Posted by: Josh Lehner | January 8, 2018

The Labor Market Will Remain Tight

The labor market is tight. Difficulty finding (and retaining) workers is the biggest challenge many businesses face today. Whether or not the economy is truly at full employment is largely an academic issue*. In practice, we’re essentially there. This is especially true in Oregon relative to much of the country. However, that also does not mean the labor market cannot get tighter, or it cannot become more challenging to find workers. Furthermore, the tight labor market is expected to remain until the next recession hits and the cycle starts anew. That said, the tight market today is really the result of two different, and independent cycles coming to a head.

The first is the business cycle, which is, err, cyclical. The expansion is in its ninth year, unemployment is flirting with record lows, and we’ve seen the labor force response you would expect. There is no longer a large reserve of potential workers just waiting around for a job. There are some, of course, but the share of the prime working-age population in Oregon that has a job is back to where we were a decade ago. It can go higher still, and we should hope it does. A tight labor market will continue to pull workers back into the economy, and force businesses to dig deeper in the resume stack, as well as increase wages to attract and retain talent. All good things! However, the result is the low hanging fruit of economic slack is gone. The growth moving forward will be slower, and likely more difficult as the economy runs into supply side constraints.

The second cycle impacting the tight labor market is demographics, which are structural. While we’ve known about the demographic imbalances for decades, and our office has built in slower net growth moving forward for quite some time, we’re finally at the point where the crunch is truly happening. Yes, the working-age population in Oregon is continuing to increase. There are more warm bodies available to work, or potentially available to work, however that increase is smaller today due to the uptick in retirements. The large Baby Boomer cohort (now about 54-73 years old) are continuing to age into their classic, or active retirement years. It will be another 15 years or so before the vast majority of Baby Boomers are not longer in the labor force at all. While economic strength ebbs and flows with the business cycle, this demographic crunch will remain throughout the coming decade, possibly two.

In the chart above, I’m using 19 year olds as an example of the intake, or the inflows into the working-age population, to compare it with the outflows of retirements. The labor market is obviously much more complex than this, and adding or losing middle-age workers for different reasons impacts overall economic growth as well. I’m also using 19 year olds because I am doing additional work on the trades, or on classic blue collar occupations and the like. Many of these workers do not attend 4 year universities, as they learn their skills on the job and through apprenticeships. More on that when it’s available, although it will be based on U.S. data due to sample size concerns.

Bottom Line: The labor market is tight and expected to remain so until the next recession. The cyclical issues will come and go, however the demographic crunch is finally upon us and here to stay for the foreseeable future.

* Count me on the “there is still some slack remaining, but it will be increasingly difficult to wring out, but we should still try to get it” side. Or as The Economist’s Ryan Avent likes to say, “try overshooting for once.”

Posted by: Josh Lehner | January 4, 2018

Recreational Marijuana Sales (Graph of the Week)

The big news this morning is that the federal government, led by Attorney General Jeff Sessions is set to rescind the so-called Cole memo, or memos as the case may be. For those who don’t know, the New York Times describes it as “an Obama-era policy of discouraging federal prosecutors from bringing charges of marijuana-related crimes in states that had legalized sales of the drug.” In practice this allowed Colorado and Washington first, followed by Oregon, Alaska, Nevada, and now California to establish recreational marijuana markets and not worry too heavily about federal prosecutors cracking down on these operations which were legal at the state level, but never legal at the federal level.

Last year, our office was tasked with forecasting recreational marijuana tax revenues for the state. You can read our summary here. Included in our work, and discussed with our advisory group was the possibility of changes in federal policy, or direction. This was especially salient given the changes in the executive branch. Our forecast summarizes it as a risk (PDF pg 38):

Finally, the one risk that looms large over the entire forecast is the federal government. While there has been no clear warning or action taken, there is a non-zero chance the federal government could step in and eliminate, or severely restrict recreational marijuana sales. In this event, taxes collected would be considerably less than forecasted.

Well, now there does appear to some action taken. Ultimately it will likely come down to enforcement, and the choices prosecutors make. We will be meeting with our advisory group again this month, and will discuss the implications of these changes, along with other issues and trends in the recreational marijuana market. More on this after our meeting and as we get closer to the Feb 16th forecast.

All of this brings us to this edition of the Graph of the Week, which shows monthly recreational marijuana sales for Colorado, Washington, Oregon and Nevada. These sales figures are estimates based on reported tax collections, and do not include medical marijuana sales. In total across the four states, they are seeing around $250 million in recreational marijuana sales per month. Additionally, all states continue to see growth in this newly legalized world. However the exact level of sales is also determined by the size of the population, usage rates, and tax policy, among other factors.

In fact, in my preferred chart in comparing sales trends, Oregon’s first year and a half of sales are nearly identical to Colorado’s first year and a half of sales, after you control for population size. Let’s call this the Bonus Graph of the Week. Also note that Nevada is seeing strong sales in their first few months. Nevada is currently selling about the same amount of recreational marijuana as Oregon is today, however with a much smaller population. Their initial adjusted sales data is the highest we’ve seen among the legalized states. Nevada and Las Vegas in particular are also a tourism hub, and thus are seeing larger sales than the resident population alone would suggest. I don’t have a huge reason to believe cannabis tourism is a big factor in Oregon’s sales, but I think it clearly is in Nevada.

As we write in our forecasts, there are a lot of risks to the recreational marijuana outlook. In particular, usage rates, prices, harvest levels, regulations and the like both have upside and downside implications for the forecast. However, none of those loom as large as changes in federal policy. Today’s actions may end up mattering substantially, or not so much, but we don’t know the answer yet. Our office will continue to work with our advisors, and to adjust the tax revenue outlook accordingly.

Posted by: Josh Lehner | December 20, 2017

More on Housing Supply, Affordability, and Filtering

Last week’s post, Why Housing Supply Matters, generated quite a bit of interest. I have fielded a number of requests from folks asking for similar types of analysis for their specific region of the state, among other things. What follows below are the filtering charts for three different regions in Oregon for which data is available.

These so-called PUMAs, or Public Use Microdata Areas, are the lowest level of geography available for which one can download the underlying Census data and perform one’s own analysis. The standard, published Census tables can go to a much more granular geographic level of course, however you are limited in what information is available. For example, you could look at median rent or median home value by decade of construction at a more granular level, but you would be unable to look at the rent/home value distribution by decade and how those homes or apartments fit into the overall market.

Additionally, keep in mind that that PUMAs have smaller sample sizes, which can result in larger margin of errors depending upon what one is examining. For example, the first two PUMAs examined today have underlying sample sizes in the 600-700 range. That’s not bad of course. The same is true for the Portland region as well, where there are more than a dozen individual PUMAs. However when we looked at the Portland region as a whole last week, the combined sample was more than 9,000.

First, lets look at the North Central Oregon PUMA, which covers the Columbia Gorge, stretching into Eastern Oregon, and then down into Central Oregon excluding Deschutes County. Overall, this PUMA’s pattern of growth, and filtering looks very similar to the Portland region and Oregon overall. That said, we know this PUMA contains a wide array of cities and regional economies with varying levels of economic performance. Is this chart perfectly applicable in Hood River and in Fossil? No, of course not. Each city, or county for that matter differs given their local conditions. That said, this is as good of a look as we can do for this region of the state given data availability, and, in the big picture, the same general patterns are evident.

Next we turn our attention to the southwestern corner of the state: Coos, Curry, and Josephine counties. These three counties combine comprise another PUMA for which data is available. One difference seen in this part of the state is the relative lack of construction in the 1990s (at least compared to other parts of the state). This is likely part of a hangover from the early 1980s recession when the timber industry restructured. It took Coos County until the mid- to late-1990s to fully regain the total level of employment it had in 1979. So relatively less new construction in an economically hard-hit area seeing slower population gains makes sense. Overall, I think most of the older housing was built on the south coast, while the newer (1990s-today) is mostly going to be Josephine county construction. The least expensive third in the housing market in SW Oregon is rents less than $500 per month or homes less than $170,000.

Finally, it can be helpful to look within a region to see how the housing stock fits together. The chart below shows the SE Portland PUMA (essentially the Brooklyn and Sellwood neighborhoods in Portland out through the Lents neighborhood). You can see the Census map here, but fair warning that it is a giant sized PDF file. I kept the price points for dividing up the stock the same as the overall Portland metro, because the goal is to see how SE Portland fits into the bigger picture. Here a couple of things stand out. First is the large stock of older housing. This makes sense particularly given these are close-in neighborhoods that have existed pretty much since Portland was founded. Second, SE Portland overall is about 5% of the Portland MSA’s total housing stock. However it accounts for 4% of the least expensive third, nearly 6% of the middle third, and 5% of the most expensive third. So the SE Portland PUMA is certainly average to above average in terms of housing costs, but maybe not quite as much as one might think. However, there is considerable variation within the PUMA as well, given prices in Sellwood or Eastmoreland vs Lents. This situation is similar to that of the North Central Oregon PUMA where the geographic area can mask some of the unequal distribution within the region. This goes to highlight one of the limitations of the data.

Anyway, just a bit more food for thought and a few other examples along these lines. Happy holidays everyone.

Posted by: Josh Lehner | December 14, 2017

Why Housing Supply Matters

Last week, I was a panel member for the YIMBY (Yes In My Back Yard) breakout discussion at the Oregon Leadership Summit. The group overall discussed the lack of supply, the importance of affordability, some regulations, market conditions, public policies and the like. It was a wide-ranging and informative session, if I may say so myself. Today I want to recap a few things, and take another stab at visualizing the importance of housing supply and the role of filtering.

First, I discussed a few of the bigger picture things our office has done, including the significance of affordability for Oregon’s long-run economic growth, the fact that affordability truly is a statewide challenge, the main housing supply constraints holding back construction in recent years, and the importance of household income gains for affordability.

Second, the basis for the whole YIMBY panel is some forthcoming research by ECONorthwest, led by Mike Wilkerson. While our office has done some back-of-the-envelope calculations trying to quantify the underbuilding of housing, Mike and ECONorthwest bring a full-fledged model looking not just at Oregon, but across all states. The upshot of the research is Oregon has probably underbuilt housing even more than we think we have. One result of this work is that for the first time the Oregon Business Plan is incorporating a housing supply/new construction goal. In essence, the newly stated goal is for Oregon to build 30,000 new housing units per year. This calculation is based on our office’s forecast for housing starts (~24,000 per year) plus an additional amount of new construction to make-up the lost ground over time.

Third, just as we know affordability is a statewide challenge, we know the lack of new supply is too. Every region in Oregon is adding jobs and new residents, however we continue to see very low levels of construction – not just relative to the bubble, but prior to that even. This is particularly the case once you get outside of the Portland area.

Fourth, as we discussed previously, housing does filter. New construction is always expensive and always aimed at the upper third or so of the market. That said, over time as housing depreciates, it does become more affordable. This filtering does not happen overnight. It is a long-run process. Filtering is also the major way to provide reasonably priced workforce housing for those making in and around the median family income. There is not nearly enough public money to fund the affordability gap, given the demand is too large, and the costs are too high. Now, there is a role for the public sector to play, particularly for the lowest income households. Don’t get me wrong. Every single unit counts. However, the solution has to mostly be a private market solution. And the linchpin to this process is to continuously add new supply. If you build more housing, you get more filtering.

Finally, what follows is another effort to show how filtering works in the real world. What the charts below show is the current housing stock in the Portland metro based on the recently released 2016 American Community Survey data. The first chart shows the housing stock divided into thirds based on home values or monthly rents*. Then we look at when these units were built by decade. Remember, we segmented by price first, then by decade of construction, not the other way around.

From a big picture perspective, you will see that we have some expensive and some more affordable units from each decade, even if the exact breakdown varies based upon the unit type, geographic location, quality of construction and the like. That said, for today I want to focus just on the least expensive third of the current housing market, or the red portion. Basically, these are apartments that rent for less than $890 per month, and homes valued below $290,000.

The biggest takeaway you see is that the total or absolute number of these more affordable units is pretty evenly distributed across the decades. Yes, there are more of these units from the 1970s and 1990s because Portland built more overall during those decades. However, there are also as many relatively affordable units built in the 2000s as there are from the 1980s and 1960s. This, too, is because the Portland region built more housing in the 2000s. If you look back at the chart above, in the 2000s Portland built nearly a third more housing than in the 1980s, and nearly double what was built in the 1960s. Again, if you build more housing, you get more filtering.

All of that said, the really unsatisfactory part of this work is noticing how little the 2010s production has been to date. Yes, of course, we have yet to see the full decade. However, even with a few more decent years like we have seen lately, the 2010s is on pace to build as many units as we did in the 1980s. And that’s in the Portland area. Across the rest of the state we will surely build fewer units.

While the current lack of supply is a problem today, it will also last a generation, if not longer. The wounds of the Great Recession and housing shortage may heal, but they will remain visible. The reason is that the units that are currently filtering from more expensive to less expensive today are those largely built in the 1990s and 2000s. Fast forward to the 2030s and the small number of units built in the 2010s means there are fewer units to go around, and fewer units to filter then. All of this ties back to the ECONorthwest research and the new business plan goal of not only building enough housing today to meet current demand and population growth, but also trying to build more than that to make up for the shortfall.

* To arrive at the overall housing market thirds, I did segment the market further into single family detached, single family attached, and multifamily for both ownership and rentals. I then added these segments together to get the total.

UPDATE: In a follow-up post, we take a similar look at the North Central Oregon region, Southwest Oregon, and SE Portland.

Addendum: In the comments, I was asked if I could show the single family broken out from the multifamily. Here are the charts for each big segment of the market I looked at. Same general story applies, although the exact specifics of which decade is the largest and which has filtered the most is a bit different. The biggest difference would be the 2000s, where we didn’t build as much multifamily, but we did a good amount of single family (it was the housing boom/bubble, after all).

 

Posted by: Josh Lehner | December 8, 2017

Oregon’s Population Outlook

When the latest population estimates for Oregon came out the other week (see our summary here), I promised you an update on our office’s forecast when it was available. Since then, Kanhaiya, the state demographer in our office, has updated the population forecast and we did discuss it a bit with the Legislature at our latest forecast release as well. The upshot of the new outlook is our forecast for Oregon’s population has been raised. We are expecting a larger population and slightly stronger population growth rates over the next decade than we previously assumed.

Now, it can be hard to tell that the outlook is a bit stronger today if you just look at our standard population forecast chart shown above. That’s because the general nature of the outlook remains unchanged. Oregon is growing, and net migration is driving the growth. What has changed relative to our previous outlook is the composition of this growth moving forward. Oregon is expected to be even more reliant upon migration than we previously thought. Births continue to come in lower than expected, and deaths are rising a bit faster than expected. So the overall increase in the population forecast is entirely due to stronger migration trends. Now, again, this general flavor of an outlook has been what our office has expected for quite some time. As the population ages, we will see more deaths, and births have been disappointing for some time. However, in recent years these trends have been a bit more pronounced than expected. Our forecast has been revised accordingly.

In fact the sharper decline in the natural increase (births minus deaths) is now leading our outlook to suggest that by 2029 the number of deaths in Oregon will actually outnumber births. This date has been pulled forward relative to previous forecasts due to the population numbers in recent years and expectations about their future trends.

What this means, is that migration is no longer just one of the primary drivers and the lifeblood of Oregon’s economy — and our office’s long-term outlook — but it is also a risk to the outlook. The reason it is a risk is that migration is an increasing share of our population growth. In a decade it will be the entire source. This growth does wonderful things for our economy on net, in particular it brings in young, skilled, working-age households. There are growing pains too, but overall it is a clear boon for Oregon. However, if this growth, or these expected migrants don’t come to Oregon in the future — for whatever reason, be it a poor economy, lack of affordability or something else — then our office’s long-term outlook will be revised lower. It would mean a smaller and slower growing economy, everything else equal. It would mean fewer sales for businesses, it would mean fewer workers, lower tax revenues and the like. So while migration is overall beneficial and a major driver of our office’s long-term outlook, it is also the likely linchpin. As such, that makes migration a risk to the outlook as well.

Finally, Kanhaiya’s been looking into births a bit more in depth and I want to revisit the issue in the near future. The fact that births are not increasing much has a number of implications and also a number of drivers. There are also a few national studies/reports discussing this issue that I’d like to tie back to the Oreogn data as well.

Posted by: Josh Lehner | December 4, 2017

Supply Side Constraints

Economic growth has firmed and the expansion continues. As the aftermath of the oil bust recedes, there are not many leading indicators today keeping economists up at night. However that does not mean there are not issues to watch. In fact, the challenges the U.S. economy faces will change as we enter into a different phase of the business cycle. Moving forward, the U.S. economy will begin to hit supply side constraints. While some economists, including the Fed, believe we are already at or beyond full employment, the consistent low levels of inflation in recent years are likely evidence that supply constraints are not holding back economic growth yet. Price pressures have yet to build. How exactly the economy adjusts to reaching some of its current limits, and how the newly reconfigured Federal Reserve reacts are key questions. The answers may go a long way toward determining how long the current expansion lasts.

Now, which supply side constraints will bind the hardest can be challenging to identify in advance. What follows is an effort to think through and sort out which constraints are more likely to be challenges sooner than others. Specifically, the lack of credit availability, labor, new technologies (productivity), and production capacity look to be potential issues in the near future. On the other hand, supply constraints like the lack of raw materials or energy, inadequate infrastructure, or deteriorating international trade relations hurting the global supply chain may be less likely to restrain economic growth in the near-term, however they do remain risks worth watching.

Among the more likely candidates, labor, or the supply of workers is the most obvious. While the unemployment rate itself may be lower than the Federal Reserve’s estimate of the natural rate, it is an imperfect measure. The fact that participation rates remain lower today than in the 1990s and 2000s, even with demographic adjustments, suggest some slack remains. More-plentiful job opportunities for better-paying jobs will bring workers back into the labor market. Currently job openings are at all-time highs and wages continue their slow upward movement, albeit it fits and starts. As such, workers are coming back.

Putting another couple percentage points of prime-age Americans back to work is a reasonable, even minimal baseline outlook. This would match what the U.S. experienced in the mid-2000s. Oregon is already at this point today. However, beyond this you begin to run into larger, longer-run trends that may be harder to reverse. In particular, the rise of those out of the labor force due to illness or disability stands out. Reintegrating these individuals into the labor market is a very important challenge, not just from a labor perspective, but also for the public health and societal benefits that would come with it. A tight labor market will aid this cause considerably.

Additionally, when labor is tight, firms must dig a bit deeper into the resume stack to fill positions. Businesses must be willing to hire candidates with an incomplete skill set, or the long-term unemployed, or those with a gap on their resume. Firms may also compete not just on price (wages) but also on nonpecuniary benefits such as flexible working hours and the like. Similarly, for businesses looking to hire, on-the-job training for those with an incomplete skill set becomes more important in a tight labor market. Overall, the U.S. is not lacking for warm bodies to fill positions. The prime working-age population is growing. It is about attracting workers to fill needs and ensuring the workforce has the skills, or is able to obtain the skills needed.

Other supply constraints likely to impact the economy are the low levels of new business formation and weak productivity growth. Economists are well aware of these trends, but lack a consensus on what is causing these issues, let alone identifying solutions to propel future growth.

Furthermore, while overall industrial capacity utilization remains lower due to the energy sector and oil bust, total manufacturing capacity utilization recently hit a new cycle high. Absent business investment in new facilities and technologies, manufacturers may run out of room to grow sooner rather than later. Industries that are bumping up against capacity include motor vehicles and parts, plastics and rubber, aerospace, and fabricated metal. All other industries look to have some room for additional expansion before new production capacity is likely needed. Over the medium- or long-term the economy desperately needs these new investments, however the path from short-term bottlenecks to long-term economic gains may not be smooth.

Lastly, the lack of market information, or lack of confidence more generally can act as a supply side constraint as well. For businesses reaching capacity today, they need to either hold steady, which slows economic growth, or believe strongly enough in future growth that the firm will bear the risk of making long-term investments. Unfortunately, consumer or business surveys are noisy and typically bear little explanatory power in predicting future growth. However, the ongoing expansion is finally resulting in a tighter labor market and the benefits that come with it, like rising household incomes and falling poverty rates. These domestic gains, coupled with a revived international economy should indicate to firms that even though it took nearly a decade following the financial crisis,  the underlying economic demand is there. The U.S. economy is entering into a new phase of the business cycle; one it hasn’t seen in quite some time. Let’s see how firms and policymakers adjust.

Posted by: Josh Lehner | December 1, 2017

Retirements Hit Close to Home

The aging Baby Boomers are placing downward pressure on economic growth in recent years, and over the coming decade, possibly two. As they continue to enter retirement, net growth rates are and will be slower than we have become accustomed to. Take employment for example. For every retirement, a business must hire two workers to see net job growth. The first worker simply replaces the retiree, resulting in no job growth. A year ago, our office explored these issues a bit more in depth. The upshot is there should be enough jobs in the future, but the topline, net job growth numbers mask the generational churn below the surface.

It should also be pointed out that these recent retirees are not just any old workers. They represent workers with a lifetime of experience and institutional knowledge for their industries and firms. Such workers cannot instantaneously be replaced. It creates challenges for businesses to adjust and adapt. However it also creates new opportunities for current and future workers to gain experience and grow into these roles.

While these trends are undoubtedly true across the economy, they hit especially close to home here in the small world of Oregon economics. This fall, we say farewell and happy retirement to both Paul Warner and Tom Potiowsky. Paul may be better known for his role as the Legislative Revenue Officer these past 18 years or so, however prior to that Paul was the State Economist throughout the 1990s. Tom was a professor of economics at Portland State University in the 1980s and 1990s before succeeding Paul as the State Economist for the 2000s. In recent years Tom returned to Portland State where he chaired the Economics Department and launched the Northwest Economic Research Center (NERC). Tom has officially retired from the faculty but will continue working at NERC. Paul’s retirement is official as of today. However both promise to be around to offer us guidance and counseling.

With the simultaneous retirements of Oregon’s two longest serving State Economists, now is as good of time as ever to examine their careers and forecasting records. Our office after all is tasked with forecasting state tax collections. To this end our office has created a few State Economist statistics.

Given Oregon’s unique kicker laws, there is a very tiny window for which our office’s forecasts can hit the sweet spot. That happens when actual tax collections come in right at our forecast or slightly above it and yet below the kicker’s two percent threshold. Over the decades this has occurred just twice, one indication of how hard it is to hit the sweet spot. Paul did hit the sweet spot once, for his very first Close of Session personal income tax forecast ahead of the 1991-93 biennium. It was not for another 20 years that our office produced as accurate of a forecast.

Now, when it comes to forecasting, one major factor in accuracy is the pesky business cycle and the turning points of when the economy heads into or out of recession. Paul, luckily, never experienced a recession under his State Economist watch. Besides being a great economist, this lack of a recession greatly aided his median forecast error over time. Paul’s forecast errors are the lowest of any State Economist in Oregon’s history. That said, Paul’s Earned Kicker Average, or EKA, was high at .700. What this means is that Paul underestimated revenues by more than 2% (the kicker threshold) on 7 of his 10 Close of Session forecasts (5 each for the personal kicker, and the corporate kicker).

Tom on the other hand dealt with a significantly more challenging economy over his tenure and it shows in his State Economist statistics, which take nothing away from the economist and mentor he has proved himself to be. Tom’s first Close of Session forecast was ahead of the 2001-03 biennium, which turned out to be a forecaster’s worst nightmare. Economic growth had slowed, but it was not entirely apparent the economy was in a full blown recession at the time of the May 2001 forecast. The recession is now judged to have begun in March 2001, or right as our office was working on producing that May 2001 forecast. The result of predicting positive, but slower economic and revenue growth when in fact revenues plunged, was a large forecast error. 2001 was also the first time — but unfortunately not the last — that capital gains swung wildly following the dotcom crash. Not to be outdone, the economy soon turned up and on the back of the housing bubble, the 2005-07 biennium yielded the largest personal income tax kicker in Oregon’s history. What Tom’s State Economist statistics show is that forecasting during a volatile economic period results in larger forecast errors. Additionally Tom has a very low EKA – just 3 kickers in 8 opportunities – but when his forecasts did kick, boy did they ever.

Every current member of our office and of the Legislative Revenue Office owe a great deal of the opportunities we have had to Paul and/or Tom. We are forever grateful for their willingness to share their time, insights and expertise. Our office and the entire State of Oregon’s analytical functions are better off for their years of service. Their daily presence in the office will be missed personally and professionally. May Paul and Tom enjoy their retirements and come back now and again to help us sort out the mess they made continue in their footsteps.

Posted by: Josh Lehner | November 29, 2017

Oregon Economic and Revenue Forecast, December 2017

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The economic expansion is expected to continue. Economists see few worrisome signs in the current data. However the economy is poised to enter into a different phase of the business cycle in 2018. Continued low levels of inflation are likely one indication that the U.S. has yet to really reach its current capacity, or reach full employment even if the unemployment rate is quite low. However, the economy is likely to begin to run into supply side constraints in the near future and how the economy adjusts, and how policymakers react to these changes will go a long way toward determining when the expansion ends.

That said, the U.S. economy is beginning to hit the sweet spot like Oregon has in recent years. Employment and participation rates are rising some and wages continue to pick-up. As such household incomes are growing and poverty rates are falling. Oregon continues to transition down from peak growth rates seen a couple years ago to a more sustainable, long-term rate. However the latest population estimates indicate that migration trends have yet to slow thus far. Expectations are for population growth to taper in the short-term, in keeping with the economy. Moving forward, Oregon’s population growth will increasingly rely on migrants.

Oregon’s primary General Fund revenues continued to grow over the first few months of the 2017-19 biennium. Although this growth was healthy, exceeding what was seen in most states, collections have come in slightly lower than what was called for in the September forecast. However, recently processed personal income tax returns for filers with extensions and amendments suggest taxable income is likely larger than was previous estimated. The net result is a relatively unchanged General Fund forecast. Combined, the total resources from the General and Lottery Funds have increased $47.4 million relative to the September outlook. The majority of the increase comes from a stronger corporate tax outlook.

The primary risk facing the near-term revenue forecast is the potential for tax legislation at the federal level. From a broader economic perspective, the most significant local impact of federal tax changes will be what happens to the amount of federal taxes paid by Oregon’s households and businesses. However, in addition to what happens to the federal tax bill, many federal law changes stand to have larges impact on Oregon’s own revenue streams.

Oregon’s tax collections are tied to federal tax law both directly and indirectly.  The starting point for calculating Oregon income tax is taxable income from a filer’s federal return.  As a result, most federal changes to what is defined as income, or to what can be deducted or excluded from it, directly feed into Oregon tax collections.  After the last major federal tax reform in 1986, Oregon’s income tax revenues increased 20% the following year.

The most recent proposals call for increasing the standard deduction, while eliminating a range of itemized deductions.  Changes to the standard deduction only impact Oregon tax collections indirectly, while changes to itemized deductions can also directly flow into Oregon collections. Oregon defines its own standard deduction levels, disconnecting its revenues from the federal policy. Itemized deductions are where much of the uncertainty lies for both Oregon’s taxpayers and its state revenues. Oregon filers, high and low income alike, itemize at higher rates than the national average. Oregon’s taxpayers are able to claim a relatively large amount of deductions, in part due to a large amount of state income taxes paid.

As is always the case regarding tax policy, the devil is in the details. Federal tax reform has not yet passed, with amendments and revisions likely still to come.  Initial rough estimates by the Oregon Department of Revenue and Legislative Revenue Office suggest that the upward pressure created by federal reform could be large enough to trigger Oregon’s unique kicker law all else being equal.

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 | November 28, 2017

Rural Job Growth Picking Up (Map of the Week)

As our office has been talking a lot about in recent years, Oregon’s economy is slowing. Now, it is still growing. We are adding jobs, seeing income gains and the like. However the pace of growth is slower today than a year or two ago. In fact, job growth has decelerated by a full percentage point over the past two years. This slowing is largely, if not entirely for good reasons. An economy digging out of a recession behaves differently than one approaching full employment. The economy needs to transition down from those peak growth rates to something more sustainable.

All of that said, we are seeing differing regional patterns within the state. One reason is that each regional economy’s business cycle is a bit different in its timing, severity and duration, even as Oregon as a whole follows the national business cycle. A lot of this is due to the local industrial structure.

Today, what we’re seeing is Oregon and most of its large, urban areas slow as they approach full employment. Rural Oregon overall is not slowing to the same extent. Rural Oregon is also further from full employment, but is making progress. In fact, since the spring of 2015, rural Oregon has added jobs at a pretty steady 2 percent annual pace. These gains in rural Oregon outpace what the nation and the typical state have seen over this time period. Encouragingly, as seen in this edition of the Map of the Week, a number of the hardest hit counties and areas of the state are actually seeing a pick-up in growth over the past two years. All counties are also seeing population gains in recent years as well.

What the map shows are the counties with faster job growth today than in 2015 (blue), those with similar growth rates today to what they saw in 2015 (yellow), and those that have decelerated since 2015 (gray). Outside of Linn (Albany MSA), Josephine (Grants Pass MSA), and Columbia (hard hit exurb of the Portland MSA) all of Oregon’s urban counties have held steady or decelerated over the past two years. Just over half of rural counties have seen steady or faster job gains.

Now, not every county or every region has fully recovered from the Great Recession and its aftermath. However growth is improving and the expansion continues. Currently, 35 out of Oregon’s 36 counties are seeing job gains over the past year. And 21 of 36 counties have more jobs today than prior to the Great Recession.

Posted by: Josh Lehner | November 21, 2017

Thanksgiving, Traffic, and your Nephew

Three thoughts as Thanksgiving nears.

First, many of us will be stuck in traffic as we head to meet our family and friends. AAA of Oregon/Idaho estimates it will be the worst traffic since 2005. Most of this congestion is about the abnormally large number of cars trying to drive at peak holiday times, but we have seen overall increases in traffic in recent years.

It is hard to portion exact blame for the increases in total vehicle miles traveled (VMT) in Oregon. That said, we know truck traffic is up about the same as passenger vehicle traffic. We know a growing population usually results in more driving. However, if you separate population growth on one hand (number of people, or potential drivers), and driving behavior (number of actual drivers, what each driver does) on the other hand, you get a rough 40-60 split. That means changes in driving behavior account for the lion’s share of the VMT increases. It’s about more than population growth.

Some of the VMT gains are likely due to a stronger economy. We have more jobs, and higher incomes, so we’re able to afford to drive more. Similarly, Oregon has seen larger increases in vehicle registrations and driver licenses issued than population growth alone would suggest. That said, the big drop in gas prices that began in late 2014, and the increases in fuel economy/fuel efficiency are major factors at work too. As the price per gallon of gasoline dropped by more than a third, Oregonians have increased their total gallons of gas purchased by about 10%. Oregonians are buying more gas in order to drive more. A similar effect is seen in fuel efficiency: as the cost per mile driven falls, we drive a bit more. Although fuel efficiency is plateauing for new purchases in recent years, at least in part because Americans/Oregonians are purchasing more trucks and few cars. The overall efficiency of the fleet can continue to increase as older vehicles are taken off the road, however.

Some academic studies show that the price drop we have seen in recent years is more than enough to explain the increases in VMT. That implies that all of the increase in traffic is due to lower gas prices and not about population growth or other factors. However, other studies show that maybe 20% of the VMT increase can be explained by the price drops. I don’t want to get into the warring battle between studies, but it’s clear that prices matter and are a significant factor influencing traffic in recent years. It is also a distinct possibility that lower gas prices are the primary, even sole, driver of the traffic increases.

Second, as we sit around the table with our friends and family, inevitably the topic of what our children, or our nieces and nephews are doing will arise. Parents love to talk about their kids, and, at times, other people’s kids as well. Along these lines, there has been a lot of hand-wringing in recent years about the lack of summer jobs for teenagers. This includes the plummeting labor force participation rates for young Americans and young Oregonians alike. As such, it is true that kids these days are not working to the same degree as past generations. That does not mean, however, that they’re necessarily up to no good.

Youth crime is down by more than half, and there has not been a huge increase in the number of Idle Youth. The decline in LFPR has been nearly perfectly offset by increased enrollments in school. Over time educational attainment is rising, which is the silver lining to today’s lower participation rates. We have fewer potential workers today, but tomorrow’s workers will have better skills. Or so the story goes. And enrollments are falling today as the economy strengthens, but that is a topic for another day. This week: be nice to your nephew!

Now, this doesn’t mean there aren’t potential issues with lower participation rates. Chiefly, one misses out on work experience and learning the so-called soft skills like communication, taking directions, accepting feedback, being a team player, and the like that are needed to succeed in most workplaces.

And finally, third, Happy Thanksgiving everyone!

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