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Oregon sales, jobs likely to double-dip

October 22, 2010

Oregon sales, jobs likely to double-dip
By California Lutheran University,
CLU Center for Economic Research & Forecasting

Highlights:
- Oregon will likely avoid a double dip recession, barely.
- Retail sales and jobs will probably show a double-dip.
- Foreclosures will remain elevated, sales are likely to increase modestly and median home prices are expected to remain flat.

Three Essays Below
1.  Oregon Economic Forecast
2.  Economy Review
3.  Status of Real Estate

Oregon Forecast
Bill Watkins

Based on the growth of Oregon’s output, GDP, Oregon will likely avoid a double-dip recession, barely. All it really means that inflation adjusted output is climbing, but that climb is likely to be very slow. Oregon’s output peaked at about $162 billion (2005 dollars) in 2007’s fourth quarter. It then fell to $154 billion (2005 dollars) in 2009’s second quarter. Since then, it has recovered to $156.1 billion. Our forecast does not anticipate recovery to pre-recession levels within the forecast horizon, two years. Indeed, we do not forecast Oregon’s annualized growth rate to reach even 2 percent in the next four quarters, and we expect to see it become perilously close to zero in the next couple of quarters.

Other measures of Oregon’s economic vigor are worse.

Oregon’s total wage and salary income peaked at $68.7 billion in 2005 dollars. It then fell to $62.5 billion, and has since crawled back to $62.7 billion, all in 2005 dollars. We don’t expect to see it exceed $64 billion (2005 dollars) within the forecast horizon.

Retail sales and jobs will probably show a double-dip. In that each has been positive, jobs for one quarter and retail sales for three quarters, but each will very likely be negative soon. After a period of renewed decline, we expect to see each resume very slow growth.

Oregon home prices have been even weaker than we anticipated. Prices showed a precipitous decline after the expiration of tax credits for home purchases.

There is a significant downside risk to this forecast. Our United States forecast is based on the assumption that there will be no tax increases at the end of the year. At the time we made the assumption, it seemed a reasonable one, but politics are difficult to predict.

In any event, while a tax increase will have negative impacts, we don’t believe that it would cause a United States double-dip recession. We ran an alternative forecast with all Bush taxes allowed to expire using the results found in Christina and David Romer’s June AER paper. Most of the impact of a tax increase would be felt later, and the impact grows over time. What this means for the United States is a very long period of very slow economic growth. It could imply a double-dip recession for Oregon.

Oregon Economy
By Bill Watkins

What we are seeing is the initial stages of weak recovery, and it is going to be a long, slow, and difficult process. Data will likely be mixed for several quarters, with signs reversing from one observation to the next or different measures sending different signals.

Oregon, with its concentration in volatile industries, particularly building materials and its building bubble, and its close economic ties to California has suffered far worse than most states.

Oregon compounded its problems with the untimely tax increases of January. The state’s status as having (with Hawaii) the United States’ highest marginal income tax rates is used by economic development people throughout the county as they attempt to lure away Oregon’s employers.

Oregon’s economic weakness is starting to affect its population. We now see increasing numbers of counties with falling populations. This feedback will further Oregon’s recovery.

All is not gloom though. There are clear signs that Oregon will soon share in the recovery. Oregon’s unemployment rate is down from its peak. Job losses have been falling for several quarters. Indeed, we had one up quarter. Retail sales have shown some strengthening. Residential real estate market declines have slowed.

Oregon Real Estate
By Kirk Lesh

Residential Real Estate

Residential real estate continues to weigh on Oregon’s economy. Home prices are still declining although the rate of decline has slowed. The increase in home sales has been modest. The sales increases in Q4 2009 and Q2 2010 were due to government incentive programs. The fact that home sales declined after the incentives expired is evidence that the market remains weak.

The paradox of modestly increasing sales and continued price declines is the result of a changing sales composition. Normally when home sales increase so do home prices. Unfortunately, this is not the case at the moment. The composition of home sales has changed dramatically during the “Great Recession”. The significant number of foreclosures, tight lending standards, and concerns regarding the recovery has led to a larger percentage of cheaper homes being bought and sold. This shift to lower priced homes has pulled down the median price.

Foreclosures continue to plague the market. The foreclosure rate in Q2 2010 was tragically high at 3.3 percent. Several major banks are suspending foreclosure as they review internal procedures. It appears that banks may have mishandled the foreclosure process. To the extent that this is true foreclosures may actually decline in the near future. However, we are cautious. Foreclosures may increase if the current moratorium only delays the inevitable.

Residential markets remain weak. High unemployment, a weak economic recovery, tight lending standards, and the desire to pay down debt rather than accumulate more will likely restrain a recovery in the residential market. Thus, we expect foreclosures to at least remain elevated in 2011. Sales are likely to increase modestly and median homes prices are expected to remain flat.

Commercial Real Estate

Commercial real estate markets have not fared any better. Businesses remain cautious. Very little expansion is taking place. Instead, most companies are consolidating operations to reduce costs. This caused vacancy rates to increase dramatically in most markets.

A significant portion of present leasing activity is current tenants renegotiating lower rents or moving their operations to lower cost higher quality commercial space. This combination and a general lack of demand reduced lease rates for commercial properties throughout Oregon.

As lease rates have fallen so have prices. Uncertainties regarding the economic recovery have increased the risk of purchasing commercial real estate. As a result, commercial real estate buyers are in short

supply. Restrictive lending standards are not helping the situation. Numerous deals have collapsed due to a lack of financing.

New commercial construction has nearly ground to a halt. Weak demand for current space has all but eliminated the need for new space. Additionally, low lease rates reduce the return on investment for new construction making it harder for developers to justify new construction.

Commercial real estate markets in Oregon are likely to remain weak in 2011. The weak economic recovery is not generating enough business expansion. Government intervention has not fueled the economic growth that many politicians had hoped for. As a result, firms are likely to remain on the sidelines while the economy sputters along.

  
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