Posted by: Josh Lehner | August 31, 2022

Oregon Economic and Revenue Forecast, September 2022

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.

Economists are on recession watch. The combination of slower economic growth, high inflation, and rising interest rates has historically been problematic. That said, despite the crosscurrents in the economic data so far this year, the U.S. economy is unlikely to have entered into a recession. Employment and industrial production continue to grow. Personal income and consumer spending are rising quickly, but struggling to outpace the fastest inflation the U.S. has experienced since the early 1980s.

While this may be reassuring today, the risks to the outlook are real. Inflation remains the key issue. Even as headline inflation slows in the months ahead, the underlying inflation trend is likely to remain above the Federal Reserve’s target. As such, the Fed is raising interest rates further to cool the economy. Given the impact of rate increases is generally felt one to two years down the road, getting policy just right is extremely difficult.

In our office’s recent forecast advisory meetings there was a strong consensus that the risk of recession was uncomfortably high. The outlook is essentially a coin flip between the soft landing and a recession. For now, our office is keeping the baseline, or most probable outlook as the soft landing and continued economic expansion. Employment, income, and spending continue to grow, but at a slower pace than assumed in previous forecasts. This slower growth is needed for inflation to subside.

However, if inflation does not slow as expected, and the Federal Reserve raises rates even further, our office’s alternative scenario of a mild recession beginning in late 2023 is more likely.

Heading into the budget development season, growth in Oregon’s primary revenue instruments continues to outstrip expectations. Both personal and corporate tax collections remain strong, in keeping with income gains seen in the underlying economy. The forecast for the current 2021-23 biennium has been revised upward.

Although the near-term forecast calls for additional revenue, this is offset in future budget periods by a more pessimistic economic outlook. Growth in spending and wages will need to slow to tame inflation, which translates into less state revenue growth across a broad range of taxes.

The potential recession would weigh heavily on revenues over the next several years. However, even if the economic expansion persists, General Fund revenues are due for a hangover in 2023-25. General Fund resources have continued to expand in recent years despite large kicker credits being issued. This growth is expected to pause in the near term, as nonwage forms of income return to earth and gains in the labor market slow.

Recent gains in reported taxable income have been driven by taxpayer behavior as well as underlying economic growth. Investment and business income are not always realized for tax purposes as the same time they are earned in the market. Late 2021 was a great time to cash in assets, with equity prices and business valuations high, and potential federal tax increases on the horizon. Income reported on tax returns last year grew at more than double the rate of economic measures of in income. After so much income was pulled into tax years 2020 and 2021, less will be realized in the near term. And with recessionary risks rising, profits and gains could turn into losses, and a smaller share of filers could be subject to the top rate.

The bottom line is that the unexpected revenue growth seen this year has left us with unprecedented balances this biennium, followed by a record kicker in 2023-25. The projected personal kicker is $3.5 billion, which will be credited to taxpayers when they file their returns in Spring 2024. The projected corporate kicker is $1.1 billion, which will be retained for educational spending. If current balances are not spent, net General Fund revenues for the upcoming 2023-25 biennium will be reduced by $24 million relative to the June 2022 forecast.

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 | August 24, 2022

In The News: Student Loans

This post is updated 9/23/22 with more information, and includes a copy of the slides Mark used during his testimony to the House Interim Committee on Education.

It is now official. The Federal Government is set to cancel $10,000 in federal student loans per borrower, with some income restrictions, and additional forgiveness for Pell Grant recipients. This is a topic that has come up in some of our forecast advisory meetings in recent quarters. We still do not have all the specifics, but recent information and analyses gives us a pretty good idea of how this will impact Oregon.

First, it’s been nearly a decade, but our office did dig into the student debt issue in Oregon previously, discussing trends, economic outcomes, and default rates across different types of institutions in Oregon. All of that holds up pretty well today looking back.

Since then, student loan debt has continued to increase but at a slower pace, or at a rate roughly equal to economic growth. Measured as a share of income, student loan debt in Oregon has been steady for the past 8 years or so. Of course this is in part a combination of people paying down their loans, underlying income growth which is important in terms of borrower’s ability to pay, and flat to declining enrollments in higher education which means relatively less new debt entering into the system. As far as new students who do take out loans, debt per student has not declined as far as I can tell, but continues to inch upward at about the pace of inflation in the past decade.

Note that this data is about student loan debt for all Oregon residents and is not specifically related to Oregon-based colleges and universities.

In terms of the forgiveness piece, I think there is a clear difference between the micro and macro view. At the micro level, there will likely be a real impact. New estimates from the White House find that 499,000 Oregonians are eligible for loan forgiveness, including 322,000 with Pell Grants which are eligible for the larger amount. Here’s what our office wrote back in 2017 when we last looked into student loans in more depth.

[T]he biggest student loan issues are those who do not graduate or who graduate from a program that does not actually provide skills valued by employers. Such individuals generally have relatively low levels of debt, ranging from a couple thousand dollars up to maybe $10,000 or $20,000. The issue is such individuals are not able to land a job that can allow them to pay off these loans.

During the pandemic, as the Federal Government has deferred student loan payments, at least on federal loans, the BEA has estimated this impact at about $38 billion annually in terms of less consumer spending on the interest on the loans due to the deferrals. Research from the Federal Reserve Bank of New York finds that during the pandemic, only about 1 in 5 borrowers opted back in and kept making payments, while 4 in 5 took the deferrals and did not make payments. If we take the BEA estimate and share it down to Oregon, the result is Oregonians have been paying about $500 million less on an annual basis since the deferrals began. That works out to roughly $1.2 billion cumulatively since the start of the pandemic through today.

So while this change in federal policy can have a big impact at the individual level, from a macro perspective these figures are relatively small. IHS Markit estimates impacts on inflation and GDP to be a few hundredths of a percent. The total amount of student loan debt cancellation is somewhat harder to pin down as there are multiple pieces to it. In total, combining the outright forgiveness with changes in repayment plans and the like it looks like in Oregon it will be around $7 billion. Our previous estimate was $4 billion, which could be more of the outright forgiveness part (will update as we learn more). Whether borrowers choose to spend this improvement in their household budgets immediately, or to lever up on new types of debt in the coming months is still to be determined. To the extent that this does happen, it could contribute further to the overloaded supply chains and inflation situation, albeit on a very modest basis. But we also know that payments on the non-forgiven portions of loans will restart at the beginning on 2023 which will be another situation where the micro impact — increased debt payments every month for the 4 in 5 borrowers who took the deferral — differs from the macro impact — a tenth of a percent impact on any shift in consumer spending between different categories is hard to notice.

Finally, our office has updated two slides looking at loans and default rates across counties in Oregon based on new Urban Institute data. Most counties in the state have roughly average shares of residents who have student loans and average default rates on those loans, when compared with all counties nationwide. That said, urban areas do tend to have higher shares of residents with loans — keep in mind one of the dominant migration patterns the last two decades has been for recent college grads to move to large metro areas — but not correspondingly high default rates pointing toward high incomes and ability to pay the loans. When it comes to default rates, something we discovered a decade ago in our work, is that local economic opportunities matter. Default rates are higher in counties where unemployment is higher.

Posted by: Josh Lehner | August 18, 2022

Declining Job Vacancies is Good News

Normally economists think about job openings as a leading indicator. If businesses are looking to grow and increase production, they will usually put out a job posting prior to actually hiring someone. The issue today is that job openings nationally and here in Oregon are declining in recent months. However, instead of foretelling doom, the recent decline is likely good news. Or it should be.

Right now we know the labor market is “unsustainably hot” as Fed Chair Powell says. The demand for labor, or the amount businesses are looking to hire outstrips the supply of labor, or the number of folks looking for work. Earlier this year there were 1.9 job openings in Oregon for every unemployed Oregonian. This imbalance leads to increased competition for workers and fast-rising wages.

Wage growth is important of course. But what we care about is real, or inflation-adjusted wage growth. Positive real wage growth means our incomes stretch further and our standard of living is increasing. That isn’t the case today where inflation is outpacing the strong wage gains for the vast majority of workers. At a base level, wage growth represents nominal spending power for workers and households. The more we earn, the more we can spend. If productivity growth does not offset these labor costs for firms, prices rise.

Now, there are two ways to get better labor market balance. One would be for the number of unemployed Oregonians to increase considerably to match the number of job openings. Given the economy is at full employment and everyone who wants a job in Oregon essentially has one, it would have to be from a big increase in layoffs. There is not a reserve army of would-be workers sitting on the couch today.

The other path toward better balance is to see a decrease in the number of job openings. This is something the Federal Reserve is explicitly watching and effectively targeting. In a slower growing economy due to higher interest rates, consumer spending and business revenues will increase but at a more measured pace. Firms will slow their hiring plans as a result, lessening the intense competition for workers and taking some of the pressure off the labor market. Plus as firms regain their pre-pandemic staffing levels, they should feel a little less desperate to hire. I think that is what we starting to see in recent months. That 1.9 job openings per unemployed Oregonian back in March is now 1.6 job openings per unemployed Oregonians in June. Still a clear imbalance and very tight labor market. But movement toward better balance is still movement toward better balance and a soft landing.

Another thing that’s striking about this chart is it clearly shows how slack the labor market has been for so much of the 2000s. The double recessions of the dotcom and housing busts meant the economy, on average, was weak at best. Today’s tight labor market is a far cry from those days. Just another way that this cycle is different.

Note that our office will flesh out this discussion a bit further in our upcoming forecast document in terms of layoffs, the probability of workers finding a job, wage growth and the like. Our next forecast will be released at the end of the month on Wednesday, August 31st.

Posted by: Josh Lehner | August 11, 2022

A Checkup on Oregon’s Vital Statistics

One big change during the pandemic has been that for the first time in recorded history, there were more deaths in Oregon than there were births. It’s been 18 months since we checked in on that here on the blog. We now have preliminary vital statistics for Oregon through June 2022 from OHA. (Data here: births and deaths)

In a word: yikes. In a 12 word summary of the implications: Without stronger migration trends, Oregon’s economic growth could be slower than anticipated.

This first chart looks at what demographers typically call the population’s natural increase. It is the number of births minus the number of deaths. Given deaths now outstrip births, Oregon’s population is in a natural decline. That means if we were to wall off Oregon and nobody could come or go, our population would start shrinking tomorrow. Note that there is a distinct seasonal pattern here driven by the fact that births tend to be higher in the summer and lower in the winter, whereas deaths tend to be higher in the winter and lower in the summer. The 12 month average continues to plumb new lows.

Of course any time we are talking about a number made up of multiple underlying numbers, it is always useful to decompose the changes and explore what is driving the topline. When we separate out the changes seen in the number of Oregon deaths and births we find one silver lining and one ongoing concern.

Let’s start first with deaths. Even as Oregon’s overall public health has been considerably better than most states throughout the pandemic, we are not immune. Comparing the actual number of deaths in the state to our office’s pre-pandemic forecast shows Oregon has suffered about 10,400 more deaths than expected (of all causes) so far. This is tragic for all of us who lost friends, family, and neighbors. The silver lining is the number of deaths has fallen in recent months and is now back within the range of our pre-pandemic expectations. Note that with a growing, and aging population, the number of deaths in Oregon is expected to increase in the years ahead for demographic reasons alone. As such we are unlikely to return to the number of deaths seen a handful of years ago.

Now let’s turn to the latest data on births. Nationally there has been some chatter about the uptick in births in late 2021 and how it was better than the 2020 pandemic lows. That uptick has proved short-lived. The baby bust continues. I have monthly birth data back to 1998, so 25 years of data. The most recent few months — April, May, June — are each the lowest such months in the past 25 years. So far, 2022 is on pace for the fewest total births in the state since the mid- to late-1980s. Oregon’s population back then was about 2.7 million residents, or nearly 40% smaller than today’s nearly 4.3 million residents.

Finally, a few thoughts on the outlook, and what it all means.

The forecast calls for Oregon’s natural decrease in the population to continue, but not accelerate further. The primary reason is the number of total births is expected to increase some in the years ahead. With a growing population, a steady, or stable birthrate means the total number of births will increase. The risks here are balanced. There could be a small, but meaningful increase in the birthrate coming off the pandemic lows (even if we haven’t seen it yet in the data, it does seem plausible and within the realm of possibilities). For example, the number of first-time mothers in 2021 has actually pretty typical of what we saw pre-pandemic, although that has fallen off again in the 2022 data. Just something to keep an eye on.

In terms of the significance, as this post led off with, Oregon is increasingly reliant upon migration to grow our economy and labor force. Without net in-migration, our workforce will shrink in the decades ahead. Our forecast calls for population growth to pick up this year and next following the pandemic slowdown. We will get the 2022 Portland State population estimates in November, and Census Bureau estimates in December.

Another impact here is on child-related activities and services, including education and even things like the type of housing people want or need. In terms of education our office’s forecast for the K-12 population (total number of Oregon children 5-17 years old) was already for a 6% decline from 2020 to 2030 even before the latest data. And of course this will impact the traditional college-age cohort in the 2030s. One note on childcare facilities themselves, we know Oregon has a shortage today, so even with the decline in births it does not mean we will suddenly be oversupplied, it just means demand could be coming down closer to existing supply.

One more thing, we know that there is considerable variation around the state when it comes to demographics. Many rural areas have already seen deaths outnumber births for a decade or two. But not all rural areas, as those in the Gorge and Northeastern Oregon have seen better trends. But these underlying demographics are something our office was focusing on quite a bit pre-pandemic. Here we talked about the labor force outlook across counties, and if not labor, we need to better use our different types of capital to grow the regional economy. More recently we reported on Oregon’s Latent Labor Force which can help boost the local economy when the labor market is tight.

Posted by: Josh Lehner | August 4, 2022

Consumers Holding Strong

Just a quick update on household incomes and consumer spending. Last week the June 2022 U.S. income and personal consumption expenditure data were released. As expected, both show strong nominal gains, which were mostly eroded by the current high rate of inflation. On in inflation-adjusted basis, personal income excluding government assistance saw a small decline, while consumer spending eked out a small increase. It’s really been remarkable to see how strong household finances and consumer spending have been so far this year. On the left you can see total, nominal spending continues to grow at rates much stronger than the pre-pandemic trend. On the right you can see how this increase in overall spending is really just due to higher prices, and the real, or inflation-adjusted spending is basically right on the pre-pandemic trend.

This ongoing strength is one reason why it is unlikely the economy has been in recession so far this year. However we are starting to see households tap into the savings they built up earlier in the pandemic. Since the start of the year, our office’s estimate of excess savings is down about 6%. Note that overall savings continues to increase, but it is now increasing at a slower rate than it has been, which is why this measure of excess savings is dropping a little bit. Even so, it is clear that consumers — at least in aggregate — have plenty more firepower to continue to spend if they so choose, or need to to continue to put food on the table and make rent.

Closer to home we lack such timely data. The BEA will release 2022q2 state income data at the end of September, and 2021 state consumer spending data in October. But fear not. We do have one real-time measure of consumer spending that isn’t subject to sampling error or revisions: weekly video lottery sales. In recent months these sales have been on an ever-so-slight downward trajectory, and remain well above pre-pandemic sales so far.

One possibility could be that inflation, and high gas prices in particular are starting to crimp household budgets, especially on discretionary spending like gaming. I believe there is some truth to that. Given how inequitable we know income and wealth is in America, the topline household savings data likely overstates the typical household situation. However that is hard to know at the moment. We know wage growth continues to be strongest among lower-wage jobs and industries. And recent comments made by Visa and MasterCard were a bit contradictory in terms of spending patterns among high- versus low-income cardholders.

That said, another possibility is that this decline in video lottery sales is due to some combination of federal aid running out which had provided a temporary boost, and consumers choosing to spend a bit more of their entertainment dollars on other activities that may have been restricted earlier in the pandemic. This could include formal restrictions or informal choices to avoid airplanes and crowds. In fact, this scenario is exactly what our office has built into the lottery forecast for some time now. This slowdown in sales in recent months is right on track.

Of course disentangling these two big possibilities is challenging in real time. Forecasting is humbling. And you can be accurate for the wrong reasons. Today I am leaning towards some combination of the two, but still mostly the second given increasing strength in travel and entertainment more broadly. We know household’s spending on gas was at a record low before Russia’s invasion of Ukraine, but the big run-up in prices still impacts household budgets in some way, even if the biggest adjustment was spending out of savings or taking on more credit card debt as opposed to cutting back on other items.

Bottom Line: To date consumers are holding up well. The strong household finances built up during the pandemic are allowing spending to continue apace even in the face of very fast inflation. Now, consumers are not increasing the quantity of their purchases much, but rather are paying more for the same items. Even the overall shifts seen in terms of goods vs services, or even gaming are modest in the context of the current macroeconomy and bout of inflation.

Now, at some point consumers may grow weary or burn through their reserves, leading to an outright drop in spending. But for the time being, this has not happened in aggregate. It usually takes job losses, or the fear of losing one’s job for consumers to slow their spending. Given the tight and strong labor market, we are not there yet, even if labor income is slowing. And looking forward, does the recent drop in gas prices free up more room in the budget to spend on other items again, or allow households to rebuilt their savings a bit?

Posted by: Josh Lehner | July 28, 2022

Labor Income is Slowing, Probably

We know the economy needs to cool to bring inflation down. It’s the reason the Federal Reserve raised interest rates yesterday and are expected to continue to do so in the months ahead. Inflation is not costless, and as Federal Reserve Chair Powell says, price stability is the bedrock of the economy. A key factor here has been that labor income is booming. That was great as we dug out from the recession and the federal aid expired. However here’s part of what our office wrote in our most recent forecast document:

The issue is consumer demand and the ability to spend is outstripping the economy’s ability to produce enough goods and services. When too many dollars are chasing too few goods, prices rise. The combination of higher interest rates, cooling of goods prices, and moderating household financial conditions should all work to slow inflation in the economy this year and next. It is an open question just how much inflation will slow. The ultimate risk is the economy needs higher interest rates to truly wring inflation out of the system.

What matters here for the macro economy are aggregate household finances. In terms of labor income that is a combination of jobs, hours worked, and hourly pay. Some slowing here is simply mechanical. Job growth will slow in a full employment economy simply because there aren’t many unemployed workers to hire. And some slowing is more expected due to forecasted changes in the economy such as average wage growth decelerating as firms are less desperate for workers as they staff up.

To be honest, so far the signals that this is happening are mixed at best. Job growth has slowed a bit nationally, but monthly job gains in Oregon haven’t really. Initial claims for unemployment insurance are up just a hair and job openings down a little, which points toward somewhat slower net job gains in the future. And different wage measures are doing that thing where they, well, differ with some showing deceleration (average hourly earnings) and others continued acceleration (Atlanta Fed’s wage tracker). Tomorrow’s Employment Cost Index for the second quarter will be another important wage data point to follow closely. It will be strong, but just how strong is the question.

And yet, here in Oregon we are seeing the expected deceleration in withholdings. Growth in withholdings over the past year has slowed to broadly in the range we experienced pre-pandemic. They are no longer in double-digit territory. Now, in terms of potentially goofy math, in recent weeks we are comparing revenues to the peak growth rates from a year ago, which itself was exactly a year removed from the worst of the initial pandemic and shutdown impacts. As such it is possible that the true deceleration in the economy is less pronounced than this chart indicates, but time will tell.

Of course withholdings are not purely just wages. There are some withholdings out of retirement accounts, bonuses, stock options and the like. So it can be a bit harder to know exactly how much of this slowing is tied to those sorts of reasons versus the fundamental underlying slowing the economy needs to cool inflation. If it is more fundamental, then expectations are the jobs reports and other labor market data in the coming months should begin to show the same patterns. The next steps would then be less strains on supply chains as consumer demand cools, and underlying inflation in the economy begins to move in the direction of the Fed’s target. And despite today’s GDP numbers, it is unlikely the U.S. economy has been in recession the first half of the year, even as our office is on Recession Watch given the risks from all of these dynamics.

Posted by: Josh Lehner | July 20, 2022

Oregon’s High-Tech Sector (July 2022)

High-technology is a pillar of Oregon’s economy. Overall it accounts for about 5% of statewide jobs, but due to its higher productivity and pay, the sector is 11% of overall wages paid and 11% of state GDP. Given the strong growth in recent years, the sector’s employment today is now at an all-time high, surpassing even the bubbliest of peaks of the dotcom era more than two decades ago.

Much of the gains seen in the past decade are driven by the fast-growing software side of the industry. Even as Oregon as a whole has a smaller concentration of jobs at software firms than the nation, that is not the case in Portland. And when it comes to tech talent, a look at software and related occupations, the Portland metro area consistently ranks around the 90th percentile. That means the share of the local workforce in these types of jobs is larger than it is in 90% of all metros around the country. Even so, such jobs are growing across the state, and possibly more so in the years ahead due to increased working-from-home opportunities.

Oregon’s relative high-tech strengths continue to be in hardware where our local concentration is among the highest in the entire country. For much of the past 20 years, hardware manufacturing has seen large investments in new technologies, but on net has not added many new jobs. To the extent some local firms were hiring, others, mostly from the older generation of firms, were contracting. Then the fact that Oregon has been passed over for the 4 major announcements for new fabs certainly seems like a missed opportunity. And it is a missed opportunity, with the final impacts still to be determined depending upon the ultimate nature of these new facilities in Arizona, New York, Ohio, and Texas.

Now, what may have been missed in all of this is the fact that Oregon’s hardware sector, and semiconductors in particular are booming today. As pointed out by Christian Kaylor from the Employment Department, since the beginning of 2021, semiconductor firms in Oregon have added well over 4,000 jobs, an increase of nearly 15 percent. To help frame that number, that’s equivalent to if Oregon got 2 of the 4 new fabs located here. So the overall strong demand for chips, and increased importance of domestic manufacturing during global supply chain struggles and geopolitical upheaval certainly seems to be bearing fruit for our regional economy.

Today, Oregon semiconductor employment is about 1,000 less than the all-time high reached in 2001 just as the bottom dropped out. Oregon’s share of the national semiconductor workforce today is 9%, whereas we were 5% back then. In general, it is clear that Oregon has been gaining marketshare over the years, even before the recent strong growth.

Looking forward we know that durable goods manufacturing is typically very volatile over the business cycle. Even with the strong underlying demand, underproduction of automobiles, and increased importance of domestic manufacturing and supply chains, we know households usually have the ability to time their durable goods purchases. Most of us do not need to buy a new car, computer, or house tomorrow even if we may want one. In times of economic uncertainty, and the fact that higher interest rates make big ticket purchases more expensive, and high inflation eats into household budgets, some cyclical declines whenever the next recession comes should be expected. Even so, these gains are not being driven by irrational exuberance or bubble-like dynamics.

Bottom Line: Expectations are for steady hardware employment in Oregon in the years ahead. Even as the new fabs elsewhere come online, Oregon’s share of the national industry will remain high, and likely higher than it was pre-COVID. All of that said, software will continue to be the major driver of growth in terms of new firms, employment, and overall tech talent.

Update 7/21: The huge rise in start-up valuations nationwide in recent years, followed by the more recent crash and decline in VC funding is starting to impact the software side of the industry with some layoff announcements. This is something to keep any eye on, but should be more of a short-term issue than a fundamental, long-term issue. On one hand, with Oregon receiving a slightly below average share of VC funding, it means the fallout could be less severe locally than, say, in the Bay Area. On the other hand, the main risk our office identified back in 2015 is that when your local economy has a lot of outposts or satellite offices and not as many HQ operations, you may be more vulnerable in a downturn when businesses cut the spokes and consolidate at the hub.

The full set of high-tech slides from our office are below.

Posted by: Josh Lehner | July 14, 2022

Inflation, Recession, and Leading Indicators

Inflation continues to run very hot. Yesterday’s June consumer price index data release was larger than expected, and expectations were for a big increase given the run-up in gas prices last month. Over the past year, CPI is running at a 9% pace. This is the fastest since 1981. You can slice and dice the data myriad ways, but at a high level it is clear that underlying inflation, what you get when you start to strip out the impacts of the pandemic reopenings, overloaded supply chains and more recently the oil shock, has accelerated over the past year or so. Some relief on headline inflation is likely coming in the next couple of months as gas prices are falling today, supply chains are improving, and consumer spending on goods slows. However it is the look at the underlying trend, and to the extent it becomes more entrenched in the overall economy and inflation expectations, that is most worrisome to the Federal Reserve.

We know that inflation is not costless, and that inflationary economic booms traditionally don’t end well. The challenge is right now we have slowing economic growth combined with high inflation and rising interest rates. This creates dynamics that can lead to a recession, especially if the Federal Reserve has to continue to raise rates to head off inflation even if the economy weakens further. Given the Fed has met the employment side of its dual mandate, their entire focus is on inflation. They are actively communicating that they are willing to induce a recession if needed to ensure inflation comes down.

Anytime economists start throwing around the R word, we risk whatever comes next out of our mouths being our famous last words. So while recession risks today are uncomfortably high, it is very unlikely the U.S. economy is currently in recession based on available data which is primarily through May at this point.

Let’s first talk about what a recession is. The National Bureau of Economic Research (NBER) is the official arbiter of recessions and they define it as a broad-based decline in economic activity that lasts more than a few months. A recession is not the sometimes used rule of thumb of two quarters of negative real GDP*. Rather the NBER looks at a handful of key metrics to gauge the depth, diffusion, and duration of changes in the economy. Our office regularly updates these key NBER metrics, as seen in the first set of charts below. On the left you can see that jobs and production are continuing to increase. On the right you can see that despite the fastest inflation in 40 years, consumer spending and household income are eking out some small gains on an inflation-adjusted basis. (Note that the data here is through May, with June’s big increase in prices, we are likely to see some inflation-adjusted declines when the spending data is released later this month.) Overall, it is hard for the economy to truly be contracting when jobs, incomes, and output are all increasing in the most recent data.

UPDATE 7/15: June industrial production data was released today. It shows a decline last month, along with revisions to previous months that slow the overall growth in industrial production.

The data shown above, that the NBER uses to determine when recessions begin and end, is subject to revisions but are the best data we have showing what is currently happening in the economy. To get a better idea of what is coming in the months ahead economists turn to leading indicators.

There are two main composite leading indicator series for Oregon. The UO Index of Economic Indicators is developed Tim Duy at the University of Oregon, and the Oregon Index of Leading Indicators (OILI) is developed by our office. These indexes are red light/green light measures, so the data moving sideways is less worrisome than it may seem. What matters are outright declines on a sustained basis. We are not their yet, and the Conference Board’s U.S. leading economic index isn’t quite either.

In terms of individual components there are always ups and downs. One of the benefits of composite indices is that each individual indicator may not perfectly lead each cycle but when all the tea leaves are combined, the overall index should. Right now the indicators are a mixed bag but most point toward an ongoing expansion. The only indicator included in OILI that has truly tanked is consumer sentiment (but consumers are still spending even if they are pessimistic.) New Incorporations are slowing off of multi-decade highs and housing permits are holding steady throughout the pandemic.

Bottom Line: Based on the current data, the U.S. economy is unlikely to be in recession. And traditional leading indicator series are not plunging. Given the pessimism built into the economic conventional wisdom today, this should be comforting. However, we know the current dynamics of slowing growth, high inflation, and rising rates presents the Fed with a very challenging situation. The vibes are off. As such, our office is on Recession Watch.


Note: Keen-eyed observers may have noticed that here on the blog our office retired the COVID-19 tracking page and created a Recession Watch page last month. There is more data and detail over there. We will likely update the page once or twice a month as new data comes out.

* Let’s get this out of the way. The U.S. economy looks likely to experience two quarters of negative GDP this year. First quarter 2022 was already negative, but it’s important to note that this was due to idiosyncratic reasons. The economy did not actually contract. Consumer spending and business investment increased to start the year. However, in GDP accounting the big increase in imports, and a decline in inventories drove the overall headline numbers negative. Here in the second quarter of 2022, the expected decline — we get actual data on 7/28 — is likely to be driven again by inventory declines, but also a pullback in residential investment in the face of the mortgage rate increases, and the fact that inflation is taking a bigger bite of nominal consumer spending than it did previously. As such, a decline in the second quarter will be more of a traditional decline in GDP, and/or sign of stagflation. Again, just to reiterate, an official recession is not two quarters of negative GDP. The U.S. very likely has had two such quarters to start the year, and yet employers have added 2.7 million jobs over the same time period. This cycle is different in so many ways.

Posted by: Josh Lehner | July 8, 2022

Update on State Economies

Happy Friday everyone. Just a quick update on the economic recoveries across the country and how Oregon stacks up. We know that Oregon suffered a pretty typical recession compared to other states, whereas we normally are more volatile when we look across recessions historically. One question was if we did not see a larger than average recession this time, would we still experience the typical stronger expansion or would Oregon be more in-line with the rest of the states. The jury is still out on that, but we are starting to get more data to do a proper comparison.

Right now, it’s clear that Oregon’s labor market recovery is right in-line with the typical state. As of the first quarter, Oregon’s payroll employment was 1.8 percent below pre-pandemic peaks. Oregon’s recovery ranks 28th highest across all states and DC. Numerically this is two tenths of a percent below the median. With the slowdown in population growth and the fact Oregon was a two shutdown state due to public health policies — which did achieve better health outcomes — this should not be unexpected as of today. Our office’s expectations are that as population growth rebounds this year and next, Oregon’s relative employment performance should improve in the years ahead.

Turning to economic output — or in the case of state GDP it is officially a value-added measure — Oregon fares a bit better than most states. Today, Oregon’s state GDP stands 3.2% above the pre-pandemic peak after accounting for inflation. This ranks 18th highest across all states and DC.

Lastly, but most importantly for all of our pocketbooks, Oregon’s personal income growth shows the strongest relative performance across these high level metrics. Today personal income in the state is 15% above where it was prior to the start of the pandemic. This ranks 15th highest across all states and DC. Oregon’s income growth continues to be above average and is translating into higher wages for workers, and higher household incomes across the entire distribution.

The two main reasons Oregon’s economy has historically been more volatile than the typical state is due to migration and our industrial structure. These factors could be working in opposite directions moving forward, although we shall see. In terms of slowing, we know goods-producing industries are more sensitive to interest rates. As rates increase due to Fed policy trying to head off inflation, we could see a slowdown in construction, manufacturing, and natural resources. Our forecast is for very modest gains in these industries moving forward as a result. To the upside, population growth should be rebounding today and in the years ahead. This will provide a larger labor force for local businesses to hire and expand from, even as demographics make the labor market structurally tight. Over the long run, it’s really that faster population growth that drives Oregon’s faster economic performance. We will get 2022 population estimates from Portland State in November, and from Census in December.

Posted by: Josh Lehner | June 29, 2022

State and Local Pandemic Revenues

It’s no secret that the inflationary economic boom has translated into very strong public sector tax revenues. It’s the reason Oregon is currently facing a record kicker. These strong collections are nationwide and not a local phenomenon. 49 states saw revenues come in above projections this past year.

The combination of an underlying strong economy and sharp increases in non-wage forms of income, like corporate profits and capital gains, means that state and local taxes as a share of personal income are higher today than any point in recent memory as seen in the latest edition of the Graph of the Week. The chart focus on the big 3 taxes that state and local government levy, as regularly published by the Census Bureau.

That said, there is tremendous nuance and variation here that is worth spending a minute discussing.

First, some of these really strong gains are clearly temporary and will either fall or more likely crash back to earth in the quarters and years ahead. This is not a permanent shift to higher taxes but rather reflects pandemic factors and/or taxpayer behavior. The typical state is forecasting General Fund growth of just 1.2% this upcoming fiscal year, which will bring revenue as a share of income lower. Our office’s forecast is for a year-over-year decline in General Fund revenues coming off such highs.

Second, general sales taxes will retreat as consumer spending shifts back into services to a greater degree. Even if spending on goods holds steady in the years ahead, spending on goods as a share of income and as a share of overall spending will decline. This will impact most states’ sales taxes which generally only apply to physical/retail goods and not services. This will not be the case in Oregon where our new(ish) corporate activity tax (CAT) applies to goods and services alike. Policymakers designed Oregon’s CAT to be more immune to the tax base erosion other states have experienced in recent decades. Retail deflation will further erode sales tax revenue in the years ahead.

Third, due to property tax restrictions in quite a few states, property taxes are growing, but not seeing the same sort of growth as underlying economic activity, let alone property valuations would suggest. In Oregon, it is likely property taxes as a share of income are declining.

All of this brings me to my main point. There is tremendous variation between state and local government revenues today, and really across different local government jurisdictions all based upon their mix of revenues.

For instance, if we look across the country, about 90% of income taxes are state revenues versus 10% going to local governments. Similarly sales taxes are roughly 75% state and 25% local. So the biggest categories of public revenues, and the ones growing the most during the pandemic are primarily state resources and not local. On the other hand property taxes are 97% local and only 3% state.

As such, jurisdictions that are only or primarily funded by property taxes are seeing the slowest revenue gains. This is the basis for the title of the chart. States are seeing stronger revenue gains while some local jurisdictions without diverse revenue streams are seeing weaker.

Now, local governments’ revenues overall are roughly 1/3 transfers from the federal and state government, 1/3 property taxes, and 1/3 everything else. So local government revenues are growing, in part due to the large ARPA transfers and shared state revenues, and most of the things in the all other category are growing too, even if property taxes are growing slowly, especially in a state like Oregon.

At a high level, every public entity is facing the same inflation and cost pressures, and the same tight labor market now that full employment is here. However some jurisdictions are seeing correspondingly strong revenue growth — some even get to keep it to provide public services — while other are seeing solid gains but that are making ongoing budget choices more challenging than you might think.

Update: one macroeconomic implication is that strong state and local revenues, and accumulated reserve funds will offset some of the declines in federal spending after the pandemic programs ended last year

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