Oregon Economic and Revenue Forecast

Transcription

1 Oregon Economic and Revenue Forecast May 2013 Volume XXXIII, No. 2 Release Date: May 16, 2013 Michael Jordan John A. Kitzhaber, MD Prepared By: Chief Operating Officer Governor Office of Economic Analysis DAS Director Department of Administrative Services

2 SPECIAL ANNOUNCEMENT: Download from the Web OEA will post all forecasts online at To receive an notice of new postings sign up at the following Web site.

3 Department of Administrative Services Michael Jordan DAS Director Chief Operating Officer Office of Economic Analysis Mark McMullen, State Economist Josh Lehner, Senior Economist Kanhaiya Vaidya, Senior Demographer Michael Kennedy, Senior Economist André Harboe, Economist Kris Klemm, Administrative Specialist

4 Foreword This document contains the Oregon economic and revenue forecasts. The Oregon economic forecast is published to provide information to planners and policy makers in state agencies and private organizations for use in their decision making processes. The Oregon revenue forecast is published to open the revenue forecasting process to public review. It is the basis for much of the budgeting in state government. The report is issued four times a year; in March, June, September, and December. The economic model assumptions and results are reviewed by the Department of Administrative Services Economic Advisory Committee and by the Governor's Council of Economic Advisors. The Department of Administrative Services Economic Advisory Committee consists of 15 economists employed by state agencies, while the Governor's Council of Economic Advisors is a group of 12 economists from academia, finance, utilities, and industry. Members of the Economic Advisory Committee and the Governor's Council of Economic Advisors provide a two-way flow of information. The Department of Administrative Services makes preliminary forecasts and receives feedback on the reasonableness of such forecasts and assumptions employed. After the discussion of the preliminary forecast, the Department of Administrative Services makes a final forecast using the suggestions and comments made by the two reviewing committees. The results from the economic model are in turn used to provide a preliminary forecast for state tax revenues. The preliminary results are reviewed by the Council of Revenue Forecast Advisors. The Council of Revenue Forecast Advisors consists of 15 specialists with backgrounds in accounting, financial planning, and economics. Members bring specific specialties in tax issues and represent private practices, accounting firms, corporations, government (Oregon Department of Revenue and Legislative Revenue Office), and the Governor s Council of Economic Advisors. After discussion of the preliminary revenue forecast, the Department of Administrative Services makes the final revenue forecast using the suggestions and comments made by the reviewing committee. Readers who have questions or wish to submit suggestions may contact the Office of Economic Analysis by telephone at Michael Jordan DAS Director Chief Operating Officer 3

5 Table of Contents EXECUTIVE SUMMARY General Fund Revenue... 9 Extended General Fund Revenue Outlook I. ECONOMIC FORECAST A. National Economic Review and Forecast B. International Review and Outlook C. Western Region D. Oregon Economic Review and Forecast II. REVENUE FORECAST A General Fund Revenues B. Extended General Fund Revenue Outlook C. Tax Law Assumptions D. Forecast Risks E. Lottery Earnings Forecast F. Overview of Budgetary Reserves APPENDIX A: ECONOMIC FORECAST DETAIL APPENDIX B: REVENUE FORECAST DETAIL APPENDIX C: POPULATION FORECASTS BY AGE AND SEX

6 EXECUTIVE SUMMARY May 2013 Oregon Economic Forecast Current Conditions and Outlook Oregon s economy continues to improve with each passing month and quarter, although the pace of improvement remains slow from a historical point of view. However, the rate of growth may now finally be picking up. Some of the major drags that have been weighing on Oregon s economic recovery are now being lifted, setting the stage for faster growth. Sentiment has improved among both businesses and households, with economic forecasters beginning to highlight upside risks to the outlook. With firms and workers having repaired much of the damage done to their balance sheets, many are in a position to spend should they remain confident about their future prospects. So far during Oregon s recovery, private sector employment has expanded at approximately a 2 percent annualized rate, far below the percent growth experienced in past expansions. Two primary reasons for this slower rate of growth have been large cutbacks among housingrelated industries and government. As the housing rebound continues, and state and local governments stabilize, these two weights are being lifted. Furthermore, as these two sectors continue to improve, medium sized cities and rural areas of the state are beginning to take part in the expansion. With the housing market and public sector no longer holding us back, the baseline outlook calls for a pickup in job growth to 2.6 percent on an annualized basis over the next two years. The housing rebound is now in full swing with sales, starts and prices all increasing at strong rates. New residential investment positively contributed to GDP growth in 2012 and in the first quarter of 2013, following 6 years of decline. Given the depth of the housing bust, the industry has at least two more years of strong growth before reaching even average levels of new construction. Moody s Analytics chief economist, Mark Zandi, estimates that each new housing start supports 4.5 to 5 jobs in the economy from construction workers and real estate agents to concrete and cabinet makers. In Oregon, benefits also flow to wood product firms who gain from additional demand for building products. Balance sheets for corporations remain very strong, particularly so for large businesses, but credit conditions are improving for small businesses as well. Household liabilities continue to decline and asset holdings continue to grow, putting consumers on a more solid footing. Stock markets are reaching all-time highs and home prices are rising briskly from recessionary lows. Even so, homeowners equity remains a fraction of pre-recession levels, making a mortgagefinanced spending boom unlikely. Given strong fundamentals, all signs point toward continued expansion. The Federal Reserve Bank of Philadelphia s Survey of Professional Forecasters places the probability of a negative economic quarter at 15%. The Wall Street Journal s Economic Forecasting Survey similarly places the risk of recession over the next year at 15%. Survey respondents estimate the upside risks outweigh the downside risks 57% to 43%. One year ago, in May 2012, the same WSJ survey estimated the downside risks outweighed the upside 5

7 risks by a 70% to 30% margin. While the average economic growth rate for 2013 has remained stable among forecasters, the risks have clearly shifted. Should the economy strengthen further than expected, job growth in Oregon will likewise exceed expectations. Oregon s Employment Trends Getting a handle on the health of Oregon s labor market is being somewhat complicated by technical issues within the underlying payroll jobs data. Technical issues aside, employment in Oregon continued to increase through the end of 2012 and into 2013, approximately in line with the gains seen at the U.S. level. While the gains continue to be slower than in previous expansions, they are gathering a little bit of steam and growth has picked up somewhat when compared with a year ago. In the past three quarters in Oregon, year-over-year employment has increased by 1.3 percent in the third quarter of 2012, 1.5 percent in the fourth quarter and 1.6 percent in the first quarter of Gains in the private sector are even stronger with the corresponding growth rates being 1.7 percent, 2.1 percent and 2.2 percent. Even with this pickup it still is not strong enough to bring the unemployment rate down quickly at least not yet. The unemployment rate in the first quarter of the year was 8.3 percent, down 0.1 percentage points from the fourth quarter of 2012 and lower than the 8.9 percent unemployment rate in early In terms of Oregon s regional labor markets, job growth is spreading beyond the Portland Metro in the past year, for the first time since the onset of recession. Even as the statewide numbers began to improve in early 2010, all counties outside the Portland metropolitan area lost jobs on net, however that has changed since the summer of In particular, Bend and Medford the dual epicenter of the housing bubble in the state, and among the largest in the country are both seeing strong employment gains in the past year. Based on the latest covered employment data (QCEW), jobs have rebounded nearly 5 percent in Medford and 5.5 percent in Bend. These employment gains are across nearly all industries and can be at least partially attributable to a pickup in construction activity and tourism. Additional jobs are being created in the Willamette Valley, Northern Coast and Northeast Oregon. Only the Southern Coast and Southeastern counties have yet to see sustained job gains. Even though there remains a long way to go before these local economies become healthy or approach what they once were in terms of job counts, the increasing geographic diversity of job creation is an encouraging sign. Demographic Forecast Oregon s population count on April 1, 2010 was 3,831,074. Oregon gained 409,550 persons between the years 2000 and The population growth during the decade of 2000 to 2010 was 12.0 percent, down from 20.4 percent growth from the previous decade. Oregon s rankings in terms of decennial growth rate dropped from 11th between to 18th between 2000 and Slow population growth during the most recent decade due to double recessions probably cost Oregon one additional seat in the U.S. House of Representatives. Actually, Oregon s decennial population growth rate during the most recent decade was the second lowest since The slowest, actually negative, was during the 1980s when Oregon was hit hard by another recession. As a result of recent economic downturn and sluggish recovery, Oregon s population is expected to continue a slow pace of growth in the near future. Based on the current forecast, Oregon s population will reach 4.25 million in the year 2020 with an annual rate of growth of 1.03 percent between 2010 and

8 Oregon s economic condition heavily influences the state s population growth. Its economy determines the ability to retain local work force as well as attract job seekers from national and international labor market. As Oregon s total fertility rate remains below the replacement level and deaths continue to rise due to ageing population, long-term growth comes mainly from net in-migration. Working-age adults come to Oregon as long as we have favorable economic and employment environments. During the 1980s, which included a major recession and a net loss of population, net migration contributed to 22 percent of the population change. On the other extreme, net migration accounted for 73 percent of the population change during the booming economy of 1990s. This share of migration to population change declined to 56 percent in 2002 and it was further down to 32 percent in As a sign of slow to modest economic gain, the ratio of net migration-to-population change will increase gradually and will reach 73 percent by the end of the forecast horizon. Although economy and employment situation in Oregon look stagnant at this time, migration situation is not expected to replicate the early 1980s pattern of negative net migration. Potential Oregon out-migrants have no better place to go since other states are also in the same boat in terms of economy and employment. Age structure and its change affect employment, state revenue, and expenditure. Demographics are the major budget drivers, which are modified by policy choices on service coverage and delivery. Growth in many age groups will show the effects of the baby-boom and their echo generations during the period of It will also reflect demographics impacted by the depression era birth cohort combined with diminished migration of the working age population and elderly retirees. After a period of slow growth during the 1990s and early 2000s, the elderly population (65+) has picked up a faster pace of growth and will surge as the baby-boom generation continue to enter this age group. The average annual growth of the elderly population will be 3.9 percent during the forecast period as the boomers continue to enter retirement age. However, the youngest elderly (aged 65-74) will grow at an extremely fast pace during the forecast period, averaging 5.0 percent annual rate of growth due to the direct impact of the babyboom generation entering the retirement age. Reversing several years of shrinking population, the elderly aged will start a positive growth as the effect of depression era birth-cohort will dissipate. A faster pace of growth of population in this age group will begin once the baby-boom generation starts to mature. The oldest elderly (aged 85+) will continue to grow at a moderately but steady rate due to the combination of cohort change, continued positive net migration, and improving longevity. The average annual rate of growth for this oldest elderly over the forecast horizon will be 1.4 percent. As the baby-boom generation matures out of oldest working-age cohort combined with slowing net migration, the once fast-paced growth of population aged will gradually taper off to below zero percent rate of growth by 2012 and will remain at slow or below zero growth phase for several years. The size of this older working-age population will remain virtually unchanged at the beginning to the end of the decade. The age group population is recovering from several years of declining and slow growing trend. The decline was mainly due to the exiting baby-boom cohort. This age group has seen positive growth starting in the year 2004 and will increase by 1.2 percent annual average rate during the forecast horizon. The young adult population (aged 18-24) will change only a little over the forecast period and remain virtually unchanged for most of the years into the future. Although the slow or stagnant growth of collegeage population (age 18-24), in general, tend to ease the pressure on public spending on higher education, college enrollment typically goes up during the time of high unemployment and 7

9 scarcity of well-paying jobs when even the older people flock back to college to better position themselves in a tough job market. The growth in K-12 population (aged 5-17) will remain low which will translate into slow growth in school enrollments. This school-age population has actually declined in size in recent years and will grow in the future at well below the state average. The growth rate for children under the age of five will remain below zero percent in the near future and will see positive growth only after Although the number of children under the age of five will decline slightly in the near future, the demand for child care services and pre- Kindergarten program will be additionally determined by the labor force participation and poverty rates of the parents. Overall, elderly population over age 65 will increase rapidly whereas population groups under age 65 will experience slow growth in the coming decade. Hence, based solely on demographics of Oregon, demand for public services geared towards children and young adults will likely to increase at a slower pace, whereas demand for elderly care and services will increase rapidly. Revenue Forecast Expectations for near-term General Fund revenue growth have become somewhat stronger since the last forecast. In recent months, both personal and corporate income tax collections have been coming in larger than was expected. In particular, the April tax filing season brought with it a big jump in personal income tax payments relative to last year. Although the revenue forecast has become somewhat stronger in the near term, the overall flavor of the outlook has not changed. Along with underlying job growth, personal income taxes paid out of wages and salaries are expected to accelerate during the biennium. Despite an improving economy, overall revenue growth will remain modest from an historical perspective. Underlying job gains, while improved, will not match the pace seen during previous periods of economic expansion. Also, personal income taxes based on investment income will grow slowly in the near term since many Oregonians cashed out gains in 2012 in anticipation of a scheduled federal tax rate increase. Tax revenue growth is expected to fall in between the rates Oregon has become accustomed to during past periods of economic expansion, and the slow gains we have seen in recent years. Although the baseline revenue forecast has not changed significantly, risks to the forecast are becoming skewed to the upside. Despite a relatively weak long-term outlook, a year or two of strong growth remains possible. In particular, if Oregon s traditionally strong migration trends and labor force gains reappear, additional jobs and tax revenue can be expected. The primary downside risk facing the near-term revenue forecast is the uncertain future of the nationwide economic expansion. Should federal government austerity or economic weakness abroad derail the U.S. economy, the expected growth in Oregon s tax collections will not materialize. Revenue growth in Oregon and other states will face considerable downward pressure over the 10-year extended forecast horizon. As the baby boom population cohort works less and spends less, traditional state tax instruments such as personal income taxes and general sales taxes will become less effective, and revenue growth will fail to match the pace seen in the past. 8

10 General Fund Revenue A strong 2013 season of income tax collections has put General Fund revenues somewhat ahead of the Close of Session s relatively optimistic outlook. Both personal and corporate income tax collections are closely matching expectations. If not for large one-time deposits and changes to the tax system, revenue growth would have been indistinguishable from the Close of Session outlook. The revenue outlook for the biennium has improved somewhat relative to the March 2013 forecast. The forecast for General Fund revenues for is now $14,248 million. This represents an increase of $126 million (+0.9%) from the March 2013 forecast. The forecast for the biennium is now $216 million (+1.7%) above the Close of Session forecast. Most of the additional revenue can be traced to legislative actions taken during the February 2012 session. Table R General Fund Forecast Summary (Millions) 2011 COS Forecast March 2013 Forecast May 2013 Forecast Change from Prior Forecast Change from COS Forecast Structural Revenues Personal Income Tax $12,193.6 $12,044.9 $12,152.7 $ $40.9 Corporate Income Tax $894.2 $898.3 $914.6 $16.3 $20.3 All Other Revenues $944.2 $1,179.1 $1,181.2 $2.1 $237.0 Gross GF Revenues $14,032.0 $14,122.2 $14,248.5 $126.2 $216.5 Offsets and Transfers $0.0 -$12.0 -$12.0 $0.0 -$12.0 Administrative Actions 1 -$23.1 -$4.4 -$4.4 $0.0 $18.7 Legislative Actions $0.0 $0.0 $0.0 $0.0 $0.0 Net Available Resources $14,008.9 $14,105.9 $14,232.1 $126.2 $223.3 Confidence Intervals 67% Confidence +/- 1.0% $ % Confidence +/- 1.9% $271.7 $14.11B to $14.38B $13.98B to $14.52B 1 Reflects cost of cashflow management actions, ex clusiv e of internal borrow ing. Personal Income Tax Personal income tax collections were $1,219 million for the third quarter of fiscal year 2013, $26.1 million (+2.2%) above the latest forecast. Compared to the year-ago level, total personal income tax collections grew by 7.5% relative to a forecast that called for 5.2% growth. Appendix B presents a comparison of actual and projected personal income tax revenues for the January- March quarter. 9

11 Personal income tax collections grew strongly during the April 2013 filing season as the 2012 gains seen in stock markets and across other investments were realized for tax purposes. In addition to asset appreciation, a considerable amount of taxable investment income has been generated by taxpayers choosing to cash in their assets ahead of federal tax increases in Due largely to this pulling forward of income, year-end personal income tax payments have come in more than 20% higher than last tax season. Although the outlook for personal income taxes over the last six weeks of the biennium is an aggressive one, it remains possible (but not likely) that payments will still outstrip the forecast. Should Oregon collect $67 million (5.6%) more in personal income tax revenue than the current baseline calls for, the personal income tax kicker would come into play. This would require an increase in revenues of more than 30% relative to the last six weeks of fiscal Corporate Excise Tax Corporate excise tax collections equaled $92 million for the second quarter of fiscal year 2013, $12.3 million above the March forecast. Compared to one year ago, net corporate receipts were up 36.6% with the forecast calling for an 18.3% increase. The rapid growth in corporate tax collections seen at the beginning of the year came to a sudden halt in April, leaving corporate collections very close to the kicker threshold (102% of the Close of Session forecast). The May outlook assumes that revenues will come in $2.7 million above the threshold, generating a kicker payment of $20.3 million.1 Although a corporate kicker is incorporated into the baseline outlook, it is far from a sure thing. The Department of Revenue is working through a processing backlog of refunds due to be recorded before the end of the fiscal year. Should corporate revenues over the last six weeks of the biennium fail to match their level of last year (as they have in recent weeks), no kicker payment will be required. Even before the recent surge in corporate tax collections, collections were very large from an historical perspective. Near-record corporate profits have yet to go away. Given that corporate tax collections and underlying profits are subject to boom-bust cycles, there is a considerable amount of downside risk to the outlook. Nevertheless, strong growth is expected during the biennium, since Oregon s economy is expected to continue to grow, and corporate tax collections are sensitive to the business cycle. However, these growth rates, while large, will remain less than half of what has been seen during recent profit booms. Other Sources of Revenue All other General Fund revenues are expected to total $1,181.2 million for the biennium, an increase of $2.1 million relative to the March forecast. Only state court fees grew significantly faster than expected. 1 Voters approved reforms to the corporate kicker in November 2012, but these changes will not be in effect until biennium

12 All other General Fund revenues are now expected to be $237 million larger than the Close of Session forecast. These additional revenues are included in the personal income tax kicker calculation. Much of the change relative to the Close of Session outlook can be traced to changes in policy. Reforms to liquor apportionment continuation of the bottle surcharge and judicial revenues reclassifying some judicial revenues from Other Funds to General Fund increased these other revenue sources. However, the February 2012 legislative session generated the largest change above and beyond the original Close of Session estimates. Unlike policy changes that take place during the full odd-year session, February adjustments are not netted out of the kicker calculation. Extended General Fund Revenue Outlook Table R.2 exhibits the long-run forecast for General Fund revenues through the biennium. Users should note that the potential for error in the forecast increases substantially the further ahead we look. Table R.2 General Fund Revenue Forecast Summary (Millions of Dollars, Current Law) Forecast Forecast Forecast Forecast Forecast Forecast % % % % % % Revenue Source Biennium Chg Biennium Chg Biennium Chg Biennium Chg Biennium Chg Biennium Chg Personal Income Taxes 12, % 13, % 15, % 16, % 18, % 20, % Corporate Income Taxes % 1, % 1, % % 1, % 1, % All Others 1, % % 1, % 1, % 1, % 1, % Gross General Fund 14, % 15, % 17, % 18, % 20, % 22, % Offsets and Transfers (12.0) (120.8) (116.3) (82.2) (44.7) (47.3) Net Revenue 14, % 15, % 17, % 18, % 20, % 22, % Other taxes include General Fund portions of the Eastern Oregon Severance Tax, Western Oregon Severance Tax and Amusement Device Tax. Commercial Fish Licenses & Fees and Pari-mutual Receipts are included in Other Revenues General Fund revenues will total $15,606 million in , an increase of 9.5% percent from the prior period, and $161 million (+1.0%) above the March forecast. In , revenue growth is expected to accelerate to 11.3%, followed by slower rates of 8.7% to 9.7% in subsequent biennia. The slowdown in long-run revenue growth is largely due to the impact of demographic changes and changes in savings behavior. Table B.2 in Appendix presents a more detailed look at the long-term General Fund revenue forecast.. 11

13 I. ECONOMIC FORECAST May 2013 This edition of the National Economic Review and Forecast contains excerpts from Nigel Gault, U.S. Economy: Current Situation: Forecast Flash, IHS Global Insight, April This publication summarizes Global Insight s baseline national forecast that OEA uses as a starting point for the Oregon economic and revenue models. OEA summarizes the Forecast Flash and the following is our interpretation of this document. Any errors or misrepresentations are attributable to OEA. A. National Economic Review and Forecast The economy began 2013 on a relatively strong note, with real GDP grow registering a 2.5% growth rate in the first quarter, an increase for the fourth quarter s 0.4%. Even so, it is premature to believe the recovery has fully moved to a stronger, more sustained growth path. Most of the increase in GDP from quarter to quarter was the swing in inventory accumulation that dragged down the fourth quarter and was a big plus in the first. This strength, given the volatility of inventories, is likely to moderate in the second quarter and may be a drag once again. Furthermore, the impact of the federal sequestration will be felt in the coming quarters as government spending pulls back. Given all of the above, the U.S. economy will likely follow the same up-and-down pattern of growth seen in recent years and expectations are the second quarter will be weak. IHS Global Insight assumes the sequester will continue through the end of the third quarter (rather than the second, as assumed previously) and has reduced third quarter GDP from 3.2% to just 1.8%, which is more in-line with average gains in the economy in recent years. IHS Global Insight now expects 2013 GDP growth to be 2.0% and 2014 growth to be 2.8%. Mixed news. Following a more upbeat stream of economic news, recent readings of key economic indicators show slower growth. The two ISM indexes both slowed in March and April, while initial unemployment insurance claims are making continued slow progress. Housing market news continues to remain encouraging sales, starts, prices are all up and should continue to support overall economic growth. The housing recovery is the chief reason IHS Global Insight believes economic growth will improve to around 3% on a sustained basis once the sequester s impact unwinds. The housing recovery also supports consumer spending via the wealth effect and direct housing-related products and is likely one reason spending is strong in recent quarters despite the loss of the payroll tax cut. However, IHS Global Insight suspects this pace cannot be maintained given it is far ahead of the forecasted 1.2% disposable income growth in Entrenched sequester. As the continuing resolution, which keeps the government funded though the end of the fiscal year, passed at the end of March, it leaves the sequester in place. For it to end soon there would need to be some evidence of severe public discomfort from its effects 12

14 to force Congress to reach a compromise [while air traffic controllers have been in the news lately, this likely is not enough to overturn the legislation]. The debt ceiling will likely be the next key deadline in Washington. [Originally estimated to be reached in May, however the announcement of Fannie Mae returning $59.4 billion to the federal government, the expected date of hitting the debt ceiling has been moved to September.] If a budget deal can be reached, this summer or when the debt ceiling is reached would be the time. It could replace the sequester s poorly designed spending cuts with better-targeted cuts spread over many years including entitlement programs and with extra revenues from curtailing tax expenditures. IHS Global Insight assumes such a package is agreed in time by the beginning of the new fiscal year in October. First Federal Reserve rate hike is The Fed announced its current pace of quantitative easing will continue for the time being. It will also likely taper off and not come to a complete stop, even when the time comes. IHS Global Insight expects QE to continue well into 2014, given the gradual labor market improvements that are expected and no rate hikes before Figure N.1* Quarterly Annual 4Q12 1Q13 2Q13 3Q Real GDP (%, AR) Federal Funds Rate Year T-Bill Oil Prices, Refiner Acquisition Cost ($) Consumer Price Index (Y/Y %) Housing Starts (millions) Consumer Sentiment (Univ. of Michigan) Unemployment Rate (Percent) *Figure N.1 was taken from Nigel Gault, U.S. Economy: Current Situation: Forecast Flash, IHS Global Insight, April

15 Graph N.1 Real GDP, Percent Change 2005 Dollars, Chain Weighted 5 Percent Change U.S. Economic History and Forecast Percent Interest Rates Prime 3M Treasury 10 Yr Treasury Unemployment Rate 11 Percent Year-Over-Year Percent Chnage ,500 2,000 Consumer Price Index All Items Excluding Food & Energy Standard and Poor's 500 Index Millions Housing Starts Total Single Family Multi-Family Real Exchange Rate Major Trading Partners Other Important Partners Consumer Confidence & Spending Real Consumer Spending (Left Axis) Consumer Sentiment (Univ of Mich, Right Axis) ,500 1, Percent Chnage

16 TABLE N. 1 U.S. Forecast Summary (Apr 2013 U.S. Forecast, IHS Global Insight) Quarterly Annual 2012:3 2012:4 2013:1 2013:2 2013:3 2013: GDP (Bil of 2005 $) Chain Weight 13,653 13,665 13,793 13,807 13,869 13,983 13,063 13,299 13,593 13,863 14,249 14,706 15,122 15,555 15,966 % Ch Personal Income (Bil of $) 13,406 13,669 13,554 13,711 13,852 14,033 12,322 12,947 13,407 13,787 14,485 15,167 15,886 16,664 17,444 % Ch (3.3) Nonagricultural Employment (Millions) % Ch (0.7) Unemployment Rate Point Change (6.4) (9.6) (3.3) (1.9) (0.8) (4.4) 3.7 (7.3) (9.5) (4.5) (5.3) (8.3) (6.2) (4.5) (3.4) Industrial Production Index (2007=100) % Ch Corporate Profits (Bil of $) 2,194 2,222 2,166 2,098 2,093 2,134 1,816 1,854 2,162 2,123 2,385 2,349 2,266 2,200 2,171 % Ch (9.6) (12.1) (0.9) (1.8) 12.3 (1.5) (3.5) (2.9) (1.3) Money Supply (M2) (Bil of $) 10,084 10,313 10,425 10,500 10,595 10,703 8,748 9,596 10,313 10,703 11,099 11,517 11,829 12,100 12,390 % Ch Prime Rate % Ch Consumer Price Index ( =100) % Ch Federal Budget (unified) (Bil of $, Fed FY (185.0) (293.3) (357.3) (34.8) (182.4) (231.6) (1,275.1) (1,249.6) (1,060.8) (806.1) (669.9) (573.2) (579.4) (675.1) (728.3) Current Account Balance (Bil of $) (449.8) (441.7) (476.9) (423.8) (418.2) (406.7) (442.0) (465.9) (475.0) (431.4) (414.6) (431.8) (432.6) (429.2) (422.0) % Ch (18.52) (7.03) (37.65) (5.19) (10.50) (9.2) (3.9) (0.8) (1.7) Population (Millions) % Ch TABLE N. 2 U.S. Forecast Change - (Current Forecast Apr 2013 vs. Last Forecast Jan 2013) Quarterly Annual 2012:3 2012:4 2013:1 2013:2 2013:3 2013: GDP (Bil of 2005 $) Chain Weight 13,653 13,665 13,793 13,807 13,869 13,983 13,063 13,299 13,593 13,863 14,249 14,706 15,122 15,555 15,966 % Change From Last Forecast 0.0 (0.2) (0.0) (0.0) (0.2) (0.2) (0.3) Personal Income (Bil of $) 13,406 13,669 13,554 13,711 13,852 14,033 12,322 12,947 13,407 13,787 14,485 15,167 15,886 16,664 17,444 % Change From Last Forecast (0.0) (0.3) (0.3) (0.3) Nonagricultural Employment (Millions) % Change From Last Forecast (0.3) (0.5) (0.7) Unemployment Rate Point Change From Last Forecast (0.0) (0.0) (0.0) Industrial Production Index (2007=100) % Change From Last Forecast (0.2) (0.1) (0.1) Corporate Profits (Bil of $) 2,194 2,222 2,166 2,098 2,093 2,134 1,816 1,854 2,162 2,123 2,385 2,349 2,266 2,200 2,171 % Change From Last Forecast (0.4) (0.9) Money Supply (M2) (Bil of $) 10,084 10,313 10,425 10,500 10,595 10,703 8,748 9,596 10,313 10,703 11,099 11,517 11,829 12,100 12,390 % Change From Last Forecast (0.2) (0.3) (0.5) Prime Rate % Change From Last Forecast (0.1) Consumer Price Index ( =100) % Change From Last Forecast (0.0) (0.0) (0.1) (0.2) 0.0 (0.0) (0.0) (0.0) (0.1) (0.1) (0.2) (0.2) (0.3) Federal Budget (unified) (Bil of $, Fed FY (185.0) (293.3) (357.3) (34.8) (182.4) (231.6) (1,275.1) (1,249.6) (1,060.8) (806.1) (669.9) (573.2) (579.4) (675.1) (728.3) Current Account Balance (Bil of $) (449.8) (441.7) (476.9) (423.8) (418.2) (406.7) (442.0) (465.9) (475.0) (431.4) (414.6) (431.8) (432.6) (429.2) (422.0) % Change From Last Forecast (0.7) (7.0) (10.8) (11.7) (10.6) Population (Millions) % Change From Last Forecast (0.3) (0.3) (0.4) (0.4) (0.5) (0.5) 0.0 (0.0) (0.2) (0.4) (0.6) (0.8) (1.0) (1.2) (1.4) 15

17 B. International Review and Outlook This edition of the International Review and Outlook will briefly examine the growth prospects of Oregon s major international trading partners along with the state s exports by industry, in particular farm, fishing and forestry exports which comprise the historic economic pillars in the state. According to IHS Global Insight, our global trading partners have a mixed bag of in terms of growth prospects. While the Eurozone is expected to continue its downward spiral in 2013 (Table I.1) Japan s prospects have brightened a bit. In the first quarter of 2013 Japan was expected to have zero growth in GI now estimates it to be +0.8 percent due to the simulative policies of Abenomics. This is the term given to recent policy decisions in the country as directed by Prime Minister Shinzo Abe, hence the name. These actions include raising the inflation target to 2 percent to finally end the, more or less, two decade long period of deflation in the country. Additional policy goals of depreciating the yen, quantitative easing by the Bank of Japan along Table I.1 Projected Growth Rates of Real GDP (Percent) As of 4/10/ United States 2.0% 2.8% 2.9% Canada 1.6% 2.5% 2.6% Japan 0.8% 1.8% 1.4% Eurozone -0.6% 0.4% 1.7% Mexico 3.6% 5.0% 3.8% South America 3.3% 4.0% 4.3% Asia except Japan 6.2% 6.7% 6.8% China 8.1% 8.3% 8.2% World 2.6% 3.5% 3.9% Source: Global Insight, April 2013 with an expansion of public investment and fiscal spending, are all designed to boost economic growth in the country. So far the early readings suggest the policies are having their intended effects, however no full assessment can be complete given the short timeframe for which these policies have been in place. Our largest trading partner, Canada, is expected to grow at 1.6 percent in 2013 which is slightly lower than the estimate last quarter of 1.8 percent. There are two primary risks to the Canadian outlook: global growth and the domestic housing market. Canada s natural resources are sold to both the U.S. and the global economy, meaning a slowdown in either would result in slower Canadian growth as well. Additionally, Canada s housing market has been growing briskly in recent years. Unlike its western peers, Canada s banks and citizens avoided the massive housing bubble and bust during the prior decade, however home prices have slowed in recent months. Most forecasters are not expecting a housing bust such as the U.S. underwent, however to the extent that the housing market cools more than expected, it could significantly impact the economy, particularly on the employment and consumer spending fronts. This remains a key story to follow when tracking the Canadian economy. Oregon s second largest trading partner, China, is expected to grow 8.1 percent this year. The greatest risk this outlook is any weakness in the global economy as Chinese manufacturing exports are sold to the world. The Eurozone remains in recession, short-circuiting a major trading partner for China, while the U.S. continues to grow at subdued rates from a historical perspective. Given these prospects, in addition to relatively weak domestic economic data in China, growth is expected to be slower than in recent years. 16

18 Oregon Exports The old trifecta The carpeting in the Oregon Senate and House are imprinted with images of fish, lumber and wheat to represent the three historical, core industries of Oregon: forestry, fishing and agriculture. Updated carpeting might include a computer chip and maybe a Nike swoosh symbol given the economic development and industry diversification that has occurred in the past thirty years. Nevertheless, even though those three industries represent a smaller portion of Oregon s economic output now compared to the early 20 th century, many of these products are still goods that other countries import from Oregon. Table I.2 Oregon Exports by Industry ($ millions, current prices) y/y % Share out change of Total Total All Industries 18,310 18, % 100.0% Computer And Electronic Products 6, , % 35.1% Agricultural Products 2, , % 14.1% Machinery, Except Electrical 1, , % 9.8% Chemicals 1, , % 8.5% Transportation Equipment , % 6.4% Food And Kindred Products % 3.5% Primary Metal Manufacturing % 3.3% Waste And Scrap % 3.0% Wood Products % 2.9% Paper % 2.5% Electrical Equipment, Appliances, And Component % 1.8% Miscellaneous Manufactured Commodities % 1.7% Fabricated Metal Products, Nesoi % 1.5% Plastics And Rubber Products % 1.3% Petroleum And Coal Products % 1.1% Source: WISER, February 2012 Graph I.1 $4,000 $3,500 Nominal Oregon Exports in Fishing, Forestry and Agriculture In Millions of Dollars The sum of Oregon s Agricultural product exports (includes agriculture, food and kindred products) in 2012 were $3.2 billion and is second only to computer and electronics products (Table I.2). This is a 5 percent decrease from 2011 export value (Graph I.1) and it comprised of 17.6 percent of total Oregon exports in There was a strong showing among these $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ *Includes forestry,wood and paper products **Includes agriculture, food and kindred products Source: WISER, May 2013 Forestry Products and Derivatives* Agricultural Products and Derivatives** Fish, Fresh, Chilled, Or Frozen exports in the first quarter of 2013, with growth of 13 percent compared to the first quarter of This growth may be due to dearer prices, increased export volume or a combination of the both. 17

19 Forestry products and its derivatives (forestry, wood and paper products) had a total of $1.1 billion of exports in 2012 with a loss of 6 percent compared to Wood, paper and forestry products all had lower exports compared with The first quarter of 2013 had bright spots for both wood and forestry products, but paper products exports continued its decline. Fishing exports had the lowest value of the three with $57 million in exports in 2012 which is also slightly less than the $59 million exported in Giving a historical perspective on these export sectors, agricultural exports have grown by 72 percent since 1997 on a nominal basis saw a loss of 22 percent in export value due to the effects of the Great Recession. This however was more due to the lower price in agricultural products rather than a decrease in export volume. Forestry has had a more tumultuous history with 14 percent growth since 1997 which is essentially negative in inflation-adjusted terms. In 2008, at the peak of forestry products before the Great Recession, exports were still lower in nominal terms than they were in saw a loss of $329 million worth of exports which translates into 36 percent loss. By 2011, forestry exports had regained all their losses and were well above the 2008 peak. Export Trends Oregon s total exports grew by 5.3 percent in nominal terms (+$223 million) in Q1 of 2013 compared to Q This growth is mainly due to an increase in agricultural products (+$91 million) and chemicals (+$87 million). Computer and electronic exports continued its decline with a loss of 1.7 percent in exports (-$24 million) compared to Q and paper products lost 13.2 percent (-$14 million) over the same period. Graph I.2 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Oregon Exports (Year-over-Year Change) Total Exports Total excluding Computer and Electronic Products -50% Q Q Q Q Q Q Q Q C. Western Region In a special edition of the Western section for the May 2013 forecast, Andre Harboe, an economist in the Office of Economic Analysis, examines vehicle miles traveled (VMT) in both Oregon and the U.S. alongside other western states. VMT is an important measure to examine on a number of fronts as it is simultaneously a measure of economic activity (the movement of goods) and personal travel 18

20 patterns. Given the data available, distinguishing between these two components of VMT is technically complicated, however important from an economic analysis point of view. In consultation with both the U.S. and Oregon Departments of Transportation, the following breaks down the available data for Oregon and then compares VMT trends across western states. Divergence in Vehicle Miles Traveled The Graph to the right shows the growth in VMT in Oregon and nationwide. Historically, recessions would slow the growth in VMT or cause it to dip slightly, but it would subsequently resume its growth as economic activity rebounded and consumers drove more. 200% 150% Growth in Vehicle Miles Traveled Base Year: 1979 This did not happen in the last recession. Even though Real GDP has rebounded from 2007 highs, VMT has not. 100% There are many theories for this lack of growth: high gas prices, a lackluster economic expansion, aging population, telecommuting, availability of mass transit, changing driving culture, particularly among today s youth, etc. What is interesting is that Oregon began this trend well before the previous recession and diverged from the national trend in % National VMT Oregon VMT* Source: Department of Transportation and Oegon Department of Transportation *Oregon data in annual format 140% 130% 120% 110% 100% Growth in Vehicle Miles Traveled Base Year: 1999 From 1979 till 2000, Oregon s VMT growth mirrored that of the nation. The divergence began in the 2001 recession and the trend lines have not met since. VMT at the economic peak in 2006 was essentially the same as that in % 80% 70% Rural Urban 60% Source: Oregon Department of Transportation Breaking Oregon s VMT numbers down by rural and urban roads reveal divergent patterns. Urban VMT is 15 percent above their 1999 base (which translates into an increase of about 2.4 billion miles) but has remained essentially flat since While growth in Oregon s urban VMT was fairly slow overall, the lack of increased VMT following the recession mirrors the national trends. Rural VMT has lost about 20 percent since 1999 (this translates into a loss of 3.7 billion VMT) and has also remained fairly flat since

21 Deciphering economic activity from personal driving within the VMT data is difficult. However, a meaningful proxy is to separate passenger vehicles from larger trucks. Some passenger vehicles are used for business purposes and represent underlying economic activity, however the converse is not true to the same degree. Not many VMT by large trucks can reasonably considered personal travel. Overall in Oregon, VMT traveled by trucks and buses since 1999 has grown by 24 percent. A large increase in 2006 was mainly due to growth in combination trucks being driven on rural roads, i.e. logging trucks. 140% 130% 120% 110% 100% 90% 80% 70% 60% Source: Oregon Department of Transportation Growth in Vehicle Miles Traveled Base Year: 1999 Motorcycles, Passenger Cars and Light Trucks Trucks and Buses The Great Recession had a large negative impact on truck miles traveled as the movement of goods stopped as businesses sold fewer products and therefore did not need to replenish inventories as quickly. This large loss happened over a year before the recession began and the recovery commenced in the middle of the recession. This also occurred in the 2001 recession where truck and bus miles fell more than a year before the recession and was well into recovery during the recession. Since its low point in 2007, there has been a swift recovery in truck miles and in 2011 this category of VMT was 21 percent higher. Light trucks (under 10,000 lbs), passenger cars and motorcycles on the other hand are 3 percent lower than in 2008 and 7 percent lower than in As with all data, there are some caveats. VMT is an estimate created by the Oregon Department of Transportation. Some 5,000 miles of rural roads have been removed from VMT calculations. In addition, 2,000 miles of rural roads were redefined as urban due to the 2000 Census, artificially lowering rural VMT miles. Western States Comparing Oregon to other western states in terms of growth in vehicle miles traveled illustrates the dichotomy between states. Each state has experienced its own path in terms of driver behavior, economic activity, population growth and the like. Oregon posted the lowest overall growth in VMT compared with regional neighbors. Oregon was also the only state to have growth below the national average since VMT growth in Oregon over this period was 75 percent that is, VMT in Oregon today is 75 larger than in 1980 while the nation as a whole experienced a 98 percent increase. Nevada had the highest growth among all western states at nearly 300 percent. Arizona was not far behind at well over 200 percent growth. 20

22 The above mentioned numbers do not adjust for population growth within the states, which is a large determinant of total VMT. When one looks at annual vehicle miles traveled per capita and chart out its growth, Nevada goes from having the highest growth to one of the lowest. The state underwent very strong population growth during this time period and even as VMT per capita remains relatively low, the fact that the population of the state increased approximately 330 percent led to the gains in VMT. On the other hand, Arizona experienced large population gains but an even larger increase in VMT. This results in Arizona being the only western state that is at or above the national average in terms of per capita VMT. At this point in time it is unclear, entirely, what constitutes the large gains seen in Arizona in the mid-1980s. A large amount of work on Interstate 10 in and around Phoenix occurred during this time, ultimately being completed through downtown Phoenix in These changes likely resulted in some of these gains. 400% 350% 300% 250% 200% 150% 100% 50% 180% 170% 160% 150% 140% 130% 120% 110% Arizona California Idaho Nevada Oregon U.S. Total Utah Washington Source: U.S. Department of Transportation Growth in Vehicle Miles Traveled (Western States) Base Year: 1980 Growth in Vehicle Miles Traveled Per Capita (Western States) Base Year: 1980 Arizona California Idaho Nevada Oregon United States Utah Washington Oregon Peaked in 1999 with an average of 10,218 vehicle miles traveled per capita. It has since fallen by 15 percent to 8,651 in Since the Great Recession, the average VMT miles traveled per capita fell by 7.3 percent since Looking at VMT per nonfarm job, however, shows an opposite effect. As the Great Recession began, VMT per nonfarm job was an average of 20,600 for the western states. It grew to 22,500 in This makes sense as the number of jobs fell, vehicle miles traveled did not drop as fast as employment, increasing its ratio. 100% 90% 80% 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Source: U.S. Department of Transportation Vehicle Miles Traveled Per Nonfarm Job (Western States) Arizona California Idaho Nevada Oregon U.S. Total Utah Washington Source: U.S. Department of Transportation, Bureau of Labor Statistics 21

23 D. Oregon Economic Review and Forecast Current Conditions and Outlook Oregon s economy continues to improve with each passing month and quarter, although the pace of improvement remains slow from a historical point of view. However, the rate of growth may now finally be picking up. Some of the major drags that have been weighing on Oregon s economic recovery are now being lifted, setting the stage for faster growth. Sentiment has improved among both businesses and households, with economic forecasters beginning to highlight upside risks to the outlook. With firms and workers having repaired much of the damage done to their balance sheets, many are in a position to spend should they remain confident about their future prospects. So far during Oregon s recovery, private sector employment has expanded at approximately a 2 percent annualized rate, far below the percent growth experienced in past expansions. Two primary reasons for this slower rate of growth have been large cutbacks among housing-related industries and government. As the housing rebound continues, and state and local governments stabilize, these two weights are being lifted. Furthermore, as these two sectors continue to improve, medium sized cities and rural areas of the state are beginning to take part in the expansion. With the housing market and public sector no longer holding us back, the baseline outlook for calls for a pickup in job growth to 2.6 percent on an annualized basis over the next two years. The housing rebound is now in full swing with sales, starts and prices all increasing at strong rates. New residential investment positively contributed to GDP growth in 2012 and in the first quarter of 2013, following 6 years of decline. Given the depth of the housing bust, the industry has at least two more years of strong growth before reaching even average levels of new construction. Moody s Analytics chief economist, Mark Zandi, Economic Drags Turning into Drivers Annual Percent Changes in Oregon Oregon Housing Starts Oregon State and Local Government Employment (Right) estimates that each new housing start supports 4.5 to 5 jobs in the economy from construction workers and real estate agents to concrete and cabinet makers. In Oregon, benefits also flow to wood product firms who gain from additional demand for building products. Balance sheets for corporations remain very strong, particularly so for large businesses, but credit conditions are improving for small businesses as well. Household liabilities continue to decline and asset holdings continue to grow, putting consumers on a more solid footing. Stock markets are reaching all-time highs and home prices are rising briskly from recessionary lows. Even so, homeowners equity remains a fraction of pre-recession levels, making a mortgage- financed spending boom unlikely. Given strong fundamentals, all signs point toward continued expansion. The Federal Reserve Bank of Philadelphia s Survey of Professional Forecasters places the probability of a negative economic quarter at 15%. The Wall Street Journal s Economic Forecasting

24 Survey similarly places the risk of recession over the next year at 15%. Survey respondents estimate the upside risks outweigh the downside risks 57% to 43%. One year ago, in May 2012, the same WSJ survey estimated the downside risks outweighed the upside risks by a 70% to 30% margin. While the average economic growth rate for 2013 has remained stable among forecasters, the risks have clearly shifted. Should the economy strengthen further than expected, job growth in Oregon will likewise exceed expectations. Summary of Recent Trends Oregon s Employment Trends Stable Economic Outlook Yet Shifting Risks Oct '11 - May '13 Upside Risks, Share of Total 2.00 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Source: Wall Street Journal Economic Forecasting Survey 2013 GDP Growth (Left) Getting a handle on the health of Oregon s labor market is being somewhat complicated by technical issues within the underlying payroll jobs data. Technical issues aside, employment in Oregon continued to increase through the end of 2012 and into 2013, approximately in line with the gains seen at the U.S. level. While the gains continue to be slower than in previous expansions, they are gathering a little bit of steam and growth has picked up somewhat when compared with a year ago. In the past three quarters in Oregon, year-over-year employment has increased by 1.3 percent in the third quarter of 2012, 1.5 percent in the fourth quarter and 1.6 percent in the first quarter of Gains in the private sector are even stronger with the corresponding growth rates being 1.7 percent, 2.1 percent and 2.2 percent. Even with this pickup it still is not strong enough to bring the unemployment rate down quickly at least not yet. The unemployment rate in the first quarter of the year was 8.3 percent, down 0.1 percentage points from the fourth quarter of 2012 and lower than the 8.9 percent unemployment rate in early The employment data discussed in this report is adjusted for two important technical purposes: seasonality and the upcoming benchmark revisions 2. Given the relative strength of employment as Each year the Oregon Employment Department and the U.S. Bureau of Labor Statistics revise the employment data a process known as benchmarking. The current establishment survey (CES), also known as the monthly payroll survey, is benchmarked against the quarterly census of employment and wages (QCEW), a series that contains all employees covered by unemployment insurance. The monthly CES is based on a sample of firms, whereas the QCEW contains approximately 96 percent of all employees, or nearly a complete count of employment in Oregon. The greatest benefit of the CES is the timeliness monthly employment estimates are available with only a one month lag and these estimates are reasonably accurate. However the further removed from the latest benchmark, the larger the errors. The QCEW is less timely as the data is released publically approximately 3-4 months following the end of the quarter. The greatest benefit of the QCEW is that is a near 100 percent count of statewide employment. For these reasons, the CES is usually used to discuss recent monthly employment trends, however once a year the data is revised to match the historical QCEW employment trends. The last month of official benchmark data is September The QCEW is currently available through December 2012, thus the preliminary benchmark used here covers the October 2012 December 2012 period. 23

25 measured by data collected through the unemployment insurance program, it is clear that preliminary payroll job counts for the end of 2012 will be revised upward when benchmark adjustments are made next year. Such preliminary revisions to the payroll survey data are regularly published in some states. Beginning with the May 2013 employment release the Oregon Employment Department will provide preliminary employment revisions for the state on a quarterly basis. Labor Market Rankings The Office of Economic Analysis examines four main sources for jobs data: the monthly payroll employment survey, the monthly household employment survey, monthly withholding tax receipts and the quarterly census of employment and wages. Through the end of 2012 and into 2013 all four of these surveys were indicating moderate labor market improvement, however the near term month to month changes are harder to distinguish. Monthly payroll gains have been strong and the unemployment rate continues to trend downward. The QCEW employment figures show sustained job gains of over 23,000 through at least December 2012, when compared with a year earlier. Withholdings from paychecks continued to Figure O.1 Oregon: 17th Nonfarm Job Growth by State March 2013 over March 2012 (Ranked by Percent Change) Bottom 10 Fourth 10 Middle 10 Second 10 Top 10 Source: Blue Chip Job Growth Update, W.P. Carey School of Business, Arizona State University trend upward through the end of the year and so far in 2013, albeit at slower rates than historical expansions. All told, Oregon s labor market continues to improve in early 2013, after slowing down during the second half of The most recent job growth rankings, published by Arizona State University s W.P. Carey School of Business, places Oregon 17 th in the nation for job growth. Between March 2012 and March 2013, jobs increased by 24,300, or 1.50 percent. Last March, Oregon ranked 43 rd. Washington s growth has been even stronger; measuring 1.87 percent of the past year. This ranks 12 th best among all states. The relative performance of the fifty states is shown in Figure O.1. North Dakota retained the 1 st ranked position with job growth of 4.27 percent, a ranking it also held a year ago. Elsewhere in the region, California s job gains ranked 6 th and Idaho s 4 th. Long-Term Unemployment The severity of the Great Recession has profoundly affected the labor market. Lasting impacts include both the increase in the number of individuals looking of work as well as an increase in their duration of unemployment. The number of long-term unemployed has skyrocketed in both Oregon and the nation overall. So far in recovery, the number of the long-term unemployed who have been out of work for 6 months or more has decreased, yet remains much larger than in recent decades. 24

26 Ensuring that individuals who have been out of work for an extended period of time remain a part of the labor force, and do not see their skills and productivity erode, is a challenge. Research by the U.S. Bureau of Labor Statistics 3 shows that in both good times and bad, the longer one is unemployed, the probability of successfully finding a job declines. Furthermore, the likelihood of dropping out of the labor force for the long-term Figure O.2 unemployed is larger than Finding a Job the likelihood of gaining Probability of Transitioning from Unemployment to Employment employment. Figure O.2 shows the probabilities of an 40% individual transitioning from 35% unemployment to employment, based on the duration of unemployment. The figure is based on national data provided by BLS. As seen in the differences between 2007 and 2012 transition probabilities, the depth and length of the Great Recession has reinforced and 30% 25% 20% 15% 10% 5% 0% < 5 Weeks 5-14 Weeks Weeks Weeks > 53 Weeks Unemployment Duration worsened these trends. In 2012, the overall probability of an unemployed individual fining a job was 18 percent. However, those unemployed for less than 15 weeks found work at an above average rate while those unemployed for longer struggled to find jobs. For each category of duration, the probability of transitioning into a job was lower than in 2007, reflecting both the slow improvements in the labor market in recent years and the larger population of unemployed individuals. A strong economy is needed to reintegrate these long-term unemployed back into a better functioning labor market. According to data from the Oregon Employment Department 4, in 2012 nearly 175,000 Oregonians were unemployed. Of these individuals, 35 percent, or over 61,000, were out of work for 6 months or longer with nearly 43,000 out of work for more than a year. These numbers are sizable improvements from 2010 when approximately 217,600 Oregonians were unemployed and the longterm numbered nearly 97,000, or 45 percent of the total. Even so, considerably more improvement, via a stronger economy, is needed before the number of unemployed in the state approach the prerecession levels seen in 2007 of 98,700 total unemployed Oregonians and just 12,100 long-term unemployed

27 Figure O.3 To the extent that the skills of displaced workers have become obsolete, permanent damage has been done to Oregon s growth potential. Encouragingly, there is a pattern to labor market improvements that suggests conditions may improve among the long-term unemployed. Following a recession, improvement is first seen among the short-term unemployed. Once the level of shortterm unemployment begins to approach its pre-recession level, then the improvement begins for the long-term unemployed. This pattern makes intuitive sense as well. During the early stages of recovery when businesses begin to hire, they are able to draw from a larger pool of potential candidates given the elevated unemployment rate. These businesses can be pickier and choose the best candidate given the overall lack of competing employment opportunities. As the labor market tightens, businesses have a smaller pool of candidates from which to choose and begin to hire workers that may have originally been further down the list. In the aftermath of the Great Recession, even with the ranks of the unemployed being much larger than following any recession in recent memory, this same general pattern of improvement appears to be happening. In Oregon, as the share of short-term unemployed passed 6 percent of the labor force, the number of long-term unemployed began to decline as well. This also occurred following the 2001 recession, however the severity of the Great Recession has made for a more prolonged recovery. Even so, today s short-term unemployed, as a share of the labor force, remains higher than in the previous expansion, likely reflecting an increase in the so-called natural rate of unemployment. National forecasters surveyed by the Federal Reserve Bank of Philadelphia 5 estimate that the natural rate of unemployment the unemployment rate when the economy is operating at full capacity has increased from 5 percent prior to the recession to 6 percent today. This increase reflects what many economists view as a structural, or permanent, change to the economy given the causes, consequences and severity of the Great Recession. Millions of workers lost their jobs and businesses did not invest in new facilities and equipment during the recession, with the result being a hit to the productive capacity of the economy. In terms of the outlook, the long-term unemployed represent both a potential upside risk and downside risk to the economy in both Oregon and the nation. On the downside, a diminished or