A look at Oregon’s latest economic forecast

According to the latest economic forecast, Oregon’s economy is steady. But at the same time, state economists say that job growth over the past few years has been at some of the state’s lowest levels in recent history. The forecast also found that there is a 50% chance for Oregonians to see another kicker in 2026.

Josh Lehner is interim state economist for Oregon. He joins us with more.

Note: The following transcript was created by a computer and edited by a volunteer.

Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Oregon’s economic outlook remains solid. That’s one of the headlines from the state’s latest revenue forecasts which came out last week. It found that there is now a 50/50 chance that Oregon taxpayers will get another kicker in two years. But of course, a downturn over the next year could change that. Josh Lehner is the interim state economist. He joins us once again. It’s good to have you back.

Josh Lehner: Thanks, Dave, great to be here.

Miller: I got that line, ‘The outlook remains solid,’ from your recent blog post. In a bigger sense, how would you describe Oregon’s current economy?

Lehner: There’s a couple things to keep in mind, right? Obviously, incomes are rising, wages are rising, employment is increasing. From a high level perspective, a lot of those major economic statistics that we look at look really good, from a historical perspective. That doesn’t mean there aren’t issues from disparities in some places that do have higher levels of unemployment and things like that. But I think the main thing today is inflation, right? Is that, yeah, our incomes are all up, our bank accounts are generally larger than they were a few years ago, but the cost of living has risen as well. And so maybe on that sort of inflation adjusted or cost of living adjusted basis, things aren’t quite as good as you would think, based upon, again, some of those top level statistics we tend to focus on the most.

Miller: I want to dig into some of the things that most stood out to me in your recent presentation and the report. You wrote that Oregon’s population, employment and income growth, they’re all in the middle of the pack nationally. But economic outcomes for individual Oregonians were noticeably stronger than the national average. Help me understand what seems like a paradox there.

Lehner: That’s right, and it’s a paradox also compared to most of Oregon’s history. One of the things, at least when we think about how does Oregon’s economy function and grow over time and certainly for the last 40 years, if not 80 years, is we’ve been a place that people want to live. And in nearly every year in reported history, more people have moved into the state than have moved out. And so we’re a national leader on things like population growth and employment gains and things like that. Like, top 10 in the nation. Not number one, but top 10 in the nation.

But we traditionally lagged on a few things. One, our unemployment rate tended to be a little bit higher historically than the average state, and our incomes tend to be a little bit lower on average than the typical state. And during really the last couple of years leading up to the pandemic, and since the pandemic, that dynamic has switched where we’ve had stagnant population ‒ either a significant slowdown in population growth, if we look at one set of estimates from Portland State University ‒ or actual outright population declines a little bit, if we look at the census bureau estimates.

So, we’re no longer a national leader in that top line growth in terms of people and jobs, but our average wage growth per worker ‒ employed Oregonian who at least still lives here ‒ has been much faster than the average worker elsewhere in the nation. And so that income growth per household or that income growth, wage gains per worker has outperformed much of the rest of the nation. And so again, those economic outcomes for Oregonians have really not been better in decades, if not generations. But at the same time, we’ve seen that big slowdown when it comes to the population numbers.

Miller: Why is it that we’ve had higher wage growth than other states?

Lehner: That’s something we were really starting to dig into before the pandemic. And the good news there is it was just fundamentally stronger across the board, across basically every industry and every region of the state was seeing strong wage gains. It wasn’t like, it was just, we saw, for lack of a better word, like a lot of high paying tech jobs being grown or generated in the economy which just pulls up everybody’s average.

Miller: That would have been my assumption.

Lehner: Right. And, and so that was one of the things we were trying to test. So like back in 2019, we were looking at that and again, it was every region and every, every industry by and large, which kind of just speaks to what the general economists would say is a tight labor market, right? It’s harder to find workers and that also kind of coincided with that slowdown in population growth those couple of years leading up to the pandemic.

Miller: Oh, in other words, if more people had been coming here, more domestic migration or international migration, that would have decreased the pressure for employers and it might have meant lower wage growth statewide.

Lehner: In the most basic sense of it, yeah, that could have been a possibility and something certainly we’re contemplating at the time. But the underlying job growth has been fine, has been good, and relative to our population, again, we’re seeing some of the strongest employment numbers as a share of the population that has a job that we’ve seen since the late 1990s right now.

Miller: So that’s one way to think about the economic vitality or health of the state. But, I mean, when we’ve talked in the past, you and others have said that a declining population is not necessarily a good thing, and doesn’t necessarily bode well for the state. I assume that’s still the case.

Lehner: Yeah, I would think so. And again, it’s generally you think about it framed in the terms of a decaying economy or an aging population with a decline in the tax base and that sort of stuff, right? Where you have to think about your ongoing infrastructure costs and your ongoing cost of operations and that sort of stuff. And it’s a lot harder to do when you have a declining economy or declining tax base relative to the growing pains, which are real. But it’s a lot easier to put in a new sewer system when you know you have housing production and system development charges to pay for it versus you have a 100 year old sewer system that’s failing, but there’s no new revenue coming into the system to replace it, that sort of thing.

Miller: Just looking at the national view and thinking about migration or immigration, you note that increased international immigration nationally has provided a kind of economic boost. Just yesterday, President Biden announced new asylum restrictions. Could that have an effect on the national economy as a whole?

Lehner: It could, and this is something that we’ve been trying to pay attention to this year. It is, for the listeners, there’s been this couple set of estimates where Census Bureau is estimating nationally the U.S. international immigration ‒ number of people moving into the U.S. versus number of people moving out ‒ it rebounded post pandemic. But it’s kind of like at its normal historical level.

But if you look at other estimates of border activity and international immigration, especially from the Department of Homeland Security and border apprehensions data, maybe some international remittances and things like that, it certainly seems like immigration and cross border activity is much, much stronger than maybe those census estimates are showing.

And so the Congressional Budget Office at the federal level released a U.S. population forecast or demographic outlook at the national level earlier this year that was much higher than anything else other people were publishing. And in the last, say three, four, five months, different forecasters have been coming around to the view that maybe international immigration is much stronger at the federal level than maybe those census estimates were showing. And they’re building that into their outlook for the U.S. economy.

So, the struggle we have is, well, we’ve seen a slow down in population growth in Oregon, and even if the U.S. is stronger, does that mean we’re going to necessarily raise the Oregon forecast, because something nationally is happening? And that’s a spot where we have to really work with our advisors and think through some of those implications in translating that into what the local impacts could be from a national change.

Miller: Josh, we were talking about Oregon wages earlier. But when you just look more broadly at the employment picture in Oregon and the unemployment picture, what stands out to you?

Lehner: It’s really getting back to sort of that difference between our top line job growth, if we look across states, it is relatively slow, right? We’re in the bottom 10 in terms of year over year job growth across all 50 states. We’re in the lowest 10 growth states in the country. But at the same time, the share of working age Oregonians ‒ generally defined as those between, say 25 years old and 54 years old, that’s the prime working age cohort is what demographers and economists call it ‒ we’re at a record high share of them that actually have a job. So that slowdown at the top line I think is really more about the population growth, whereas the economic outcomes, if you’re an Oregonian looking for a job today, is quite strong. Because again, the strong economy and the tight labor market is creating a lot of opportunities for you to find work out there.

Miller: One of the lines that stood out to me in your recent analysis of the forecast is that, over the last decade, you wrote, Oregon has increased its dependence on consumption based taxes. It stood out to me because, obviously, we don’t have a sales tax. So what are the taxes that are directly tied to our spending?

Lehner: Yeah, and this is something that we always try and highlight when we talk across states. [When] we talk with bond rating agencies when it comes to Oregon’s credit worthiness and that sort of stuff, is our revenue stream historically is so reliant on income taxes which are very volatile over the business cycle that that generates a lot of excess revenue and kickers during the good years and falls further in recessions and that sort of stuff. And so policymakers in the last decade or so have really diversified that revenue stream compared to what it was.

And so specifically, what have we seen? We’ve seen, the largest one would be the corporate activity tax, which is the gross receipts tax on businesses, which is somewhat in line with a sales tax, but it’s not exactly the same thing. And then we have increased, say, lodging taxes. We have recreational marijuana, which is consumption based. We have vehicle privilege taxes, things like that, that are all tied back to broader consumer spending. And in theory, will stabilize state revenues.

Miller: Is the lottery also considered a kind of consumption based tax?

Lehner: Absolutely. Lottery is, and there hasn’t been a lot of change with lottery products. Sports betting is new, but by and large, the video lottery in its current form has been around for almost 20 years at this point. But that is certainly consumption based.

Miller: You had assumed, you and other economists at the state had assumed, that these versions of sales taxes or taxes based on individual spending, that they’d go up because of the huge kicker. But you wrote that that didn’t happen. Why not?

Lehner: That’s a little bit of a puzzle. We had our most timely based  consumption based revenue that we have is the lottery, and we saw strong lottery sales in recent months, just not quite as strong as we thought. So I think there is some boost in there, but maybe just we over forecasted it. Or maybe the consumers, I think, could be dealing with that cost of living, where it’s like, yeah, I did get the large kicker this year but the cost of food or the cost of gas or the cost of daycare or the cost of housing or whatever it is also up in recent years.

So maybe even though generally an income tax refund is sort of a shot of disposable income all at once into your bank account, I’m going to spend it on necessities more than on discretionary spending this year, given the inflation in the last couple of years. I think that’s a working theory, but we don’t know for sure. And we don’t have data from all the other states to be able to sort of compare and contrast as of today. But we’ll look at it in the months ahead.

Miller: And you wouldn’t immediately be able to see, say, if people paid down credit card balances, right?

Lehner: That’s right. That’s another thing, where we lack local data in real time on some of those measures of household debt and things like that. We get it, but it comes out with a lag, but certainly a possibility for sure.

Miller: Speaking of this record-breaking recent kicker, the most recent forecast, as I noted at the beginning, it says that there is an even chance ‒ a 50/50 chance ‒ that once again Oregonians will get a kicker in 2026. What are the reasons that so far revenue has exceeded your projections?

Lehner: In its simplest form, two things going on. We refer to it as the personal kicker, right ‒ in the shortest form, personal kicker for Oregon ‒ but it’s really all of the revenue sources in the general fund that are not corporate taxes. So it’s personal income taxes, the bulk of that, but there’s things like estate taxes and interest earnings and liquor revenues and that sort of stuff are in there as well. And by and large, those are up.  The interest earnings in particular are up considerably, with high fund balances at the state and the high interest rates nationally in the economy that also generates interest income. And so that is up a lot more than it has ever been in our state’s history. So that is a contributing factor.

But on the income tax side of things, it’s really that the final payments that Oregonians made on April 15th, or during the filing season, outstripped expectations a little bit. We don’t have a full composition of that based upon our expectations because a lot of our highest income taxpayers, they file extensions and so they send their check in or their direct payment in on April 15th, but we don’t get their tax return until the fall when the extension deadline is. So we don’t have a full accounting of why we got a little bit more money than we expected. But hopefully this fall we’ll have a better idea of which taxpayers and which types of revenue, whether it’s capital gains or wages or business income or whatever the case may be. That’s what we’re waiting on to be able to dig into and figure that out.

Miller: It would be up to Oregonians to change this system. We’ve had conversations about the kicker in the past. We probably will again, but this is a system we have right now. This would be the sixth kicker in a row, if it kicks, if revenues come in over 2% higher than projections, it would be the sixth time in a row in 2026. How many kickers in a row would you need to see before you decided that your system of forecasting has to change?

Lehner: That’s a good question, and it’s something that’s an ongoing discussion. And it’s really, if we’re gonna talk about it from a forecasting perspective or statistical perspective, it’s sort of the serial autocorrelation where you’re making the forecast mistakes in the same direction time after time after time. That is the indicator that, as a forecaster, you start to be more concerned about and think about it and work on improving methodologies and things like that. So, six in a row would be a long period of economic expansion. And if you look back historically, it’s really the downturns that kind of break some of those cycles. So we haven’t had a real recession ‒ an economic recession ‒ in quite some time. And so that would be one contributing factor.

But we’ve also made a number of forecasting adjustments already in recent years, particularly regarding the changes in federal tax policy regarding corporations following the Tax Cuts and Jobs Act at the federal level that has clearly been a factor in raising the corporate revenues. And then also this inflationary economic environment we’ve been in in recent years, which generates much more income for people, even if they’re not getting ahead from a cost of living adjusted basis, their nominal incomes are up, tax revenues are up. Consumer spending is up as the cost of goods and services increases, and it’s really, that dynamic has also been something that five, six years ago, was not really on economists radar, but certainly is today given what we’ve lived through.

Miller: I mean, is it absurd to suggest that whatever system you have now ‒ and as you said, the system has been evolving ‒ but if you get it wrong in the same direction six times in a row, just add half a percent to whatever final number you get. I mean, that’s sort of a joke, but it’s also sort of not. I recognize that this is incredibly complicated and circumstances change and every two years you have to respond to all kinds of things. But at a certain point, Oregonians wonder if you keep making the same mistake in the same direction, what gives?

Lehner: That’s right. And so further study is required. If we’re going to be honest about it…

Miller: Please.

Lehner: If you look at things like our economic forecast, our economic forecasts have been more accurate than they have been at the national level in terms of jobs and economic income. Some, so some of the challenges have been translating that, just in terms of the taxpayer behavior aspect of it. It’s one thing to say, oh, here’s how many jobs there are. Here’s how much wages there are. That’s the thing we’re most accurate on and we’ve been doing that. It’s a better rate than the national accuracy would indicate.

And then it’s the other sort of things. The capital gains in particular, where that was the biggest sort of supercharging factor with the record kicker that was just paid out to Oregonians is capital gains in 2020 ‒ or 2021, excuse me ‒ increased 80% off of the record. We’re at a record level in 2020 then they supercharged an increase of 80% in 2021. That is something that is outside of any historical record, and so, therefore, generated a lot of increased revenue. And so there still would have been a kicker that biennium absent that, but it just would not have been the record size that it ended up being. So there’s things like that that are extremely challenging, if not impossible, to predict. But the things that we’re working on is that underlying baseline forecast, making sure that is the best thing we can put forward.

Miller:  Back to the next year or so, what are the most likely headwinds that would erase the current kicker and that would take Oregon backwards in terms of revenue?

Lehner: I would say, if we look at the current forecast right now and if it comes perfectly accurate for the second year of the biennium, that it would be a revenue forecast error of 2.5%. So if the kicker is at 2% and the forecast is currently saying 2.5% error above the closing session forecast that the legislature budgeted to originally, half a percent is something that can evaporate or double, essentially overnight, especially as we head into next tax season in March and April and May of next year. So, what to change the kicker’s outlook? It’s just a very small difference between our assumptions for what April 15th, 2025 looks like versus what actually shows up.

But fundamentally… that would not be a fundamental change. That would just be the April surprise, so to speak, of what comes in the door when we all file our taxes. Fundamentally, it’s going to be the underlying economy and whether this inflationary economic boom cools on its own and inflation slows and wage growth continues to slow. And so then that could have a longer run effect on revenues versus a hard landing where the Federal Reserve has to raise interest rates higher or hold them higher than they’re expecting. And that ultimately leads to a crash in the economy which would then send revenues down as well. Like those would be the larger concerns, or larger changes, to the revenue picture.

Miller: Josh, thanks very much.

Lehner: Thanks, Dave.

Miller: Josh Lehner is Oregon’s interim state economist.

Contact “Think Out Loud®”

If you’d like to comment on any of the topics in this show or suggest a topic of your own, please get in touch with us on Facebook, send an email to thinkoutloud@opb.org, or you can leave a voicemail for us at 503-293-1983. The call-in phone number during the noon hour is 888-665-5865.