Posted by: Josh Lehner | December 2, 2020

COVID Shifts What We’re Buying

OK, this was fun. Willamette Week is out today with a set of articles highlighting some of the sectors of the economy that are doing quite well this year, despite the pandemic and recession. My hat’s off the Aaron Mesh and company for their ability to turn my spreadsheet of figures into coherent, local stories. But in general, I appreciated the request about which sectors are doing well because it allowed me to clarify my thoughts and better think through some of the changes we have seen so far this year. Last month we posted a chart showing industries that have seen job growth this year and noted a lot of them are related to e-commerce and the housing market. We fleshed out the discussion a bit further in our latest forecast document, but today I wanted to really dive into the figures a bit.

First, the main reason consumer spending has held up relatively well this year is the fact that incomes have. In fact incomes for the majority of households are flat, or up, allowing us to continue to buy things. The top line in the chart below shows total income across the country (we get 2020q3 Oregon data in a couple weeks). The main reason it is higher is due to the one-time recovery rebates back in the spring, plus the expanded unemployment insurance benefits. However even if we exclude the federal support, incomes in October were essentially back to where they were prior to the pandemic (-0.17%). Total consumer spending has rebounded accordingly. The fact that spending is still a bit weaker than incomes, means household savings is growing. Latest figures indicate Americans have saved nearly $1.5 trillion extra so far this year. That savings is literally just sitting in bank accounts at the moment and will be a key source growth next year, when the pandemic wanes.

What has changed, however, are the things we are buying. We are no longer going out to eat, to the movies, on vacations, getting hair cuts or our nails done like we used to. These activities were highly visible parts of what we did on a regular basis and today we are not doing them much. We can certainly feel this, and notice these activities are missing in our lives. But what it also did was free up a lot of money to spend on anything and everything else that doesn’t require a lot of in-person interaction. Mostly, this means physical goods we can order online. Many of these things help spruce up our apartments and homes where we are spending more time, or help pass that time at home.

In the chart below the bubbles shows different categories of consumer spending. On the x-axis going left and right, is growth in these categories in recent years prior to the pandemic. This is sort of the baseline of what one would expect sales in 2020 to look like absent COVID. On the y-axis going up and down is growth over the past 12 months. Nearly everything above the horizontal 0% line isn’t just up over the past year, but it’s up even more than pre-COVID expectations would indicate. Sales of everything below the horizontal 0% are down.

A few notes on some of these categories:

In terms of food, we are clearing going out to eat a lot less. This means grocery sales are up as we cook at home more. Interestingly enough sales of vegetables, meat, dairy, etc are up the most while sugar and sweets are up the least. This points to us really cooking at home and not just buying more junk food to keep us company. Even so, pandemic fatigue has set in. We are not cooking at home quite as much as we did back in the spring. In the past handful of months, we have begun going out to eat more, even if it’s primarily takeout, and fast food, which is now positive on a year-over-year basis.

Activities at home primarily include things that help us enjoy our time indoors more and include audio/visual equipment, computers, TVs, internet and streaming services, but also sewing, magazines, books, musical instruments, and games, toys, and hobbies.

Remodel and furnishings include furniture, carpet, windows, appliances, dishes, glassware, tools, gardening supplies, and plants. I suspect some of this is we are sitting around more at home and notice things that could be upgraded, or projects we’ve been meaning to get around to but now have the time to do so.

Outdoor recreation includes sporting equipment, camping equipment, RVs, boats, bikes and the like. As we move into winter this will include skis, snowmobiles, sleds, and so forth. The demand here is up likely due to being spaced further apart outside is less of a risk and is something fun to do.

If we’re spending more time at home that means we are also cleaning and grooming more at home. Sales of household cleaning products, toilet paper, and personal care products like shampoo, shaving-related items are up, as are pharmaceuticals both prescription and over the counter medicines.

Now, one type of spending where sales are not up includes clothes and shoes (not shown on the chart). I suspect some of this is because we like to try these on in the store. Online returns, however seamless, still require some effort and waiting a few days. Clothes and shoe sales may also be down because we are missing out on special events where we buy a new shirt, a new dress or the like. This may include weddings, holidays, school events, and even traditional back to school shopping. Such activities are fewer in number this year, or at least the gatherings are smaller in size.

Finally, the pandemic appears to have accelerated the growth in e-commerce at the expense of traditional brick and mortar. Of course this has been going on for a long time, but the shifts so far this year are larger than we have seen before, likely because we try not to venture out as much and are stuck inside, browsing the internet to a higher degree.

As such, these online sales do translate into more jobs related to moving, storing, and delivering the products. Since the start of the pandemic, Oregon e-commerce and related jobs are up 6,000, while brick and mortar retailers are down nearly 5,000 jobs, which even includes the growth at warehouse clubs. The e-commerce employment data is confirmed by growth in weight-mile taxes paid by truckers moving products into and across Oregon. Overall, these sectors are expected to grow in the years ahead. That said, e-commerce’s share of overall retail sales will drop in the year ahead when consumers feel confident again going out shopping like they used to. However, long-term trends all point toward sustained, future growth in e-commerce sales. In fact, many of the new business applications nationwide are for firms looking to focus on online sales.

All told, given incomes have largely held up so far this year, consumer spending has as well. We are clearly missing many of our normal social activities, and our spending has largely revolved around finding other ways to enjoy pass the time during the pandemic. I do believe there is strong pent-up demand for going out to eat, to the movies, on vacations, to the salon and the like. Of course this demand will not fully return until it is safe to do so. But when it is safe — and vaccines start in a matter of days, although it will be months before most of us get them — we will see a big shift back into these in-person activities. This shift will be pro-growth and pro-jobs. Even as spending on physical goods reverts back to trend, or below it for a period of time, there is unlikely to be a major impact on jobs as much of the growth is in warehousing and delivery, which were already long-run growth sectors.

Posted by: Josh Lehner | November 18, 2020

Oregon Economic and Revenue Forecast, December 2020

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 and a copy of our presentation slides.

While the economic recovery continues, the virus remains in control. Expectations were already that growth would slow noticeably over the colder, wetter months ahead. The latest surge in COVID cases all but ensures it. Businesses and consumers are likely to pull back out of fear of the virus, and more restrictive public health policies are being implemented such that the health care system does not breach capacity. When the weak labor market and spreading virus is combined with months of federal inaction regarding both the pandemic and the economy, it brings the recovery to its most challenging point yet.

Even so, expectations remain that the economic expansion will endure. The recovery will be faster overall than in past severe recessions. This is due to a key assumption regarding a widely available medical treatment by next fall. After that, economic growth should accelerate. Schools will reopen, workers will return to the office in greater numbers, and travel and tourism will pick up. With the end of the pandemic likely in sight, the key macroeconomic risk remains minimizing the amount of permanent damage done the economy in the meantime. As such, additional federal aid to support small businesses and the laid off workers who face dim job prospects until the pandemic is over will ensure the recovery is faster, and disparities do not widen. Oregon’s economy is expected to return to health by mid-2023.

Oregon’s primary revenue sources have tracked very closely with expectations since the previous forecast was released. Even so, a considerable amount of uncertainty remains due to the virus and government policy responses. Despite the uncertainty, General Fund revenue collections have been surprisingly healthy since the recession began. Total spending and income have been propped by the first round of federal fiscal aid. Also, the fact that high-income households have been relatively spared so far has supported tax collections.

Corporate excise tax collections, lottery sales and taxes on investment forms of income have shown the strongest recoveries. While those sources stand out, all major forms of revenue have bounced back, including labor-related income taxes. In fact, given the extraordinary growth, a personal income tax kicker for the current biennium is not out of the question, although it would take a big April 2021 tax season to get there.

Oregon’s budget process for the next biennium is getting started next month with the release of the Governor’s Recommended Budget. Oregon’s primary revenue sources are expected to grow by a 5% during the 2021-23 budget period. The losses of jobs and business income due to the recession have yet to completely flow through to tax collections.

Such growth is quite modest from an historical perspective, and not sufficient to keep up with the rising cost of providing public services. Should the baseline outlook come to pass, state resources will have remained roughly unchanged for three budget periods, while Oregon’s population and prices will have continued to grow. It is not unheard of for Oregon’s tax revenues to remain flat for several years. The 1991 recession and recovery provides the most recent example. That said, the typical recession in Oregon has brought with it a much larger swing in revenue collections. Significant risk to the revenue outlook remains.

While the revenue outlook is uncertain, Oregon is in a better position than in the past to manage this risk. Encouragingly, Oregon has saved a larger amount of reserve funds than ever before. Automatic deposits into Oregon’s Rainy Day Fund and Education Stability Fund throughout the long expansion have added up. Oregon’s budget writers have never had access to significant reserve funds during past recessions. Although today’s reserves will not cover all of the likely shortfall caused by a recession, they are large enough to ease much of the pain.

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 17, 2020

Oregon Employment, October 2020

Tomorrow our office is releasing the latest economic and revenue forecast for the state. We have a lot of new material regarding the outlook to keep you busy during the holiday season. But first, our friends over at the Employment Department released the October jobs data this morning.

Overall, the report continued to bring goods news and the recovery remained intact. To the extent we did see some relative slowing the September data that was fire-related, it looks to have reversed, as expected, in the October data.

A couple additional notes. One, this month’s report incorporated the first round of revisions to pandemic-related data. It looks like the severity of the recession was a little bit worse than the initial estimates indicated, but overall the the cycle remains pretty much the same. (Our office built in these expected revisions to our forecast that will be released tomorrow.) Two, OED highlights the declines in education employment in Oregon. It was clear that education employment was down — see our previous work for more on why and how — but we really need to wait until a month or two into the school year to get the most accurate picture. Education and related employment will not fully recovery until the pandemic is over and schools return to in-person learning.

Speaking of the pandemic, we are at a crossroads of sorts. On the one hand COVID cases are surging across Oregon and around the country. On the other hand, the vaccine trial news continues to be better than expected. As such the end of the pandemic is likely in sight. We just need to make sure we are able to keep the amount of permanent economic damage to a minimum between now and then to ensure a stronger, faster recovery once it may begin in full force. These next handful of months will be our most challenging yet.

The key measures to watch for that permanent damage are the number of business closures and associated layoffs. While the little bit of information we have on real-time closures (bankruptcy filings, liquor license renewals, video lottery retailers reporting revenue) look OK, or at least relative to initial expectations, we know the longer the pandemic drags on the more damage that will accumulate. In fact, now that we are into our ninth month of the pandemic, we are starting to see things like long-term unemployment increase. There are real economic, human, and social costs to long-term unemployment. And we know that the longer someone is unemployed the lower the probability they will find a job becomes, and the higher the probability they will drop out of the labor force entirely.

In order to not end on a down note, I wanted to share one final chart that tries to show that not everything is terrible. I’m borrowing this concept from our counterparts in Washington who use a similar chart that I thought was useful and interesting.

While total spending in the economy remains down a little bit, we have clearly shifted our consumption basket away from services like going out to eat and getting haircuts and more to physical goods. We have been buying RVs and camping equipment to get outside over the summer. We have been sprucing up our yards, remodeling our homes, stocking up on toilet paper, and cooking and drinking at home to a greater degree. And as much as ever before, we are doing so by buying online as opposed to going into stores. As a result, employment in sectors that sell these products, or move, store, and deliver them actually have higher levels of employment today than a year ago. Note that in past cycles, state government tends to increase initially in recessions as more workers are hired to process claims for needs-based programs before traditional budget cuts reduce employment in the year(s) after.

Stay tuned, we have lots more information on the economy and revenues tomorrow with our forecast release.

Posted by: Josh Lehner | November 13, 2020

Working from Home on the Decline, and Outlook for Downtowns

Working from home has been a key economic response to the pandemic. As detailed before, about 1 in 3 workers are theoretically work remotely. We know that number was higher earlier this year as working from home wasn’t so much about optimal business operations as it was to stop the spread of the virus and still get some work done. The key question remains just how large of a permanent shift we will see in the years ahead. It will increase. And recessions have a way of speeding up structural changes, but where exactly it lands is still very much to be determined.

While we know working remotely wouldn’t stay at these high levels forever, even if telecommuting a day or two remains an employee perk, the question was how quickly would workers be recalled to the office? The answer it turns out is, at least to me, sooner than expected. Since May, the Bureau of Labor Statistics has been asking some supplemental questions about the virus and remote work. If you look at Americans with a job, the share who are teleworking due to the pandemic has been declining in recent months. It has fallen by more than a third, going from roughly 35% to 20% of all employees.

If you dig into the data, it shows this decline is across the entire economy. The share of workers in every industry, or in every occupational group has fallen. The overall decline is not due to compositional factors, like the fact a lot of the job growth recently is in leisure and hospitality as bars and restaurants reopened. That sort of industrial or occupational mix accounts for less than 10% of the decline, while the within industry or within occupational declines resulting in more than 90% of the overall drop in telecommuting. We’re still on track for remote work to set all sorts of records in 2020, but workers being recalled to the office is maybe happening even sooner than expected.

This issue has big implications for downtowns, or commercial centers more broadly across the country. These hubs of economic activity are reliant upon demand from local residents, yes, but also from commuters who spend the workday in the area, and also demand from being destinations for those looking to shop, eat, and partake in nightlife and entertainment. This destination demand includes both those traveling from within the regional economy and also tourists.

With the pandemic, working from home lowered the daytime demand for restaurants and shops as workers commute less. This removed one key source of sales for businesses in downtowns and commercial districts. It also means it boosted relative demand in suburban areas as the workers stayed home. Then on top of commute trends, the drop in tourism — particularly air travel — and local residents staying home more to socially distance themselves, it all hit these hubs of commerce especially hard.

Note: Other Services includes things like barbershops, nail salons, parking lot/garages, and laundry services which are more prevalent in downtowns.

So what does all of this mean? It’s still too early to know for sure. On the one hand, the fact workers are being recalled to the office in recent months bodes well for businesses in these commercial districts, leaving to the side any discussion of pubic health. It is also likely an indication that there is no massive change in business operations on a permanent basis*, or at least not yet.

On the other hand, a partial rebound in the lunch crowd, while helpful, is unlikely to keep all of these restaurants and shops afloat. At best it is a necessary, but insufficient condition for jobs centers and commercial districts to rebound. There remains key risks to the outlook for these locations and commercial real estate more broadly given the ongoing shift away from brick-and-mortar retailers and a potential drop in demand for traditional office space and high rise apartments. We know a full rebound is unlikely until the pandemic is over. At that point, people will go out to eat more, take in a concert, go on vacations, and the like.

While our office expects no real long-run damage to cities and downtowns, that doesn’t mean there won’t be issues this year and next. As City Observatory notes, there are a lot of reasons to be optimistic about cities. In the meantime our office is watching employment trends in office-based work, and tracking measures regarding working from home, dining out, and travel. To the extent there are larger, permanent changes, it provides opportunities to repurpose existing spaces to meet whatever that future demand is.

*Note that the BLS data only refers to workers who telecommute due to the virus. It does not include those working remotely not due to the virus. As such, to the extent permanent full-time remote work is already increasing, that is not captured here.

Posted by: Josh Lehner | November 6, 2020

Macroeconomic Policy Matters

As our nation gets clarity on the outcome of the election, a few economic-related items stand out. While the economy is currently digging out from a severe recession, I think many voters understand or believe that this cycle is different. It was an exogenous, or outside shock that sent the economy into a tailspin. So when some election models use the current state of the economy, or economic growth directly before an election as a predictive variable, it could overstate the expected weakness for the incumbent if today voters are gauging the economy in a broader sense given the nature of the cycle. And I think in that light it is hard to argue that Americans, and Oregonians of all stripes have not seen good economic growth in recent years. We clearly have.

This brings to mind a discussion that has been taking place in the economic twittersphere this year. Macroeconomic policy matters. It’s hard to pin down exact policy levers to generate a strong economy — most policies are about creating incentives to achieve desired outcomes, or directly supporting residents and businesses when issues arise. But as our office has said before, a strong economy works wonders, even if it cannot cure all ills. And I think in this context, the cumulative impact of the decade long economic expansion that just ended has maybe not been appreciated enough, especially the material impact it has on those who have generally been left out due an underperforming economy for much of the past 20 years.

What I mean by that is the U.S. economy had not been at full employment since the late 1990s. We had a very brief period in the mid-2000s of a decently strong economy, and then in the late-2010s an extended period of a strong economy. But in between that, the economy was downright bad to terrible. As a result, we have kind of redefined normal. From, say, 2000 through 2015, the normal state of the economy was basically income growth that kept up with inflation, but nothing more for the typical worker or household. But that all changed in recent years.

The economy, near the end of the decade long expansion, broke through that malaise after the labor market became sufficiently tight. We were finally seeing real, solid gains across the spectrum. Firms had to dig deeper into the resume pile, and cast a wider net to attract and retain workers, because most people who wanted a job, had a job. Labor was not as easy to find. The result is wages started rising. Given that wages are the only real source of income for most households, the stronger labor market where more people were working, for more hours, and at higher pay, really started to move the needle on income growth. We got so used to a weak economy, that when we finally saw a strong one, it really resonated with those most impacted. Now, whether or not one should assign credit for this process to whomever is currently holding office is a different discussion, and I digress…

So with that said, I’ll leave you with a few charts to this end. The economic expansion that begin in the summer of 2009 and ended in the spring of 2020 really did start to bear fruit in recent years.

You can see that in income growth for all parts of the state, where they are now higher on an inflation-adjusted basis than back in 2000. (Once more detailed 2019 ACS data is available, I will update our more granular regional income work.)

Looking at growth rates over 5 or 10 year periods shows just how different a strong economy delivers for the typical household than a weak one does.

And this third chart is one you have seen before, but we cannot lose sight of the fact that while large racial disparities remain, the strong economy was really delivering results for Oregonians of all races and ethnicities. Poverty rates for Black, Indigenous, and People of Color are at multi-decade, meaning multi-generational lows. That is something to celebrate, even as we realize there is more work to be done to help address ongoing disparities.

To bring this full circle, it is clear that a strong economy delivers results and puts more money in the pockets of everyday Americans. We still need public policies to help address issues, inequities, increase efficiencies, and the like. But macroeconomic policy matters considerably. Full employment matters. Americans notice when it does happen. And to paraphrase the economic twittersphere, we should try doing that!

Stay tuned. Our next economic and revenue forecast is released in a couple of weeks, Wednesday, November 18th. We will have more thoughts on the potential economic impacts of the election as we know more.

Posted by: Josh Lehner | October 27, 2020

Zoom Towns are Real (Graph of the Week)

Stories about pandemic migration and working from home abound, even as we are months away from any hard data. This can be a struggle, balancing these anecdotes and speculation when we lack any real evidence. And the issue isn’t that these things are not happening. They clearly are. The issue is that Oregon sees hundreds of thousands of people move every single year. What really matters is when any changes are widespread enough to be more than noise.

To that end, we just don’t know yet. We will get Oregon population estimates from Portland State in December, but need to wait until April for the full set of underlying data tables. And the 2020 ACS data won’t come out until September 2021.

The key question is to the extent we do see pandemic migration, will that be enough to offset the fact few people moved during the shelter in place phase of the cycle, let alone offset the traditional slowdown in migration during recessions? Statewide, our office does not believe so, but our forecast may be too pessimistic given this is not your normal business cycle. Plus regional patterns will always differ from statewide figures.

Our view is further clouded by the fact the DMV is appointment only these days due to social distancing. As such we have lost our traditional real-time migration indicator: surrendered driver licenses. That leaves us looking at things like home sales as a measure of mobility, even as it is hard to disentangle local moves vs out-of-state migration.

Here we see ongoing strength in housing due to the fact higher-income households have been less impacted by the recession to date, interest rates are at record lows, and there is the strong demographic tailwind of Millennials aging into their 30s and 40s.

Even so, all of these factors bring home sales nationally and in some popular metro areas to a point where 2020 will show solid to very strong gains. But there are some places experiencing eye-catching growth. Home sales are up double digits among Conor Sen’s “Zoom Towns” — popular, smaller, scenic areas from which workers can telecommute. Keep in mind that given the ongoing strong demand and pending sales numbers, the final year-end figures will be up even further across all locations.

UPDATE: The chart has been updated to reflect better Missoula home sales data. The previous chart showed 22% growth which was incorrect. The true number is 9.8% per local MLS statistics. A big thank you to Brint Wahlberg, a Missoula realtor, for spotting the error and correcting the data. My apologies for the error.

One of the key questions earlier this year was whether we would see people double down on existing patterns of migration and places to live, or whether we would see new patterns emerge. Keep in mind that it is still early in the cycle and the winds may change as it drags on, but early returns indicate we are doubling down.

Now, I want to touch on a couple related issues. The first is inventory, which is down about 40 percent a lot of places in Oregon, and 20 percent nationally. Normally inventory does not actually restrain sales. The main reason inventory is low is because sales are strong! But this year in some places it may actually be an issue. Take Hood River for example. You can currently count on your fingers the number of homes for sale, even at luxury price points. This extremely lean inventory is problematic for the market. But more generally, lower inventories make it a sellers’ market, and prices appreciate faster.

Second, I think the major increases in luxury homes are distorting some of the overall market figures. Some media articles out of Montana indicate the $1 million+ properties are a hot segment. In Bend, sales have been very strong above $750,000 with pending sales of $1m+ through the roof. Now, it’s hard to say that this means all that much for middle-income families, but it does drag up the average, and even the median home price due to a big compositional shift.

Third, it remains an open question as to what all these home sales actually mean for migration and population growth. Most buyers are usually local. They tend to be either first-time or move-up buyers. However a part of the strength is tied to migration as well. Increases of 10-15% in the Zoom Towns is not due to local demand alone. Although an added question is whether these sales represent true migration and population growth, or simply increased demand for second homes. That distinction may not matter for the housing market, but it does for the local economy.

Bottom Line: The housing market is among the strongest segments of the economy. Ownership is expected to remain strong due to demographics, low interest rates, and the nature of the cycle. Even so, popular, scenic areas have experienced an even greater influx of demand. Zoom Towns appear to be real and pandemic-related migration looks to be doubling down on existing patterns of growth.

Posted by: Josh Lehner | October 23, 2020

In the News: Oregon High-Tech

Yesterday Intel, the pillar of the state’s tech industry, announced their latest quarterly earnings and continued discussions on manufacturing challenges and the possibility of partnering with other firms for future production. See Mike Rogoway’s piece in The Oregonian for more.

This is something we recently discussed with our advisors as well and what it may possibly mean for not only the high-tech outlook in the state, but even the broader Portland economy. The upshot of their thinking is none of the potential changes are likely to happen overnight. What’s really a potential risk would be if, for whatever reason, the Portland region was no longer the main hub of research and development. It’s not just the direct manufacturing jobs that would be at risk, it would be all the engineering, management, office jobs and the like. To date there has been no discussion along those lines, which is encouraging. Plus the overall tech market looks to be strong in the coming years, helping support sales and activity.

With that in mind, it gives me an excuse to post a few charts on a Friday.

First, it’s always important to keep in mind that Oregon’s tech specialty has always been hardware, or tech manufacturing. The state has seen strong growth in software in the past decade, but that growth has largely matched national trends.

Second, a breakdown of tech jobs in Oregon by occupation shows that the manufacturing jobs that actually do the manufacturing, so-called production occupations, account for about 1 out of every 4 jobs. To the extent the vertically integrated business model that has served Intel (and Oregon) so well over time changes, the first impacts would potentially be felt among these jobs. That is, if the manufacturing of future chips is outsourced, one may think local production jobs would be lost. But as stated earlier, it’s really the broader cluster of occupations that comes with R&D and headquarter-type operations that accounts for the bulk of local employment.

This third chart drills down on these occupations for just Computer & Electronic Product Manufacturing, and the pure Software firms. It’s interesting to note that the manufacturers have just as many jobs in architecture and engineering, and computer and math occupations as do the local software firms. This is likely one reason Oregon does see some start-ups spin off, it’s because there is a large pool of workers with the skills and ideas to be able to do so.

Finally, just a reminder of what the outlook looks like. Our office expects tech manufacturing employment to hold relatively steady. It remains a key part of Oregon’s economy. The sector undertakes big investments every handful of years that help drive productivity gains not only in the industry but also in the statewide data. But, in keeping with the manufacturing story overall, those productivity gains do not tend to result in more employees. Or to the extent some firms are hiring, we know some of the other firms are downsizing, keeping sector employment relatively steady. The overall growth in high-tech jobs in Oregon will continue to be on the software side.

Note: this is an older, pre-COVID chart. Our office’s outlook for tech manufacturing remains relatively unchanged today, but we have seen some recent software job losses that aren’t reflected in this chart.

Posted by: Josh Lehner | October 19, 2020

COVID’s Impact on State and Local Governments

This started with a seemingly basic question: “Why is public sector employment down so much this year?” The normal pattern we see is that the public sector is more of a stabilizing force in the economy. Job losses and budget cuts come with a delay as it usually takes time for lower levels of economic activity to translate into fewer tax collections. Those impacts usually hit the budget the fiscal year after the recession starts. However, so far in 2020 local governments have shed nearly as many jobs as the private sector. Both the size of the losses and swiftness with which they came is highly unusual.

After digging into the data it is quite clear that the local government job losses are not a result of your standard budget cuts. That traditional recessionary dynamic is likely to come, but will hit next year, not this. The losses today are directly related to the pandemic and social distancing.

Most surprising are the declines in local education. Yes, bus drivers and lunch workers are impacted by distance learning. However the bulk of the declines appear to be teachers themselves. If all we did was switch from in-person to online schools, why are teaching occupations down double-digits? Some is likely due to lower enrollments — students switching to purely online options, homeschooling, or redshirting potential kindergartners. Some districts may be holding vacancies open in anticipation of future budget cuts.

Even so,the primary reason seems to be the lack of using substitutes. With online school, teachers feeling under the weather can better manage a few live meetings with their classes or send additional work remotely, whereas standing in front of the room all day is more challenging. Nationally, subs account for about 13% of all K-12 teaching jobs. Informal conversations with a few local districts confirms that sub use is down considerably, and really only used for durations lasting more than a day or two.

In terms of higher education, the impacts of the pandemic, social distancing, and online schooling are clear. There’s no sugarcoating it, enrollments across Oregon appear to be down double digits. Official counts will be available later this fall. Informal conversations indicate that full-time employee layoffs are minimal to date. Fewer adjunct instructors and professors are being used. The bulk of the layoffs are tied to student workers, recreational centers, dorms, student unions, and the like.

Besides education, the public sector does a lot of things. Employment here is down largely due to zoos, convention centers, recreation facilities, public pools, libraries and the like being limited during the pandemic. The losses in public administration are relatively small to date.

All of that said, there is still the traditional recessionary dynamic at play. Those impacts will largely come next year, not this. Depending upon a given jurisdiction’s population and economy, it may fare better or worse when it comes to local trends in sales, property and lodging taxes. These differences are already emerging in neighboring jurisdictions, across the state, let alone around the country.

The key question in the outlook is whether these traditional budget issues will be in addition to the pandemic and social distancing ones, or simply replacing them.

Full set of slides are below.

Posted by: Josh Lehner | October 15, 2020

Oregon Employment, September 2020

Yesterday we got the September 2020 jobs report from our friends at the Employment Department. The topline numbers continue to be good, or at least probably good enough. The recovery is likely self-sustaining even as it slows as expected. That said, it doesn’t mean we’re out of the woods yet. There remains a Great Recession sized hole left to fill. And remember, the recovery from the Great Recession was self-sustaining too, it was just stuck in a low gear and we grinded our way out over the course of a decade. Our office expects this recovery to be faster, and more complete but that is largely predicated on limiting the amount of permanent damage in terms of business closures and layoffs until the pandemic is managed and brought under control, and a medical treatment of some sort becomes widely available by the middle of next year.

As we’ll get into more in the coming weeks, a few things are emerging in the data. First is there is a clear gap when it comes to employment among women and men. Second, now that we’re in the seventh month — how is it only been seven months? — of the pandemic, we are starting to see a rise in long-term unemployment, commonly defined as six months or longer. Third, the virus remains in control. Yes we are learning to grow around the virus and resume some activities. However large swaths of the economy cannot recover until the pandemic is over. This includes some sectors you may not fully expect, like local governments.

Overall, job growth was decent in September. The state added 5,100 jobs. Normally that’s about as strong as you would ever see, but today it represents a gain about 1/3 as big as Oregon saw in July and August. Overall the state has now regained 45% of its lost jobs. This truly does remain good news overall, even if the path forward isn’t well lit.

I’m switching up this first chart to include our office’s forecast. We fully expect growth to slow further in the months ahead. I suspect that some of the slowing in September is fire-related in terms of less economic activity due to many of our friends and neighbors being evacuated and the smoke keeping the rest of us indoors. Not so much as jobs were cut outright, but more in the sense Oregon saw somewhat fewer gains than the average state. If true, that relative slowing vis-a-vis the nation should reverse in the October data. Even so, its important to keep in mind that the baseline outlook calls for more slowing in the months ahead. That doesn’t mean the recovery is in jeopardy, even if it will feel that way. The combination of any seasonal component to the virus, plus the seasonal issues related to the colder, wetter months when we are forced indoors more, plus some hangover from the lapse in federal aid, and that underlying traditional recessionary dynamic will all weigh on growth in the months ahead. After that, growth should pick up and, again, provided the permanent damage is fairly minimal, the overall recovery will be faster.

One silver lining continues to be that much of the job loss and corresponding increase in unemployment still looks to be temporary. The headline unemployment rate is back down to 8.0% and the core unemployment rate — a measure of permanent layoffs and damage — ticked down as well, even as it continues to be somewhat elevated. This is the part of the recovery that will take the most time, even as many of those on temporary layoff continue to be recalled.

As always, a huge thank you to Tracy Morrissette over at the Oregon Employment Department for his great work digging into the detailed data so we can look at core unemployment in Oregon. Thanks Tracy!

Finally in a good news/bad news update, we continue to see a split in labor market outcomes. Low-wage industries suffered the most during the shelter in place phase of the cycle, given the sudden stop nature of the shutdown. It is here that much of the job growth in recent months is taking place. This is good news as those workers are brought back following temporary layoffs. The bad news is that middle-wage sectors are only seeing very modest gains and high-wage sectors are not seeing any growth in recent months. They may not have suffered as much to date, but they’re also not bouncing back. This is a concern and likely speaks to more permanent layoffs in these industries. Keep in mind that job losses of 5% are more severe than Oregon suffered in the 1973, 1990, and 2001 recessions. Further research shows that many of these layoffs in middle- and high-wage sectors appear to be lower-wage workers within those industries. But overall, the slowdown in the September data is very clear in the chart below.

All told, Oregon’s economy continues to recover and heal. Employment is up and unemployment is down. The recovery is likely self-sustaining but it is expected to slow in the months ahead. The virus itself and the amount of permanent damage that accumluates will determine the overall strength and duration of the cycle. Stay tuned for more next week on some of the issues related to the gender gap and local governments.

Posted by: Josh Lehner | October 12, 2020

Economic Dynamism in Oregon

The key economic concern today is one of permanent damage. How many firms close and how many permanent layoffs occur? While much of the damage has been temporary to date, it’s that underlying traditional recessionary dynamic that will go a long way to determining how long the recovery takes. And in past severe recession in Oregon, like the early 1980s and the Great Recession, we saw both an increase in closures and a drop in new businesses forming. This prolonged the recovery process as it takes time to replace firms and rebuild the network of employees and supply chains in the broader economy.

Unfortunately we lack good, timely data on firm closures. It takes months to realize that a business is not reporting payroll, paying taxes, renewing business licenses and the like. What little information we do have shows closures are rising, but not yet considerably so. One reason may be that we are still early in this cycle, and firms do not close overnight when sales drop. They burn through reserves, maybe take out a loan, and then if those fail to tide the company over, then they close for good. Additionally, Oregon companies received $7 billion loans/grants from the Paycheck Protection Program and while that money is long gone, it was also $7 billion of temporary cushion.

What good, timely data we do have is about new businesses forming. This is one of the key metrics our office is following over on the COVID-19 tracking page. Here we see encouraging news to date. There has been no real drop-off in start-up activity in 2020. It may well happen as the cycle drags on, again it’s still early. But so far the data points toward a rise of business closures but no real decline in new business formation. While not good, this would still be better than those past severe recession, and be less of an drag in recovery.

The rest of this post comes from our office’s June 2020 forecast document, where we discuss some of the implications of firm closures and the broader issues at play. The slides at the end are a full update of these broader issues related to entrepreneurship, start-ups, closures, venture capital and the like. This is something we last really dug into on the blog more than 5 years ago. The update is largely based upon newly released, and revamped Census data on business dynamics.

Finally, the economy was already struggling with lower rates of productivity in recent decades. While an imperfect relationship, productivity gains are a key driver of employee wages and a rising standard of living. Many economists point toward the low rate of entrepreneurship as one key reason for low productivity growth. After all, new products and services are usually brought to market by young companies who seize the opportunity to improve efficiencies and generate profits.

COVID-19 may further entrench these trends. A byproduct here would be that the large businesses that have already won out in today’s economy may further strengthen their positions. Big companies generally have better access to capital markets to raise money to survive, while small firms rely upon the owner’s own worth, and programs like the PPP. Furthermore, benefits that workers generally want, particularly during a pandemic, such as health care, paid time off, the ability to work from home or remotely, and the like, are much more common among large firms than small. When combined overall, these issues may potentially paint a dark picture for small businesses, start-up activity, productivity, and ultimately for workers and job growth.

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