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By Josh Lehner
Oregon Office of Economic Analysis Blog [6]
Full employment is finally within sight. It is not here yet, and the current economic expansion is far from perfect, but a long stretch of modest gains in recent years have cumulatively delivered significant progress across the economic spectrum. The number of actual jobs and job openings posted by businesses have never been higher. Combining this with an unemployment rate that is back to normal, at least on paper, indicates that workers are finally becoming a bit scarce. The result is businesses must now compete on price (wages) to attract and retain the best employees. Finally, after years of lackluster wage gains nationally, average hourly earnings for all workers are now increasing faster than inflation. More income for U.S. households will not only feel good but should allow for continued improvement in household finances.
Oregon’s economy continues to make significant gains. Job growth has slowed just a bit from early 2015 rates, yet remains more than strong enough to bring the unemployment rate down and account for the influx of new workers as population growth picks up. More importantly, Oregon’s stronger-than-the-nation’s wage gains have continued through the fall. Overall, the state has regained and retained its traditional economic advantage in expansion relative to the nation. Job growth over the past year in Oregon is more than one percentage point faster than in the typical state. This advantage is primarily due to the state’s industrial structure and migration trends, both of which remain strong today.
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Unfortunately, there are always risks to the outlook and warts to the expansion. The significant deterioration in manufacturing, driven by weak global demand, a stronger U.S. dollar and the pull-back of investment related to oil and gas, has eliminated one pillar of growth. Even with the sizable gains in the labor market, there remains large levels of underemployment and a wide disparity between urban and rural economies. Ongoing growth will help, but so far has failed to close these gaps. Even so, most economists and forecasters are relatively bullish about the near term, with many expecting the economy to reach full employment in 2016.
Oregon’s General Fund revenues are growing strongly. Over the first four months of the 2015-17 biennium, personal income taxes, lottery sales and corporate taxes all grew at double-digit rates relative to last year. Although much of this growth was expected, gains in corporate taxes and lottery funds outstripped what was called for in the September forecast, leading to an upward revision to the outlook. Total available resources – combined General Fund and Lottery – are now expected to be $56 million larger over the current biennium than what was expected when budgets were drafted.
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The revenue outlook is stable, yet uncertain. Volatility in equity markets is injecting a great deal of risk into the forecast. Oregon’s budget depends heavily on personal income tax collections tied to realizations of capital gains. These collections are extremely volatile, with revenues subject to the sometimes unpredictable behavior of investors. Many analysts believe equity markets will take a step backward soon after monetary policymakers begin to raise interest rates this winter. A 10% drop in stock prices will typically lead to a decline of twice that rate or more in the amount of net capital gains reported on tax returns. This negative impact on personal income tax collections is often delayed for several months after investors pull their assets out of equity markets. During a sell-off, the volume of trades increases, and paper gains from past years become subject to tax. Afterward, taxable capital gains face considerable downward pressure, with paper earnings from past years having been tapped, and with losses being carried forward into future tax years.
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.
See our full website [9] for all the forecast details. Our presentation slides for forecast release to the Legislature are below.