Oregon Forecast: Retail sales take lead, Housing drags

Oregon Forecast Highlights 2011 Q2
Dan Hamilton,
CLU Center for Economic Research & Forecasting

Oregon’s recent economic performance has exceeded my expectations. Much of the 2011 first quarter data is not final, but it appears that we have enough to understand that it was strong. It was atypically strong for any coastal economy in this anemic and jobless recovery. It was broad based, with more than 14,000 jobs gained in good-paying sectors like: professional and business management, durables manufacturing, information technology, and education and healthcare. There were over 12,000 jobs gained in a number of other sectors as well: non-durables manufacturing, retail trade, personal and maintenance services, and leisure and hospitality services.

Retail sales

Estimates of Oregon’s real retail sales also indicate surprising strength, registering 12.2 percent quarter-on-quarter annualized growth in 2010 quarter 4. We estimate that 2011 quarter 1 real retail sales were 3.2 percent.

Oregon’s recent income data (wages and salaries, and dividends, interest, and rent), indicate growth as well, but not with the same vigor shown in retail sales, jobs, and GDP. The 2010 quarter 4 wage and salary growth measure was 2.5 percent, followed by an estimated 2.9 percent in 2011 quarter 1.

Our initial 2011 quarter 1 real GDP estimates indicate 4.2 percent quarter-on-quarter annualized growth, up from 2.6 percent in 2010 quarter 4. Even with reasonable downward revisions this is relatively strong growth.

Real Estate weak

Real estate indicators are still weak with one possible exception, construction employment, which, amazingly, rose in 2011 quarter one. All other real estate indicators are weak, and one that I find especially worrisome is the measure of foreclosure proceedings started, which rose and was near an all-time high in 2010 quarter 4, the most recent data available.

The Forecast

Our forecast presumes that the 2011 quarter 1 strength in Oregon’s economy was transitory. Why are we comfortable with this? Indicators of real estate, banking, and the average household’s balance sheet still indicate weakness. Most firms are not expanding operations.

To us, these things are fundamental. To explain using national measures: with the long-term GDP average of a 65-percent consumption share, the current level of 71 percent combined with historically high household debt levels is not sustainable. At some point consumption shares must fall back closer to the long-term average.

Given that GDP, retail sales, and jobs were strong, this transitory strength could be viewed as a positive demand shock where companies responded with hiring. We will understand this much better once the first quarter 2011 data is final.

We forecast that Oregon’s economic growth falls in half from 4.2 to 2.1 percent in 2011 quarter 2, and remains at a rate that is typically about 30 basis points slower than national economic growth through 2012 quarter 4. This implies growth of 3.6 percent in 2012 quarter 4.

While Oregon’s forecasted economic growth is weaker than the U.S., our forecasts of both real GDP growth rates are substantially higher than our previous forecasts as a result of higher productivity forecasts at both the state and national levels.

Job growth is forecast to fall from four percent in quarter one to 0.3 percent in quarter two and then slowly, very slowly rise every quarter after that for 2 years. The unemployment rate continues to decline every quarter for the next 2 years, but at a very slow rate, reaching 9.2 percent by the end of 2012.

The housing market is forecast to continue in the same malaise that it has been for two years with flat sales, flat prices, and very high foreclosures. Residential and commercial building activities are also forecast to be flat for the next 2 years.

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