Posted by: Josh Lehner | August 21, 2018

Gorge Discussions Pt 2: Tech

A few weeks ago our office and the Governor’s Council of Economic Advisors had our annual off-site meeting where we get out of Salem and into a regional economy to learn more about what’s going on. This year we were in Hood River where we had one panel discussion on housing and another on tech (the unmanned aerial systems cluster), in addition to two business tours. What follows is Part 2 of the discussions. All errors in terms of relaying information, or interpreting comments are mine.

First, I wanted to give a massive thank you to Nate Stice of the Regional Solutions Team, and Carolyn Meece from Business Oregon for arranging the panels and business tours for our group. It was a great day due to the groundwork they did for us. Thank you!

The second panel of the day focused on gorge technology, and consisted of Greg Davis of Overwatch, Ross Hoag of Power4Flight, Tammy Kaufmann of Insitu, and Kevin Below of Orbital UAV.

As with many thriving clusters that began with a start-up company or two, part of the magic is a combination of happenstance and intentional efforts by the original founders to work on a product in a location they wanted to live in. The gorge unmanned aerial systems cluster is no different. Ross, who was either employee #3 or #4 at Insitsu back in the early- and mid-1990s, told the story of how they wanted to live in a beautiful area and work on these systems. They were fiddling with small aircraft out of an old school bus in the area. While such intriguing stories are part of the lore, the unique part is that this effort succeeded.

Today, the panelists estimated, that the gorge is home to more than a dozen firms that employ around 1,500 workers in the region, which straddles the Columbia and state lines. The panelists discussed how they do have local supply chains. And being next door to the Portland region provided many resources as well, including the airport for both travel and shipping, professional/legal services, manufacturers, and so forth. However, this success was far from a foregone conclusion 25 years ago. First, the ideas and products had to be successful, of course. But a cluster of firms takes more than that. And, according to the discussion, there were noncompete clauses 10-20 years ago that prevented workers from spinning off their ideas into new companies, and also prevented suppliers from working with similar (i.e. competing) firms, and the like. As those noncompetes were eliminated, the broader cluster took off. For example, Kevin talked about how Orbital UAV, an Australian company, chose to locate in the gorge due to the existing companies and workforce. Success begets success.

The gorge regional economy is certainly successful overall. In fact, the gorge is among the fastest growing rural economies in the nation in addition to being among the most highly-educated rural economies in the nation. And as discussed the other week, it is also among the least affordable areas too.

After this overview of the UAS cluster and the region, the discussion turned toward two things: whether or not this successful is replicable in other areas, and also what issues or barriers to growth the region faces.

We will start with the issues and barriers to growth. At the top of everybody’s list was housing; not just affordability, but also availability as inventory and vacancies are low. Housing is part of these businesses’ recruitment efforts. They have had employees accept jobs and then leave because they were unable to find suitable housing. Similarly, finding work for spouses and partners can be more challenging in a smaller region than in a large metro. Commuting into the gorge for work is somewhat common, as is remote work. Tammy discussed how Insitsu has an office in Vancouver, WA and runs a bus from Vancouver to Bingen, then across the river to Hood River and back every day (maybe multiple times a day? I cannot remember).

Greg mentioned how his growing company is running into issues finding more office space. Also good internet access is at least an issue, if not a barrier. [These are part of the supply constraints our office has been highlighting, and included in our Rural Oregon report too.] None of the firms said they are actively looking to leave the region, but that growth is becoming more challenging and finding space or housing is a growing share of their daily activities, taking them away from their core products and services. Finally, another regional issue both panels mentioned was the need for the bridge across the Columbia to be replaced. That link is vital not just for the UAS cluster, but also for residents, and also as a transportation route, especially when parts of I-84 of SR14 are shut down due to weather, or wildfires as they were last year.

In terms of the UAS success being replicable, the answer is likely no. The specifics of the individuals involved, the industry they were creating and the like are just that, they are very specific. However that does not mean all hope is lost. From our office’s vantage point, and most of advisors as well, it is less about the specific industry and more about the foundation upon which the success was built. Having a good workforce, infrastructure, planning, and taxing system in place, in addition to being able to provide information and contacts for firms looking for assistance is critical. These pieces of the foundation are the natural fit for the role of the public sector. It is really hard to pick winners and losers, but providing the platform from which any type of business can succeed is the goal.

Finally, after lunch the Governor’s Council toured both Cardinal Glass’s plant just outside of town where they assemble windows for the Pacific Northwest, and also pFriem Family Brewers. It was a rough way to end the day, down there on the river at a brewery, but somebody had to do it.

Posted by: Josh Lehner | August 8, 2018

Wildfires: A Preliminary Economic Assessment

In the midst of another severe wildfire season, lets take a look at some of the potential channels in which economic problems may materialize in the future. This preliminary assessment is something our office put together a year ago and was originally published in our December 2017 forecast document but never here on the blog. The summary and concerns very much apply to this year as well, although the names of the fires need to be updated. In terms of the general process of economic recovery from natural disasters, see our previous post.

First, however, a quick look at the location of wildfires and the air quality around the state. The air quality in the Rogue Valley and Klamath Basin is unhealthy both due to local fires and smoke blowing in from the Mendocino complex fire in northern California. With local fires burning in southern Oregon, the Gorge, and in eastern Oregon, much of these areas have moderate air quality (yellow). Finally, with no local fires and favorable winds, much of the coast and the Willamette Valley still has healthy air quality.

From a long-term perspective, the scariest potential impact of Oregon’s 2017 [and 2018] wildfire season is that fewer households and investments may be attracted to the region moving forward. Oregon’s primary comparative advantage remains its ability to draw skilled workers away from other states. To the extent that local quality of life has been reduced, or if Oregon is perceived as a riskier or costlier place to live and do business, this advantage will be less pronounced. Our office’s long-run economic outlook would need to be lowered, if this were true.

Increased risk lowers growth prospects. If investors and households view Oregon as a riskier place, businesses, property owners, and governments will face higher costs moving forward. While it is still early given wildfire season ended not too long ago, interest rates spreads between Oregon’s municipal bonds and bonds in other states have not widened. However this may not only reflect a stable Oregon outlook, but also heightened risk in other states following a severe hurricane season.

In terms of the lost forests, how valuable are they? The market value of timber is a natural place to start. However for a place that was never going to be logged, like the Gorge scenic area, log prices are largely irrelevant. That said, when damages are argued and assessed through the legal system, like the 2007 Moonlight Fire in northern California, the end result tends to be the replacement value of the lost land/timber. [For the lost cropland in the Gorge in 2018 it is a bit different. For the lost wheat that was just about to be harvested, farmers should receive a partial reimbursement from crop insurance. For the lost pastures I am not sure what happens.]

The [2017] transportation disruptions due to the wildfires did bring significant costs, although they were temporary. Westbound lanes of I-84 were closed for 8 days in the Gorge, and eastbound lanes for 19 days. Economists at the Oregon Department of Transportation estimated the daily costs to trucking firms due to higher operating costs and payroll to be $250,000 to $290,000 per day. Passenger traffic was diverted to Washington SR14. Rail traffic disruptions were similarly modest. Union Pacific noted that tracks were shut down for four days, with customers experienced up to 48 hour delays on shipments.

Assessing the net impact on Oregon businesses is difficult. While areas in the Gorge were shut down, other areas benefited from the diverted traffic. In particular, retailers on WA14, OR35 and OR216 reported increased traffic and consumer demand. However the fact that some areas temporarily benefited comes as little consolation to many businesses that may have suffered permanent damage. Small businesses that were negatively hit by closures, particularly during their peak season when winter reserves are accumulated, will bear watching and could require public help over the next couple of years. In particular, access to capital is difficult for many small businesses. Cash flow issues for some may start to show up over the winter, and for others down the road when they face a major expense. In terms of specific industries, hospitality firms and retailers are the most likely to see the impacts. Agriculture firms and manufacturers were less likely to be impacted, however they did see increased shipping costs and/or delays. Additionally, many service firms that depend upon local customers were also likely spared long-term losses, even as they experienced a quiet few weeks.

As the Oregon Employment Department has been tracking, the impact of the fires on direct employment is minimal based on the initial, preliminary data available today. As more complete data becomes available, impacts are more likely to be seen in hours worked per employee, and wages, rather than whether an individual has a job or not.

For Oregon overall and the impacted regional economies within the state, the concern is slower growth moving forward as tourists, investments, and new firms or residents avoid the impacted areas. As such, looking for historical precedents may help to understand what Oregon has in store moving forward.

First, the Yellowstone fires of 1988 are a notorious example of a major fire event in a federally-owned tourist area. Surprisingly, looking at visitation to Yellowstone and the other major and popular national parks, there does not seem to be a noticeable impact outside of the year of the fires. Tourism and visitors returned the following year, and the year after, and the year after.

Yellowstone is huge. There are lots of trees, meadows, wildlife and the like. Just like the Gorge is big. There are myriad trails, waterfalls, and outdoor opportunities for people to enjoy right now and certainly next year. Concerns in Ashland and possibly Brookings are more problematic. If cancellations of Shakespeare plays becomes a reoccurring pattern, year over year that could hurt attendance over an extended period of time. For Brookings and surrounding areas that were impacted by the Chetco Bar fire, there could be larger local impacts to the extent it represents a smaller geographic area with fewer opportunities (potentially).

Second, tourism around Mt. Saint Helens exhibited a similarly quick rebound following the eruption in 1980. Hotel occupancy one month after the eruption was down 15% in Portland relative to the previous year. Declines in areas with more ash problems like Spokane (-26%) and Yakima (-64%) were even more pronounced. However much of this decline could also be traced to high gas prices and the onset of a nationwide recession. That said, the eruption soon turned into a tourism asset. By August of 1980, just months after the eruption, U.S. Forest Service observation booths were welcoming 4,000 visitors per day.

Finally, there was a great deal of concern that heightened risks following the Mt. Saint Helens eruption would curb long-term regional economic activity. This is exactly the concerns today as well. The analysis performed at that time is somewhat comforting, even amusing, given the benefit of hindsight. As the report says, a lot of the Portland area economic growth were in newer, “footloose” industries like electrical equipment, instrument, machinery, and transportation equipment manufacturing. These sectors located in the Portland area for “reasons other than accessibility to the local market or local natural resources. Instead most [located] for … high quality of life, including a clean environment and easy access to abundant recreational facilities.”

Posted by: Josh Lehner | August 3, 2018

The Pacific Northwest in Expansion

Recently I gave a broader, regional outlook talk that included many attendees who were either from Washington or had clients or offices north of the border.

Overall there is not a massive difference between the states in terms of where they are in the business cycle, the risks to the outlook, and the like. Our office’s counterparts, the Washington Economic and Revenue Forecast Council, have the same general flavor in their forecasts, namely slowing economic, revenue, and population growth as the economy transitions down to more sustainable rates. Their labor market is similarly tight due to both the cycle and booming retirements.

There are differences in the specifics however. Washington is more exposed to the trade fisticuffs. E-commerce has grown more briskly (obviously). Washington’s prime-age EPOP is improving but remains lower than in Oregon and the US. Their population’s natural increase is shrinking but holding up better due to a significantly higher birth rate than in Oregon. (Although I suspect revisions to Washington’s population forecasts will incorporate a little lower births and higher deaths. But still a much higher birthrate than here in Oregon.) And Washington, or at least the Seattle MSA has been able to add more housing supply relative to population growth than has Oregon and the Portland MSA.

What did stand out to me in preparing for the talk was that all of the Northwest is expanding. And all of the region’s urban areas are at record employment levels. Tri Cities leads the pack, but Bend is close behind, showing both the largest employment losses in recession and the strongest growth since. And while Eugene and Grants Pass may be at the bottom of this chart, that is mostly about how far they fell in recession. Growth since the downturn is significantly faster than a handful of other PNW metros.

Now, the above focuses on urban or metro areas. We do see some differences when looking across the PNW rural counties. Like Oregon, Washington’s rural employment trends fall into two big categories. Instead of the north-south divide Oregon has in terms of economic growth this cycle, Washington sees an east-west divide. Jobs in Oregon’s northern rural counties and in Washington’s eastern rural counties are at historic highs. The same cannot be said for Oregon’s southern rural counties and Washington’s western rural counties. While I did not do a full decomposition to figure out what exactly is driving these trends, we do know one common variable across both regions is their historic strength in timber. While the sector is growing again, it does remain significantly smaller than prior to the recession, let alone 40 years ago.

Finally, there was a recent internet listicle that ranked both Grants Pass and Bellingham as among the 5 worst job markets across the country. That surprised me and seemed a bit harsh, so I went and pulled a handful of labor market indicators to see how true this may be. No doubt if you look at the relatively high unemployment rates (compared with all other metros, not compared with where unemployment rates have been historically), low average wages, and low prime-age employment rates, these metros do rank low across the country. However, that listicle also said they incorporated not just these snapshot rankings but also rankings of growth and improvement. Here, you can see that both Grants Pass and Bellingham are growing strongly in recent years. Job growth is picking up and above average, which drives the unemployment rate down at the same time, everything else equal. And while both metros have low average wages, their growth over the entire business cycle is among the best nationwide. None of this is to say Grants Pass and Bellingham are the best labor markets in the nation, but in digging into these various measures, I also have a hard time saying they’re the worst.

Posted by: Josh Lehner | August 1, 2018

Gorge Discussions Pt 1: Housing

Last week our office and the Governor’s Council of Economic Advisors had our annual off-site meeting where we get out of Salem and into a regional economy to learn more about what’s going on. This year we were in Hood River where we had two great panel discussion on housing and tech (the thriving unmanned aerial systems cluster), in addition to two business tours in the afternoon. What follows is a summary of the discussions. All errors in terms of relaying information, or interpreting comments are mine.

First we had housing panel which included: Maui Meyer, a realtor, restaurant owner and former Hood River County commissioner; Nan Wimmers, a realtor and president of the Oregon Association of Realtors; Dustin Nilsen, City of Hood River’s planning director; and Tom McCoy, a farmer, Sherman County commissioner, recovering economist and member of the Governor’s Council of Economic Advisors in the 1990s.

Like everywhere, housing affordability is the biggest issue in recent years. The region has underbuilt housing relative to population growth since the Great Recession. This dynamic, unfortunately isn’t unique to the Gorge. That said, Hood River is in the 99th percentile nationwide for the worst affordability among rural counties. That means only 1% of all US rural counties have higher home prices relative to household incomes. The rest of the gorge doesn’t fare much better as Wasco is in the 93rd percentile, Sherman in the 90th, Wheeler in the 86th, and Gilliam in the 68th.

The affordability crunch and lack of available units has pushed people to search in other areas of the gorge. If housing is unavailable in Hood River, people are moving to The Dalles, and from there to Biggs, Moro and other small towns in the area.

Vacation rentals and second homes are additional hurdle in the gorge. While the region has underbuilt housing relative to population growth in the past decade or two, when you factor in these second homes the ratio is even worse. To be clear, the housing imbalance is due to a supply side problem of not enough construction, not that demand is too high or population is increasing faster than it typically does in expansion. 

While the above is true pretty much everywhere in Oregon, there were a few items in particular that stood out in the discussion.

One, the City of Hood River recently passed restrictions on short-term rentals. Only primary residences can be rented out short-term, and only for a set number of nights per year. Second homes are not allowed to do short-term rentals, at least within the city limits. This will be something to monitor moving forward in terms of the rental housing stock, and how these policies impact available units for residents, and how it may or may not curb second homes in the area.

Two, the issue of effective land supply versus what land is actually zoned on paper is an issue. Now, I hear this issue throughout the state as well. But in the gorge they are going parcel by parcel and figuring out what can realistically be developed in the near future. Some big issues are large tracts of land zoned for housing (either single family or higher densities) but they remain as farms today with no plans to redevelop. This, in essence, means just looking at zoning overstates the true, effective land supply in the region. To help address this issue, Hood River included an amendment to their housing/land use work that looked just at this effective land supply, which showed a larger need than if they only looked at a current map of zoning. As a result they do have a multi-pronged approach that includes rezoning (upzoning) and more new construction. Will be interesting to see how this plays out moving forward and to what extent getting at the true, effective land supply helps planning, construction, and affordability moving forward.

Three, Sherman County now has a partial renovation payment for people who come in and fix up rental properties in the county. As is seen elsewhere in the country where the housing stock was built for a larger population, there are numerous older units that are falling into varying stages of disrepair. Sherman County’s population is largely flat in recent years, but down over the past couple of generations. It is down enough that they are worried about the viability of the grocery store. So providing an incentive program to help increase the useful housing supply, and provide a place for new residents to live certainly seems like a smart strategy. The program is modeled after a similar one in Morrow County. This is the first I’ve heard of these, and looking forward to seeing the outcomes moving forward.

Stay tuned for Part 2 and the tech/UAS panel discussion.

Posted by: Josh Lehner | July 25, 2018

The Housing Market is Rebalancing, at Least in Portland

There’s a basic story I like to tell when giving presentations on the housing outlook. It goes like this. After years of significantly underbuilding housing, new construction activity continues to pick up. Supply is increasing. After years of acceleration, population growth and migration trends are ebbing. Demand is stabilizing and set to slow. The housing market is moving toward better balance. Couple this with continued household income gains and affordability should improve in the coming years. It’s a neat, concise story. However, the real world is messier and uneven across different regions of the state.

To this end, the housing market is not yet rebalancing statewide as far as I can tell. When I comb through rental reports and local realtor statistics, inventories and vacancies remain low nearly everywhere. It is still a landlord’s or seller’s market throughout much of Oregon. That said, the tide is turning a bit in the Portland region, which has seen the biggest increases in new construction (both in absolute terms, but also relative to population gains). Rents are flat or down, see Joe Cortright at City Observatory for the latest. And the ownership market is cooling just a bit as well. Sales of homes are stable to down, and inventory is rising. The market is clearly shifting. Buyers have a few more options relative to the breakneck pace of recent years. Elliot Njus had a good summary in The Oregonian on this the other day. Inventory remains lean, yes, but it is rising which brings somewhat better balance.

However, underlying these topline trends, different factors are at play. Rising interest rates make the financing costs of carrying a mortgage more burdensome for households, as do higher home prices. As the market rebalances, will the adjustment be on the buyer or on the seller? Meaning, will buyers continue to spend a larger share of their income on housing, or will the adjustment come in the form of slower price appreciation? My bet is on the latter. At some point rising borrowing costs will have to come out of the selling price as households max out their budget. For every one percentage point increase in the mortgage rate, purchasing power falls by about 10 percent. Meaning if you can afford a $400,000 home at a 4% interest rate, you can afford a $360,000 home at a 5% interest rate. That said, at least so far in recent years, it has been the buyer doing the adjusting and spending more. Sellers have reaped the benefits, as have all owners in terms of home equity.

Leonard Keifer, Freddie Mac’s deputy chief economist, is a great follow on Twitter in general for housing stats and data visualizations created in R. He does this periodic update that highlights what happens to different housing measures when we see a big rise in mortgage rates. Below I do my best impersonation of Len’s work but for the Portland market.

Essentially we have experienced three separate run-ups in mortgage rates (and other long term interest rates) in recent years. The taper tantrum back in 2013, another following the 2016 presidential election, and again in recent months. It is pretty clear in the data that the one percentage point increase in mortgage rates during the Taper Tantrum cooled the housing market in 2013 and 2014. Price appreciation slowed considerably, and home sales fell around 10% nationwide (12% in the Portland market). As interest rates declined in 2014, 2015, and 2016, price appreciation and home sales revived. Rising mortgage rates in the last couple of years result in a similar pattern, although less pronounced.

I think the reason for that is affordability is worsening, at least based on available data today*. The combination of higher interest rates and home prices mean households have to devote a larger share of their income to housing, if they want to buy. For much of the recent past this was less of a problem given low interest rates and strong gains in household income. The rise in housing costs reflected more of a return to normal following the record affordability in the aftermath of the Great Recession, if you had the money and could get credit that is.

However this recent upward movement in housing costs pushes affordability beyond where it was throughout the 1990s and early 2000s. This is why moving forward I would expect to continue to see home prices slow to something more inline with income gains, or even slower if inventory continues to build. The reason is higher mortgage rates are here to stay, and should largely move sideways or up between now and the next recession.

Of course there are myriad factors that can alter this outlook, including to what degree does new construction and household formation differ from forecast. Furthermore, in the worst case scenario, the stage is now set for another bubble where supply increases, and yet households devote an increasing share of their income toward housing in the belief that rising prices will save them. We’re still a long way from that, and mortgage debt remains tame, but given the past 15 years it, unfortunately, cannot be ruled out entirely even if it is unlikely.

*Our office’s affordability measure is based on costs relative to median family income. We are assuming relatively strong income gains in both 2017 and 2018, but not quite as strong as Census data showed for 2015 and 2016. If gains continue at those paces, housing costs would be about 1 percentage point lower in 2018 than what is shown in the chart. Better, yes, but not enough to offset rising prices and mortgage rates.

Posted by: Josh Lehner | July 20, 2018

Fun Friday: Air Conditioning

During recent heat waves I have seen social media posts on how hot a person’s home was at bedtime, or what the outside temperature is in the middle of the night. Personally, I certainly remember the last major heat wave where I didn’t have AC. We covered ourselves in wet towels to cool down and try to fall asleep. It was brutal. So, just as everyone does, I went searching for data on how many people actually have air conditioning here in Oregon. (Everyone does things like that, right?)

Well, a year ago in the New York Times, Emily Badger and Alan Blinder wrote “How Air-Conditioning Conquered America (Even the Pacific Northwest)” which highlights and details trends over time. (HT: David Beffert on Twitter). As they discuss, western states have lower levels of AC use than the rest of the country. Unfortunately we cannot get statewide or even county/regional data from Census about air conditioning. It looks like Census only asked about this in 1960, 1970, and 1980. You have to turn to third party data for those types of estimates.

That said, not all hope is lost in this data quest for information on air conditioning. The American Housing Survey asks about AC, but only really covers the biggest metropolitan areas of the country. In digging into those results, it is western metros that lead (?) the nation in their lack of air conditioning. Seattle ranks #1 among the 42 covered metros in terms of not having AC, while Portland ranks #3. However, Seattle and San Francisco truly are in another stratosphere than even Portland, LA, and Denver when it comes to the use, or lack thereof of AC. Now, given climates in these locations it makes sense that they rely on AC less than in the Midwest and South, and frankly other western metros like Las Vegas and Phoenix. However that is hardly reassuring to those who just lived through the latest heat wave.

Of course not all housing units are created equal. Whether or not your house or apartment has AC is in part a function of what type of housing unit you live in and when it was built. Unfortunately we cannot get a complete cross tabulation of this data from the AHS — the data is suppressed — but you can get an overall feel for the pattern of AC in the Portland area. Single family homes have higher AC usage, as do large apartment buildings (probably because a lot of these are newer construction). While the old Oregon specialty of quads and eight-plexes have low levels of AC use, at least in part because a lot of these were built in the 1960s and 1970s.

Update: In the comments (and via email) it was brought to my attention that the Northwest Energy Efficiency Alliance (NEEA) has great information on housing units in the NW, across Idaho, Montana, Oregon, and Washington. You can find their 2016-2017 report HERE. There is tons of great information in that report when it comes to not just air conditioning, but wall/ceiling insulation, heat source, finished/unfinished basements and so much more. As for air conditioning, among single family homes it looks like Montana is actually the lowest at 48% having AC, Washington clocks in at 52%, Oregon at 59%, and Idaho at 78%. Thanks for the heads up, and let me know if there are other great resources out there too.

Posted by: Josh Lehner | July 19, 2018

Welcome to the Trade Skirmish

Tariff proposals and enactments continue to build in recent months. The situation has not risen all the way to a full-blown trade war, or at least not yet.  But we need to call it something. Trade fisticuffs doesn’t quite sound right, so let’s go with trade skirmish for now. This post largely builds upon previous work from our office on global supply chains and Oregon’s direct trade exposure to China.

The upshot of the trade skirmish remains that the direct exposure of goods subject to tariffs is small when measured against the size of the economy. Yes, we’re talking about nearly $60 billion worth of U.S. exports, but in a $19 trillion economy that represents 0.3 percent. And even as these exports will decline some, they will not go to zero overnight. Given the relative size of the tariffs, some forecasters are not adjusting their outlook at all, while others are revising down their growth expectations a hair, something like shaving 0.1 percentage points of growth off their 2019 GDP forecasts. As such, the real macroeconomic concerns remain focused on continued escalation across products and/or involving more countries.

The reason for the concern is that we now have integrated, global supply chains. While goods producing industries rely more upon imports than other sectors, every single industry imports something. As Moody’s Analytics writes in their trade report, “higher tariffs change the economics of the supply chain. If the tariffs remain in place long enough, they will cause the chain to shift.” They go on to note that this shift, should it occur, will be highly disruptive. Economist Paul Krugman, Nobel winner for his trade work, notes something similar as well. The big picture concerns aren’t where things stand today, but where they may head in the future should a full-blown trade war occur.

This next chart tries to show overall trade exposure for the various subsectors within manufacturing. On the horizontal axis is a measure of import exposure, while on the vertical axis we look at export exposure. The size of the bubbles represent the size of industry output.

A few subsectors stand out. First, petroleum and coal manufacturing uses a lot of imports but the U.S. exports very little of these goods. Second, transportation equipment (autos, aerospace) is a big sector with both imports and exports that are significantly above average rates. We know this industry has a true global supply chain. Third, computer and electronic products have a small share of import exposure but the highest export exposure across manufacturing. Here in Oregon we know a lot of these exports represent within firm shipments to assembly plants around the world, but I cannot speak for the other 96% of these exports. Finally, sectors like food and beverage, wood products, printing and the like have relatively small trade exposures as they rely on U.S. grown or produced inputs and sell largely to the domestic/local market.

For Oregon specifically, we are now talking about $800 million worth of goods subject to the enacted or proposed tariffs.

Within these tariff impacted exports there are two groups. The first is composed of Oregon-made products that are sold abroad. This includes wheat heading to China and wood products heading to Canada. However the second group of products represent things that aren’t necessarily made in Oregon, but for whatever reason get coded as Oregon exports. This includes the passenger vehicles and soybeans heading to China. Now, Census and WISERTrade do their best in coding exports back to where they were made, but there are limitations to their data and efforts. Additionally, while these products may not be grown or produced in Oregon, they do have a local economic impact in terms of port jobs, transportation, warehousing, logistics and the like. So a decline in these exports nationwide would have a local impact as well, just not nearly as large as if those good were made here in Oregon. Finally, it is highly likely that some Oregon-made products get counted as exports to other states as well, so the real world impacts will not be confined to what is seen above.

Bottom Line: The trade skirmish is here. Tariffs are raising the prices of some imported goods and will curtail some exports as well. To date these actions have minimal macroeconomic impact, even if specific businesses and industries see larger changes. The real concerns lie with continued escalation that would eventually disrupt the global economic supply chains. Should this come to pass, the economy would see noticeable impacts. Moody’s Analytics, in their trade war scenario, pegs the decline in GDP relative to baseline around 1.5 percentage points and more than 2 million jobs nationwide. In a full-blown worldwide trade war where international trade falls by 70 percent, Krugman finds a 2% GDP decline is plausible. That is an outright decline, not a reduction relative to the baseline. Again, the economy is far from these potential scenarios today, however there does not seem to be a clear resolution in sight either.

Addendum: A look at export exposure across all states ranked from the highest to lowest in terms of the size/value of their exports subject to tariffs.

Posted by: Josh Lehner | July 10, 2018

Deciphering Oregon’s Tight Labor Market

We know the economy is beginning to run into capacity constraints. The biggest issue today facing Oregon firms is the ability to attract and retain workers. The labor market is getting tighter for two primary reasons: a strong economy, and demographics as retirements increase. These factors are seen across the entire economy, not in an industry or two. Overall this results in slowing statewide job growth as the economy transitions down to more sustainable rates.

That said a tighter labor market is not the same as a true labor shortage. There is plenty of evidence of the former and none of the latter. The share of prime working-age Oregonians with a job is back to where it was a decade ago, yes, but remains lower than in the late 1990s. In fact we continue to see the labor force response where previously sidelined individuals return in search of these more-plentiful, and higher-paying jobs. Additionally a true labor shortage, or a genuine lack of workers is not the same as a skills gap. While these concepts are intertwined (or even nested), the implications and policy prescriptions are different.

Supplementing data with qualitative information and reports is a great way to help flesh out the entire story. One such source is the job vacancy survey our friends over at the Oregon Employment Department do (full report, blog summary). Given Employment has conducted the survey for 5 years now, we have a treasure trove of information on hiring directly from Oregon businesses. The recent report is filled with juicy anecdotes like an Oregon grocery store that had zero applicants for more than six months. Do read the real report for more information.

To start I like to group the responses into different buckets to gauge overall trends. First, Oregon firms continue to report that a plurality of their job openings are not difficult-to-fill. It takes time to post a job, conduct interviews, and get all the paperwork filled out, so it is no surprise that many job openings reflect general labor market churn, akin to, say, frictional unemployment. Second, when it comes to the rising number of difficult-to-fill openings in Oregon, the relative pattern has remained essentially unchanged in recent years. Roughly, an equal number of these difficult-to-fill positions are due to a general lack of applicants, issues with the jobs or employers themselves, and issues with underqualified applicants. Each of these segments has different implications for the economy and policy, but so far none are really sticking out.

A general lack of applicants is likely tied to the overall tightness of the labor market, and potentially a true labor shortage should it come to pass. Job-specific or employer issues are a reflection on the jobs themselves, including low wages, unfavorable working conditions and the like. These issues are best addressed by individual firms or industries. However it is the third group, the underqualified applicants, that is the most important to watch for legitimate workforce issues, including a skills gap should it ever materialize.

In digging into the details, or individual responses, there are only a few changes from 2016 to 2017 that stand out. First, the increase in not difficult-to-fill positions. Second, the increase in difficult-to-fill positions but no reason given as to why the vacancies were difficult-to-fill. This makes it hard to interpret these results. And third there was a sizable increase in the lack of soft skills as a reason for why some positions are difficult-to-fill.

From the report:

Soft skills include professional competencies required for a job, such as communication, interpersonal, and social skills. In the Job Vacancy Survey it included employer responses related to subjective traits such as honesty, reliability, and motivation. It also included more quantifiable traits such as having a valid driver’s license and clean driving record, passing a background check, and passing a drug screen.

The report goes on to note that drug testing issues accounted for 1-2% of all vacancies from 2013 to 2016, however they increased to 4% in 2017. This is similar to what our office noted a few weeks back and in our latest forecast document. And in our forecast advisory meetings our friends at Employment did share with us some of this information during the discussion of the labor market and anecdotal reports our office has received. Again, we’re not exactly sure what to make of this development. Some of it likely is a compositional issue, but it does warrant monitoring these trends moving forward.

So what are employers expected to do? For one they must dig a bit deeper into their resume stack to find workers that may have been previously passed over. This includes searching in places where participation is down but likely to respond in a strong economy. Employers may also downskill some positions by having fewer skill and/or work experience requirements. Similarly, on-the-job training becomes considerably more important in a tight labor market. And raising wages to compete in the market. Additionally providing other benefits like consistent hours, or a flexible work arrangement, and the like can similarly attract and retain workers.

Bottom Line: To date, based on the information and responses from Oregon businesses, it does not yet appear that Oregon is facing a genuine labor shortage, nor the much-hyped-but-never-proven skills gap. This is great news. The pattern of job vacancies overall reflect a strong economy in which businesses are having a harder time filling positions, but at least not yet due to legitimate labor market problems. Oregon’s working-age population continues to grow, in large part due to migration trends. However, the tighter labor market is expected to remain until the next recession. It does makes it a bit more challenging for firms to grow and expand, but it is also good news for workers as strong wage growth is expected to continue as well.

Posted by: Josh Lehner | June 27, 2018

Oregon’s Food Economy

When our office discusses Oregon’s world class strengths, we tend to focus primarily on things like timber, semiconductors, and migration, with only passing reference to the others, like UAVs and food and beverage. This is in part due to the fact we have spent less time researching these topics; alcohol being an exception. And also in part because it is difficult to properly frame the conversation given that residents in every state eat and drink. However our office is asked periodically about the state’s food and beverage sector and also the tie-in with tourism. Consider this post a first effort to help quantify the discussion and highlight how Oregon differs from other states. Our office is indebted to Portland State researchers who produced a tremendous report for the City of Portland a few years ago. It breaks down the food economy into segments representing different portions of the supply chain. The report goes from farm to table, but with economic data. What follows below borrows heavily from the Portland State report.

Oregon’s food economy overall employs nearly 290,000 workers, or 15% of the state workforce. It accounts for 4-5% of state GDP in recent years. One-third of these workers — nearly 100,000 — are in the production, processing, and distribution segments of the food economy. It is here where Oregon has a distinct comparative advantage, and a growing national share of the market. However, most of us only really interact with the fourth segment of the food economy: food services. The lion’s share of jobs are found in these food services, which includes restaurants, supermarkets, specialty food and beverage stores, food carts and the like. And while these services garner the (inter)national attention, and satisfy our tastebuds, they play a lesser role in terms of the economic impact and what makes Oregon unique from an industrial structure perspective. This is partially because food services are largely driven by population and consumer spending patterns. Even as Oregon may be home to award-winning chefs and renown restaurants, residents of other states also go out to eat. Standard economic data is insufficient to distinguish between the quality of products or services sold.

Where Oregon’s food economy differs from other states is on the production and processing portions of the food economy. The more famous food services are an integral segment, a byproduct and growth off of the fact Oregon is home to successful producers and processors of the local food economy. Specifically, Oregon’s location quotient for food production is 2.6, meaning the concentration of agricultural jobs is two and a half times what it is nationwide. This is primarily driven by crops (grains, fruits, vegetables, etc) and fishing. Additionally, Oregon’s location quotient for food processing is 1.5 meaning the local concentration 50% larger than in the average state.

As seen in the chart above, the growth in food processing really stands out both here in Oregon, and when we look across the country. These processing jobs (food manufacturing plus beverage manufacturing) are being driven not just by overall economic growth, but also a regional shift, or regional competitive effect. Using a shift-share analysis, the overall growth in food processing jobs in Oregon is 70% regional competitive effect. Contrast these processing gains with those seen in food production and food services which are 99% and 97%, respectively, driven by the national growth and the industry mix components of the shift-share analysis. In other words, the growth seen in much of the food economy can be tied to general economic and industry trends. However, Oregon’s food processing growth is predominantly due to Oregon gaining a significantly larger slice of the pie.

To help frame these gains I looked at changes across all states over the past decade. The next few charts focus just on food manufacturing (NAICS 311) and leaves beverages to the side for a moment. Here you can see Oregon is among the top performers for job growth both in the absolute number of jobs gained, and in percentage terms.

What is most surprising to me, however, is how broad-based these gains have been across the various subsectors here in Oregon and across the state from a geographic perspective. Anecdotally, our office has heard reports about the growth of the frozen food companies here in the Willamette Valley as they import more products during the offseason to keep production high and employees working, in addition to some of the bread and bakery growth in the Portland region. However in digging a little bit deeper, it is clear that those ancedotal reports in recent years are just a portion of the overall growth.

Nearly every single subsector of food manufacturing has added jobs in the past decade. Yes, dairy manufacturers are flat over the 10 years but this includes many years of growth followed by a large drop in 2015, only to resume growth again in 2016 and 2017. I am unsure of what is happening there. Additionally it should be pointed out that a small portion of these gains, a few hundred at most, are due to the growth of the recreational marijuana industry. Companies making edibles are classified into food manufacturing, mostly into the bakeries and confectionery product subsectors. However the marijuana gains are very small compared with the overall growth seen in the past decade.

Additionally, the food manufacturing job gains are widespread across the state. The largest concentration of firms and employment is in the Portland region, however the strongest gains in percentage terms are seen in the Rogue Valley, Central Oregon, and the Columbia Gorge.

Given the strong growth in the past 15 years, and expectations that the food economy will continue to outpace the overall economy moving forward, what types of jobs are we talking about? In the NERC report, they highlight both wages and skills needed (educational attainment) for most of these jobs from an industry and occupational perspective. On net, food economy jobs pay relatively low wages. In the job polarization research, the food production and food service jobs are considered low-wage occupations, while the food processing and food distribution jobs are considered middle-wage (or lower middle-wage). That said, the largest occupations included in the food economy do not require formal education beyond high school, with the exception of truck drivers for the distribution. Among all Oregon jobs that do not require a college degree, food economy jobs — particularly food processing and distribution — pay similar to others in this broad group.

Finally, the market for Oregon-grown and Oregon-made products is much larger outside the state than inside the state. As such, Oregon firms are finding success in exporting their products across the country and around the world. For smaller producers and manufacturers, finding a niche market is one way to help weather both commodity price swings and competition from larger firms. In the past decade, Oregon’s food producers and processors export $2-3 billion in value of products internationally.

Bottom Line: Oregon’s food economy is helping drive overall growth in the state. Above average gains are expected in the coming years as well. The largest segment of the food economy are the services, which garner much of the deserved acclaim. However it is the food production and food processing where Oregon stands apart from most states. The growth in local food processing means Oregon is getting a larger slice of the value-added manufacturing segment of the food economy. These gains are broad-based across subsectors and regions of the state.

Posted by: Josh Lehner | June 22, 2018

Fun Friday: Guard the Northern Flank

Previously our office found that the Portland region continues to experience net in-migration among lower-income households. However that does not mean households are not responding to the changing housing market and moving around — either by choice or by (financial) force. As such, our office continues to be on the lookout for spillover impacts of the housing crunch. For one, we know that many displaced households in the Portland area are moving into East Multnomah County. However, if you are willing to paint with broad strokes from a tiny sample size*, we are also seeing long-time migration patterns between Portland and Salem shift as well. This is the first real sign of housing spillovers seen in the data outside the Portland region itself.

*I do mean tiny sample size. We’re talking around 20 individual household responses moving in each direction when it comes to analyzing the ACS microdata here. Some may say this is a data crime and I largely agree. However the data patterns make intuitive sense, and it is Fun Friday. Do take these results with a grain of salt.

Our office’s talking point has been that Oregon used to send it’s natural resources from the rural ares, up the Willamette into Portland and then out into the world. Today those natural resource flows have largely been replaced with human resources (people). Many, young working-age Oregonians do move into the state’s urban areas. And from there many do end up in the Portland region. This includes net migration from the rest of the Willamette Valley into the Portland area. However, that pattern appears to have shifted. For the first time I can remember we are now seeing net migration out of the Portland area and into Salem (Marion County). It is not just the total number of people or households moving either. The migrants into Salem have higher incomes, much higher homeownership rates, and they are buying homes that are about 25% more expensive than what local Salem residents are buying in recent years. But those higher prices are still less than most houses in the Portland area sell for. As such, some of these shifts appear to be housing-related spillover.

Commuting patterns are another way to help gauge the spillover. While we cannot easily answer the Salem to Portland commute question, or at least not with a good enough time series to gauge trends, we do have some information. Examining commuting out of Salem to any and all metro areas — Portland yes, but also Albany, Corvallis, Eugene plus small numbers to other areas — shows that the absolute number reached a record high in 2016. However, when measured as a share of the workforce, these commuters are back to where they were prior to the Great Recession. This data is at least suggestive of spillover effects as well, or at a minimum a more integrated labor market throughout the Willamette Valley.

All told, these patterns may be at least in part driven by affordability problems in the Portland region. But they are also at least in part driven by the benefits and amenities of the Salem area. The Salem economy is booming, experiencing the best economic expansion the region has seen in at least 25 years. The job growth is strong and broad-based across industries. Household incomes are outpacing other Willamette Valley metros. Salem’s downtown is noticeably more vibrant than at any point in the past decade based on foot traffic and building remodeling activity. The region also boasts great demographics.

However, in conversation with Salem residents, realtors, and the like — you’re not going to believe this** — the concern is the relatively new Portland migrants are worsening affordability and changing the character and culture as well. Now, the Salem area is building hardly any new housing units (see slide 17.) The lack of new supply is a major problem, even more so than the return to average levels of demand.  That said, these issues are pretty much universal across the state, and no matter where I go, these housing conversations are always the same, it’s just the name or location of the new residents that changes.

** You will totally believe it.

Note: All of the above uses American Community Survey data through 2016. 2017 data is coming out this fall and our office will update some of this work when available.

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