This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data
The longest running U.S. economic expansion marches on. Growth has slowed in 2019 and downside risks remain elevated. However, a recession is not yet seen in the data. Importantly, the two primary causes for concern are either improving the yield curve is no longer inverted or at least not getting worse the trade war escalation is on hold for the time being. That said, while slower growth this year was expected, the question is whether or not the composition of and factors behind the slowdown point to something more worrisome.
Nationwide economic growth has slowed to potential as business investment remains weak, but the consumer is strong. Of course consumption is not a leading indicator, but provided the labor market holds up, so too should spending. Here in Oregon, job growth has slowed to gains seen in our underlying population. For the eleventh year of expansion, such gains remain solid. To date, Oregons slowdown is driven more by fewer hirings and a tight labor market, rather than an increase in layoffs. These dynamics, when combined with ongoing strong income growth keep the outlook intact. As confirmed by recently released Census data, current economic conditions in Oregon have rarely been better. The expansion endures even as risks remain elevated.
Oregons General Fund tax collections continue to outstrip gains in the underlying economy so far in the 2019-21 biennium. The largest part of Oregons General Fund, personal income tax collections, surged during the peak tax season and continued to post strong gains as extension filers submitted their tax returns in the fall. Both income tax payments net of refunds, as well as withholdings out of paychecks, have been posting growth rates above what economic gains would call for. Corporate tax collections have slowed a bit in recent months, but remain elevated above their typical size as well.
The primary forecasting challenge for the current biennium is to determine how much of the recently strong tax collections are due to temporary factors that will fade away in the months ahead. Even without the onset of recession, revenue growth is facing major headwinds during the current biennium. State & federal tax policies, a big kicker refund and slower economic growth will all weigh on General Fund revenues in the near term.
While there is a great deal of uncertainty about the staying power of recent revenue growth, the December forecast reflects a stable economic outlook, with the expected size of General Fund collections increasing slightly over what was expected at the Close of Session.
Going forward, the uncertain path of the nationwide economy will dominate the revenue outlook. Fortunately, Oregon is better positioned than ever before to weather a revenue downturn. Automatic deposits into the Rainy Day Fund and Education Stability Fund have added up over the decade-long economic expansion. When the projected ending balance for the current biennium is included, Oregon is expected to end the biennium with more than $2.7 billion in reserves set aside, amounting to almost 13% of the two-year budget.
See ourfull websitefor all the forecast details. Our presentation slides for the forecast release to the Legislature are below.
Posted inDemographics,Employment,Housing,Income,News,RevenueTags:2019-21 biennium,2021-23 biennium,biennium,budget,Employment,Forecast,job growth,Jobs,Oregon,outlook,Revenue,revenue growth,tax revenue
Today we learnedthat the NORPAC sale to Oregon Potato Company fell through and that NORPAC would be shutting down both its Brooks and Salem facilities, in addition to the previously announced closure of their Stayton facility. All told 1,400 jobs are being lost, which any way you slice it is a big number. If we look at food manufacturing in the Salem MSA, on an annual basis employment totals about 4,500 jobs. Now, there are still big seasonal swings where the industry goes from around 6,000 during peak season to more like 4,000 during the rest of the year. But when such large losses are concentrated in a specific industry and in one regional economy, the concerns mount.
Losing a job and having to find another one usually results in lower wages, at least initially, as part of worker pay is not just overall experience, but within firm experience (length of tenure). On the brighter side, it is relatively easier to find a job today when the labor market is tighter than it is during a recession when there is more competition for fewer job openings. But layoffs, closures, and transitions are never easy. The Salem economy is about to have another 1,000 job seekers with similar skill sets searching for employment during the holidays.
Now, we had some inkling that there was trouble within the food industry even if we could not pinpoint what was going on. Starting about a year ago, we saw declines in weekly hours worked. We have imperfect data, but what we could tell were the drops were seen in food manufacturing and were outside of the Portland region. These declines did not appear to be trade war related, as the timing does not line up neatly nor were there declines in durable manufacturing hours worked at the time either. Now, we have seen durable hours worked decline in 2019, and we think some of that is trade war related. But back to food.
The hard thing to know was whether these hours worked declines meant there were underlying issues, or if it was volatility in the data. At the time, and even so far in 2019, the food manufacturing industry overall was adding jobs. We flagged the hours worked issues with our advisors a few times, but kept our outlook intact given employment was growing. Clearly there was something else afoot and we are adjusting our forecast accordingly ahead of next weeks forecast release.
As we discussed last year, Oregons food economyhas been doing quite well over the past 10-20 years. The cluster is growing quickly, and outpacing growth in most other states as well. In particular, the employment gains in food processing had been robust. During a time period (2005-2018) when Oregon lost nearly 10,000 manufacturing jobs on net, the gain of 12,000 jobs among food and beverage manufacturers was a key reason why the state didnt see larger losses.
The largest drivers of these gains have been breweries and fruits and vegetables. However the growth has been across all sub-sectors and regions of the state. The processing segment of the food economy in Oregon had grown to around 2% of all such jobs nationwide, and its local industry concentration was 50% larger than it was nationwide (location quotient of 1.5). And while wages arent high, the pay does tend to be better in processing the value-added part than it is in the distribution or service segments of the food economy.
As always in these types of situations, the question is whether or not the closure is a firm specific issue, an industry specific problem, or a harbinger of macroeconomy problems. I wont pretend I have the answer right now. And even though I am not aware of similar announcements elsewhere in the industry, only time will tell.
Finally, the food industry has a fairly large presence throughout the Pacific Northwest. Expectations today are that local crops will be sent to other facilities, maybe (probably?) those in the region for processing and packaging. This will require reworking the local supply chain to get goods to market. These transitions are also not costless and not always easy, however local farmers should be able to find buyers for their commodities.
Posted inEmployment,NewsTags:closures,food manufacturing,Jobs,Oregon
Just a quick reminder that housing supply remains a macroeconomic issue:
Residential investment has been a drag on GDP growth in 8 out of the last 10 quarters.
Low levels of new construction contribute to rising prices and worsening affordability if incomes dont keep up.
For places like the Pacific Northwest that rely on in-migration to drive long-run economic growth, if young, working-age households cannot afford to move here in the first place, forecasts for private sector revenues and public tax collections need to be lowered.
While local policies clearly have impacts, new construction relative to population growth remains quite tame across the country.
Our office has harped on this topic quite a bit over the years but its really this last point that is missing at times from the conversation. It is true that national statistics can mask regional differences and we also tend to attribute local statistics to local conditions. However, if we step back and look at new construction, it really has been low everywhere. Or at least low relative to population growth, despite considerable variation in economic conditions and local policies.
This was once again front and center over the holiday weekend as thehad an articleon Boises growth, California migrants, and housing affordability. Sound familiar? Do read the piece if you want a bit of navel-gazing. But I think it is important to highlight that Idaho and Boise are experiencing low levels of new construction just like the rest of the Pacific Northwest. Their trends in terms of construction, prices, vacancy rates and the like has really driven home the point to me that housing supply truly is a macro issue.
A more timely look at new construction relative to population gains shows no real encouraging signs of life either.
Its been a few years, butour office previously dug intosome of the commonly cited reasons for the low levels of new construction. I dont believe that list has really changed. Its more nuanced than this, but if we trace the logic of industry trends this cycle it goes something like the following. Affordability is worse today because we didnt build enough units. We didnt build enough units because there arent enough buildable lots. There arent enough buildable lots because we havent done enough land development to turn raw dirt into buildable lots. We havent done enough land development in part because financing remains tighter for these types of loans.
If housing supply is a macro issue (it is) then it makes sense to look for macro policies or levers as key players. Our offices earlier work, and relying of work from the National Association of Home Builders, shows that the stock of loans for single family builders for acquisition, development, and construction remains quite small. It takes time to turn raw dirt into lots and these are risky loans, their collateral is typically the dirt itself. But this, at least to me, seems to be a key sticking point for housing production.
Notes: This chart is nominal, so in real terms these loans are even smaller. That said this is the stock of these loans and not the flows, which could mask a healthy amount of churn and project financing. Builders turn to other sources of financing if traditional lending is unavailable, so this chart is an undercount of all of this type of activity, but still highlights in important issue.
While housing supply is an macro issue, it does not mean that nothing can be done locally. This past legislative session, Oregon passed 3 main housing-related laws. I have spoken to a few groups about the new policies in recent months and at a very high level they look something like the following.
SB 608 rent stabilization is designed to prevent the worst displacement scenarios while also not discouraging new housing supply. HB 2001 re-legalizing missing middle housing is designed to encourage or at least allow more housing units on land already inside urban growth boundaries. HB 2003 regional housing needs analysis is designed to ensure that housing supply meets the true, regional needs and not focus purely at the city level where we can lose the forest for the trees at times.
Bottom Line: Housing supply is a macroeconomic issue. New construction remains subdued across the country and not just due to local policies, although they certainly matter too. It will take years before we know if new legislation bears fruit, but hopefully over the long run supply will increase relative to the previous status quo. In the big picture, higher levels of new construction would support stronger economic growth today, and better affordability for current residents. In places like the Pacific Northwest, higher levels of new construction would also ensure stronger growth in the future as well.
When economists talk about growth, we almost always are referring tonetgrowth. There is considerable amounts of churn in the economy every single day. Roughly, 12% of jobs are either being gained or lost at any given point. What were concerned about is whether the good news outweighs the bad news, or vice versus. Even though we focus less on the gross flows, they still can provide insights and highlight important trends. This could be especially important at a point in time like today whenjob growth has slowed considerablyover the past couple of years.
Lets first look at job availability in Oregon. The number of open positions that firms are looking to fill tells us something about how companies view their current workforce needs and also how they view the future. Here we have have three different measures that are, unfortunately, telling us three somewhat different stories.
That said, in the big picture its clear that firms are holding steady their number of available jobs at best, but more likely pulling back on their number of openings, or at least advertised openings. Our office uses the help wanted online ads as part of our leading indicator model and the declines in recent years does weigh on that index of future growth.
Now, the question is are firms actually looking to hire fewer new workers or are they simply advertising their openings less? That unknown answer matters quite a bit on how to interpret the data for the outlook. If firms are hiring less because their sales are slow or expected to be slow in the future then it would signal trouble. However if they are advertising their openings less because they know its a tight labor market and its hard to fill positions, then the implication is more benign and less malignant. While we can discount the state JOLTS data its largely a sharedown from national and regional data the national JOLTS data does point more toward the latter than the former. Job openings are weakening, yes, but only after years of very significant gains, and national hiring patterns are holding up better as well.
Now, what about the other side of the ledger? Are firms laying workers off at a higher rate or just hiring them at a slower pace? We lack timely data here, but one indicator is looking at Worker Adjustment and Retraining Notifications (WARN) where firms let public agencies know they are downsizing or laying folks off. This is publicly available information and lately the numbers are elevated.
That said, this is clearly an imperfect measure. WARN notices in recent months are on par with readings weve seen a few times so far this expansion, or at times when job growth remained quite strong and the unemployment rate was dropping. WARN notices also do not add up to much in the grand scheme of things. Even during the Great Recession, WARN notices only totaled around 11,000 jobs or so, even though the state overall lost nearly 150,000. They are one indicator, certainly, but at the same time they do not appear to be aleadingindicator of where we are headed.
One measure that is a good leading indicator for the economy is the number of initial claims for unemployment insurance. These figures capture two effects. The biggest one being they are a measure of layoffs in the economy. Around 96% of all jobs are covered by unemployment insurance, so folks who file claims are representative of the overall labor market. This also includes people impacted by firm decisions that may not meet the technical thresholds required to file a WARN notice like those seen above.
The second, smaller effect captured by UI claims is worker behavior. If an individual is able to quickly land another job, they may not take the time and effort to fill out the paperwork, file a claim, and wait for their payments. On the other hand, if an individual believes it will be harder to find another job quickly, or maybe they search for a week or two and then file a claim, we could see these figures rise not just because layoffs are higher, but because hirings are weaker.
The good news overall is that initial claims for unemployment insurance remain near historic lows. Despite the largest economy, workforce, and population in Oregons history, initial claims are basically lower than ever. This should bode well for future growth in the months ahead.
The one potential issue here is that claims are somewhat elevated in 2019 relative to 2018, at least in Oregon. Prior to each of the past two recessions, these initial claims jump up and run about 10-15% higher on a year-over-year basis. This increase occurs about 8-12 months prior to the official start date of the recession. Today, claims are running more like 5% higher on a year-over-year basis. Clearly were not at a similar threshold as the past two cycles, but any increase is certainly worth monitoring in the weeks ahead. A complicating factor here is a handful of the announced layoffs will be hitting the time of year when seasonal work ends and UI claims increase anyway. We know WARN notices in and of themselves do not tend to move the needle in the big picture, but may make it harder to interpret the data in the weeks ahead.
Bottom Line: Job growth in Oregon is slower today than in recent years. Most signs point more toward an economy that is closer to full employment and it being harder for businesses to find the labor, even though they want to grow. However there are a few potential worrisome signs. The number of job postings is flat at best and initial claims are just a hair above their year-ago readings. Should these patterns continue or of course worsen, then we should be more concerned. However, today there are not many red flags that a recession is imminent *knocks on wood*. The broad array of leading indicators are not plunging.
Furthermore, while initial claims is one of the top two or three indicators available, it is unclear whether a small increase is a warning sign or just part of the noise. If we look back two charts and examine the 1990s, there was nearly a decades worth of ebbs and flows around a very low number of claims during a long economic expansion. Only when claims spiked significantly in 2000 was it a clear warning sign. Bringing more comfort and possibly clarity, the rise in initial claims is not seen in the U.S. data. In fact 2019 is running just a hair lower than 2018. The expansion remains intact, at least for now.
Posted inEmployment,Miscellaneous,NewsTags:2019,Employment,firings,help wanted,help wanted ads,hiring,initial claims,Jobs,layoffs,mass layoffs,openings,Oregon,UI claims,Unemployment,unemployment insurance,vacancies,warn notices
One forecasting challenge is we do not know what the 11th or 12th year of an economic expansion looks like. Weve never been here before. Our baseline forecast calls for ongoing, but slowing growth as we run into supply side constraints. However, that is more theory than data. Ive been wrestling with two big questions in recent months that Im putting to our advisors in the coming st week we covereda short-run growth question, while this week I will lay out the long-run growth question.
Over the long-run, after we get away from near-term cyclical dynamics, there are two primary sources of growth: labor and capital. This means long-run economic growth is really about how many workers there are and how productive each worker is. Our office has written extensively onpopulation growth and demographicsover the years because it is Oregons comparative advantage and is a key driver of growth.
Our office has certainlydiscussed capital and productivity, however we have spent less time doing so because we lack good local data. This summer the Bureau of Labor Statisticspublished some experimental state productivity statistics(H/T OEDs Nick Beleiciks). No surprise, but Oregon ranks well. From 2007 to 2017, Oregons labor productivity increased the 2nd fastest among all states. Our unit labor cost growth ranked 3rd lowest, meaning the regional economy was able to produce a lot more stuff without price pressures forming. Now, the flipside of that is our real hourly compensation increase was right in the middle of all states, ranking 25th best. Now, we know our wages haveincreased significantly fasterinrecent years, so this is something to keep an eye on.
In the big picture, there are different types of capital that can raise worker productivity and drive long-run economic growth. These types of capital are not mutually exclusive and one type is not necessarily better than another.
Financial capital is essential for firms to grow and expand and overall Oregon does OK here. Oregon is not a financial center nor do we have a deep bench of venture capital or the like. The state largely relies upon investments and loans made by out-of-state financial institutions. Encouragingly, thelatest Oregon Capital Scan reportshows we are seeing some improvements.
Physical capital is probably what most of us think of when it comes to worker productivity. Its about plants and equipment and being able to make more widgets per worker. However it is also about office space and software and worker productivity in the knowledge economy.
Natural capital is largely about putting natural resources to use. Obviously here in Oregon we have an abundance of natural capital. The questions are how best should we use them and to what degree should we use them?
Finally, I tend to think of human and social capital together, although there are important differences. Social capital is more about community networks and involvement and is somethingweve touched on brieflywhen it comes to economic mobility. Human capital is largely about the skills of the workforce.
Now, it is important to point out that education, at least in the form of a 4 year degree or higher, is not the be-all and end-all of a good paying job. Nor is it the only measure of skill. See ourreport on job polarizationand our dive intooccupations, wages, and educationfor a more thorough discussion. That said, we know that in the coming decade a college degree is required to be a competitive job candidate for around 80% of high-wage jobs. It is increasingly the ruler many are measured against.
So hows Oregon doing? Statewide were doing alright. This is in part becausemigrants have higher levels of educational attainment, but also in part becauseattainment is rising among those born in Oregonas well. But if we look beneath the statewide figures we see a lot more variation.
The share of the working-age population in Corvallis with a college degree is among the absolute highest in the nation. Portlands is getting up there and theincreases in the past decadeare part of thetransformative growth experienced this cycle. Bend is now better than three-fourths of all U.S. metros. And both the North Coast and Gorge have some of thehighest levels of educational attainment in rural areasacross the entire country.
However, one of the clear trends that has emerged in recent years is that educational attainment is not rising everywhere. The share of the working-age population with a college degree has remained pretty steady over the past two decades throughout much of the Willamette Valley. This is true in the Rogue Valley as well.Click here for more on college graduates in Oregon metros and their ranking.
Now, I am not here to try and pick on anyone. While most of the Willamette and Rogue Valleys do not have an above average, nor increasing share of college graduates, they do have larger shares of the workforce with Associates degrees or with some college coursework. We know that every year of schooling helps when it comes to employment opportunities and wages. As such some of these potential concerns may be overblown.
That said, I have been trying to think through the implications of these trends on future economic growth. At this point I do not believe these trends are a barrier to growth, but I do believe they warrant being an issue to watch. This is for a few reasons.
First, all regions of the state are seeing good economic growth this cycle when it comes to jobs, wages, household incomes and the like. It does not appear to be holding back growth so far. Second, there are many other types of capital. Not all local economies will hit it out of the park along all dimensions. So to the extent a local economy lacks in one type of capital, it can make up for it with higher productivity and stronger economic growth by using the other types.
However the reason it is an issue to watch is precisely because it is one type of capital that is not showing gains in some parts of the state. As such, it is like removing one avenue of future economic growth. By no means is it a deathblow but it does mean some local economies are more reliant upon the other avenues of growth. To the extent those falter, then there are fewer overall opportunities. The real concern is if it at some point in the future it does put a lid on potential growth. It could make further progress even more challenging once we get beyond the short-term cyclical dynamics.
Of course this is not an Oregon specific issue. These trends and patterns are seen throughout the nation. In a research note just the other day titled The rich get richer, Moodys Analytics wrote the following:
As more educated workers congregate in places that already boast significant advantages, divergence across regional economies will likely intensify. Variation in median household income across economies has grown more pronounced over the past few decades, as high-wage jobs cluster in selected metro areas with large, skilled workforces. With prime tech jobs bypassing much of the nation, more creative approaches may be needed to try to ensure that left-behind regions can attract young, educated workers.
And brandnew research out of the Federal Reserve Bank of Richmonddocuments the growth of college graduates in a handful of larger metropolitan areas.
Update: In conversations a question I keep getting is why? Well, I dont have a perfect answer here. However some of it is a form of economic sorting based on the types of jobs and also on housing costs. We discussed this at greater length when looking at theUrban Wage Premium researchpreviously and the Richmond Fed work linked above does as well.
But at a basic level, the clustering of knowledge-based, high-wage jobs in select urban areas attracts certain types of residents and workers (i.e. young-ish college grads) . This also occurs within regions, where growth and patterns within the urban core differ from the suburbs. It also means, given there no longer is an urban wage premium for those without a college degree, they increasingly do not live in the urban core or even in the handful of large metro areas.
Now, to date there does not appear to be net out-migration from a place like Portland. However I view it more as a choice on the front end. College graduates are disproportionately choosing to move to Bend, Corvallis and Portland. While those without college degrees are moving more to, say, Eugene, Medford, and Salem.
Lastly, it is important to note that al