oregon office of economic analysis: forecast released on august 26, 2011

8/4/2019 Oregon Office of Economic Analysis: Forecast released on August 26, 2011

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Oregon Economic and

Revenue Forecast

September 2011Volume XXXI, No. 3

Michael Jordan John A. Kitzhaber, MD Prepared By:

Chief Operating Officer Governor Office of Economic Analysis

DAS Director Department of Administrative Services


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Department of Administrative Services

Michael JordanDAS Director

Chief Operating Officer

Office of Economic Analysis

Mark McMullen, Acting State EconomistKanhaiya Vaidya, Senior Demographer

Damon Bell, Senior AnalystJosh Lehner, Economist

Susan Daniels, Administrative Specialist

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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 andprivate organizations for use in their decision making processes. The Oregon revenue forecast ispublished to open the revenue forecasting process to public review. It is the basis for much of thebudgeting 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 AdministrativeServices Economic Advisory Committee and by the Governor's Council of Economic Advisors.The Department of Administrative Services Economic Advisory Committee consists of 15economists 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 EconomicAdvisors provide a two-way flow of information. The Department of Administrative Servicesmakes preliminary forecasts and receives feedback on the reasonableness of such forecasts andassumptions employed. After the discussion of the preliminary forecast, the Department ofAdministrative Services makes a final forecast using the suggestions and comments made by thetwo reviewing committees.

The results from the economic model are in turn used to provide a preliminary forecast for statetax 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 inaccounting, financial planning, and economics. Members bring specific specialties in tax issuesand represent private practices, accounting firms, corporations, government (Oregon Departmentof Revenue and Legislative Revenue Office), and the Governors Council of Economic Advisors.After discussion of the preliminary revenue forecast, the Department of Administrative Servicesmakes the final revenue forecast using the suggestions and comments made by the reviewingcommittee.

Readers who have questions or wish to submit suggestions may contact the Office of EconomicAnalysis by telephone at 503-378-3405.

Michael JordanDAS DirectorChief Operating Officer


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Table of Contents

EXECUTIVE SUMMARY .......................................................................................................... 7

I. ECONOMIC FORECAST ............................................................................................. 15

A. National Economic Review and Forecast ......................................................................... 15

B. International Review and Outlook .................................................................................... 21

C. Western Region ................................................................................................................. 29

D. Oregon Economic Review and Forecast ........................................................................... 35

II. REVENUE FORECAST ................................................................................................ 67

A. 2011-13 General Fund Revenues ...................................................................................... 67

B. Extended General Fund Revenue Outlook ....................................................................... 69

C. Tax Law Assumptions ...................................................................................................... 69

D. Forecast Risks ................................................................................................................... 70

E. Lottery Earnings Forecast ................................................................................................. 71

F. Overview of Budgetary Reserves ..................................................................................... 72

G. September 2011 Forecast Addendum Close of Session Forecast .................................. 74

APPENDIX A: ECONOMIC FORECAST DETAIL ............................................................ 77

APPENDIX B: REVENUE FORECAST DETAIL ............................................................. 103

APPENDIX C: POPULATION FORECASTS BY AGE AND SEX .................................. 117


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EXECUTIVE SUMMARY

September 2011

Oregon Economic Forecast

After a very strong start to 2011, the second quarter job growth came in at a very slow pace.Preliminary estimates place the second quarter growth at 0.7 percent. At least this is the thirdconsecutive quarter of positive job growth, the longest continuous stretch since the secondquarter of 2007. On a year-over-year (Y/Y) basis, job growth is up 1.4 percent.

While the total estimated job growth for the second quarter is disappointing, the private sectorhas been improving. After a rocky start in the first quarter of 2010, the private sector has addedjobs every quarter. More sectors had job gains relative to job losses. Notable job increases arereported in manufacturing, retail trade, health services, and leisure and hospitality. Some of thesectors with relatively higher job losses are wood products, food processing, transportation,

warehousing, and utilities, educational services, and other services. Budget shortfalls havecaught up with the public sector, with declines in all three government levels, notable localgovernment and in particular local education.

The headwinds facing the U.S. economy did not appear to be present in the first quarter inOregon, but the second quarter is feeling the effects. Higher gasoline and other commodityprices are squeezing household budgets. The slowing impacts around the country have come toOregon, but the private sector is still producing more jobs, albeit at a relatively slow pace. Thereal story of the slow growth in the second quarter is the government sector. Comprising around18 percent of total employment in Oregon, job losses in this sector will have a damping impacton the economy moving forward.

At this juncture in the business cycle, using the past two expansions as a guide, the Oregoneconomy typically adds around 3,400 jobs per month. Over the past twelve months, Oregon hasadded 2,100 jobs per month. There are two main drags on economic growth currently: thecontinued delayed improvement in the housing market and the public sector pullback. These twoissues more than account for the discrepancy between the typical expansion employment gainsand the ones we are seeing today. Housing related industries (construction, home and gardensupply stores, mortgage loan brokers and real estate employment) normally add 575 jobs eachmonth; however over the past year they have added, on average, only 50 jobs per month.Similarly the public sector typically adds 350 jobs per month, however over the past year,excluding the temporary Census workers; the public sector has averaged cuts of 475 jobs permonth. This net swing of over 1,300 jobs per month between the past two expansions and todayresults in the difference in the total nonfarm employment figures.

The U.S. economy got through the soft patch in 2010 only to hit the headwinds of 2011. Thefirst half growth of real GDP in 2011 is only 0.8 percent. Personal income growth in June wasonly 0.1 percent and consumer spending fell 0.2 percent, the first decline since September 2009.The ISM Manufacturing Index fell to 50.9, slightly above its expansionary measure of 50.0 and


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the fourth monthly decline in the past 5 months. All of this bodes poorly for a second halfrebound for the U.S. economy.

Some of the headwinds in the first half of this year may not be with us in the second half. TheJapan natural disaster should not be squeezing supply chains as the year progresses. The

European debt situation is still unclear with worries arising with Italy and Spain. Highcommodity prices are starting to retreat which should help out household budgets.

One piece of good news for the U.S. economy was the July employment report. Unemploymentcame down a notch to 9.1 percent and jobs increased by 117,000. But this report brings toforefront another headwind that has not gotten the attention it deserves. While the private sectoradded 154,000 jobs in July, the government sector shed 37,000 jobs. The Minnesota stategovernment shutdown is likely responsible for about 30,000 jobs in this number and istemporary. Still, if we take out the entire Minnesota job losses for July, job losses still total over518,000 since the summer of 2009, a decline of 2.3 percent. The bulk of these job losses are atthe state and local levels. The Center for Budget and Policy Priorities notes that the budget cuts

go beyond the layoffs with 44 states and the District of Columbia engaged in cost savingmeasures from furlough days, lower worker benefits, cancelling of contracts with vendors,reducing payments to businesses and nonprofits, and tax increases. All of these measures to somedegree slow down near term economic activity.

Oregon is similar impacted by the need to balance budgets. State and local governments receivedfederal stimulus funds during the recession and used budget reserves to avoid deeper cuts duringthe recession. Now that these funds are no longer available and tax revenues have not recoveredto meet expenditures, budget tightening is leading to worker layoffs and other spending cuts.Since the summer of 2009, the June 2011 total government employment in Oregon is down 2.2percent, or around 6,600 less jobs. Although we do not believe this drop in jobs is enough to stopthe present recovery, with other headwinds impacting the state, the public sector pull back isstill an additional dampening impact on the economy. For a thorough look at the Oregon publicsector employment picture,see our blog and associated listings by clicking here.

http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/

Although the second quarter of 2011 reported weak but positive job growth, we are notforecasting a recession for the Oregon economy. Risks of a downturn are heightened and we willbe watching indicators for any further signs of weakening. OEA (Office of Economic Analysis)forecasts an increase of 0.5 percent in the third quarter of 2011 for total employment and 1.8percent in the fourth quarter. Job gains continue to improve moving to nearly 2.0 percent in2012. For the year average in 2011, total employment is projected to increase 1.7 percent and

rise to 1.95 percent in 2012.

Population growth will be slowly picked up along with the economic recovery. Populationgrowth is forecasted to be 0.7 percent in 2011, 0.8 percent in 2012, and 1.0 percent in 2013.
http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/http://oregoneconomicanalysis.wordpress.com/2011/07/20/more-on-public-sector-employment/


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payments to counties will be this October. While this temporary reinstatement helps cover shortterm budgets for Oregon counties, finding or replacing this dwindling revenue source will beimperative as any loss of public services could have adverse impacts on economic activity.

Global Spillovers Both Up and Down. The international list of risks seems to change by the day:

sovereign debt problems in Europe, equity and property bubbles in places like South America andAsia, political unrest in the Middle East, and commodity price spikes and inflationary pressures inemerging markets. The natural disaster in Japan has caused slight supply chain disruptions toOregon firms but the coming reconstruction phase may bring new business. Also internationallywe have economies recovering, incomes rising, and demand for U.S. and Oregon exports arerising. Whether the downside risks will dissipate and the recoveries take hold will influence thedirection of strength of U.S. and Oregon economic recoveries. With China now the top destinationfor Oregon exports, the state of the Chinese economy has spillover effects to the Oregon economy.

State and Local Governments. The Center on Budget and Policy Priorities finds that 44 states andthe District of Columbia are projecting budget shortfalls totaling $125 billion for fiscal year 2012

which generally starts this summer. Local government budget shortfalls add to this total. Oregon isamong the states facing a budget shortfall. Given that further tax increases are unlikely in Oregon,balancing budgets will mainly be through spending cuts. In a mixed private-public economy, thiswill be a drag on the economic recovery. The question is whether the building strength of theprivate sector will be enough to continue the recovery through the state and local governmentbudget crises.

Undoing the Federal Policy Used to Combat the Financial Crisis and Recession . Bailouts, taxcuts, monetary quantitative easing, and other fiscal packages most likely prevented a more seriouseconomic downturn. But the clean-up after the storm can have its own risks to the economy. Exitstrategies will have to be carefully implemented to prevent premature tightening and choking offthe recovery or acting too late to avoid an inflationary environment. All states, including Oregon,face the same risks.

Initiatives, referendums, and referrals. Generally, the ballot box brings a number of unknowns thatcould have sweeping impacts on the Oregon economy.

Demographic Forecast

Oregons population count on April 1, 2010 was 3,831,074. Oregon gained 409,550 personsbetween the years 2000 and 2010. The population growth between 2000 and 2010 censes was12.0 percent, down from 20.4 percent growth between 1990 and 2000 censuses. Oregonsrankings in terms of decennial growth rate dropped from 11

thbetween 1990-2000 to 18

thbetween

2000-2010. Slow population growth during the most recent decade due to double recessionsprobably cost Oregon one additional seat in the U.S. House of Representatives. Actually,Oregons decennial population growth rate during the most recent decade was the second lowestsince 1900. The slowest was during the 1980 when Oregon was hit hard by another recession. Asa result of recent economic downturn and sluggish recovery, Oregons population is expected tocontinue a slow pace of growth in the near future. Based on the current forecast, Oregonspopulation will reach 4.28 million in the year 2020 with an annual rate of growth of 1.1 percentbetween 2010 and 2020.


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Oregons economic condition heavily influences the states population growth. Its economydetermines the ability to retain local work force as well as attract job seekers from national andinternational labor market. As Oregons total fertility rate remains below the replacement leveland 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 good economic andemployment situations. During the 1980s, that included a major recession and a net loss ofpopulation, net migration contributed to 22 percent of the population change. On the otherextreme, net migration accounted for 73 percent of the population change during the boomingeconomy of 1990s. This share of migration to population change declined to 56 percent in 2002and it was further down to 34 percent in 2010. As a sign of slow to modest economic gain, theratio of net migration-to-population change will increase gradually and will reach 67 percent bythe end of the forecast horizon. Although economy and employment situation in Oregon lookstagnant at this time, migration situation is not expected to replicate the early 1980s pattern.Potential Oregon out-migrants have no better place to go since other states are also in the sameboat in terms of economy and employment.

Age structure and its change affect employment, state revenue, and expenditure. Growth in manyage groups will show the effects of the baby-boom and their echo generations during the periodof 2010-2020. It will also reflect demographics impacted by the depression era birth cohortcombined with diminished migration of the working age population and elderly retirees. After aperiod of slow, and even negative, growth during the 1990s and the first half of the last decade,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 elderlypopulation will be 3.9 percent during the forecast period as the boomers continue to enterretirement age. However, the youngest elderly (aged 65-74) will grow at an extremely fast paceduring the forecast period, averaging 4.8 percent annual rate of growth due to the direct impactof the baby-boom generation entering retirement age. Reversing several years of shrinkingpopulation, the elderly aged 75-84 will start a positive growth as the effect of depression erabirth-cohort will dissipate. The oldest elderly (aged 85+) will continue to grow at a moderatelybut steady rate due to the combination of cohort change, continued positive net migration, andimproving longevity. However, the annual growth rate will continue to taper off as thedepression era small birth cohort transitions from the younger age group.

As the baby-boom generation matures out of oldest working-age cohort combined with slowingnet migration, the once fast-paced growth of population aged 45-64 will gradually taper off tobelow zero percent rate by 2012 and will remain at slow or below zero growth phase for severalyears. The young adult population (aged 18-24) will change only a little and remain virtuallyunchanged for most of the years into the future. Although the slow or stagnant growth of college-age population (age 18-24), in general, tend to ease the pressure on public spending on highereducation, college enrollment typically goes up during the time of high unemployment andscarcity of well paying jobs when even the older people flock back to college to better positionthemselves in a tough job market. The growth rate for children under the age of five will remainbelow zero percent in the near future and will see positive growth only after 2013. Although thenumber of children under the age of five will decline slightly in the near future, the demand forchild care services and pre-Kindergarten program will be additionally determined by the labor


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force participation of the parents. The growth in K-12 population (aged 5-17) will remain lowwhich will translate into slow growth in school enrollments. This school-age population hasactually declined in size in recent years and will grow in the future at well below the stateaverage. The 25-44 age group population has reversed several years of declining trend during theearly part of the last decade and before. 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 by1.2 percent annual average rate during the forecast horizon. Overall, elderly population over age65 will increase rapidly whereas population groups under age 65 will experience slow growth inthe coming decade.

Revenue Forecast

The outlook for revenue growth in Oregon is threatened by the uncertainty surrounding thenascent recovery in the regional job market. Given how fragile consumer and businessconfidence have become, downside risks to the forecast have clearly intensified in recent weeks.

Through a lack of confidence, the troubles in Europe, Washington D.C., and on Wall Street maywell infect the local economy going forward. That said, all of Oregons core measures ofeconomic activity (private employment, earnings and tax collections) are still expanding--albeitat disappointing rates. In particular, until we see private employers cutting jobs, it is difficult toargue that Oregons economic expansion has ended.

Although the turmoil in financial markets is not expected to derail Oregons economic recovery,it will nevertheless create additional headwinds for growth. Most notably, wealth losses sufferedin stock markets can be expected to put downward pressure on household spending, and willresult in fewer tax collections tied to realizations of capital gains.

Despite these challenges, the baseline (most likely) forecast has not been revised downwarddrastically at this time. However, the risks to the outlook are clearly skewed to the downside.There is around a one in three chance that the U.S. economy will slip back into recession, whichwould certainly drag Oregons regional economy down with it. In such a scenario, the forecastfor tax revenues would fall drastically.

After the smoke clears, revenue growth in Oregon and other states will face considerabledownward pressure over the 10-year extended forecast horizon. As the baby boom populationcohort works less and spends less, traditional state tax instruments such as personal income taxesand general sales taxes will become less effective, and revenue growth will fail to match the paceseen during recent periods of economic expansion.

2011-13 General Fund Revenues

Led by personal income tax collections, general fund revenues are posting large gains enteringthe 2011-13 biennium. Temporary factors will help support healthy growth in personal incometax collections in the near term, but growth in collections will lose a steam in the second half ofthe biennium. Corporate tax collections are now falling rapidly, with the boom in underlyingcorporate profits having come to an end.


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Due in roughly equal parts to losses to labor earnings and to investment forms of income, theoutlook for the 2011-13 biennium is somewhat weaker than what was predicted in the May 2011forecast. The forecast for General Fund revenues for 2011-13 is now $13,816 million. Thisrepresents a decrease of $62.0 million (-0.4%) from the May 2011 forecast. Excluding policychanges and fund transfers, general fund revenues are expected to be $192.6 million (-1.4%)

lower than in May.

Table R.1

(Millions)

2011 COS

Forecast

May 2011

Forecast

Sept ember 2011

Forecast

Change from

Prior Forecast

Change from

COS Forecast

Stru ctural Revenues

Personal Income Tax $12,193.6 $12,202.1 $12,035.1 -$167.0 -$158.4

Corporate Income Tax $894.2 $863.3 $875.5 $12.2 -$18.7

All Other Revenues $944.2 $836.0 $928.8 $92.8 -$15.4

Gross GF Revenues $14,032.0 $13,901.4 $13,839.4 -$62.0 -$192.6

Administrative Actions1 -$23.1 -$23.1 -$23.1 $0.0 $0.0

Legislative Actions $0.0 $0.0 $0.0 $0.0 $0.0

Net Available Resources $14,008.9 $13,878.3 $13,816.3 -$62.0 -$192.6

Confidence Intervals

67% Confid ence +/- 9.4% $1,298.8

95% Confid ence +/- 18.8% $2,597.6

1 Reflects cost of cashflow management actions, exclusive of internal borrowing.

2011-13 General Fund Forecast Summary

$12.54B to $15.14B

$11.24B to $16.44B


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Extended General Fund Revenue Outlook

General Fund revenues will total $15,932 million in 2013-15, an increase of 15.1% percent fromthe prior period, and $206 million (1.3%) below the May forecast. In 2015-17, revenue growthwill moderate to 11.6%, followed by 12.0% growth in 2017-19 and slower rates of around 10%to in subsequent biennia. The slowdown in long-run revenue growth is largely due to the impactof demographic changes. Revenues in 2015-17 and beyond are expected to be smaller than in theMay forecast, largely due to the downgraded outlook for job growth. Table B.2 in Appendixpresents a more detailed look at the long-term General Fund revenue forecast.

Table R.2

General Fund Revenue Forecast Summary (Millions of Dollars, Current Law)

Forecast Forecast Forecast Forecast Forecast Forecast2009-11 % 2011-13 % 2013-15 % 2015-17 % 2017-19 % 2019-21 %

Revenue Source Biennium Chg Biennium Chg Biennium Chg Biennium Chg Biennium Chg Biennium Chg

Personal Income Taxes 10,467.2 3.7% 12,035.1 15.0% 13,881.0 15.3% 15,692.8 13.1% 17,353.3 10.6% 19,247.5 10.9%

Corporate Income Taxes 827.6 20.9% 875.5 5.8% 1,131.8 29.3% 1,112.3 -1.7% 1,126.6 1.3% 1,206.7 7.1%

All Others 1,226.9 29.3% 928.8 -24.3% 919.6 -1.0% 971.2 5.6% 1,021.9 5.2% 1,102.2 7.9%

Total General Fund 12,521.7 6.8% 13,839.4 10.5% 15,932.4 15.1% 17,776.3 11.6% 19,501.8 9.7% 21,556.4 10.5%

Kicker Distributions - - - - - -

Total Revenue 12,521.7 -2.2% 13,839.4 10.5% 15,932.4 15.1% 17,776.3 11.6% 19,501.8 9.7% 21,556.4 10.5%

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


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I. ECONOMIC FORECAST

September 2011

This edition of the National Economic Review and Forecast contains excerpts from Nigel Gault,

U.S. Economy: Current Situation: Forecast Flash, IHS Global Insight, July 2011. Thispublication summarizes Global Insights baseline national forecast that OEA incorporates intothe Oregon economic and revenue models. OEA summarizes the Forecast Flash and is ourinterpretation of this document. Any errors or misrepresentations are attributable to OEA and notIHS Global Insight. In addition, Table N.1 provides a quick look at the annual rates. Table N.2provides a look at the forecast change from the last forecast. Graph N.1 provides a graphic U.S.history and forecast.

A. National Economic Review and Forecast

Forecast Flash

A Positive Signal at Last More Needed.

With mostly soft data signals coming in, one bright spot was the uptick in the June national ISMmanufacturing survey. The June ISM report also showed a noticeable decline in the prices index,indicating some relieve from rising costs. The first half of the year suffered from risingcommodity costs, supply-chain disruptions from Japans natural disaster and severe weatherconditions domestically. The June ISM improvement is consistent with IHS Global Insightsview of better growth in the second half of this year, though more positive signals are needed tomake this case. (The national June employment report came out after the publication of the JulyForecast Flash. The rather dismal employment numbers are not helping to make the case for astronger second half.) Calendar year forecasts for GDP are 2.5 percent for 2011 and 2.6 percentfor 2012.

Second Quarter Little Different from the First. Second quarter GDP growth expected at 1.9percent, same as the first quarter. (Advance estimate of second quarter GDP growth is 1.3percent. Revised estimate of first quarter GDP growth is 0.4 percent OEA.) Initial Consumerspending will slow in the second quarter to 0.6 percent compared to 2.2 percent in the firstquarter. This slowing is caused by drops in light-vehicle sales due to the Japan natural disasterand higher gasoline prices impacting household budgets. Other components of GDP are expectedto improve in the second quarter. Construction should rise due to better weather and defensespending is expected to come back from an unusual drop in the first quarter.

The Second Half Remains the Big Question Mark. IHS Global Insight projects better growthin the second half of 3.2 percent compared to the 1.9 percent growth in the first half. Thisstronger second half is dependent on a number of factors: production of vehicles returns to amore normal state, temporary acceleration of business equipment spending to take advantage ofgenerous depreciation allowances this year, and continued improvement on gas prices movingdown to $3.40 per gallon by the fourth quarter.


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Oil Reserves Release Helps Only Temporarily. The 60 million barrels of oil released from thestrategic reserves (30 million barrels in the United States) had a temporary impact on loweringoil prices, but this amount of oil only represents less than one days global consumption. IHSGlobal Insight has dropped their projection for West Texas Intermediate (WTI) price of oil from$104 to $94 for the third quarter. Going forward the price of oil is little changed with prices

averaging $104 per barrel in 2012.

The Risk of a Self-Inflecting Wound: The Debt Ceiling. The need to raise the debt ceiling bythe drop-dead day, August 2, remains a potentially disruptive wild card. An agreement onsubstantial spending cuts appears within reach but the stumbling block is whether Republicanswill accept some revenue increase to accompany the spending cuts. If negotiators aredeadlocked, a short-term fix raising the ceiling just for a few months would be better than risingthe consequences of hitting the ceiling. (As of July 22, negotiations are still underway.)

QE II Has Ended; No QE III. The Federal Reserve states it has no plans to implement a QE IIIprogram of quantitative easing. Slow growth in the economy suggests no plans to raise interest

rates in the near term. IHS Global Insight delays their assumption about a Fed interest rate hikefrom March 2012 to September 2012, with the possibility that the Fed may not raise rates until2013. (Note that since the release of the July forecast, the U.S. Federal Reserve has made apublic statement that it given the current state of the economy and expectations moving forward,it will not raise rates for two years, or until mid-2013.)


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Graph N.1U.S. Economic History and Forecast

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0

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1998

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2012

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2018

2020

PercentChange

Real GDP, Percent Change2005 Dollars, Chain Weighted

0

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5

67

8

9

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1996

1998

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Percent

Unemployment Rate

50%

75%

100%

125%

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2020

Real Exchange Rate

0

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1996Q1

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2016Q1

2018Q1

2020Q1

Percent

Interest Rates

Prime 3M Treasury 10 Yr Treasury

0.0

0.5

1.0

1.5

2.0

2.5

1996Q1

1998Q1

2000Q1

2002Q1

2004Q1

2006Q1

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2018Q1

2020Q1

Millions

Housing Starts

Total Single Family Multi-Family

-2

-1

0

1

2

3

4

5

6

1996Q1

1998Q1

2000Q1

2002Q1

2004Q1

2006Q1

2008Q1

2010Q1

2012Q1

2014Q1

2016Q1

2018Q1

2020Q1Y

ear-Over-YearPercentCh

nage

Consumer Price IndexAll Ite ms Excluding Food & Ene rgy

0.5

0.6

0.7

0.8

0.9

1.0

1.1

-4

-2

0

2

4

6

8

1996Q1

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2004Q1

2006Q1

2008Q1

2010Q1

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2018Q1

2020Q1

PercentChnage

Consumer Confidence & SpendingReal Consumer Spending (Left Axis)

Consumer Sentiment (Univ of Mich, Right Axis)

0

500

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1,500

2,000

2,500

1996Q1

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2000Q1

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2018Q1

2020Q1

Standard and Poor's 500 Index


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B. International Review and Outlook

This edition of the International Review and Outlook contains information written by AdrienneMack, Research Analyst with the Federal Reserve Bank of Dallas. The following section wasoriginally published as the International Economic Update, dated August 10, 2011, and is

reprinted here in accordance with the Banks disclaimer and privacy policy.

Growth Stalls as Economies Adjust

Following the moderation in the first quarter of 2011, global growth is expected to continuedecelerating throughout the year. Both advanced and emerging economies are seeing economicperformance slow.

Mounting government debt is the main contributor to the diminished outlook for the advancedeconomies, especially in the euro area. The emerging economies continue to fight inflation, withhigh food prices producing additional price pressures. Monetary authorities have adopted

contractionary policies in an attempt to control rising inflation, and these policies have facilitatedweaker economic activity.

Evident in this recent economic slowdown is how interconnected economies have become. Anoptimal strategy for promoting global growth requires the stabilization of both advanced andemerging economies.

Uncertainty Rises with Sovereign Debt Debates

Advanced economies are suffering from high public debt levels. Austerity measures arenecessary, but the structures for new budget plans are under much debate. Market uncertainty has

heightened as the effectiveness of current and future plans are called into question. Stockmarkets in the U.S. and euro area have declined substantially as investors seek safer asset optionsamid falling growth potential.

Switzerland has become an attractive destination for investors. Exchange rates show investorsprefer to hold Swiss francs over the U.S. dollar and the euro. Switzerland serves as a beacon ofhope for debt-laden countries; after struggling with high sovereign debt in the 1990s, the nationadopted strict austerity measures to promote a balanced budget, contributing to its stableeconomy.

Europe Placed in the Spotlight

Sovereign debt issues in the European periphery pose the greatest risk because of the possibilityof contagion with other euro-area economies. On July 21, European leaders agreed to extendfinancial relief measures: Previous loan conditions were eased, and Greece was granted anadditional bailout package. Despite this aid, the markets are still cautious. Subsequentmovements in 10-year bond-yield spreads suggest uncertainty remains due to fears of a possibledefault by Spain or Italy.

These spreads show differences in bond yields when compared with the German equivalent,which is viewed as a safe investment. A rising spread is indicative of a risky asset. Spreads for


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Spain and Italy hit record highs. In two weeks, beginning on July 25, spreads rose 19 percent forSpain and 32 percent for Italy. Though Spain and Italy are not at risk for immediate default,some doubt the ability of the European Financial Stability Facility (EFSF) to supply adequatefunds on a longer-term basis. The debt obligations for those countries in more immediate risk ofdefault surpass the lending capacity of the EFSF. If Italy or Spain were to default as well, the

funds would not be available to assuage the situation.

Debt Affects European Economy

The sovereign debt crisis is having a negative impact on the euro area's economic performance.The Purchasing Managers Index (PMI) for the euro area indicates both the manufacturing andservice sector are dangerously close to contraction levels. PMIs closely follow the economicperformance for the overall economy. Thus, gross domestic product (GDP) growth is expected todecline in the second quarter of 2011. The downward trend of the PMIs suggests a furtherdecrease in GDP growth.

Germany has been a growth leader in the euro area, but the underperformance of othereconomies has caused a drop in German exports. Exports are a major contributor to GermanGDP growth; on average, 42 percent of Germany's exports go to the euro area. As GDP growthslows in the euro area, so will Germany's exports. German exports fell 2.6 percent from March toApril. The deceleration of emerging economies has also affected the German export sector.

Emerging Economies Slow Amid Inflation Battles

Emerging economies continue to face inflationary pressures due to high capital inflows. Risingfood prices have added to these pressures. Changes in the consumer price index (CPI) are used tomeasure inflation. The CPI tracks prices for a select bundle of goods, which is determined by theconsumption habits of an economy. The CPI composition for emerging economies is heavilyweighted in food. Thus, high food prices have a disproportionate effect on inflation in theemerging economies. For example, food and beverages comprise 31 percent of the CPI in Braziland 48 percent in India, compared with 15 percent in the U.S.

Monetary authorities are vigilantly raising policy rates to combat rising inflation. Since thebeginning of 2011, Brazil has increased its policy rate five times, with the latest increaseoccurring in July. China also increased rates in July, the third time this year. India raised rates inJune, its fourth increase this year.

The latest PMI data for the manufacturing sectors in Brazil and China indicate these tighteningmeasures have successfully slowed down their economies. China's PMI dropped to 50.7 in July.Brazil's PMI reached contractionary levels in June and dropped even further in July to 47.9. Asthese economies begin to slow, their inflation rates should fall. This will help moderate capitalinflows.

Momentum Expected to Rebound in 2012

The recent economic slowdown highlights the growing effects of globalization. Countries thatwere regional growth leaders are starting to be affected by the poor performance of othereconomies through the export sector. High inflation in emerging economies has prompted policy


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IHS Global Insights July 2011 global forecast discusses highlights from the world economy andregional issues as well. Just as the U.S. economy has encountered a soft patch of growth in early2011, the global economy has too, however a return to recession in unlikely even if theprobability of such an event has increased. Deleveraging and tightening fiscal policies are

contributing to the developed countries slow recoveries. Given this, the worlds real GDP isexpected to increase 3.4 percent in 2011, somewhat slower than 2010s 4.1 percent growth. On aregional basis, the expected growth slowdown in the Eurozone is materializing given sub-1.0percent growth in each of the first two quarters of 2011. Even with the European Union andInternational Monetary Fund providing the necessary support to meet Greeces financing through2012, a sovereign debt restructuring is likely in 2013 or 2014. Greeces debt is projected to reach157 percent of GDP in 2012, which represents an unsustainable level given the countrys direeconomic outlook and record-high bond yields. Finally, IHS Global Insight discusses the factthat local government/provinces debt in China has emerged as a major risk to the countrysgrowth. The National Audit Office reported that local debt increased to over $1.6 trillion (10.7trillion yuan) at the end of 2010. This figure represents about 33 percent of Chinas GDP.

Oregon Exports

U.S. exports have increased quarter-over-quarter since 2009 Q1. With nine such increases in arow, national exports in 2011 Q2 set a new record in terms of total dollar value (nominal) of U.S.exports. Oregon exports have followed the same general pattern over the past two years;however in mid-2010, Oregon exports declined slightly primarily caused by a decline in hightechnology exports to Asia before resuming strong growth in the most recent quarters. Stronggains the past three quarters have Oregon exports nearly back to pre-recession levels. Stateexports declined 38.8 percent between their peak in 2008 Q3 and their recession lows in 2009Q1. Since then, exports have increased substantially and the current levels of exports are just 7.6percent below their historic highs. In fact, Oregon exports in the second quarter were the thirdhighest level of exports on record, trailing only the second and third quarters of 2008.

Exports are expected to continue to follow the global economy through the expansion, however,as economic expectations change, exports will similarly grow either faster or slower along witheconomic conditions. Besideseconomic growth (andconsumer demand), exchangerates are another mechanismwhich will influence exportsmoving forward. Should theU.S. dollar appreciate againstour major trading partners,exports will slow more,however should the dollardepreciate, exports shouldbenefit and see strongergrowth.

Graph I.1 illustrates Oregonstotal exports and the Y/Y

Graph I.1

-45%

-30%

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0%

15%

30%

45%

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011

$millions

Oregon Total ExportsTotal Ex por ts (L eft A xi s) Ye ar -ove r-Ye ar Change (Right A xis)


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percent change from 1997 through 2011 Q2. For 2010, Oregons exports growth ranked 31st bestamong all states and since 2009 Q1, when exports reached their recessionary lows across thecountry, Oregons growth ranks 26

thbest. While it is true that Oregon typically experiences more

volatile movements than the US overall during booms exports increase more than the nationand during recessions they decrease more than the nation the current expansion is somewhat

different given the nature ofOregons exports. High dollarvalue computer and electronicproduct exports typicallycompose around 40-45 percentof the states total and thusmovements within the hightech sector swing the statewidetotals. As shown in Table I.3and Graph I.2, these exportshave fallen 21.2 percent in the

past year. This large decline isprimarily driven by decreasedexports by Intel to its facilitiesin China (and Malaysia), andis more a function of within-firm movements than anoverall industry decline. (Formore information please seethis August 12, 2011 article in The Oregonian.http://www.oregonlive.com/business/index.ssf/2011/08/oregon_exports_to_china_slide.html)

Table I.3 shows Oregons dollar value of exports and year-over-year growth rates for 2011 Q2.Graph I.2 illustrates quarterly exports by major industry since 1997. For Table I.3, these are thetop fifteen industries by exportvolume (in value). Y/Y growthis positive for thirteen of the topfifteen export industries. Asmentioned above, computer andelectronic products havedecreased over the past year.Exports in the industry are downto the top three partner countriesin the past year China, CostaRica and Malaysia - whichaccount for nearly 64 percent ofthe industry total. High techexports to China fell 55.7percent over the year in thesecond quarter, which more thanaccounts for the total industrydecline. Industry totals fellnearly $447 million, while industry exports to China declined over $474 million during the same

Table I.3Oregon Exports by Industry

($ millions, current prices )

2010 Q2 2011 Q2y/y %

change

Share out

of TotalTotal All Industries 4,473.2 4,824.1 7.8% 100.0%

Computer And Electronic Products 2,110.6 1,663.6 -21.2% 34.5%

Agricultural Products 465.7 776.9 66.8% 16.1%

Chemicals 370.8 487.7 31.5% 10.1%

Machinery, Except Electrical 364.3 434.1 19.2% 9.0%

Transportation Equipment 209.0 219.2 4.9% 4.5%

Primary Metal Manufacturing 149.9 176.1 17.5% 3.7%

Waste And Scrap 84.6 166.2 96.5% 3.4%

Wood Products 123.6 142.2 15.1% 2.9%Food And Kindred Products 121.0 135.4 11.9% 2.8%

Paper 66.7 121.8 82.5% 2.5%

Miscellaneous Manufactured Commodities 63.4 71.0 12.0% 1.5%

Fabricated Metal Products, Nesoi 73.6 78.1 6.0% 1.6%

Electrical Equipment, Appliances, And Component 83.6 71.5 -14.4% 1.5%

Plastics And Rubber Products 41.3 49.4 19.7% 1.0%

Forestry Products, Nesoi 2.9 56.5 1864.7% 1.2%

Source: WISER, August 2011

Graph I.2

$0

$200

$400

$600

$800

$1,000

$1,200

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$1,600

$1,800

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Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011

Oregon Exports by Major Industry ($ millions)Computer And Electronic ProductsAgricultural ProductsChemicalsMachinery, Except ElectricalTransportation Equipment
http://www.oregonlive.com/business/index.ssf/2011/08/oregon_exports_to_china_slide.htmlhttp://www.oregonlive.com/business/index.ssf/2011/08/oregon_exports_to_china_slide.htmlhttp://www.oregonlive.com/business/index.ssf/2011/08/oregon_exports_to_china_slide.html


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time period. Overall, this industry is Oregons largest and most important export sector, drivenby the states cluster of high technology firms and accounted for 44 percent of all exports in2010.

Agricultural Products (benefiting from higher commodity prices), Chemicals (likewise, plus

increases in Potash exports),Paper and Waste and Scrap allincreased over 30 percent in thesecond quarter. Machineryexports, long a Top 4 industryin Oregon, have increasedsteadily throughout theexpansion and have grown over76 percent since 2009 Q1 andare nearing their pre-recessionpeak levels. These increases are

indicative of the broad-basedgains seen in many sectorsduring the recovery.

While high technology productsdominate Oregon exports, it isuseful to examine exportsexcluding the industry to gauge the overall health of Oregons exports. This allows one toexamine how widespread the increases (or decreases) are among all industries. Graph I.3illustrates growth both for total exports and total minus computer and electronic products. Whilehigh tech exports are holding downthe total export figures, non-computerand electronic products have increasedover 30 percent, year-over-years.

Table I.4 charts exports of Oregonproducts to major destinations. Out ofthe top fifteen export markets, fourcountries saw decreases in trade in2011 Q1 year-over-year. Thosecountries are China, Malaysia, CostaRica and the Netherlands. Exports toChina were strong in 2010; howeverthe fluctuations quarter to quarterrecently have been large (see GraphI.4 below). While exports to Japanhave increased nearly 48 percent overthe past year, the recent rise is evenstronger. Over the past three quarters,exports to Japan have grown over 66 percent primarily driven by agricultural products,however increases in computer and electronic products, chemicals and wood products also arecontributing to the gains.

Table I.4

Oregon Exports to M ajor Trading Partners($ millions, current prices)

2010 Q2 2011 Q2y/y %

change

Share out

of Total

Total All Countries 4,473.2 4,824.1 7.8% 100.0%

China 1,087.3 737.2 -32.2% 15.3%

Canada 675.9 737.2 9.1% 15.3%

Malaysia 645.5 585.9 -9.2% 12.1%

Japan 328.5 484.4 47.5% 10.0%

Korea, Republic Of 226.4 342.6 51.3% 7.1%

Taiwan 144.2 188.1 30.4% 3.9%

Brazil 71.1 191.3 169.0% 4.0%

Germany 91.4 126.0 37.8% 2.6%

Costa Rica 156.4 115.7 -26.0% 2.4%

Singapore 88.7 115.2 29.9% 2.4%

Philippines 106.0 109.2 3.0% 2.3%

Australia 62.2 83.2 33.8% 1.7%

United Kingdom 54.5 70.6 29.5% 1.5%

Mexico 55.5 60.8 9.4% 1.3%

Netherlands 84.0 53.3 -36.6% 1.1%

Source: WISER, August 2011

Graph I.3

-50%

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-30%

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-10%

0%

10%

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Q1 1998 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010

Oregon Exports (Year-over-Year Change)Total Exports Total excluding Computer and Electronic Products


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C. Western Region

This section of the September forecast examines the economies of seven western states and theirrelative performance to the U.S. overall. Gauging the health of local economies is important forbusiness planning purposes and looking at a wide range of data points is useful. Below, you will

find tables analyzing how Oregons economy is fairing compared to the following western states:Arizona, California, Idaho, Nevada, Utah and Washington.

Employment

The slowdown in economic activity in the first half of 2011 has likewise resulted in slower jobgrowth in recent months. Even with this slowing, jobs continue to expand on a monthly basisacross the nation and the western states (except Idaho in 2011 Q2). On a year-over-year basis, allwestern states have seen job gains except Nevada. At the national level, total nonfarmemployment increased 0.8 percent year-over-year which marks the third consecutive positivevalue. Table W.1 details employment by major sector for each of the western states and their

respective year-over-year changes.

Oregons strong job gains over the past year have the state ranked thirteenth best in the countryin year-over-year percentage change for the month of June. Among western states, Oregonsgrowth only trails Utahs. Within employment, it is interesting to note the composition of growthacross the states. In particular for Oregon, the states growth within goods producing sectors isoutpacing our neighboring states. Oregons construction growth is best compared to the nationand western states. Oregons trade, transportation and utilities growth is tied with Utah for thefastest, while Oregons manufacturing growth is second fastest. Given that these are theindustries that were hardest hit during the recession, it is good news to see relatively stronggrowth today.

Table W.1

Arizona California Idaho Nevada Oregon Utah Washington United States

Total Nonfarm 2,393.4 14,056.4 606.5 1,117.6 1,625.0 1,201.2 2,810.7 131,024.7

Y/Y Percent Change 0.2 1.0 0.6 -0.2 1.4 1.6 0.9 0.8

Natural Resources and Mining 11.0 27.2 3.4 12.6 6.8 10.9 6.0 780.0

Y/Y Percent Change 0.0 0.7 -1.9 4.4 1.1 4.5 0.0 12.0

Construction 111.1 567.4 29.6 54.0 69.1 64.6 138.8 5,526.3

Y/Y Percent Change -0.5 0.8 -5.3 -10.3 2.0 -0.7 -1.6 -0.2

Manufacturing 150.0 1,254.7 54.0 35.9 168.5 115.1 263.4 11,711.3


Trade, Transportation and Util it ies 473.4 2,646.8 122.1 204.8 313.7 233.8 520.4 24,895.3


Information 36.3 452.9 9.3 12.5 32.8 29.9 103.9 2,684.0Y/Y Percent Change -0.9 7.0 -2.8 0.3 2.1 2.5 1.3 -1.0

Financial Activities 163.0 756.6 29.6 48.6 93.4 66.9 137.4 7,614.7

Y/Y Percent Change 0.5 -0.3 2.9 -7.2 0.5 -1.3 2.2 -0.3

Professional and Business Services 335.1 2,127.2 72.1 140.6 185.5 158.8 348.0 17,141.7

Y/Y Percent Change -2.0 3.0 -1.5 4.0 2.3 4.2 7.2 3.0

Leisure and Hospi tali ty Services 257.9 1,526.3 60.8 317.3 167.6 112.1 270.0 13,194.3

Y/Y Percent Change 1.8 2.2 5.1 2.7 3.4 1.2 1.2 1.5

Other Services 86.5 482.5 21.3 34.4 57.3 35.0 103.4 5,445.0

Y/Y Percent Change -2.8 -0.7 0.8 1.9 -0.6 4.3 -1.4 1.9

Government 410.4 2,385.6 118.2 152.1 295.8 216.2 538.2 22,109.0

Y/Y Percent Change -2.7 -3.0 -1.2 -3.2 -2.2 -0.8 -2.7 -2.9

Employment by Sector (2011 Q2)

Source: U.S. Bureau of Labor Statistics, State employment in 000s, U.S. employment in milli ons


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While all westernstates have seenheavy job losses,their relative

performance hasvaried to somedegree. Graph W.1and Table W.2compare job lossesacross the states.Different statesemploymentreached its peak atdifferent timeperiods based on

the uniqueeconomies in eachstate. Graph W.1illustrates the cumulativepercentage of job losses ineach state since the firstquarter of 2008. Each statesrespective employment peakis noted in parenthesis in thegraphs legend, and also incolumn two in Table W.2.Relative to other westernstates, Oregons job losseshave been less severe thanArizona, California, and Nevada; however Idaho, Utah, Washington and the U.S. have seenlower levels of job loss. Now that each state has registered positive employment gains, at leastfor one recent quarter, Oregons gains have outpaced both the national average and all otherwestern states except Utah.

Economic Coincident Index

One very useful state level economicindicator is the State CoincidentIndex, produced by the FederalReserve Bank of Philadelphia. Eachmonth the bank compiles and indexesdata for each state that combinesnonfarm payroll employment,average hours worked inmanufacturing, the unemploymentrate, and real wage and salarydisbursements. As a coincident index,

Table W.2Peak Trough % Dec line from % Increase from

Employment Employment Peak to Trough Trough to Current

Arizona 2007 Q3 2010 Q1 -11.70% 1.11%

California 2007 Q3 2010 Q3 -8.79% 1.39%

Idaho 2007 Q4 2010 Q3 -8.44% 0.88%

Nevada 2007 Q2 2010 Q4 -14.26% 0.61%

Oregon 2008 Q1 2009 Q4 -8.41% 2.03%

Utah 2007 Q4 2010 Q1 -7.00% 2.30%

Washington 2008 Q1 2010 Q1 -6.80% 1.43%

United States 2008 Q1 2010 Q1 -6.23% 1.32%

Table W.3

Index Value

Q/Q Percent

Change (AR)

Y/Y Percent

Change

5 Year Percent

Change

Arizona 176.58 1.3% 0.5% -11.4%

California 150.62 2.1% 2.6% -1.0%

Idaho 188.35 2.1% 0.9% -11.1%

Nevada 176.80 0.1% -1.0% -24.0%

Oregon 188.14 5.9% 4.2% -2.5%

Utah 183.96 3.5% 2.5% -0.4%

Washington 148.01 1.5% 1.6% -2.1%

United States 152.48 3.0% 2.2% -1.5%

Economic Coincident Index for 2011 Q2

Source: Federal Reserve Bank of Philadelphia, Index = 100 in July 1992

Graph W.1

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2008Q1 2009Q1 2010Q1 2011Q1

PercentJobLossfrom2

008Q1

U.S. (2008 Q1)

Arizona (2007 Q3)

California (2007 Q3)

Idaho (2007 Q4)

Nevada (2007 Q2)

Oregon (2008 Q1)

Utah (2007 Q4)

Washington (2008 Q1)


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the data is designed to report current economic conditions on a monthly basis, and is not aleading or a lagging indicator.

On a year-over-year basis, Nevada continues to be the worst performing western state, a result ofcontinued job losses and high unemployment rate. Oregons index, after growing moderately

through 2010, has turned strongly positive in the past six months. Oregons 4.2 percent growth inthe past year betters all other western states and also the U.S. average. Oregons quarter-over-quarter growth ranks fifth best nationally, Oregons year-over-year increase ranks fourth bestnationally and Oregons five year percentage change ranks twenty-sixth best nationally.

Housing Price Index

Many of the western states havebeen hit hard by the housing boomand subsequent bust. Table W.4shows the Federal Housing Finance

Agencys home price index for eachwestern state. Graph W.2 shows theFHFA Housing Price Index for eachof the western states since 2000.While the data is typically indexedto 1991, for graphing purposes, thedata is indexed 2000 = 100 toillustrate the home price changesover the past decade.

Prices in Arizona,Nevada and California allat least doubled between2000 and 2006. By 2007and 2008 prices inOregon and Washingtonhad increased over 80percent, while Idaho andNevada experiencedgains over 60 percent.Since that time, priceshave declined across allwestern states by at least20 percent.

Home prices continue todecline across all westernstates in both the mostrecent months and over the past year. The states that experienced the largest run-up in pricesduring the bubble years have likewise seen the deepest declines over the past few years. Arizona,California and Nevada have all seen price declines of over 40 percent since each states homeprice peak.

Table W.4

Index

Value

Q/Q Percent

Change (AR)

Y/Y Percent

Change

Percent Change

Since Peak

Arizona 167.73 -10.8% -12.2% -47.5%

California 154.79 -10.5% -7.7% -45.2%

Idaho 178.46 -21.5% -15.7% -32.4%

Nevada 120.75 -16.0% -8.6% -55.9%

Oregon 247.12 -13.2% -10.3% -27.0%

Utah 239.12 -15.1% -7.1% -25.5%

Washington 217.32 -12.6% -9.4% -22.3%

United States 181.02 -9.6% -5.5% -19.3%

Housing Price Index (2011 Q1)

Source: Federal Housing Finance Agency (FHFA)

Graph W.2

80

100

120

140

160

180

200

220

240

2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1

FHFA Home Price Index (Purchase Only)Arizona Idaho Oregon WashingtonCalifornia Nevada Utah U.S.


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Housing Permits

With the large home price declines across the nation in recentyears and an oversupply of houses on the market, there hasbeen very little new construction relative to historical levels.

One measure used to gauge new home construction ishousing permits issued, shown in Table W.5. It appears thateach passing year brings worse news for new homeconstruction. 2009 was worse than 2008 which was worsethan 2007. After a mixed bag in 2010, expectations were forat least some semblance of stability in 2011; however the firstsix months figures for permits indicate no such stability asthe numbers are substantially lower than early 2010 figures.

All western states and the nation have seen a decline in permits issued, except for California.Across locales, the sub-industry experiencing any growth is the multi-family market as single

family homes continue to remain at depressed levels in terms of both sales and new construction.While multi-family permits have increased, these gains have not been large enough to offset thedeclines in single family homes in most locations. California is the exception among westernstates as their multi-family permits have increased 46 percent through the first six months, eventhough single family permits in the state have declined 13 percent. In Oregon, multi-familypermits have increased 36 percent and single family permits have declined 20 percent.

Exports

The global recession decimated international trade throughoutlate 2008 and early 2009; however exports have reboundedsharply since around mid-2009. As show in Table W.6, on ayear-over-year basis most states and the nation overall areexperiencing sizable increases in trade, with only Oregonfailing to reach double digit growth in the second quarter.Oregons figures, as detailed in the International Section, areattributable to high technology exports to Asia declining inrecent months, even though all other Oregon exports areincreasing over 30 percent on a year-over-year basis.

Even with the sizable increases in recent months, the nationand western states exports remain slightly below their peak levels achieved during the summerof 2008.

Tax Revenue

While the recession pummeled tax revenues for all states during the 2007 through early 2010period, the past four quarters (2010 Q2 2011 Q1) have brought good news to most state coffersin the form of positive revenue growth. Table W.7 shows tax revenue by major revenue sourcefor 2011 Q1, along with year-over-year percent changes, for the western states. Every westernstate has seen state and local tax revenues increase over the past year. While in previous quarters,growth has originated primarily through business taxes (gross receipts, income, etc) due to the

Table W.6

Exports

($ mill)

Y/Y Percent

Change

Arizona $4,463 15.0%

California $39,915 12.5%

Idaho $1,513 12.4%

Nevada $1,894 27.8%

Oregon $4,824 7.8%

Utah $4,246 39.0%

Washington $15,725 31.2%

United States $370,571 17.6%

Source: WiserTrade, August 2011

Total Exports (2011 Q2)

Table W.5

Permits

Y/Y Percent

Change

Arizona 6,005 -16.4%

California 22,964 8.4%

Idaho 1,833 -34.7%

Nevada 3,727 -7.3%

Oregon 3,589 -9.1%

Utah 4,126 -15.3%

Washington 10,106 -3.6%

United States 295,831 -5.8%

Source: U.S. Census Bureau

Housing Permits Issued (2011Q2 YTD)


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very high profitability of businesses in 2010, the current growth is a result of increased sales taxcollections and personal income tax collections. While many business (typically the largest)remain highly profitable, this profitability has not increased further, making year agocomparisons more difficult and expectations are for business tax receipts to decline in thecoming year. On the personal or consumer side of the ledger, these tax collections are increasing

and are expected to continue to do so throughout the expansion. As more and more individualsare able to find jobs, and wages increase, consumers spend more money on purchases and theirincome tax liabilities increase. The data below reflect this pattern.

As shown in the employment table at the beginning of this section (Table W.1), governmentemployment in each western state has declined in the past year, with further decreases expectedover the next year. This is a direct result of how governments budget, which makes the publicsector late comers to recessions. With the ARRA federal monies coming to an end, and statesbeginning new fiscal years (and/or biennium), the recessions impact is just now being fully feltin many states budgets. While increasing tax revenues will alleviate some of the programreductions this year, these gains are not enough to offset the loss of federal monies and depletedreserve funds.

Table W.7

Arizona California Idaho Nevada Oregon Utah Washington

Total Taxes 2,523,894 27,129,164 745,728 1,577,577 1,748,617 1,202,004 4,382,821

Y/Y Percent Change 14.1% 5.5% 22.7% 4.1% 16.2% 8.8% 5.9%

Property tax 193,653 729,904 X 86,213 5,316 X 804,924

Y/Y Percent Change -7.3% -10.3% X -19.4% -31.9% X 5.8%

General sales and gross receipts 1,449,434 8,233,845 306,407 689,941 X 469,547 2,480,495

Y/Y Percent Change 18.9% -3.1% 14.3% 6.8% X 15.0% 6.0%Motor fuel sales taxes 199,140 1,377,075 54,749 69,779 108,121 87,247 283,322

Y/Y Percent Change -2.1% 82.5% 10.1% 3.9% -16.2% 7.6% 2.5%

Alcoholic beverages 18,405 76,526 1,743 10,323 3,582 11,197 81,554

Y/Y Percent Change 6.4% 3.7% -5.6% 3.5% 9.7% 1.6% 17.1%

Public utilities 5,351 158,834 556 4,592 4,602 5,111 117,765

Y/Y Percent Change -11.0% 8.2% 79.9% -18.9% -45.3% -27.2% -12.0%

Insurance 109,493 126,165 8,983 56,710 16,925 21,124 47,064

Y/Y Percent Change -0.3% 7.4% 2.2% 0.1% -20.8% -4.3% 7.9%

Tobacco products 78,771 258,498 11,113 26,402 59,669 26,252 110,187

Y/Y Percent Change -5.8% 18.8% 3.9% 2.0% 23.3% 72.8% 23.4%

Amusements 3,045 X X 278,727 17 X 0

Y/Y Percent Change 2139.0% X X 0.9% -64.6% X X

Motor vehicles 44,024 777,239 38,131 40,326 141,279 48,703 118,575Y/Y Percent Change -10.2% 4.4% 8.5% -9.6% 10.8% -35.6% 4.4%

Corporations in general 2,364 13,229 531 18,741 7,689 2,149 7,588

Y/Y Percent Change -68.1% -10.8% 1.7% 14.3% 106.4% 115.8% 12.9%

Occupation and business licenses 28,293 1,016,274 20,106 174,594 132,900 12,088 58,775

Y/Y Percent Change -0.6% -8.4% 10.1% 10.9% 72.9% 5.7% -2.4%

Individual income taxes 257,491 12,045,229 226,078 X 1,152,216 449,112 X

Y/Y Percent Change 56.7% 12.1% 27.2% X 20.6% 14.6% X

Corporation net income taxes 83,560 2,063,265 37,056 X 73,111 27,362 X

Y/Y Percent Change -14.6% -7.8% 262.2% X 12.9% -15.1% X

State and Local Tax Revenue (2011 Q1)

Source: U.S. Census Bureau ($ 000s)


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Figure O.1

Nonfarm Job Growth by State

July 2011 over July 2010(Ranked by Percent Change)

Source: Blue Chip Job Growth Update, W.P. Carey School of Business, Arizona State University

Bottom 10 Middle 10Fourth 10 Second 10 Top 10

Oregon: 13th

D. Oregon Economic Review and Forecast

Summary of Recent Trends

Statewide Trends

After a very strong start to 2011, the second quarter job growth came in at a very slow pace.Preliminary estimates place the second quarter growth at 0.7 percent. At least this is the thirdconsecutive quarter of positive job growth, the longest continuous stretch since the secondquarter of 2007. On a year-over-year (Y/Y) basis, job growth is up 1.4 percent.

While the total estimated job growth for the second quarter is disappointing, the private sectorhas been improving. After a rocky start in the first quarter of 2010, the private sector has addedjobs every quarter. More sectors had job gains relative to job losses. Notable job increases arereported in manufacturing, retail trade, health services, and leisure and hospitality. Some of thesectors with relatively higher job losses are wood products, food processing, transportation,

warehousing, and utilities, educational services, and other services. Budget shortfalls havecaught up with the public sector, with declines in all three government levels, notable localgovernment and in particular local education.

The headwinds facing the U.S. economy did not appear to be present in the first quarter inOregon, but the second quarter is feeling the effects. Higher gasoline and other commodityprices are squeezing household budgets. The slowing impacts around the country have come toOregon, but the private sector is still producing more jobs, albeit at a relatively slow pace. Thereal story of the slow growth in the second quarter is the government sector. Comprising around18 percent of total employment in Oregon, job losses in this sector will have a damping impacton the economy moving forward.

The most recent Blue Chip JobGrowth rankings place Oregon13th in the nation for Y/Y jobgrowth. Between July 2010 andJuly 2011, jobs increased by25,800, or 1.62 percent. LastJune Oregon ranked 21st. Therelative performance of the fiftystates is shown in Figure O.1.

North Dakota retains the 1st

ranked position with job growthof 5.39 percent, a ranking it alsoheld a year ago. California had job gains ranking at 15

th.

Washingtons job gains havemoved the state from a rank of46

thto a ranking of 16

thin the

nation. Idahos job gains was0.79 percent, ranking 29th among the 50 states.


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-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Total Nonfarm Private ex Housing Housing Related Public

Where's My Recovery?(Monthly Employment Changes)

Typical Expansion Past Year

Industry Trends

Right now the economy is growing at a frustratingly slow pace and employment gains are notstrong enough to bring down the unemployment rate quickly. As of today there are two maindrags on the recovery: the delayed improvement in the housing market and the public sector

pullback. The housing market is not a new issue and has been and is expected to continue to be anegative factor on the recovery, or at least not a strong positive. Once the existing overhang ofinventories, including some of the shadow inventory and foreclosures, are whittled down further,then the rebound in new construction can take full force and drive economic growth. Reasonableestimates of when this may occur fall in the 2014 2016 timeframe.

The public sector pullback is a relatively new drag on the economy. Initially, largely driven bythe American Recovery and Reinvestment Act of 2009, the public sector was an economic driverwith increased spendingon infrastructure projects,tax cuts and financial

block grants to the statesto shore up their budgets.Now that the vastmajority of these federalmonies have been spentand no further federalassistance is on thehorizon, state and localgovernments are cuttingtheir budgets, which leadsto employment losses.The graph to the right isdesigned to illustrate howthese two main economicdrags are impacting jobgrowth in Oregon.

It is interesting to note that the private sector excluding housing is currently expanding at aslightly above average pace, relative to the two previous economic expansions in Oregon. Thatmeans 75 percent of all industries, or employment, is growing more quickly today than in pastrecoveries. Unfortunately the impact from the two main drags is holding total nonfarmemployment from growing at a similar pace. Typically, housing related industries add 575 jobsper month and the public sector adds 350 jobs per month. In the past year, these industries haveadded only 50 jobs per month and cut jobs at a 675 per month pace, respectively. It is true thatthe temporary Census workers are included in some of the public sector cuts; however, oncethese jobs are accounted for the public sector has cut employment by 475 per month, on average.

In total, between the two drags, instead of adding a combined 925 jobs per month, theseindustries have actually been cutting 425 jobs per month (ex-Census), a net swing of over 1,300 jobs every single month. If these industries were able to increase employment at their typicalpace, total nonfarm employment in Oregon would be growing extremely well by historicalstandards and the unemployment rate would be declining more quickly.


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Methodology Notes: The typical expansion is defined here for these purposes as the average of the 1992-1999 and

2004-2007 periods. Housing related industries include all construction employment, building material and garden

supply stores, mortgage loan brokers and real estate employees. The past year is the July 2010 to July 2011 time

period.

Table O.1 shows a comparison of preliminary estimates for second quarter Oregon employmentgrowth compared to the May 2011 forecast. Table O.1 also provides forecast errors and Y/Ygrowth. While percent change in the preliminary estimate shows the most recent development inthe employment front, Y/Y growth indicates what has happened over a years time. Unless

Table O.1

Total Nonfarm Employment, 2nd quarter 2011

(Employment in thousands, Annualized Percent Change)

Y/Y

Change

level % ch level % ch level % % ch

Total Nonfarm 1,625.0 0.7 1,633.1 2.6 (8.1) (0.5) 1.4

Total Private 1,329.2 1.6 1,335.5 3.4 (6.2) (0.5) 2.2

Natural Resources and Mining 6.8 (2.0) 6.9 4.4 (0.1) (1.2) 1.1

Construction 69.1 3.6 68.9 2.9 0.2 0.3 2.0

Manufacturing 168.5 3.8 164.8 (5.0) 3.7 2.3 2.6

Durable Goods 118.3 7.2 117.3 3.5 1.0 0.9 2.7

Wood Product 18.8 (6.9) 19.2 0.6 (0.4) (2.0) (7.9)

Metals and Machinery 32.9 7.3 33.1 9.2 (0.1) (0.4) 6.0

Computer and Electronic Product 36.4 6.2 35.8 (0.3) 0.6 1.8 4.4

Transportation Equipment 10.5 7.2 10.5 5.9 0.0 0.4 2.2

Other Durable Goods 19.6 25.8 18.7 2.9 0.9 4.6 5.8

Nondurable Goods 50.2 (3.7) 47.5 (22.6) 2.7 5.7 2.5

Food 26.2 (6.9) 23.5 (41.1) 2.8 11.9 9.9

Other Nondurable Goods 24.0 (0.1) 24.1 3.0 (0.1) (0.3) (4.5)

Trade, Transportation & Utilities 313.7 2.2 314.4 3.2 (0.7) (0.2) 1.9

Retail Trade 189.0 4.2 188.4 3.4 0.6 0.3 3.4

Wholesale Trade 72.2 0.6 72.8 3.7 (0.6) (0.8) (1.1)Transportation, Warehousing & Utilities 52.5 (2.7) 53.2 2.3 (0.7) (1.4) 0.8

Information 32.8 (0.0) 33.7 10.8 (0.8) (2.5) 2.1

Financial Activities 93.4 1.0 93.6 1.4 (0.1) (0.1) 0.5

Professional & Business Services 185.5 (2.2) 191.1 9.0 (5.6) (2.9) 2.3

Educational & Health Services 234.4 2.5 234.6 3.3 (0.3) (0.1) 2.9

Educational Services 31.7 (3.6) 32.0 0.1 (0.3) (1.0) 0.9

Health Services 202.7 3.5 202.6 3.8 0.1 0.0 3.2

Leisure and Hospitality 167.6 4.4 168.8 7.3 (1.2) (0.7) 3.4

Other Services 57.3 (7.3) 58.7 1.8 (1.4) (2.5) (0.6)

Government 295.8 (3.2) 297.6 (1.1) (1.8) (0.6) (2.2)

Federal 27.9 (8.0) 28.3 (2.1) (0.4) (1.4) (14.9)

State 80.5 (0.7) 80.3 (2.0) 0.1 0.1 1.1State Education 31.1 3.6 30.9 0.7 0.2 0.7 5.6

Local 187.5 (3.5) 189.0 (0.6) (1.5) (0.8) (1.5)

Local Education 98.4 (4.7) 98.1 (6.1) 0.3 0.3 (2.8)

Estimate

Preliminary Forecast ErrorForecast


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Other services that include personal, repair, and maintenance decreased by 7.3 percent. Possiblythe higher commodity prices (e.g., oil and thus gasoline, food) squeezed households budgetsimpacting sales in this sector.

While the private sector is struggling through this recovery with mild job growth, the

government sector is cutting jobs. Federal government employment is down 8.0 percent. As taxrevenues have not grown to replace temporary federal stimulus money, state and localgovernments are cutting services. State government is down only 0.7 percent, mainly becausestate education is up 3.6 percent. Public colleges are countercyclical to the recession as morestudents enroll and pay tuition. Local government jobs are down by 3.5 percent, and unlike stateeducation, local education is more dependent on tax revenues and jobs are down 4.7 percent.

Regional Trends

Total nonfarm employment in Oregon increased 1.3 percent from the second quarter of 2010 tothe second quarter of 2011. In recent months, government job losses have weighed down

improvements in the private sector. Private employment gains stood at 2.2 percent over thesecond quarter of 2010, while the public sector declined by the same percentage. Censusemployment in 2010 continues to affect over-the-year trends in government, as those jobs weretemporary.

Oregons overall employment trend turned positive in the fourth quarter of 2010, which showeda slight increase over the year after nine consecutive quarters with a year-over-year decline.Many rural regions of Oregon endured longer declines. Generally, regional employment losseswere most severe in the second and third quarters of 2009. Losses moderated in 2010 and growthresumed in the first quarter of 2011. By the second quarter of 2011, every region except thePortland area had dipped back into negative territory.

Regional unemployment rates (not seasonally adjusted) in the second quarter ranged from a lowof 8.5 percent in the Portland area to a high of 12.0 percent in Southern Oregon. In every region,unemployment rates were significantly lower than last year. Statewide, the unadjusted June 2011unemployment rate was 9.7 percent, nearly matching the national rate of 9.6 percent.

Employment Gains Slow in the Portland Area:

Clackamas, Columbia, Multnomah, Washington, and Yamhill counties

Employment losses in the Portland area began in the fourth quarter of 2008, and accelerated untilthe third quarter of 2009 before beginning to moderate. In the third quarter of 2010, employment

growth resumed and job gains followed through the first quarter of 2011. Nonfarm job counts inthe second quarter of 2011 slowed but growth continued at a rate of 1.0 percent over the year.

By county, second quarter employment growth was fastest in Washington (+1.3%), whileMultnomah and Yamhill tied (+0.5%). After slight growth in the first quarter of 2011,Clackamas employment dropped (-1.4%). Columbia County has yet to see positive growth, anddropped 2.3 percent between the second quarter of 2010 and the second quarter of 2011.

Of 11 broad industry sectors, seven showed employment gains in the Portland area from June2010 to June 2011. Manufacturing and education and health services grew the fastest, and


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together added over 5,000 jobs. Professional and business services also gained a significantnumber of jobs (+1,750), as did trade, transportation, and utilities (+670). Construction grew 1.0percent over the year, driven by growth in Multnomah and Washington counties.

Government and other services had lower job counts in June 2011 than one year earlier,

declining 4.0 percent and 1.7 percent, respectively.

The unemployment rate in the Portland region was the lowest in the state, at 8.5 percent in thesecond quarter of 2011. The rate dropped 1.4 percentage points from the prior year.

Job Growth Stalls in Willamette Valley:

Benton, Lane, Linn, Marion, and Polk counties

The Willamette Valley posted its first over-the-year jobs loss at the same time as the state, in thethird quarter of 2008. Over the next two years, the rate of local job loss essentially mirrored thestatewide average. As the state resumed growth in the final quarter of 2010, regional job gains

lagged behind. The area experienced negative over-the-year job growth in every quarter sincethe recession began, except for the slight gain in the first quarter of 2011 (+0.1%). In the secondquarter, declines returned (-0.5%).

Benton was the only county in the region with positive employment gains, adding about 900 jobsbetween the second quarter of 2010 and the second quarter of 2011. Lane County followed theoverall regional trend, dropping 0.1 percent. Linn County also saw jobs decline 0.6 percent overthe year, with job losses continuing for the 11

thconsecutive quarter (-1.6%).

Seven of 11 broad industries lost employment in the region between June 2010 and June 2011.Government had the highest job losses, most from local government

(-1,630). Retail trade and construction saw the next greatest losses, at 360 and 180 jobs,respectively.

Three broad sectors showed growth over the year. Education and health services added the most jobs regionally (+320), predominately in the Salem metro area. Leisure and hospitality added240 jobs on net, driven entirely by growth in Benton and Lane counties. Although Linn Countyadded 270 manufacturing jobs over the year, employment in this industry dropped within thewhole region (-0.2%).

In the second quarter of 2011, the Willamette Valleys unemployment rate was 9.5 percent. Therate dropped 1.3 percentage points over the year.

Employment Gains Limited along the Coast:Clatsop, Coos, Curry, Lincoln, and Tillamook counties

Employment declines in Oregons coastal counties began in the second half of 2007. Over-the-year losses were fairly mild through 2008 but became severe in 2009. Losses moderated in thefirst half of 2010, and the third quarter of 2010 brought the coasts first over-the-year job gains.Growth accelerated in the first quarter of 2011, but declines resumed in the second quarter (-0.4%).


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Every county on the coast posted employment gains by the final quarter of 2010, whichcontinued through the first quarter of 2011. In the second quarter of 2011, over-the year joblosses resumed in Lincoln (-1.9%), Curry (-0.7%), and Tillamook (-0.2%), while Clatsop andCoos remained positive. Employment growth in Coos County slowed to 0.2 percent over thesecond quarter of 2010, while Clatsop saw double this growth rate.

Less than half of the regions 11 broad industrial sectors gained jobs over the year. Leisure andhospitality added the most at 370, followed by 180 jobs in professional and business services.Educational and health services saw mild growth among all counties, increasing employment by140. Other services added a few jobs in each of the coastal counties, totaling up to 90 over theyear.

Trade, transportation, and utilities; manufacturing; and construction dropped around 120 to 190jobs each, while government dropped 670 jobs over the past year. Mining and logging remainedflat.

Since the second quarter

oregon office of economic analysis: forecast released on august 26, 2011

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