Posted by: Josh Lehner | April 15, 2020

COVID-19: Small Business Survival and PPP

Recessions always change the economy. Even as jobs, income, and profits return and surpass the previous peak, the underlying structure of the economy is different than it was prior to the recession. In technical terms, something like GDP fails the unit root test even if activity and growth returns to it’s long-run trend, at least gauged by the naked eye.

Today, one big concern about the economy is the amount of permanent damage done during the social distancing and shutdown phase. We have already seen the leading edge of the impact in the data and it indicates severe labor force displacements. Hundreds of thousands of Oregonians have applied for unemployment insurance in just the past few weeks. Getting all of these Oregonians back to work will be a challenge once the public health crisis subsides, even under the best assumptions. It will be even harder to do if there are no firms to hire them back.

Running a business is extremely difficult. Roughly speaking about 1 in 5 new companies fail within their first year, while only around half make it to their fifth anniversary. When we layer on the impacts and drop in revenues today, we are seeing many more firms stretched financially, and likely an increase in firm closures in the months ahead. (Given start-up activity was already at or near historic lows, it will take time before new businesses are created to meet business and consumer demand.) This is why increased loans and grants to businesses were a big part of the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Below we look at some recent research and insights on small businesses and the first available data on the initial round of Paycheck Protection Program (PPP) lending for small businesses.

First, while most businesses are profitable or at least solvent, they do rely on cashflow to operate. A sudden stop in revenue impacts financials differently than the typical recession would, or at least the challenges and problems arise overnight and realigning expenses with revenues must occur just as quick. A new survey and paper by Bartik et al (2020) find that while the vast majority of small businesses have savings and cash available, it will only tide them over for a month, maybe two (see chart). Few firms can survive without revenue for longer than that. A recent Brewers Association survey of craft breweries found a nearly identical pattern among their members.

So what can businesses do today to stay afloat? The chart below shows the different approaches and actions small businesses would take, according to a survey from the Federal Reserve. I’m not sure if it is encouraging or discouraging that about 1 in 6 small businesses say they would need to close or sell the business if they experienced two months of revenue loss. Either way it is clear that a lot of firms cannot survive a sustained reduction in revenues, understandably so.

What is encouraging are the new business lending programs included in the CARES act. Probably the most prominent being the Paycheck Protection Payment (PPP) administered by the Small Business Administration which provides about $350 billion in forgivable loans to small businesses.

Update 4/17: The SBA announced that as of Wednesday night the PPP is fully accounted for. Small businesses will need more support. As the police chief said in Jaws “you’re going to need a bigger boat.” The rest of the post is updated and edited, plus the chart is now includes the final data.

The PPP was administered on a first come, first serve basis. Overall nearly 1.7 million loans were approved, totally $343 million. Here in Oregon nearly 19,000 businesses were approved in time before the funding ran out – hopefully more is coming — with Oregon firms receiving a total of $3.8 billion. This means small businesses in Oregon accounted for 1.1% of all PPP loans nationwide. This is somewhat low, but broadly in line with Oregon’s share of U.S. small businesses (1.6%) and small business payroll (1.3%).

Looking across all states you can see how PPP loans largely match the patterns of small businesses themselves. That said, a majority of states are seeing somewhat larger shares, which are primarily coming at the expense of relatively lower volumes to California and New York, and somewhat lower to New Jersey and Washington. It’s interesting to note that these states are either the hardest hit by COVID-19 or experienced the impact and spread of the virus first. On twitter, economist Ernie Tedeschi had a few thoughts on why this may be.

Finally, to help put Oregon’s 18,700 PPP loans for $3.8 billion in some sort of perspective, the rough math shakes out as following. About 1 in 5 small businesses in Oregon have been approved for a PPP loan. These loans are designed for 75% of the loan amounts to cover payroll over an 8 week period. This means the $3.8 billion will fill a 30-40% hit to small business payrolls in Oregon over two months. Given some of the initial claims data and speculation on the level of job loss and unemployment increases, these numbers are at least in the same ballpark in the big picture. The open question is whether the individual firms and dollar amounts of the approved loans are lined up those who need it most, and whether PPP will truly tide these companies over.

All of that said, I think these initial findings represent good news. At least at first blush, the size of the CARES act appears to mostly fill the initial hole due to COVID-19. This also includes the household recovery rebates — being deposited now — which are a 1, maybe 2 month band aid for most Oregonians. Now, it doesn’t mean everyone or every firm will be made whole. There are a lot of things that fell through the cracks that policymakers are currently working on fixing. And of course the concerns lie with the duration of the public health crisis, the shape and strength of the subsequent recovery, and the ongoing need for financial assistance to struggling firms and households. But for now, the public policy response has been an encouraging first step. Time will tell whether it came fast enough to truly help small businesses.

Posted by: Josh Lehner | April 7, 2020

COVID-19: The Square Root Recovery?

Our office is working on developing the latest state economic and revenue outlook. While much uncertainty remains, the broad contours of the recession and recovery may be coming into focus. While our office previous discussed the underlying conditions that could lead to the classic V or U-shaped recovery, today we’re introducing the possibility of a new path: the square root recovery. The reason will hopefully be self-evident in minute. I wish I could claim the name, but Mark’s the one who coined it the other day in our discussions. The nature of this outlook is beginning to gain some traction among forecasters and among our advisors. The thinking is as follows.

The sudden stop of the economy sends us into a severe recession overnight. Once the health situation improves some, the curve flattens and caseloads peak, the restrictions begin to be lifted. This results in some initial bounce back in economic activity, although far from 100%. We may be able to got out to eat, or get a haircut again, or the like. These firms will staff back up to meet this demand, but is the rebound 1/3 of the losses? 1/2 the losses? We don’t know that answer today. Plus some interest rate sensitive industries like construction or durable goods may come back once households are able to go out and resume some activities, particularly among the higher-income households who are building savings today.

This initial bounce back likely takes the economy from near-depression level readings up to something resembling a severe or bad recession. From there the economy sees slow or moderate rates of growth until the health situation is under control. This may be due to the wide availability of a vaccine, herd immunity or some other treatment (antibody, etc) or development. Remember we are economists trying to translate the public health crisis into an economic forecast. For those familiar with the concept, this time period is the dance part of Tomas Pueyo’s The Hammer and the Dance.

After we have control over the public health side of things, then the economic recovery may exhibit more of the classic U or V shapes depending upon a variety of factors, including how much permanent damage is done during the recession — number of firms that fail, displaced labor, demand destruction, etc — plus consumer’s pent-up demand, monetary and fiscal policies, and the like. Visually, the nature of the recession and recovery resembles the square root symbol.

Even if the contours of recovery may be coming into focus, there are considerable ranges of outcomes at all of these key points. Just how severe is the initial drop? When do health restrictions begin to life, when does the bounce back start? How strong will that be? Is it possible that even as consumer services rebound some, losses in other sectors offset those gains? How long until the health situation really is under control? How much permanent damage have we done to the economy in the meantime? In the weeks ahead our office is asking our advisors to help us map out these possibilities to produce our next forecast for policymakers.

Finally, just to be clear, none of this is designed to be pitting the economy against public health. Research shows they are clearly connected and in past episodes, the economy is stronger in places that improve public health the most. As Bill Conerly said the other week, if you tell me the health outcomes, I can tell you the path of the economy. That remains true today.

Two economic recommendations:

Tim Duy’s latest in Bloomberg where he discusses how depth, duration, and deflation are the likely markers of a depression versus a recession. Tim also highlights how the permanent damage to the economy, and lack of a vaccine or cure for the virus are clear barriers to that initial bounce back being 100%.

A new NBER paper by Guerrieri et al (2020) looks at how a pandemic supply shock can cause demand recessions. For those not interested in an academic paper, I recommend seeing this Tweetstorm by MIT’s Ivan Werning, one of the coauthors.

Posted by: Josh Lehner | April 3, 2020

COVID-19: Initial Claims, Sectors, and Unemployment

The bad economic data is just now starting to roll in, helping to quantify some of the initial impacts of the coronavirus. Yesterday we got another round of initial claims for unemployment insurance from last week at both the U.S. and state level. This morning we got the March employment report for the nation. Neither are good, which is to be expected, but we also know these are just the tip of the iceberg of what’s the come in the months ahead as the data catches up to the reality of what’s happening.

First, initial claims last week set new records at the national and state level. The Oregon Employment Department reported that they received 92,700 initial claims last week. That breaks the previous record of 76,500 set the week before, which was basically triple the previous record set during the Great Recession. To be honest, it is hard visually to show these increases and to pay justice to the fact we’ve set records two weeks in a row. That fact gets lost in the charts. So I have switched from showing the weekly claims and below I show monthly initial claims. Obviously the point still stands, and thankfully the calendar aligns perfectly for looking at weekly data for March 2020.

Now, we don’t yet have detailed information for all of these initial claims. Right now OED is able to provide sector and country breakdowns for the roughly 77,000 claims fully processed so far in March. See here for that detailed information including some nice Tableau visuals (good work Will BTW). I especially like the sector tree maps which are such an improvement over hideous pie charts.

Now, I’ve repurposed the data a bit in the table below to try and show the relative sizes and increases across sectors. Tables have no visual impact, which is why I’ve color coded it some, but they do serve an important purpose in terms of being a reference. The table focuses on the 74,000 private sector claims for which detailed data is available.

Claims are up significantly across all sectors. That said, as expected the biggest increases are seen in leisure and hospitality with bars and restaurants nearly shutdown. Other sectors impacted to a larger degree include retail, and other services which includes gyms, salons, social organizations and the like. Health care is also seeing large increases which at least anecdotally is tied to childcare services in addition to reductions in elective surgeries, dentist offices and so forth. The final column is a bit of a goofy concept but it takes a location quotient style calculation to try and adjust for typical industry churn, or level of UI claims compared to its industry size and how those have changed today relative to recent years. Larger numbers and darker reds are bad.

The second big piece of economic data we received this morning was the national employment report for March. Simply put, March was one of the worst economic months on record. Payroll jobs fell 701,000 and the unemployment rate spiked 0.9 percentage points, rising from 3.5 to 4.4 percent. To be honest these figures were a lot larger than I expected for March. The reason is due to timing. Data collected is focused on the pay period that includes the 12th of the month. The thought was early/mid-March was too early to really capture the impacts of COVID-19 which really hit later in the month. But even with the bad March numbers, we know April will be even worse. We get the Oregon March report on Tuesday, April 14, and the April report on Tuesday, May 19th.

Finally, I want to touch on a technical data issue. I have been fielding a lot of questions about how high Oregon’s unemployment rate will increase. I don’t have any specifics to offer right now, other than to note we are working on our next forecast. Of course the answer is probably a lot, but there is actually considerable amounts of gray area. It really comes down to how Americans and Oregonians answer the survey questions. How do they categorize themselves during this bizarre time where you aren’t at work but probably have a job to come back to whether you’ve been laid off or not, and how then how do BLS workers code the answers?

The main possibilities can be seen in the flow chart below. Impacted workers will move from the dark blue “Yes” box to the light blue or red boxes, depending upon how they classify themselves. Do they still have a job, but are not at work? Are they out of work and still looking for a job? Or are they out of work and not actively searching because the federal UI changes waive the job search requirement?

To be clear, the answers to these questions have no impact on the underlying economic conditions, which are terrible. However they can have a tremendous impact on what our standard economic data shows.

To this end, BLS has a great write-up on how COVID-19 impacted the March data. They specifically noted that while they instructed their data collectors to code furloughed workers into unemployment, per standard procedures, the actual household survey did see a large increase in workers who had a job, but were not a work for “other reasons.” BLS noted that this increase was just as big at the unemployed increase, meaning the unemployment rate would have increased by nearly 2 percentage points, had they gone into the survey data and re-coded the responses, which they did not. This difference here in how individuals respond to the questions and how they are counted in the data is not trivial for our standard measures! Now the broader measures of unemployment, like U-6, should encapsulate these changes.

For these reasons, I have put together a highly stylized example for Oregon, although a bit different than the situation that arose in the national data this morning. In the table below I am calculating the unemployment rate if Oregon lost 200,000 jobs. If those workers transition from employment to unemployment then we would see the unemployment rate skyrocket. However if those workers transitioned from employment to not being the labor force, maybe because they no longer have to search for a job to receive the new UI benefits, then the unemployment rate would only increase a little bit.

Please keep in mind that this is not a forecast for Oregon’s April unemployment rate. This is just a hypothetical that is designed to show how the data may shake out. There are always lots of individuals flowing into and out of the labor market all the time. Focusing just on initial claims can’t tell you the magnitude of the end results of the household survey, even if it gives a clear indication of where things are headed. We won’t know the final answers until we get the actual data and survey responses in the coming weeks and months.

I hope everyone enjoys their weekend. The good news is next week’s weather is supposed to be gorgeous for all of us.

Posted by: Josh Lehner | March 31, 2020

COVID-19: Working Parents and Educators

“Everyone’s a Keynesian in a foxhole” is a popular economics phrase describing how public policy is important, especially in recessions. Riffing off of that I think we need to add “every parent’s an educator in a quarantine” to the list as well. Schools across the country are increasingly closed or on hiatus until next school year. That means the kids are spending more time at home.

During this period of social distancing, we are all facing issues and challenges we haven’t had to deal with before, or not at this scale. For parents and guardians that means more childcare duties and finding enough activities and projects to educate and entertain the kids, while also trying to limit the blessed and cursed screen time. There are myriad resources online to help and thankfully schools across Oregon are now rolling out their lesson plans and materials for students to work on moving forward. The State is also working on Distance Learning for All.

A couple years weeks ago our office dug into Census data to better understand what impacts social distancing may have on Oregonians based upon how we live. Today I wanted to touch on two things regarding Oregon households with children, mixing demographics and economics.

First, let’s explore Oregon households along a few different dimensions. The Venn diagram below segments households based on whether or not an adult is working, whether the household has children, and whether or not the household includes an educator. Here I am defining educator broadly. It includes adults working in occupations related to education (teachers, professors, librarians, etc) in addition to childcare workers, and then anyone else who holds an education degree. Being a good parent or possessing the characteristics, temperament, or skills that good teachers have isn’t necessarily unique, but we know educators do have more training and experience along these lines than the rest of us. If my household is any indication — my wife is an educator, I am not — these skills and training are extremely useful today! Some of us struggle more than others.

In 2018 there were 1.64 million households in the state. 28% of these households (454,000) had at least one child. 94% of those households with children had at least one adult working (427,000 or 26% of all households), including 68,000 with an educator (15% of households with kids, or 4% of all households). You can see how all these different segments of Oregonian households overlap below. Closed schools in Oregon directly affects about 1 in 3 households as kids stay home or educators are not going into work. Of course social distancing more broadly affects more that that, but just this piece touches a lot Oregonians.

The second aspect to explore today is looking at trends among working parents in Oregon. While we are now consistently seeing about 1 percent of Oregon fathers not working and staying home specifically to take care of the family, we know that household duties, kin keeping, and emotional labor primarily fall on mothers. For that reason I want to focus on working moms for a minute. (Also, see our office’s previous report on Stay-At-Home Parents for more.)

A few years ago our office predicted that one source of available labor in a strong economy would be moms. There was a rising share of moms staying at home during the 2000s. Some of this increase was likely cultural or societal, but some was also likely due to economic conditions: job availability, flexible schedules, high enough wages to cover childcare costs, etc. Between the late 1990s and mid-2010s the biggest change that occurred was among mothers of elementary school-aged kids. They were staying home to a much larger degree than before. Well, as you can see in the chart below, there has been a strong reversal of these trends in recent years. Labor force participation rates among Oregon moms of elementary school-aged children has increased considerably in the strong labor market.

One concern is not just that we lose a lot of jobs during a recession, but employment also tends to follow the last in, first out pattern overall. So all of the labor force gains we have seen among some disadvantaged or overlooked groups — be it racial or ethnic, geographic, based on educational attainment, age, physical ability and so forth — may be undone in a matter of months during the recession. I would add these labor force gains among Oregon moms to that watch list as well.

All told, COVID-19 and social distancing is putting all of us in situations we haven’t been in before. We need to keep in mind that these policies do work. If we follow them, we will flatten the curve and see public health improvements. As for what comes after that, and key metrics, policies and steps, I found this plan from the American Enterprise Institute helpful in thinking about it. Closer to home, our office is continuing to research COVID-19’s impact on Oregon, the economy and public tax collections. In the weeks ahead we will meet with our advisors multiple times as we develop the updated outlook.

Posted by: Josh Lehner | March 26, 2020

COVID-19 Drive Record Initial Claims (Wonky)

By now I’m sure all of you have seen the eye popping charts today of surging initial claims for unemployment insurance. I add my own #DataViz to the stack below but really wanted to add a few points of clarification on the data given this is one of the best real-time indicators available about the economy.

This morning the U.S. Department of Labor reported there were 3.2 million initial claims for unemployment insurance last week across the country, setting a new record by a considerable amount. This was expected given various state reports that have come out, plus all the announced closures from around the country. That said, the increases are still staggering. And we know they represent an undercount of the situation for a few reasons.

Now if you happened to scroll through the U.S. release or are used to downloading the data from the Department of Labor (Hey! All 3 of us raised our hands!) you may have noticed that the Oregon number for last week was 22,800. That’s an Oregon record as well but no where close to the eye watering national figures in terms of the severity of the increase. There is a good reason for this.

What is usually reported are the number of processed initial claims. Typically the number of initial claims filed is equal to the number of initial claims processed which is equal to the number of initial claims reported. However, the swiftness and severity of the changes in recent weeks was so large that there is a backlog of claims being processed today.

Thankfully our friends at the Oregon Employment Department filled all of us in on what is going on. OED issued their own press release this morning indicating that they saw 76,500 initial claims for unemployment insurance filed last week. Their staff is working as fast as they can, managed to process a record number of claims without warning, but that does mean there is a backlog they are working currently working through. When we put it all together, you get a chart that looks something like the following.

Now, what does this mean? First it means there are a huge number of workers who are being laid off due to COVID-19 and the social distancing measures being put in place. Keep in mind that these are the right health policies to fight the spread of the virus. Congress is acting to help provide the financial band aids in the meantime to allow the economy to recover once the health situation improves.

Second, we should expect these initial claims to remain large for another couple of weeks. As the current backlog is processed, they will begin to show up in the reported data at the national level. This initial surge in claims is probably tied to the first round of social distancing measures, but as those policies ramp up or cover more industries or regions of the country, we will see more workers file for unemployment insurance. Furthermore, not everyone gets laid off one day and files for UI the next day. It will take a few weeks for everyone impacted to file, plus the newly expanded UI benefits will allow more workers impacted by COVID-19 to receive the needed assistance.

Finally, our office appreciates the Oregon Employment Department for letting all of us know what is happening in real time. Normally we would have to wait for all of the claims to be processed and reported before we would know the extent of what is happening. However given the circumstance OED was able to not only process record numbers of claims, but also communicate what is happening. Fr those unaware, OED also has a COVID-19 website with information for employers and employees in addition to more information and data on the claims. They provide underlying details in terms of which industries those filing for UI come from, which county they live in and the like. In the weeks ahead when all of this surge of claims is fully processed, this data will become even more important and will help our office’s industry forecasts.

Posted by: Josh Lehner | March 25, 2020

COVID-19: The Shape of What’s to Come

While it is still too soon to know the full extent of the economic fallout, I thought it may be helpful to sketch out how our office is currently thinking about the outlook. Last week I was on OPB’s Think Out Loud and the following builds off of the conversation I had with Dave Miller. I want to hit on a few main topics including the nature of the shock and the severity of the recession, in addition to a couple of the more plausible paths to recovery.

Nature of the Shock and Severity of Recession

The U.S. has seen a sudden stop in economic activity. We will likely set some bad economic records in the weeks and months ahead given the severity and swiftness of the transition to being in recession. The unemployment rate will basically double and in some places triple overnight. From there it could rise further depending upon how events unfold. This initial drop in activity is due to the impacts of social distancing and the various shelter in place policies being put in around the country. Here in Oregon our Stay Home, Save Lives executive order directly affects sectors that employ about 1 out of every 5 private sector jobs. That said we know all industries are impacted by the drop in demand, changes in staffing patterns and working from home, knock-on effects across supply chains, and the like.

Historically Oregon is more volatile than the U.S. for two primary reasons. First is our industrial structure and larger goods-producing industries like natural resources and manufacturing. The second are migration flows. Both are pro-cyclical meaning they lead to more severe recessions in Oregon but also stronger growth in expansions. Over the entire business cycle, Oregon tends to come out ahead.

Well, what about today? Is there reason to believe this time is different? Yes and no. This initial shock to the economy is different than recent recessions. This initial shock is primarily to consumer services, travel, leisure and hospitality, plus the impacts on mining and the energy sector with low oil prices. Here, Oregon tends to rank average or even below average. Unlike the Great Recession where the initial shock was housing, or the dotcom bust where tech manufacturers suffered the most, Oregon is not overly reliant upon the initial sectors hit hardest by COVID-19. Beyond those sectors, other items to keep in mind in terms of the severity of the local or regional recession are demographics and older populations, in addition to reliance upon investment-related income and the wealth effects on spending with asset markets down.

So at first blush, the severity of the recession here in Oregon looks to be about what it is nationwide. Some places within the state do have older populations (mostly rural), a higher reliance on travel and tourism (central, coast, gorge), and a larger share of investment-related income (central, southern). But from a big picture perspective, the nature of the 2020 recession does not at first look appear to hit Oregon harder than the rest of the country, for a change.

That said, the deeper the recession, the longer it persists, or the weaker the initial recovery, the more likely our office believes Oregon could be impacted to a larger degree. This would in part be due to the goods-producing losses that are more likely to come with a deeper or more prolonged loss of consumer demand or longer-lasting supply chain disruptions. However the bigger impact will come from less migration and slower population growth.

Today nobody is moving. Migration flows this year will be quite low, particularly should the sheltering in place style policies remain in effect throughout the summer moving months. This would impact the southern and western states the most. While people still generally move to Oregon in good times and bad, this is a bit different. Migration is the key issue our office is watching over the medium-term. That said we do know that as the health situation improves, restrictions are lifted, and job opportunities return, migration flows will too.

Outlook

It is clear that the economic fallout we are seeing is a direct result of the public health situation and global pandemic. Certainly once the health situation improves the economy will come back. Now, the economy can come back earlier than that due to the policy response and federal disaster assistance (it’s not stimulus). Announcing health policies and plans can similarly have an impact, letting people know that testing is increasing, that the curve is flattening, that different treatments and vaccines are being tested and the like. This can provide confidence and make us less fearful.

So far the policy response has been faster and stronger than during the Great Recession. The Federal Reserve has cut interest rates and reinstated a number of lending programs to keep the financial system intact, to prevent a credit crunch that would worsen the situation. Importantly it now looks like Congress has settled on a disaster relief bill. This includes programs and spending packages to provide assistance to the health care industry, businesses more broadly, households, and also a little bit to state and local governments. While some of the numbers look big — ~$2 trillion overall — all of this really is a short-term band aid to keep firms and families afloat for a couple months at best as we limit economic activity in order to improve the public health situation.

Some very quick math on the federal rebates to households — $1,200 per adult, $500 per child — shows that while they will provide a needed financial respite they will not cover all the needs. For the Oregon households that do receive the checks, the rebates will replace somewhere around half a month of income. This means that for 90% of Oregonian households the rebates will cover rent or the mortgage payment for one month. When you start adding in other necessities (utilities and groceries average $300-400 per month each, or more) or the possibilities of a drawn out period of sheltering in place, it is easy to see how the rebates don’t truly fix household finances, even if they do help.

Probably the key policies included in the federal package are assistance to businesses and also the expansion of the unemployment insurance program for workers. By expanding UI to cover more people who were previously ineligible for the program, loosen other requirements and administrative rules, and increase the payments by an additional $600 per week on top of the regular payment, unemployment insurance will be more significant for household finances than the one-time rebates, and also more targeted to those most impacted.

In terms of the outlook and recovery, there are myriad scenarios one could envision. We need to factor in improvements (or not) in the health situation, the potential seasonality of the virus, how likely treatments are to work, how quickly a vaccine can be developed, the prospects for herd immunity and the like. That said, in my mind, most of these scenarios generally fall into two buckets when it comes to the economic outlook, as I discussed with Dave on Think Out Loud.

V-Shape Recovery

The more optimistic scenario, and I don’t mean this as pie in the sky, but a very real plausible assumption and scenario, [is that] as soon as things start to bottom out and get better — caseloads are flattening — the economy can come roaring back. It’s not like overnight the entire leisure and hospitality industry is unviable. It is unviable today because we are social distancing ourselves, and we’re closing it down except for take out, so hundreds of thousands [of workers are] being laid off, but the expectations are temporary. We are still going to go out to eat further down the road. There is a very real scenario where the economy comes roaring back later this year, and so if you look over the course of 12-18 months [probably more like 24 months] the economy will look like we expected it to be, it’s just the path we took is something unprecedented.

U-Shape Recovery

The other more likely scenario is where that health situation doesn’t improve in the short-term. Maybe the caseloads slow down and we flatten the curve a little bit, but maybe treatments or vaccines prove more difficult than expectations, and so we kind of operate at a quasi-depressed level for some extended period of time. Now the economy would grow, people would come back to work [some] but we cannot completely shut down society for an indefinite period of time. We’re taking the hard medicine now of fully shutting down some of these public gatherings to help the health care sector and slow the spread of the virus. In China they’re coming back, we’re seeing some better data. They’re still at a relatively depressed level compared with where they were prior to the [Chinese] New Year, but they’re growing again. Saying we’re going to permanently decline and never grow again, that’s not a reasonable assumption.

Overall it is plausible we experience a strong rebound in economic activity later this year, but it is also plausible we see a period of prolonged weakness if the public health crisis does not abate. As Bill Conerly, an economic consultant and member of the Governor’s Council of Economic Advisors, recently said, if you tell him how the health situation plays out, he can tell you how the economy will respond and recovery.

Two recommended links for more thinking along these lines.

Bill Conerly’s recent economic outlook: Video here, Article here

Jim Hamilton over at Econbrowser has some good thoughts as well

Posted by: Josh Lehner | March 17, 2020

Statement on COVID-19 and the Economic Outlook

The public health and economic landscape has shifted dramatically in recent weeks. Our office continues to assess the damage and identify channels of impact on the economy. Given the scale of the events, economic forecasters are increasing assuming a recession in the baseline. However it is still too soon to know the full extent of the economic damage as solid data remains weeks away. It is likely that until the public health situation improves, or at least the fears subside as health policy plans are announced, the economic damage will continue to mount.

Our office has re-run our forecast models to provide a first look at generic recessionary scenarios based loosely on past business cycles. However a full forecast update will not be available until our next release on May 20th. The coming weeks will allow time for us to analyze updated data, gather input from our advisory groups, and assess the public policy responses that are still being formulated. These are needed before formalizing a new outlook, especially one that will likely represent a sea change relative to recent quarterly forecasts.

Overall, economists struggle in times of such dramatic changes because we lack good, timely data. We probably won’t see the start of the impacts in standard economic data until the March retail sales report (released in April), the April employment report (released in May) and 2020q2 GDP (released in July). That said, there are at least three Oregon-specific data points we are tracking on a daily or weekly basis.

First, withholdings out of Oregonian paychecks are important trackers of the labor market, and of course income tax collections overall. Withholdings are one of the noisiest data sets we have, however data through last Friday (3/13) shows withholdings growing, but weak on a year-over-year basis.

Second, initial claims for unemployment insurance are a great leading indicator and measure of firm layoffs. Initial claims also incorporate some worker behaviors in the sense of how they respond to being laid off. Do they quickly land another job and not file a claim or do they take the time and effort to file the claim and wait for the income support as they search for a job. Weekly initial claims are available with a 2 week time lag, and data through 2/29 shows no causes for concern yet. See the Employment Department’s helpful COVID-19 frequently asked questions for more information for employees and firms.

Third, weekly video lottery sales are the most timely measure of consumer spending in Oregon we have. These too are inherently noisy on a weekly basis, and sales have been growing strong in recent months. Some of the growth early this year is propped up by the kicker, however sales have finally tapered in recent days; beginning with last Friday (3/13). On a weekly basis, last week’s sales were 8 percent lower than the same week a year ago. Negative prints aren’t entirely uncommon, however this decline is larger than the usual noise.

Finally, our office has also taken a first look at the relative sizes of the industries most impacted by social distancing. These include air, ground, and sightseeing transportation in addition to museums, spectator events, lodging, and bars and restaurants. Overall these industries account for 225,000 jobs in Oregon, or 12 percent of all jobs statewide.

See our full set of slides for more information.

 

Posted by: Josh Lehner | March 9, 2020

COVID-19: Social Distancing, Isolation, and the Workforce

The public health situation continues to evolve in recent days. Equity and bond markets are dropping, signaling elevated concerns, to say the least. Here at home Governor Brown declared a public health emergency over the weekend, which helps fund state health programs and bring additional health care professionals into the fold.

As our office noted last week, the health care system is likely to be stressed. While the industry has grown quite a bit in recent decades, much of those gains are simply keeping pace with population. According to data from the Kaiser Family Foundation, hospital beds per 1,000 residents has fallen by 20% in the past two decade across the country and here in Oregon. Total health care capacity is up, but relative capacity maybe hasn’t increased all that much. Now, from an industry efficiency perspective, this is likely good news. To the extent this means more individuals are being kept out of hospitals and being treated by primary care physicians, then it would be a big public health policy win. That said, in a pandemic where the caring capacity of the system may be put to the test, it is one potential limiting factor.

Update: This chart highlights changes in health care capacity relative to population growth since 2000. The total number of health workers in Oregon has risen faster than population, however it is largely keeping in-line with growth among the older population.

In recent days our office has been thinking more about the economic fallout from the virus. We have been digging into workforce and Census data to get a better gauge of how we, as Oregonians, live and how we work. What follows are some rough cuts of the data and how we are currently thinking through some of the implications. Of course we are not medical professionals. We are not offering medical advice, nor are we sharing this Census data to be alarmist. We are trying to wrap our heads around the potential demographic and economic data and are sharing it here for those interested.

First, we know that humans are social animals. Our ability to work together is one of our greatest strengths. It helped us run mammoths and buffaloes off of cliffs to survive. More recently the agglomeration effects of regional economies propel growth and increases in living standards. However, by building communal networks, it does put us in close proximity to one another. While this is greatly beneficial as a species, it can be problematic when facing a pandemic.

This first table takes a rough cut to gauge how many Oregonians live in close proximity to others. The answer is about 1 in 3 of us do, or about 1.3 million Oregonians. How I come up with this estimate is I included everyone living in what are called Group Quarters (dorms, nursing homes, prisons, etc) where individuals have very little personal space. Next, I included everyone living in medium or large apartment complexes, where interactions with neighbors are more common. After that I added in everyone enrolled in school who was not already counted. Again, this is a rough cut. Your mileage may vary. I think this probably represents a reasonable lower bound on Oregonians living in close proximity.

Second, if someone in your household becomes sick, one precaution some medical professionals have recommended is to isolate them within your home the best you can. Ideally this would include having their own room to rest/sleep and their own bathroom to use. This should reduce contagion. But of course not everyone has a spare bedroom or an extra bathroom. Combining American Community Survey data with American Housing Survey data, we’re able to look at these types of situations in the Portland MSA.

The next table estimates what I am calling cramped quarters living in Portland. What I am trying to estimate is how many people would struggle to isolate someone in their own room and also only have one bathroom. My quick definitions here are really if the number of household members outnumbers bedrooms by 2 or more. As an example, a household of 4 living in a 3 bedroom unit does not count. That could easily be parents sharing a room and one kid in each other bedroom. However a household of 5 living in a 3 bedroom unit would likely struggle more to isolate an ill member of the household.

All told, the data show that nearly half a million Portland area residents live in a situation described above, or about 20% of the total population. Next, we layer on the fact that 30% of all housing units in the Portland region only have one bathroom, although this varies by unit size of course. When combined, the data indicates that about 125,000 Portland area residents live in cramped quarters, where they would be unable to successfully isolate a sick member of their household. All told this is about 3% of all households or 5% of the overall population.

Next we’ll take a few looks at the economy and workforce.

Initially, we were focusing almost entirely on the supply side impacts of COVID-19 back in late January and early February. The disruptions to global supply chains are big due to the outbreak and shutdowns in China. However as the situation evolves, economists are increasingly worried about the demand side implications as well. This is one reason the Federal Reserve acted between meetings last week, and may well act again this month.

The main issue here is that the consumer has been key to economic growth in recent years as the trade war zapped the manufacturing industry. So if consumers pull back on spending out of fear, then growth would slow even further. To the extent they cancel vacations, go out to eat less, and really avoid anything with large crowds — these are all part of what is generally called social distancing — then sales drop for these types of firms, and paychecks shrink for these workers. Typically households spent so long as they are confident and much of that confidence is driven by jobs and income. However, should incomes weaken and job prospects dim due to lower consumer spending, there is a chance a negative, recessionary cycle ensues.

Two related notes. Obviously recommendations are that if a worker is sick, they should not go into work to help prevent contagion. Similarly folks should work from home to help prevent contagion. The problem here for the workforce is these are easier said then done.

For instance, in the table below I have tried to highlight in yellow some of the fringe benefits that are most applicable to workers staying home. This comes from the good survey work our friends over at the Oregon Employment Department have done in recent years. Many firms simply do not offer time off, either paid or unpaid, and rarely do they offer telecommuting. Rightly or wrongly, all of this does make it harder for employees to not go into work. This is obviously something to track as the health situation evolves and to see how employers respond.

As you can see at the bottom of the table, these time off benefits can vary greatly across different industries. It’s these variations that are important to keep in mind. As our office noted last week, it will likely be the service workers who bear the brunt of the slowdown in consumer spending as their shifts are potentially cut or reduced.

UPDATE: I have simplified the following chart to better drive home the point. Instead of looking at all 22 occupational groups, the updated chart groups the occupations as we do in the job polarization research.

The final chart below shows Oregon workers by occupation and just how many of them actually work from home. (See our office’s previous work for more.) All told, about 7% of Oregon’s workforce currently works from home, meaning just over 100,000 workers of so, out of nearly 2 million. Now, BLS surveys show that about 30% of workers nationwide can work from home. However the variations across occupational or income groups, largely based on educational attainment are notable at the same time. Simply put, the vast majority of the workforce cannot work remotely. Their jobs require operating machines in specific locations, interacting with customers at a given facility, or the like. There are only so many data monkeys like myself who can crunch numbers pretty much anywhere with an internet connection.

Bottom Line: Humans are social creatures. Our ability to build community is inherently valuable. However even our greatest strengths are not without weaknesses. About 1 in 3 Oregonians live in close proximity, while about 1 in 20 would be unable to isolate an ill member of their household should they need to. Combine these facts with a workforce that largely needs to be in a specific location to earn money, with benefits and protections that may be lacking, and it’s easy to see downside risks emerge. This is one reason why it is important — socially and economically — to make sure we are taking necessary precautions if we do become sick. It is still too soon to know any potential economic fallout of COVID-19. The backward looking economic data all still looks good. Initial claims for unemployment insurance in Oregon are still at or near record lows with data available through February 22nd.

Finally, federal stimulus policies are being debated in terms of supporting workers and firms. We shall see how that plays out. Here in Oregon, there is one silver lining today. The state is currently distributing a $1.7 billion kicker this tax filing season. As a form of stimulus it is only timely by happenstance, and not particularly targeted at those likely to be most in need. Remember this kicker was 3 years in the making, and is paid out proportionately based on tax liability. Households in the bottom half of the distribution will receive a couple hundred dollars at most. Even so, the kicker credits should help support consumer spending, and to the extent they are saved, improve household liquidity in these uncertain times.

Our office’s next forecast is scheduled for May 20th. At that time we will have another couple months of economic data plus public health updates that we will incorporate into the economic and revenue outlook. Until then our office will continue to monitor the data and look for impacts.

Posted by: Josh Lehner | March 5, 2020

Coronavirus, the Economy, and Oregon

Our office continues to get asked about the potential impacts of the coronavirus (COVID-19) on the economy. Long story short is that it is still too early to tell how much economic fallout will occur given the ongoing public health developments as the virus spreads. That said, we did write up our thoughts on the potential impacts in our latest forecast (see PDF pg 6) and discussed this with the Legislature during the forecast release last month. What follows are the main points in how we are thinking through the impacts.

1. In times of war, famine, and disease, the largest impacts are human and social. The coronavirus outbreak is a public health event first and foremost. The dark scenarios here are that the costs of the pandemic are the health and potentially even the lives of our neighbors, friends, and family. I think it’s important to keep these things in their proper perspective and that there are bigger concerns at play than possible short-term, work-related disruptions. With that said, like other natural disasters, there is an economic fallout as well.

2. The outbreak will likely stress the healthcare industry. Clearly health care-related jobs have grown quite a bit in recent decades, and have proven more stable than the overall economy. However much of these gains are simply keeping pace with population growth. We have yet to see these facilities and workforce stressed with a large outbreak, and a sizable population needing intensive care. This goes for medical facilities, public sector programs, insurance companies, and the like. Hopefully we will not see this play out, but if the virus continues to spread further, it is an increasingly likely scenario. See Bloomberg’s Justin Fox for more on some of these numbers.

3. The biggest economic risk of the coronavirus is that it serves as a coordinating event and recession catalyst. Fears over the human and economic impact could potentially reach critical mass where consumers pull back and delay spending money and employers put off hiring and investment decisions. If enough firms and households do this at the same time, then a recession ensues as growth plunges. We’re not there today. Prior to the outbreak the U.S. and Oregon economies were strong. We only have economic data through January and it all points toward ongoing, solid growth. We will begin to get February data here in the coming weeks and March data a month from now. The U.S.-based outbreak and domestic concerns are all too new to show up in the standard measures yet. But, economically speaking, the coronavirus’ potential to be a coordinating event is the the worst case scenario.

4. Outside of serving as a recession catalyst, the most economically disruptive impact of the coronavirus is its impact on supply chains, both globally and increasingly locally.

China is the world’s second largest economy, accounting for roughly 16 or 17% of global GDP. China is closer to a quarter of global manufacturing. All industries rely on imports to some degree, with manufacturing being the most prominent. Additionally, China is also Oregon’s largest market for exports, accounting for 20-30% of Oregon exports in the past decade.

As such, disruptions to the Chinese economy, like effectively shutting down for 3 or 4 weeks, have ripple effects around the world. Depending where your firm sits in the supply chain, shortages and stockpiles emerge. Chinese economic activity remains at depressed levels relative to a few months ago but it is growing again and coming back online slowly. Until fully back, global trade overall will be reduced. The economy will be operating below potential.

Now that the coronavirus is clearly on our shores, we are potentially no longer talking just about shutdowns, social distancing or quarantines across the Pacific, but possibly locally as well. If Oregon or the U.S. gets to the point where we isolate/quarantine our friends and neighbors, or ban public gatherings or the like, then these types of disruptions will obviously be more noticeable given they impact our everyday lives. We won’t go to work, or not full-time. Our children will stay home from school. We won’t go out to eat and similar types of social activities will be reduced.

The thinking today remains that of natural disaster recoveries. There is a temporary disruption but relatively limited permanent, or long-run damage. There may even be a short-term boost to grocery store sales as households load up ahead of hunkering down. But overall there would be much slower economic growth in the near-term. Sales would be depressed across a host of industries as consumers stay home or put off some purchases. The key question is how long would this last?

As the population and economy gets back up and running after fears of contagion subside, then many of those sales would return due to pent-up demand. People will still buy a car or a house, just a month or two later than they originally thought. That said not all of the sales will come back. Are you going out to eat twice tomorrow because you didn’t go out to eat tonight? Will you take 2 vacations next year because you had to cancel your plans this year?

5. Besides supply chain disruptions and the manufacturing industry, travel or leisure and hospitality more broadly will likely be where the next largest impacts are seen. Chinese tourism to Oregon accounts for about 2% of total travel spending in the state. So the direct linkages there are manageable from an industry wide perspective. Of course specific locations, or types of business will see larger impacts than others. However the real fallout will be if broader travel restrictions are put in place, either formally or informally, and either internationally or domestically.

Here we would see the same types of impacts talked about above in terms of lost travel and restaurant sales as people stay home more to avoid public settings. The workers — mostly hourly and part-time — in these impacted industries will bear the brunt of the losses as well. Even in a temporary disruption scenario, these workers will still lose a paycheck or work reduced hours given the low level of sales. They may need to rely on the social safety net to a larger degree as a result.

Note: The map below shows local travel spending as a share of personal income as a way to highlight where any declines in travel will be felt the largest. Leisure and hospitality employment patterns are similar, but the focus is on potential changes in travel spending due to short-term disruptions if households bunker or restrictions are put in place.

6. Finally, the coronavirus can impact the economy through financial markets and heightened risks. This could mean a stronger U.S. dollar, wider credit spreads, or a drop in equity markets. All of these would work to slow current economic growth via fewer exports, less borrowing and lending activity, and lower levels of consumer spending and business investment.

Clearly the U.S. has seen some of these last impacts in recent days. The Federal Reserve’s emergency rate cut this week, largely in response to these financial market risks, should, or at least hopefully, go a long way from turning the virus’ supply shock into a broader demand shock. Of course we shall see.

Bottom Line: Prior to the coronavirus outbreak, the Oregon and U.S. economies were strong and continuing to see solid gains. This remains the case today based on economic data through January, however forecasters are still assessing the situation and adjusting their forecasts. It may be easy to envision dark scenarios and even recession catalyst scenarios developing, but we just don’t know yet. Given current information, many forecasters as expecting slower growth during the first half of the year, but much of that should or at least could be made up later in the year.

Of course the longer any global problems last, or if significant local issues emerge, the larger any economic fallout from the public health outbreak will be. Economically, the strong response from the Federal Reserve is encouraging. Let us pray the health situation follows suit or at least hope it does not deteriorate too much.

Our office’s next forecast is scheduled for May 20th. At that time we will have another couple months of economic data plus public health updates that we will incorporate into the economic and revenue outlook. Until then our office will continue to monitor the data and look for impacts.

Posted by: Josh Lehner | February 25, 2020

Young Oregonians and the Trades

Two years ago our office really dug into the trades and classic blue collar occupations. Today we’re back with an updated look based on available Oregon data. Today, as then, the primary focus and concern is trying to see if younger workers are avoiding these potential career paths. This matters for at least a couple of reasons.

First, construction (mainly nonresidential work) and installation, maintenance, and repair jobs are the gold standard for wages in fields that do not require college degrees. Now, as discussed before, these are skilled workers, but the skills are learned more on the job than in the classroom on a college campus. Furthermore, from a job polarization perspective, these manual, non-routine occupations are hard to automate and their outlooks are tied not to technological change but to population growth.

Second, the labor market is tight for both cyclical and structural reasons. If younger workers are not entering into a particular occupation, then it makes those structural, demographic challenges even more difficult given the Baby Boomers will continue to retire.

The upshot is young Oregonians are coming back into the trades as the economy improves. Overall there are more job opportunities in these fields today than a few years ago as the economy grows. Younger workers are filling these openings to a larger degree. Now, I don’t want to minimize legitimate supply side concerns, like the lack of vocational training programs or the everyone should go to college mantra, which work to limit people’s knowledge about and exposure to the trades. However the data continues to point toward the demand side being a the larger factor.

Now, a couple things stand out in the chart above.

One, even while rising recently, the share of young adults working in these occupations is down over the past couple of generations. These declines are directly tied to production (the manufacturing jobs that actually do the manufacturing) and transportation and material moving (mostly laborers with the drop). There are not corresponding drops over time for construction, or installation, maintenance, and repair occupations. This points toward big picture, structural changes in the economy being the primary culprit, and not that kids these days are soft.

The other very evident thing in the chart is the massive differences seen among men and women. These classic blue collar occupations are dominated by men. In 2018, women accounted for just 2% of all construction jobs in Oregon, 4% of installation, maintenance, and repair jobs, and 22% each for production, and transportation and material moving occupations. These percentages are nearly identical if we focus on young Oregon women or across all ages. Clearly, women remain a largely untapped pool of workers for these careers. The good news is women enrolled in apprenticeship programs is up in the state, although not evident in the Census data yet.

Finally, we know a lot of Millennials graduated into the Great Recession. Job opportunities were few and far between, especially for the trades which are more cyclical. A key question and risk is to what degree workers would come back into the trades a bit later in life in this case, or if they would forgo the professions entirely. We know wounds heal, but do scars remain?

Here we find some more encouraging news. The chart below tracks different cohorts of Millennial men in Oregon as they age into their 20s and their 30s. Older Millennials (light blue line) graduated into the housing boom. A historically large share of them entered into construction given the opportunities. However middle Millennials (dark blue line, and not really a thing, I know) graduated into the Great Recession. Very few found jobs in construction given the housing bust. However, notice how the lines converge despite the massive gap at the beginning. As the economy improved and construction industry rebounded, these Millennials born around 1990 found their way into construction jobs.

Today, about 7% of Millennial men in Oregon work in construction occupations. This goes for old Millennials and young Millennials alike.

Bottom Line: Younger workers are entering into the trades in greater numbers today than a few years ago. The Great Recession left scars, and underlying shifts in the economy does mean some of these career paths provide fewer opportunities today than for past generations. That said, the real fears that younger workers would forgo these professions entirely appear overblown. Strong economies really do work wonders, even if they don’t cure all ills.

Note: See our previous work for a more thorough discussion on these topics. I have a lot more on recent Oregon trends if you wish to discuss further. I focused primarily on construction for two reasons. First, our office has a few construction-related presentations coming up. Second, more than half the volatility of young people in the trades in recent decades is driven by construction specifically. The other blue collar occupations show less movement.

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