast (starts on PDF pg 21).

During last week’s economic and revenue forecast release, a number of important questions were raised regarding working parents and more details on the racial and ethnic gaps experienced in the economy. Our office’s follow-up research is shown below in the slides.

The upshot is that while clearly the lack of in-person schooling is a major challenge for a lot of families, it’s not really seen in the macro data. Working moms experienced job losses at about the rate as the overall economy. Dads are among the best performing socio-economic groups. On one hand, this is encouraging in that distance learning is not holding back the recovery as much as first thought. On the other hand we just went through a global pandemic and shutting down schools “only” meant families had to juggle extra to make ends meet. It’s likely not as rosy of a social story as it is an economic one. At this point I’m putting working parents and childcare/schooling in the “it’s always a challenge, and while the pandemic didn’t worsen the situation, it has brought it more into the light” bucket, right there with struggling renters, which I will have an update on next week.

Now, on to the slides. If you’d like to discuss these further, please reach out (email me).

Updated 6/4: Slides are updated to include the latest data, and a couple new slides – one on parents, and one on concentrated wealth by race and ethnicity.

Posted by: Josh Lehner | May 19, 2021

Oregon Economic and Revenue Forecast, May 2021

This afternoon 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.

Economic growth is surging as the pandemic wanes. Thanks to federal fiscal policy, consumers have higher incomes today than before COVID-19 hit. Now they are increasingly allowed to and feel comfortable resuming pandemic-restricted activities like going out to eat, on vacations, getting haircuts and the like. The outlook for near-term economic growth is the strongest in decades, if not generations.

Oregon’s labor market is expected to return to full health during the upcoming 2021-23 biennium. With the strong near-term outlook for consumer spending, job growth is front-loaded such that the largest employment gains will occur this summer and fall. Total employment in Oregon will surpass pre-pandemic levels in late 2022 with the unemployment rate returning to near 4 percent in 2023.

While a jobs hole remains in the labor market, the same cannot be said for household incomes. Currently incomes in Oregon are 20 percent higher than before COVID-19 hit, thanks in larger part due to the temporary federal measures put in place. Excluding the direct federal aid, incomes are back to pre-pandemic levels and expected to grow 6-7% this year and next.

However, with such a strong consensus near-term outlook, the risks do primarily lie to the downside. The risk is that supply cannot keep pace with demand. The path forward may be bumpier than expected, even if the trajectory is up. Already supply constraints have emerged in semiconductors, lumber, and rental cars to name a few. More bottlenecks are likely on the horizon. Furthermore, running through all of these issues is labor. Attracting and retaining workers is already much more challenging than expected given the economy went through a severe recession last year. There are a variety of simultaneous factors impacting the number of available workers including strong household finances, the virus itself, and lack of childcare or in-person schooling. While the temporary pandemic-related constraints will ease in the months ahead, the labor market is expected to remain tight for the foreseeable future in large part due to demographics and the large number of Baby Boomers retiring.

With the prospect of strong growth and near-term supply constraints, the possibility of an overheating economy has quickly replaced fears of a long-lasting, demand-driven recession like the past few cycles have been. Undoubtedly inflation will pick up in the months ahead. Production costs are rising quickly in part due to capacity constraints and bottlenecks. However these price pressures are coming off of a low base and are largely expected to be transitory. The Federal Reserve so far has indicated it will only become concerned should price pressures turn persistent. Given the overall economy is not at full employment, and generally strong wage growth is needed for persistent inflation, almost by definition the current bout of inflation is transitory.

In May of odd-numbered years, the revenue forecast takes on added importance. With the legislature in session, the May forecast determines the size of General Fund resources available for the upcoming budget, and sets the bar for Oregon’s unique kicker law. 

Oregon’s state revenue outlook continues to brighten as the income tax season unfolds. Personal and corporate tax collections are booming despite the job losses and business woes brought on by the COVID pandemic. Tax collections based on consumer spending are also posting large gains. With the near-term economic outlook looking very strong, healthy growth in tax collections is expected to continue into the 2021-23 budget period.

In a typical year, the income tax filing season is winding down when the May forecast is produced. At that point, the vast majority of payments have been processed, and we have a good idea of how the tax season turned out. This year, the tax filing deadline was extended to May 17th due to the pandemic, leaving many returns yet to be processed. This injects added uncertainty into the outlook. In particular, there is the potential for a significant revenue surprise (up or down) in the final weeks of the biennium. That suggests that leaving a large ending balance would be wise. Also, it is possible that the size of the kicker credit for next year will change significantly from the current estimate when the kicker is certified this fall.

So far, with around half of payments having come in, the tax season is turning out to be a healthy one. Payments are expected to reach an all-time high by the end of the fiscal year. While there is still a large amount of payments outstanding, most of this season’s refunds have already been issued. Taxpayers who are expecting refunds tend to file returns earlier than those making payments. Refunds are significantly lower than they were last year, due largely to the kicker credit issued in 2020. This year, refunds include $81 million in automatic adjustments sent to 164,000 taxpayers who paid taxes on unemployment insurance benefits. In March, the federal government exempted the first $10,200 in unemployment benefits from taxation. The Oregon Department of Revenue has sent refunds to taxpayers who filed before the exemption was announced. 

In light of massive job losses, Oregon’s General Fund revenue outlook for the current biennium was revised downward by around $2 billion immediately following the onset of the COVID-19 pandemic. As of the May 2021 forecast, this hole has more than been filled, with the outlook now calling for significantly more revenue than was expected before the recession began. 

Many factors are playing into the unexpectedly strong revenue collections, but two reasons stand out. First, an unprecedented amount of federal aid has far outstripped the size of economic losses. As a result, personal income is up sharply in Oregon despite job cuts. Second, during the typical recession, Oregon has lost a tremendous amount of revenue associated with sharp declines in investment and business income. This time around, asset markets and profits have remained at or near record highs. The baseline outlook prior to the recession called for income growth to slow. A tight labor market was expected to weigh on growth, and asset prices and profits were expected to return to sustainable levels. None of this came to pass, leading to an expected personal income tax kicker of $1.4 billion and a corporate tax kicker of $664 million.

Looking forward into the 2021-23 biennium, the increasingly rosy economic outlook suggests healthy tax collections will persist. A broad consensus of economic forecasters is calling for near-term output growth to be the strongest seen in decades. Given Oregon’s unique kicker law, a booming economic outlook requires an equally aggressive revenue outlook to match it. Taxable income is expected to continue to post healthy gains, showing no evidence of the economic shock we are living through. The outlook for General Fund tax collections has been revised up by around 5% over the next few years. This translates into significantly more resources for policymakers.

Although budget writers have a lot more to work with, a good deal of caution is required and savings are a must. The kicker law dictates that we stick our necks out with an aggressive revenue outlook, exposing us to the risk of a large budget shortfall should growth stall. Of primary concern are nonwage forms of income including profits and the return on investments. With a healthy underlying economy, economic forecasters are calling for continued growth in stock prices, profits and the like. Although valuations are unsustainably high right now, forecasters predict underlying economic activity will catch up over time. Unfortunately, this does not mesh well with our past experience. Profits and capital gains often evaporate overnight, which always puts Oregon’s budget in a hole.

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

Posted by: Josh Lehner | May 12, 2021

Older Workers and Retirements

The prospect of pandemic-related retirements was one labor supply issue that we left on the cutting room floor of our joint report with the Employment Deparment last month. It’s worth exploring a bit further, especially as Jed Kolko is out in the NYT this morning with a national article on the topic, and I just so happened to have finished updating our retirement projections yesterday 🙂

First, Jed finds that the share of older Americans who are not working and specifically say they are retired did increase a little bit in the past year. Our office takes a bit of a more holistic view of retirement in Oregon — we count anyone 60 years and older who is out of the labor force for whatever reason, in part because the splitting the already small sample into the different possible answers yields some noisy results. Even so, we know retirements have been large in recent years.

The labor market is tight for demographic reasons, irrespective of the business cycle. The inflows into the labor market (young adults) are basically equal to the outflows. The tight demographics are expected to remain for the next handful of years as a large number of Baby Boomers retire each year. That means labor force gains will be smaller on net, and come from in-migration and other middle-aged adults returning to the workforce in search of the more-plentiful, and higher-paying job opportunities. Wage growth should remain strong as a result.

This overall dynamic is not new and these demographic patterns are a key piece to the labor market and public revenue outlook in the decade ahead. Our office dug into retirements in more detail nearly five years ago, and again two years ago.

Today a key question is whether the increase in retirements was forced due to involuntary job loss versus planned or based on the strong asset markets that better support retiring financially. Here the data points more to the former, rather than the latter. In his research, Jed finds the increase in retirements nationwide among those in their late 50s or early 60s occurred right at the start of the pandemic, and was concentrated among those without a college degree. Retirements did not pick up or accelerate later in 2020 or in early 2021 when the impact of the record home prices and stock markets would make retiring easier from a financial standpoint.

Now, another factor in play here may be Social Security. We know that 1 in 10 Oregonians in the workforce is eligible for Social Security. They can retire today and have the security of at least receiving some benefits, regardless of whether or not personal savings is adequate or at an all-time or the like. It is possible that some workers immediately chose this option at the start of the pandemic, especially in light of the fact that the health impacts of the virus were much more severe among our older friends, family, and neighbors than on our younger ones. Case in point, the increase in those receiving Social Security has slowed nationally but for the terrible reason that deaths have increased during the pandemic.

Looking forward it can be hard to know whether the current job losses among older workers will be permanent or whether some workers will come back when it is safe to do so.

The table below shows job losses by major occupational group in the past year for the overall economy and for older workers. What it shows is older workers have seen much larger job losses overall, but they are really concentrated in a handful of occupations. Teachers account for nearly half of the overall gap. There are a variety of reasons this makes sense. First, we know substitute use is down with online learning and many substitutes are retired teachers. Second, in some other states, schools returned to in-person learning earlier and teachers may not have been a vaccination priority group, increasing the health risks. Many older teachers may have taken the pandemic as an “opportunity” to retire.

Besides teachers, there were large job losses among Community Service occupations, specifically clergy. Additionally in Health Support, or lower skilled nursing or health aid jobs. These jobs, along with teaching, are high contact, in-person services which exposes workers to the virus to a greater degree. Together they account for 70% of the gap in terms of older workers being harder hit than the overalle economy in the past year.

On the flipside, high-wage jobs were largely unaffected, especially among older workers. This, like Jed’s educational attainment findings, is at least an indication that strong asset markets were not a primary driver of retirements in the past year.

Bottom Line: Older workers have become increasingly important for the overall economy. Retirements are both a disruption and an opportunity. The disruption is because firms lose valuable employees with a lifetime of experience. The opportunity is for younger workers to step into these roles. These transitions are not seamless, and play out over years, if not decades. The pandemic may have accelerated some of these changes, but it is hard to fully nail down in the current data. That said, these broader demographic patterns will be with us for the foreseeable future and have big impacts on the economy.

Posted by: Josh Lehner | May 7, 2021

Fun Friday: Northwest Cigarette Sales

Last fall, Oregon voters passed Measure 108 at the ballot box, increasing tobacco taxes and establishing a new tax on inhalant delivery (vape/e-cigs). The changes went into effect at the start of this year. Right now we’ve only had a couple of months with the changes. To date it looks like the revenues are coming in roughly in-line with expectations*. In recent forecast reports we’ve dusted off the border tax framework when talking about the outlook. While used many times over the years here on the blog, it looks like we haven’t talked about it here since the Oregon Vice report and presentation which was nearly 4 years ago! So without further ado.

Today, Oregon sells 50% fewer cigarette packs than we did in the 1990s. This is due to a lower smoking rate (16% vs 25%) but also due to less consumption among smokers (the average smoker today smokes 0.5-0.75 packs per day, in the 1990s they averaged a full pack). Update: the rest of the post talks about taxes but there is certainly a broader societal change impacting tobacco trends as well, likely in part due to the studies on the health impacts of smoking, etc.

The literature generally shows that the price elasticity of demand for cigarettes is around -0.4, meaning a 10% increase in price results in a 4% decline in sales. The research also shows that tax increases work through both the overall smoking rate, and the smoking intensity to reduce demand.

As such, taxes matter. It can be hard to disentangle the impact of higher prices and taxes on smoking behavior from cessation programs because cessation programs are usually funded from the increased taxes. This has certainly been the case here in Oregon.

Additionally, taxes matter so much in fact that Oregon currently sells more packs of cigarettes than Washington even though they are nearly twice our population but they also do have a lower smoking rate (12%). The primary reason Oregon outsells Washington is cross border activity due to the $3.03 per pack tax in Washington and the (old) $1.33 per pack tax in Oregon. There is considerable money to be saved by buying in Oregon, especially with around 1 million Washingtonians living along the Oregon border.

Going back to 1980, Oregon has always had a lower cigarette tax than Washington and any time Washington raise their tax, sales fall there but hold steady or rise in Oregon. Due to this big cross border activity, a more appropriate price elasticity of demand for Oregon is larger than the overall literature suggests, possibly in the -0.7 range or so.

All of that standard material said, the changes Measure 108 made are very large from a historical perspective. The cigarette tax per pack was increased $2, going from $1.33 to $3.33. Oregon’s cigarette taxes are now higher than Washington’s, at least leaving to the side the impact of Washington’s retail sales tax (which has always existed). If historical patterns hold, Oregon cigarette sales will drop noticeably this year, while they will likely hold steady or decline more slowly across the river. Only time will tell just how much this change in tax policy impacts consumer behavior.

In terms of revenue, the new, additional $2 per pack is dedicated to health programs and tobacco cessation. The General Fund portion of cigarette revenues is down due to that weaker underlying sales forecast for the number of packs sold. But all told, total tobacco revenues for the State of Oregon will increase in the short-term due to the higher taxes, but are expected to resume their downward trend as fewer Oregonians use tobacco, and those that do use less. See our Table B.6 in Appendix B of our forecast document for the full breakdown of tobacco related revenues.

* Cigarette revenues are a little lower than expected these first couple of months, but generally within the range of noisy data. The initial inhalent delivery revenues are noticeably larger than expected but it is currently unknown just how much of that reflects current sales versus existing inventory that was carried over from previous months. But all told, again, within the realm of expectations. Our office will not be adjusting the long-term forecast due to the initial few months following a large change in tax policy. We will continue to monitor the data and should actual collections differ noticeably from the forecast in the year ahead, we will adjust the outlook accordingly.

Posted by: Josh Lehner | April 26, 2021

Why Oregon’s Labor Market is Tighter Than You Think

This morning the Oregon Employment Department and the Oregon Office of Economic Analysis are releasing a joint article on the current state of the labor market and why it may be harder for businesses to find workers than you might think. Download a PDF at the link below, or find the post below the fold.

Read More…
Posted by: Josh Lehner | April 14, 2021

The Enhanced Child Tax Credit in Oregon

Included in the American Rescue Plan Act were some significant changes to the child tax credit for 2021. While some policymakers are looking to make these changes permanent, at this point they are for just 2021 only. These changes include an increase in eligibility, an increase in the size of the credit, and switching from a one-time credit every year when filing tax returns to periodic (monthly) payments directly to families. Each of these changes is noteworthy by itself and what follows takes a look at the implications here in Oregon.

First, the financial benefit for Oregon families is significant. The previous credit was for $2,000 per child less than 17 years old. The new credit is for children under 18 years old. For kids under 6 the amount is increased to $3,600 while those 6-17 years old it is increased to $3,000. Importantly the credit is also now fully refundable, allowing lower income families to receive the full amount unlike in years past.

Roughly, these changes increase Oregonian after-tax income by $1 billion or so. Building an analysis off of Census data, like our office does here, gets us $1 billion while sharing down the federal budget cost gets us more like $1.3 billion in Oregon.

Overall about 85% of Oregon families — defined as a related child and adult — will receive the enhanced credit due to the income limits of $75,000 filing single, $150,000 married filing jointly. For most families, the increase is right around $2,000 relative to the old credit. Broadly speaking the easiest way to think about this is the credit increased from $2,000 to $3,000 for most kids and the average family has two kids. There’s more nuance here based on expanded eligibility and the age of the kids but overall it mostly seems to even out to around $2,000 for most eligible households.

The enhanced child tax credit is a progressive policy, as seen in the chart below. Yes, it is a fairly flat, evenly distributed $2,000 for most families, however the boost in after-tax income this provides is much larger for lower-income households. For example, the median household with kids earns around $85,000 per year. They will receive a 2.6% boost in income from the enhanced child tax credit. However for households in poverty the boost is more like 5, 10, 15% or more. Researchers at Columbia University estimate that the enhanced credit will reduce U.S. child poverty by 45%, and by 46% here in Oregon. (Note that the chart below does not factor in the increased refundability.)

Additionally the enhanced credit will lessen racial and ethnic income disparities as well. This is for at least two reasons. Yes, Black, Indigenous, and People of Color in Oregon generally earn less money than their white, not Hispanic peers. However younger generations are also more diverse than older cohorts in the state. So young families are more likely to be diverse, and also earn less money because one parent may stay home to look after the kids and even those that are working are more likely to earn less income because s/he is still relatively early in her/his career.

Specifically what this analysis shows is that households with white, not Hispanic kids account for 66% of aggregate family income. However such households account for 59% of the increase in the credit. Put another way, households with BIPOC children account for 34% of income but will receive 41% of the increased credit. These relative changes are not drastically different, but boosting family-friendly policies do work to lessen racial and ethnic disparities.

Second, while the overall boost to after-tax income is great for families, the switch to periodic payments has big implications as well. The IRS just announced they are expecting to begin monthly payments in July. Families will get half of the credit on their tax return when they file in April 2022, but the other half will be in direct payments from July through December 2021. As such, starting this summer, parents will begin receiving $250 or $300 per month per child, depending upon the child’s age.

As the Sightline Institute summarized last year, cash benefits offer flexibility for recipients that allows them to better spend on the things they need instead of being tied to specific products or categories. Additionally, monthly payments also better allow households to build the money into their regular budget and plan better financially then relying upon a large, one-time payment that is intertwined with everything else on a tax return. (Note this was part of the rationale with Make Work Pay, the Obama era payroll tax cut designed to boost household incomes coming out of the financial crisis.)

Third, the enhanced credit is being administered by the IRS. The IRS has a lot of recent experience dispersing the recovery rebates during the pandemic, which works quite well for the majority of households. However, that means it works well for those who file tax returns. If your family is a non-filer, usually because your income is below the filing threshold, signing up to receive the enhanced credit and monthly payments creates administrative hurdles. As the People’s Policy Project points out (H/T Michael Andersen), BIPOC families and those in poverty are much more likely to be non-filers. It’s based on a very small sample size here in Oregon, but we do get a question once a year about tax filing status from the household survey. As seen in the chart below, families in poverty are much less likely to file taxes, which means receiving the enhanced benefits requires more outreach and paperwork. This is something to keep an eye on in terms of policy effectiveness. The enhanced credit can only reduce poverty and boost family incomes to the extent that those eligible actually receive it.

Fourth and finally there may be some broader societal responses should such a policy be made permanent. We know childhood poverty impacts outcomes as an adult. For example, growing up in concentrated poverty is particularly bad for economic mobility. Should we see greater economic mobility in the decades ahead, that would be great news overall.

That said, recent discussions about unintended consequences tend to focus more on how parents will respond should they receive larger government benefits. Specifically will labor supply decline, leaving comparatively fewer available workers?

In short the answer is maybe. Some past research found that married spouses do work less when benefits increase. This is presumably an indication that one spouse was the primary earner and the other one worked to augment their incomes. The need to work a few hours on the side is lessened when benefits increase.

However, brand new research finds that the reforms and enhancements that Canada did a few years ago has not led to reduced labor supply, at least among single moms. Overall the Canadian reforms look a lot like the current 2021 child tax credit in the U.S., primarily a $3,000 child allowance that is paid out monthly. The linked paper above finds that the reforms did lead to a reduction in child poverty, an increase in after-tax income for parents, and no impact on labor supply. The focus on labor was primarily comparing employment among single moms and single women without kids. As such, it does not rule out any married spouse responses, but overall the findings are quite strong in terms of the policy outcomes.

Bottom Line: The enhanced child tax credit for 2021 will provide a noticeable boost to family incomes in Oregon and across the country. Based on the available data, and a similar Canadian policy, childhood poverty is set to decline in 2021. It is important to keep in mind that public policies can create unintended consequences. At some point there is a tradeoff between the generosity of government programs and earned income. But we also know that forcing children into poverty so that their parents have to work isn’t a great baseline either. A key question is where do we draw that line? Better yet how do we design programs to avoid fiscal cliffs, and high marginal tax rates as households move up in the income distribution? Monitoring the socio-economic outcomes from policy changes, and then adjusting those policies as needed is paramount. However to really analyze such changes, the enhanced child tax credit, or something of its ilk, needs to last more than a single year.

Posted by: Josh Lehner | April 13, 2021

Oregon Employment, March 2021

This morning the Oregon Employment Department released the March 2021 jobs report. Overall the new data shows what we are expecting is the beginning of a robust recovery. Last month Oregon saw more than 20,000 jobs added. Most of the gains were in Leisure and Hospitality as the economy continued to reopen and Oregonians returned to bars and restaurants in much greater numbers. Since the depths of the dark winter when cases surged and more restrictive health measures were re-implemented, Oregon has added more than 40,000 jobs. Overall these gains, while expected, are a little bit stronger than the forecast we released at that time.

All told, the latest report continues the encouraging news even as there is a long way to go. Today only 54% of the recessionary lost jobs have been recovered. Even with a strong recovery expected, it will take some time before we fully regain all of the lost jobs. The COVID recession was, and is that deep.

While we are in the midst of a smaller, 4th wave of the pandemic, the overall economy continues to reopen and recover. As vaccinations ramp up, consumers are returning to going out to eat, getting their hair cut and the like in greater numbers. As such, now is as good a time as any to do a quick check on how Oregon is faring economically compared to the nation.

In the big picture, Oregon’s economy is faring about the same as the U.S. as a whole, albeit with a little more severe job losses and possibly a similar lag in overall wages. I bring this up in part because there was another random internet listicle the other day that got some traction as it said Oregon had one of the top performing economies. Given the actual data at hand, I’m not sure how anyone could conclude that. Oregon is right in the middle of the pack of states when it comes to employment, income, and public revenues in the past year. Note that this is actually better than our usual position near the bottom of the pack in terms of recession severity.

This next graph lifts the hood a little bit and decomposes the 1.2% employment gap between Oregon and the U.S. based on the new March data. The chart shows sector differences but weighted by the size of the sectors as well. Adding up all the weighted differences gets you to the total 1.2% difference.

In short, Oregon’s employment is a bit lower than the nation’s due to the pandemic and more restrictive health measures. Employment in local bars and restaurants is down more here than in many states, and given Oregon school’s are not full-time in-person, unlike some other states, that means public employment is down further as well (substitute teachers mostly). As the economy reopens and the pandemic wanes due to rising vaccinations, these gaps are expected to close in the year ahead.

On the flipside, Oregon has seen stronger growth in e-commerce related sectors than much of the country. Jobs in transportation and warehousing have been particularly strong.

Finally, I mentioned there is the possibility of a lag in Oregon wages compared the nation but we are getting some conflicting data there. Right now two measures our office follows closely show a strong rebound in wages in recent months. However the BEA state income data for wages (red line) does not, or at least not in terms of year-over-year growth rates. In fact the latest BEA data release also included a little bit of a downward revision to Oregon wages for 2020. Now, normally these measures all move together. In fact the QCEW data, which comes from actual unemployment insurance records, is the major input into the BEA data. Usually when there are discrepancies like this, over time revisions to the BEA data bring those estimates more closely in line with the QCEW and withholding numbers. Our office expects something similar to occur this time as well.

All told, Oregon’s economy is rebounding strongly in recent months. We expect this pattern to continue over the rest of the year. Our office is currently working on our next forecast which will be released on Wednesday May 19th.

Posted by: Josh Lehner | April 8, 2021

It’s Actually Infrastructure Week

With the Biden administration’s American Jobs Plan proposal being released, it’s actually time to start talking about infrastructure. The U.S. government can and has done big investments in the past, however since building the interstate highway system, ramping up space exploration, and even the height of the Cold War, public investments have been considerably smaller. In recent decades, government investment spending has been at these reduced levels and has increased at about the same rate as the overall economy as seen in this edition of the Graph of the Week.

Note that “structures” in the BEA data really means anything that stays in place and is not mobile. It includes physical buildings but also roads and the like.

The American Jobs Plan has a lot in it. There is funding for classic old school infrastructure like roads and bridges. Additional funding for rail and transit. Furthermore it includes retrofitting public buildings, increasing broadband access, modernizing the electrical grid, improving water systems, and electric car charging stations.

Overall there’s some discussion about the specifics of all the above in terms of what’s the best opportunities and highest priorities, but it’s really the other portions of the proposal that have people talking in the past week. The plan also includes things that fall under the umbrella of what folks are calling human infrastructure or social infrastructure. This includes increasing patient access for medical care, caregiving services for the elderly and those with disabilities, and funding for schools and child care. While most everyone agrees these programs don’t fall under the traditional infrastructure definition, arguing over terminology (e.g. social infrastructure vs public investment) is a bit pedantic. What ultimately matters is what program areas do receive increased public funding and what are those impacts on the economy and society more broadly.

Overall economists are very supportive of infrastructure as it typically raises productivity in the economy. With improved transportation and broadband access, goods, services, workers, and consumers can more efficiently move around. A lot of these projects fall under the banner of “public goods” which really means they are things everybody uses and are important but the private sector tends not to build, or not enough on their own. If I’m going to build a road, I’m going to build it where I need it for my business and then maybe not left everyone else drive on it otherwise it will get congested and if I do let them drive on it I will probably charge them a lot of money because it was expensive to build it in first place and I’d like to make sure it is profitable for me.

In terms of how any potential federal packages will impact Oregon it’s too early to say. Our office’s expectations are that much of this funding, should it come to pass, will be shared via some sort of standard formula where each state will get their fair share. As such, the overall economy will get a boost in the years ahead but the impact in Oregon will likely be the same as in the typical state. Of course this is all pending the details of any actual policies that do get passed.

That said there are possibly some areas where Oregon could see an outsized impact. Included in the initial proposal are funding related to Affordable Housing, domestic manufacturing, and child care. For Affordable Housing and child care we know the need is proportionately greater in a place like Oregon where housing affordability is worse and child care costs are higher. These are needs across the country, but if some of the additional federal funds were to be disbursed in part based on need and not just overall population, Oregon may see a greater boost, but that is unknown today. Additionally, given Oregon has a somewhat larger manufacturing industry than other states (15th in GDP, 18th in jobs) than a boost to domestic manufacturing is likely to impact Oregon to a greater degree. Of course the details will matter and if there are sector specifics related to wood products, tech, food manufacturing or the like than even more so.

Finally, the caregiving aspects to the American Jobs Plan proposal ties in nicely with some research our office has in the works. First, next week we will share a few thoughts on the new, enhanced Child Tax Credit that passed as part of the COVID relief bill earlier this year and policymakers are looking to make permanent. Second, we will take a look at how the pandemic is affecting older workers and retirements. Third, the caregiver proposals specifically reminds me it is time to resurrect our office’s Aging Oregon series we were partway through when the pandemic hit. The next post in that series was going to be on nursing and residential care facilities. I am in the process of updating all of that and should have it ready in the next couple of weeks.

Posted by: Josh Lehner | April 7, 2021

Checking in on Portland

Large urban economies have tended to suffer the most during the pandemic. Portland has been no exception. If we look at the latest employment data here in Oregon it shows that Multnomah County has the largest job losses in the state relative to pre-COVID peaks*.

Much of the urban losses can be tied directly to things like the substantial decline in business travel and the increases in pandemic-related working from home where folks stay home and do not travel into downtown. Our urban cores depend so much on being a hub of activity. Local bars, restaurants, and retailers rely on daytime foot traffic from commuters working in office buildings, and evening foot traffic from travelers, and residents heading downtown to go out to eat, take in a show, and the like.

All of this we know. It’s what we’ve been talking about for much of the past year. The key question is what does it look like moving forward? Here we have a couple of pieces of new information that show a rebound, albeit an incomplete one.

First, video lottery sales are rebounding strongly across the state. The past 5 weeks of video sales are the 5 largest in Oregon’s history. We know the vast majority of households have the income, and that pent-up demand for entertainment is very real. The strong video sales confirm that at a macro level there is not much hesitancy on the part of consumers to resume normal pre-pandemic activity.

If we really dig into the lottery sales data, thanks to our friends at Oregon Lottery, it shows that the downtown core of Portland is likewise seeing a strong rebound. Video sales downtown are nearly fully recovered to where they were pre-pandemic. Even so, downtown is lagging the regional and statewide trends a bit as seen in the chart below. As the economy reopens, foot traffic is picking up and consumers are returning but this data is an indication that downtown Portland hasn’t fully recovered as of yet. OpenTable diner counts seem to confirm a similar pattern as well**.

The second piece of data is an update on the pandemic-related working from home which is only really available at the statewide level if you crunch the numbers yourself. Here we can see that while there has been a decline since the shelter in place phase of the cycle ended, there are still 25-30% of West Coast workers who are telecommuting due to the pandemic. This decrease in the number of commuters heading into downtowns and office parks impacts the broader cluster of activity that builds up in these places. Note that in the U.S. March numbers that came out last week, this percentage did tick down again, after stalling out in the past 6 months or so. Expectations are this figure will continue to decline as the pandemic wanes and more workers are recalled to the office.

Finally, based on the daily TSA passenger counts, air travel is picking up noticeably in the past few weeks. U.S. air travel is now up to 60-65% of 2019 volumes whereas in February it was more like 40%. Over on our COVID-19 tracking page, we report monthly passenger counts at PDX which as of February show no real increases. However given the national patterns, we would expect the local ones to show similar gains when the data do become available. It is thought that most of the recent increases are leisure travel, while business travel remains depressed. Based on informal conversations, expectations are that business travel won’t rebound until 2022 or even 2023. Even so, any increase in air travel will better support urban economies in terms of hotel occupancy, ground transportation, and bars, restaurants, and retailers.

All told, as ECONorthwest’s John Tapogna has said recently, for a big city, Portland appears to have fallen into an average sized hole economically speaking. Of course this is then followed up with the concerns of what the recovery path looks like and whether Portland may lag other big cities around the country. No doubt challenges remain from the pandemic itself (Multnomah is moving back into high risk) to commercial real estate, houselessness, social justice, and clashes of violence. Ultimately the outlook for the urban core rests on the number of workers returning to the office, and the demand from residents wanting to live near all the urban amenities that cluster in such places. After acknowledging and discussing these challenges, Mr. Tapogna also says “don’t bet against Portland.” Our office is also bullish on the outlook in terms of office workers returning, migration flows picking up, and residents wanting to return to the core for nightlife entertainment. The strong rebound in video lottery sales in downtown Portland is our first real data point that shows this recovery process, while clearly incomplete, is already underway.

* We get the March jobs report for counties in Oregon on April 20th.

** OpenTable data is reported as “city” data but really encompasses the broader region, even as the urban core of Portland looks to have an outsized share of restaurants that use the software

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