Posted by: Josh Lehner | January 17, 2020

Fun Friday: More Marijuana Border Effects

A border effect can arise when neighboring jurisdictions have different rules, regulations or tax rates for the same industry or product. Border effects are a well researched topic and evident at the local, regional, and international levels. They are especially common among vice industries.

In digging into new county marijuana data from our friends at OLCC and the Washington State Liquor and Cannabis Board, four main findings stand out.

First, looking at regional sales in Oregon per adult reveals patterns both expected and unexpected. Regions with the largest sales relative to the size of their local populations are generally located along state borders and/or have large tourism industries where visitors increase demand.

What was most surprising, to me at least, isn’t the top of the chart but the bottom. The Rogue Valley (Jackson and Josephine) is where Oregon’s marijuana historical strength lies. And yet despite the industry’s roots, and being on a border with an interstate highway, sales are the lowest in the state. This could be a difference in the business of the industry vs consumers of the industry. But it does keep with patterns I first noticed in the Measure 91 vote back in 2014. Jackson County votes in favor of legalization but by a slim majority (53%). Josephine County on the other hand voted against M91 albeit by 2 votes, but still.

Update: A friend of our office raises an interesting point. It is possible that the lower retail sales in the Rogue Valley is in part due to the fact so much is grown there that they do not have to go into stores to purchase, but rather buy/barter/trade with their neighbors or their neighbors’ neighbors.

Second, even if we expect — and get — border effects, the sales in counties along the Idaho border were much stronger than I anticipated. Obviously recreational marijuana is not legal in Idaho, but even after throwing the data into a rough border tax model that accounts for incomes, number of retailers, tax rates and the like, there remains a huge border effect. Roughly speaking, about 75% of Oregon sales and more like 35% of Washington sales in counties along the Idaho border appear due to the border effect itself and not local socio-economic conditions. Furthermore, and in things you cannot make up, Oregon sales per adult along the Idaho border are 420% the statewide average.

Wait, there’s even more Idaho border effects at play which is finding #3. Initially the closest retailers to Idaho were located in Baker County, however that changed last summer. There are now 3 retailers in Ontario (Malheur County) which is right at the border. These new retailers are 30-60 minutes closer each way to any potential customers traveling into Oregon along I-84 than the retailers in Baker County. As one might expect, as these new stores in Malheur County came online, sales plunged in Baker County by around 80%. This is a knock-on impact of the border effect. Proximity or distance traveled matters as do product availability, prices, and taxes.

Finally, the last finding decomposes the differences in sales seen along the Oregon-Washington border itself. Overall sales are 16% higher per capita on this side of the Columbia than the other. The largest differences between the states I see is the number of stores (lower in Washington) and taxes (lower in Oregon). This speaks to product availability and the final price to consumers being key driving factors in consumer spending patterns, which create much of the border effect.

Even so, we see considerable variation along the Oregon-Washington border.

Out near the Pacific Ocean, sales in Clatsop County significantly outpace sales in neighboring Pacific County, WA. Clatsop has nearly twice the population but more than three times the overall sales in part due to higher incomes, higher reported marijuana usage rates and considerably more retailers (17 vs 3).

Similarly, Hood River and Wasco counties significantly outsell Klickitat County, WA across the river in the Gorge. The Oregon side has twice the population, four times the sales and many more retail outlets (10 vs 3).

The one region where the patterns differ is out east. Now, Umatilla County has solid sales, but neighboring counties like Sherman, Gilliam and Morrow do not have any retailers, and weigh on the regional figures. On the other side, both Benton (Tri-Cities) and Walla Walla counties have solid sales themselves. All told, sales per capita are pretty equal in eastern Oregon and Washington. Some of this will be due to population and where consumers regularly travel in the first place. Both Tri-Cities and Spokane are regional hubs with more stores of all types than communities in surrounding areas.

Bottom Line: The border effect is real. Both Oregon and Washington see a clear impact in higher recreational marijuana sales along the Idaho border than can be explained by local socio-economic factors. Now, this does not mean that all of those larger sales are neccesarily to Idahoans. It could be other customers maybe traveling from further away or from elsewhere within our state who are traveling through.

All told, recreational marijuana sales continue to increase and are expected to do so in the decade ahead. Our office’s forecast calls for sales to grow approximately 80% over this time period as incomes grow, the state’s population increases, and marijuana becomes more socially acceptable and usage rates rise.

Posted by: Josh Lehner | January 9, 2020

Friday Beer Thoughts and One Last 2020s Prediction: Closures

One last prediction for the 2020s: Oregon will see more brewery closures. In fact we are likely to see a dozen or more closures every year in the decade ahead. This is mostly due to the fact that Oregon has seen considerable growth in the number of breweries in the past 10-15 years. More breweries means more potential closures.

Statistics show that running a business is hard. About 20% of new companies fail within their first year. Only 50% survive more than 5 years. Clearly, start-ups face long odds and successful firms have overcome a lot.

That said, as our office has shown before, Oregon’s brewery closure rate is about half that of the overall economy. Regardless of whether the closure rate remains very low, or it rises to match the average closure rate, Oregon will see more breweries fold in the coming decade, which brings us to this edition of the Graph of the Week.

These projections are based on business survival rates by age of firm. There is not a ton of variation in these survival rates when looking at Oregon versus the U.S. or by specific sector. Any sort of sensitivity analysis I did here does not yield significantly different results.

The chart above shows 3 scenarios based on different assumptions. The bottom end of the error bars assumes Oregon breweries continue to close at half the rate of all businesses. The top end of the error bars assumes Oregon brewery closures jump overnight from low closure rates to average closure rates based on the age of the business. The blue bars are a middle scenario where over the course of a handful of years, the Oregon brewery closure rate, especially for established breweries, gradually rises until it matches the overall average closure rate.

As one can see, under any of these scenarios, the number of Oregon brewery closures in the decade ahead will increase. However there are at least two other factors in play here when discussing the health of the Oregon beer industry overall.

We know that the industry is growing slower and feeling more stress. Breweries that rely on tap handles and grocery store shelf space are feeling the biggest impacts. Aaron Brussat over at the New School has a rundown of closures in 2019. While the number of brewery closures last year is in-line with recent years, the pain is felt more broadly with a few cideries, beer bars, bottle shops and the like also closing. See Beervana Buzz’s Pete Dunlop who continues to be on the forefront of discussing these trends and underlying issues within the industry. Now, none of the projections above incorporate any sort of industry correction or potential bubble, so there is certainly downside risks to outlook if either of those happen to materialize.

Finally, closures are just one end of the pipe. Brewery openings in Oregon continue to outnumber closures, so the industry overall is growing. To date, even with the hand wringing, we have yet to see any real increases in the brewery closure rate, which is what matters for industry health. There is always a given amount of churn in the economy. So far it is quite low for Oregon breweries. A reasonable outlook would call for this closure rate and the amount of churn to increase in the decade ahead. This should be expected, even if there are no broader industry issues or concerns.

Posted by: Josh Lehner | January 7, 2020

Predictions for the 2020s

Welcome to a new decade. The 2020s should be the best decade so far in the new millennium, not that the tech bust/housing bubble/Great Recession and its aftermath puts up much of a challenge, but still. While the most remarkable economic trend of the 2010s was the lack of a recession, we know the business cycle will strike again at some point. It is certainly possible we go another decade without an official recession — Oregon did go 20 years without a major hit to state revenues between the early 80s recession and the dotcom bust — but I’m not necessary willing to bet on that today. What I am willing to bet on are two big changes we will see in the decade ahead. These aren’t new changes per se, but the aging of the Baby Boomers and the Millennials into different points in their life cycles will have big economic impacts.

First, at the end of this decade all Millennials will be in their 30s or their 40s. It is much more likely they will have their own kids than be the punching bag about how kids these days don’t walk uphill both ways, or something. But this transition from one’s 20s to their 30s and 40s brings about big shifts in one’s life. In the decade ahead, Millennials will fully transition through their root-setting years. This is when you settle down, begin your career in earnest, get married, have kids, buy a house and the like. And while long-run societal shifts means young adults today are getting married later, having fewer kids and at older ages, these big picture milestones are still common even as single-person households are on the rise.

So what does this mean for the 2020s economy? It means there is a big demographic tailwind for housing, and homeownership in particular. Two key demographics for housing and related industries are first-time homebuyers and young families. Even in today’s housing market, when I’ve dug into the Census data it shows that Oregonians are 50/50 in terms of owners/renters by their mid-30s. As the younger Millennials age into their 30s in the years ahead, this will increase demand for homeownership.

If we step back and look at overall housing-related spending, it peaks in one’s early to mid-40s. This spending isn’t just mortgages and property taxes, but also housekeeping supplies, appliances, furniture and the like. This time period also coincides with many people’s lives when they do have kids living at home, and maybe some even trade up and buy a larger house. People in their 40s also have higher rates of employment and rising incomes at this point in their life cycle, so they spend more money on a lot of categories, housing included. Starting next year, the oldest Millennials will turn 40 and the number of 40-something Oregonians will rise throughout the coming decade. Total housing expenditures should grow faster than the overall economy as well.

The second big shift we will see in the 2020s will be the growth among Americans and Oregonians 75 years and older. We know economically what matters most is that transition from working to retirement. Our office has dug into the potential labor force and number of retirees quite a bit in recent years. However we’re right around peak retirements today. While retirements will remain large in the decade ahead, what will be new, and will reshape the economy will be the growth in the 75+ population. This is why our office is currently working on our new research series, Aging Oregon. Here we will explore the overall demographic trends, improving health, impacts on personal income, tax revenues, housing markets, retirement homes, their workforce needs, and the like. Stay tuned for more as we continue to explore these impacts.

We start the dawn of a new decade on strong economic footing. Rarely has Oregon experienced a better economy. However, we know the business cycle will strike again at some point, even if the outlook remains solid right now.

If we step back and look at what big shifts we are likely to see in the decade ahead, demographics are easy to point out. The aging of Millennials through their root-setting years and Baby Boomers fully into retirement stand out in advance. These transitions will have big, long-run impacts on the economy.

In terms of uncertainty in the decade ahead, the biggest demographic unknown are migration flows. Expectations are that young, skilled households will continue to vote with their feet and move to Oregon, however when compared to births, deaths and the aging of the current population, migration, by far, has the most uncertainty.

Posted by: Josh Lehner | December 31, 2019

Economic Trends of the 2010s (Graphs of the Decade)

Economically, the 2010s were a disappointment. Now, the U.S. economy went the full 10 years without a recession, a first in history. However we began the decade at the bottom of the worst recession in a long time. As such much of the decade was about regaining the lost ground. That means we spent most of the decade below potential, with a slack labor market and the like. It is true that today’s economy is strong, and that should be celebrated. Rarely has Oregon seen better economic conditions than we do today. However today’s strength alone does not negate nearly a decade, actually nearly two decades of general weakness. That’s why, when taken as a whole, the 2010s were an economic disappointment.

Beyond the general business cycle fluctuations of starting off the decade in bad shape and ending it in good shape, three trends stand out. I’m submitting these as my Graphs of the Decade to best understand the economy of the 2010s.

First, household incomes are setting new record highs on an inflation-adjusted basis. This is not just about recovering the losses from the Great Recession. Rather the importance is putting Oregon’s income gains in perspective relative to the nation and relative to recent history. For the first time in at least 50 years, Oregon’s median household income is higher than the U.S. And assuming another solid year of income gains in 2019, Oregon will end the decade with inflation-adjusted household incomes somewhere around 13% higher than they ever have been before. This means our vantage point today should be high enough to finally break through the malaise of stagnant household incomes in recent decades, even after the next recession, whenever it comes. This potential development is massive, and largely due to the strong labor market in which we are ending the 2010s.

Encouragingly we know growth has now reached every sector of Oregon’s economy, every region of the state, and all populations as evidenced by the narrowing racial poverty gap. That said, we also know the growth in the 2010s has been uneven across the state. Our own experiences vary based upon where in the state we actually live. The second big trend of the decade is the growth in the urban-rural divide.

Economically, the Great Recession was an equal opportunity disaster. However the nation’s biggest, most diverse regional economies were the first to return to growth and recover. Even beyond these general patterns, Portland’s growth has been transformational as it outpaced all but a few other metro areas in terms of things like increases in educational attainment, household income gains, and growth in the number of high-wage jobs.

The state’s other metro areas spent a few years at the bottom of the Great Recession with no growth. However as the housing market recovered, migration flows returned, and public sector budgets were repaired, overall economic growth resumed. Keep in mind that Bend and Medford experienced two of the worst housing bubbles and busts in the nation, so they began the decade in very bad economic shape.

It took another couple of years for these patterns of growth to reach the entire state. Rural Oregon overall basically spent half the decade seeing no gains but has seen solid growth the past handful of years. That said, just 9 of Oregon’s 23 rural counties have more jobs today than they did last decade. Encouragingly, rural Oregon has very few places in permanent demographic or economic declines relative to patterns seen throughout the country. However, even with decent to solid growth in rural Oregon overall, the state’s urban-rural divide increased in the past decade.

Finally, the third major economic story of the 2010s is housing affordability, which worsened throughout much of the decade. We know this impacts all corners of the state and populations. It is both a near-term concern in that it makes it harder for our neighbors to make ends meet, and it is a long-term risk to the outlook if young, working-age households cannot afford to move here in the first place. And while much of the attention is paid to rising housing costs, we know they are the symptom and not the cause of the disease. The chief underlying cause is the ongoing low levels of new construction this decade. On a population growth-adjusted basis, Oregon built fewer new housing units this decade than we have since at least World War II. With data going back nearly 60 years, never have we built fewer new units on a sustained basis than we did in the 2010s.

Update: This received quite a bit of attention. Please see our previous look at how Housing Remains a Macro Issue for more on these trends. They’re not just Oregon-specific. And the Oregon Legislature recently passed bills trying to encourage housing supply.

All told, the 2010s were a bad economic decade. We spent much of the past 10 years simply digging our way out of the Great Recession, which means we underperformed overall. That said we are ending the decade in great shape and with an economy that has rarely been better. It’s a low bar to overcome, but taken as a whole, the 2020s should be better.

Stay tuned, I’ll be back in the New Year with two big picture predictions for the 2020s.

Posted by: Josh Lehner | December 18, 2019

Aging Oregon Part 2: Improving Health

Welcome back to the occasional series where our office will explore some of the demographic, economic, and societal impacts of an aging population. Previously we looked at overall demographic trends, while today we dig into our generally improving health. Future posts will examine the impacts on income, tax revenue, housing markets, retirement homes, their workforce needs, and the like. As always email me with your thoughts on the topic and other aspects to explore further.

Father Time is undefeated. At some point we all pass from this life to more life. And we know statistically speaking the probability increases as we age. While this can be uncomfortable to talk about — my family just celebrated my grandma’s 95th birthday! — it will become increasingly common in the decades ahead due to our demographics.

However, the good news is that our health overall has improved. All cause mortality is down 40-50% for Oregonians in their 50s, 60s, and 70s. But we have seen less improvements among our oldest cohorts. As the saying goes, 70 really is the new 50, but 85 is still 85.

Importantly, it’s also about the quality of the life we live and here we have more good news. The share of the population with a self-reported disability is on the decline based on available Census data. So not only are more of us living longer*, we’re generally in better health while we’re alive. These decreases in self-reported disabilities are seen across the various types, including self-care difficulty.

And it’s here, when discussing disabilities and self-care difficulty, where we really get to the intersection of the impact of an aging population and the economy overall. Our previous research showed that downsizing isn’t really a thing. People clearly prefer to age in place, up until they pass onto more life or move into some sort of retirement home. As an example, my grandma lived in her house until she was 90 before she moved into an assisted living facility closer to my aunt and cousins. As the chart below shows, individuals with a disability are significantly more likely to live in group quarters than in a traditional housing unit. Groups quarters are dormitories, prisons, nursing homes and the like. As one ages, of course, nursing homes are the predominant type of group quarters we live in.

Overall as our society has an increasing number of friends, relatives, and neighbors entering into similar points in their lives in the decades ahead, these trends can have big impacts on the housing market, nursing homes and the workforce needed to take care all of us. I haven’t finished crunching all the numbers but the next couple of posts in the series will focus on these topics. They may not be fully ready until the New Year. But I hope to be able to help put these impacts in perspective and to figure out how big of a deal they are, economically-speaking.

* U.S. life expectancy has increased considerably over time, but it has flattened out in the past decade and even declined a bit in recent years. Some of that is due to things like the Deaths of Despair pushing back on improving health and medical advancements. You can also see the plateauing of mortality among the 55-64 year old demographic in the chart above. So while health has improved and life expectancy risen, it’s not all rosy.

Posted by: Josh Lehner | December 13, 2019

Initial Claims Remain Low (Graph of the Week)

Recently our office has brought up initial claims for unemployment insurance a few times, including at the most recent forecast release. The reason was Oregon’s initial claims have been running higher in 2019 than in 2018 throughout much of the year. Now, the increases were more like 5% increases relative to last year and we typically see jumps of 10-20% in the year leading up to a recession. So the increases were a concern, but not yet a red flag. The good news, as shown in this edition of the Graph of the Week, is initial claims in the past month have improved and are now down on a year-over-year basis. Recent readings of initial claims are at historic lows for this time of year with data going back to 1987.

One outstanding concern is that the recent layoff announcements, including food manufacturing closures in the Willamette Valley, have yet to hit the data as the layoffs are recent, with some still to come. We will continue to watch initial claims closely because they are one of the best leading indicators available. Until initial claims increase significantly, the labor market should continue to grow and the expansion endures.

Posted by: Josh Lehner | December 11, 2019

Aging Oregon Pt 1: Population Growth

Today begins a new occasional series where our office will explore some of the demographic, economic, and societal impacts of an aging population. Right now I see at least a handful of future posts. Some will be summarizing previous work on retirements and the impact on the labor force. However most will be new as we dig into the impacts on personal income, public sector revenues, housing markets, retirement homes, their workforce needs, and the like. I would appreciate your feedback and thoughts on topics for further exploration, including work you may have done as well. As always email me..

Oregon remains a magnet state. Our ability to attract and retain working-age households is our comparative advantage over the typical state. It is also the primary reason Oregon outperforms economically over the entire business cycle. These inflows of young, skilled residents should ensure relatively strong growth in the decades ahead. That said, the biggest changes and demographic shifts we will see across the state and the country will be the growth among our older age cohorts. Here in Part 1 of the series, I just wanted to illustrate this growth to set up the discussion on some of the implications of these changes.

Of course this is not unique across the country, the share of Oregon’s population that is 75 years or older will increase from around 6-7% of the overall population today to 12% in 2040. The Census Bureau’s projections for the U.S. are nearly identical, even as the underlying composition of the total population differs in part due to Oregon’s stronger growth among the working-age population.

As is always the case it is helpful to look at these changes in both absolute terms, or the number of residents, and in percentage terms. The growth in Oregon’s older populations is large in both dimensions, but the percentage changes are especially strong as the Baby Boomers age into their 70s and 80s in the decades ahead.

Taking more of a historical view we can clearly see how Oregon’s population has evolved. Now, the top two lines are what matter most for economic growth and the labor force. However the second two lines are where the demographics will shift the most in the decades to come. The implications of this will be where most of our newer research will focus.

Finally, while the aging population will impact every community and regional economy, we know these changes vary from place to place. This last chart shows the percentage increase in the population 75 years and older on the horizontal axis, or how large of an increase in the 75+ population there will be. On the vertical axis is a measure of the change in the share of the population 75 years and older. This speaks more toward how does the growth in the 75+ population relate to overall population growth in the country.

Let’s look at two examples.

First, notice the similarities and differences between Lane and Multnomah, right there in the middle of the chart. Both counties are expected to see increases of around 80% in their population aged 75 years or older. However the increase in the share of the overall population this represents in Lane is nearly twice that in Multnomah (5.2 vs 2.7 ppt). What this means is that while the percentage increase is the same, due to slower growth among children and the working-age population, Lane will age more than Multnomah will. Now, of course we all age the same amount each day, but in terms of the overall age distribution, it will seem like Lane ages more than Multnomah.

Second, notice Hood River way over on the right and Baker over on the left. The older population in Hood River is expected to grow 3.5 times as much as in Baker, however given Hood River is expected to to growth faster among all age cohorts, these percentage increases represent the same share increase of the total population. Both Hood River and Baker will see the share of their population 75 years and older increase by nearly 6 percentage points. The relative changes among each county’s age distribution are nearly identical, the difference is one county will grow faster than the other.

Stay tuned for more in the coming months on the impacts of these demographic changes.

Posted by: Josh Lehner | December 6, 2019

Labor Supply and Oregon’s Slower Job Growth

As our office developed our latest forecast, we dug into Oregon’s slower employment growth. As discussed previously, we highlighted three main channels in which the slowdown could materialize: worsening current economic conditions, uncertainty over future growth, and tight labor markets. We tried to spell it out more clearly in our forecast document and during our forecast release. And while I believe all three channels are impacting the numbers and the outlook to a certain degree, Representative Reschke really pinned us down during testimony (in a good way, trying to get economists to stop doing the whole “on one hand … on the other hand” thing).

What I told Representative Reschke was that labor and the number of available workers was by far the largest factor behind Oregon’s slowdown. Uncertainty over future growth and a potential recession was the second largest factor, but at a tier below labor supply. And rising business costs and squeezed profit margins being the third largest factor, which was another tier below uncertainty.

Back to the issue of labor, there are a number of reasons I believe this is the largest factor. Economists’ views differ, but I’m not of the belief we are truly at full employment or beyond full employment. That said, there is no question Oregon’s labor market is stronger and tighter given the gains experienced in recent years.

Unemployment is at or near record lows. More importantly the share of prime working-age Oregonians with a job is back to where it was prior to the Great Recession, although not quite all the way back to the late 1990s. This means it is harder for firms to hire and expand even if they want to. I think we can see this in some of the data points discussed before: hiring is slower but layoffs are not higher. Given ongoing wage gains that are stronger than the nation, I think this points toward a tight labor market being a considerable factor in slower net job growth.

But beyond the general economic statistics, there are indications that Oregon’s labor supply is slowing more than expected at both ends of the pipe. These further my view on the impact of labor constraints, and if the numbers are to be believed, are more than enough to account for slower growth this year than what our office expected a year ago.

First, it is important to point out that the slowdown means Oregon is adding approximately 2,000 jobs per month so far in 2019. Underlying demographics suggest the state needs around 1,900 or so to hold the unemployment rate steady. Growth clearly remains solid.

As for the flows into the labor market, these appear to have slowed more than expected in 2019. Preliminary population estimates indicate that net migration was 11-12,000 below our office’s forecast. This would work out to approximately 6,000 fewer prime working-age Oregonians (25-54 years old) or 9,000 total fewer working-age Oregonians (18-64). Now, not all of these individuals would be looking for work, and we will get final 2019 estimates from Portland State here in another week or two so these figures may change some. That said, indications are migration was slower than expected, meaning the number of available workers for firms to hire is smaller than expected.

While annual population estimates are difficult, one year from now we will have the official 2020 Census population counts. This will provide a solid anchoring point for our office’s demographic research and forecast, and we will be able to better gauge migration flows in recent years. This doesn’t help our understanding today of course, but it is the demographic light at the end of the decade-long tunnel of data darkness.

While the inflows into the labor market appear to have slowed, it also looks like the outflows into retirements are larger than expected this year. From our forecast:

Retirements appear to have spiked. The household survey indicates retirements are running some 7,000 or so higher than what would be expected based upon demographics and the aging population alone. To put the 7,000 increase in perspective, that is equivalent to three or four months of employment growth. This means even if firms hired replacements, the higher level of retirements could certainly impact net employment gains across the state.

All told, the sharper slowdown in migration and spike of retirements works out to something like a 15,000 labor supply drag in 2019. Given Oregon firms have added around 20,000 net new jobs so far this year (data through October), the labor supply drag is quite large.  Now, about half of the drag — retirements — means firms hired more new workers than the net numbers indicate, while the other half — migration — means firms are trying to hire from a smaller pool of available workers.

As our office wrote two years ago: 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.

Posted by: Josh Lehner | November 20, 2019

Oregon Economic and Revenue Forecast, December 2019

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 longest running U.S. economic expansion marches on. Growth has slowed in 2019 and downside risks remain elevated. However, a recession is not yet seen in the data. Importantly, the two primary causes for concern are either improving – the yield curve is no longer inverted – or at least not getting worse – the trade war escalation is on hold for the time being. That said, while slower growth this year was expected, the question is whether or not the composition of and factors behind the slowdown point to something more worrisome.

Nationwide economic growth has slowed to potential as business investment remains weak, but the consumer is strong. Of course consumption is not a leading indicator, but provided the labor market holds up, so too should spending. Here in Oregon, job growth has slowed to gains seen in our underlying population. For the eleventh year of expansion, such gains remain solid. To date, Oregon’s slowdown is driven more by fewer hirings and a tight labor market, rather than an increase in layoffs. These dynamics, when combined with ongoing strong income growth keep the outlook intact. As confirmed by recently released Census data, current economic conditions in Oregon have rarely been better. The expansion endures even as risks remain elevated.

Oregon’s General Fund tax collections continue to outstrip gains in the underlying economy so far in the 2019-21 biennium. The largest part of Oregon’s General Fund, personal income tax collections, surged during the peak tax season and continued to post strong gains as extension filers submitted their tax returns in the fall. Both income tax payments net of refunds, as well as withholdings out of paychecks, have been posting growth rates above what economic gains would call for.  Corporate tax collections have slowed a bit in recent months, but remain elevated above their typical size as well.

The primary forecasting challenge for the current biennium is to determine how much of the recently strong tax collections are due to temporary factors that will fade away in the months ahead.  Even without the onset of recession, revenue growth is facing major headwinds during the current biennium. State & federal tax policies, a big kicker refund and slower economic growth will all weigh on General Fund revenues in the near term.

While there is a great deal of uncertainty about the staying power of recent revenue growth, the December forecast reflects a stable economic outlook, with the expected size of General Fund collections increasing slightly over what was expected at the Close of Session.

Going forward, the uncertain path of the nationwide economy will dominate the revenue outlook.  Fortunately, Oregon is better positioned than ever before to weather a revenue downturn.  Automatic deposits into the Rainy Day Fund and Education Stability Fund have added up over the decade-long economic expansion. When the projected ending balance for the current biennium is included, Oregon is expected to end the biennium with more than $2.7 billion in reserves set aside, amounting to almost 13% of the two-year budget.

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 14, 2019

In The News: Food Manufacturing Closures

Today we learned that the NORPAC sale to Oregon Potato Company fell through and that NORPAC would be shutting down both its Brooks and Salem facilities, in addition to the previously announced closure of their Stayton facility. All told 1,400 jobs are being lost, which any way you slice it is a big number. If we look at food manufacturing in the Salem MSA, on an annual basis employment totals about 4,500 jobs. Now, there are still big seasonal swings where the industry goes from around 6,000 during peak season to more like 4,000 during the rest of the year. But when such large losses are concentrated in a specific industry and in one regional economy, the concerns mount.

Losing a job and having to find another one usually results in lower wages, at least initially, as part of worker pay is not just overall experience, but within firm experience (length of tenure). On the brighter side, it is relatively easier to find a job today when the labor market is tighter than it is during a recession when there is more competition for fewer job openings. But layoffs, closures, and transitions are never easy. The Salem economy is about to have another 1,000 job seekers with similar skill sets searching for employment during the holidays.

Now, we had some inkling that there was trouble within the food industry even if we could not pinpoint what was going on. Starting about a year ago, we saw declines in weekly hours worked. We have imperfect data, but what we could tell were the drops were seen in food manufacturing and were outside of the Portland region. These declines did not appear to be trade war related, as the timing does not line up neatly nor were there declines in durable manufacturing hours worked at the time either. Now, we have seen durable hours worked decline in 2019, and we think some of that is trade war related. But back to food.

The hard thing to know was whether these hours worked declines meant there were underlying issues, or if it was volatility in the data. At the time, and even so far in 2019, the food manufacturing industry overall was adding jobs. We flagged the hours worked issues with our advisors a few times, but kept our outlook intact given employment was growing. Clearly there was something else afoot and we are adjusting our forecast accordingly ahead of next week’s forecast release.

As we discussed last year, Oregon’s food economy has been doing quite well over the past 10-20 years. The cluster is growing quickly, and outpacing growth in most other states as well. In particular, the employment gains in food processing had been robust. During a time period (2005-2018) when Oregon lost nearly 10,000 manufacturing jobs on net, the gain of 12,000 jobs among food and beverage manufacturers was a key reason why the state didn’t see larger losses.

The largest drivers of these gains have been breweries and fruits and vegetables. However the growth has been across all sub-sectors and regions of the state. The processing segment of the food economy in Oregon had grown to around 2% of all such jobs nationwide, and it’s local industry concentration was 50% larger than it was nationwide (location quotient of 1.5). And while wages aren’t high, the pay does tend to be better in processing — the value-added part — than it is in the distribution or service segments of the food economy.

As always in these types of situations, the question is whether or not the closure is a firm specific issue, an industry specific problem, or a harbinger of macroeconomy problems. I won’t pretend I have the answer right now. And even though I am not aware of similar announcements elsewhere in the industry, only time will tell.

Finally, the food industry has a fairly large presence throughout the Pacific Northwest. Expectations today are that local crops will be sent to other facilities, maybe (probably?) those in the region for processing and packaging. This will require reworking the local supply chain to get goods to market. These transitions are also not costless and not always easy, however local farmers should be able to find buyers for their commodities.

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