Economic & Revenue Outlook August 26, 2011 Office of Economic Analysis Josh Lehner Mark McMullen

Macroeconomic Outlook

Is Recession Imminent?

Pessimism Sets In Office of Economic Analysis Average LT Growth Soft Patch Better Growth Data “Headwinds” Revisions, Stock Market, Debt Ceiling 4 Office of Economic Analysis 4

Where is the slowdown? Coincident Index Components 1) Nonfarm Employment 2) Average Hours Worked Manufacturing 3) Unemployment Rate 4) Inflation Adjusted Wages and Salaries Long-term growth trended to state GDP. 5 5 5

Coincident Index Components Where is the slowdown? Coincident Index Components 1) Nonfarm Employment 2) Average Hours Worked Manufacturing 3) Unemployment Rate 4) Inflation Adjusted Wages and Salaries Long-term growth trended to state GDP. 6 6 6

U.S. Economic Growth Continues at Subdued Pace The economic expansion is sluggish by historical standards, with momentum being lost during the first half of 2011. With home prices still falling, the housing recovery has yet to support growth. Sustained job growth and an easing of commodity price pressures will enable consumers to spend more confidently. Core inflation will rise only gradually. The Fed is expected to begin raising interest rates in mid-2013. Business equipment investment, exports, and consumer durables are driving growth; recoveries in housing and commercial construction markets will come later.

Regional Oregon Outlook

Recent Oregon Economy Facts 9.5% unemployment rate for Jul 2011 (Jul US rate is 9.1%) is down from the highest rate of 11.6% in May and June 2009. The 2010 average was 10.8%. 13th fastest job growth at 1.62% for all states for July 2011 over July 2010. Total nonfarm employment increased 1.4% year-over-year for the 2nd quarter of 2011. S.A. job gains in nine of the last ten months since Oct. 2010 (down in March). Total nonfarm up 30,000 since Sept 2010 with the private sector up 33,500. 4.4% personal income growth for 1st quarter of 2011 over 1st quarter of 2010. Annualized 1st quarter 2011 growth at 7.7%. Oregon exports increased 18.6% in 2010 compared to 2009. June YTD in 2011 up 5.8% over June YTD 2010. 9 9 9

All Sectors Returned to Growth During 2011 Q1….

…but Have Lost Steam Since 2011 Q2

Unemployment Rate by Region, July 2011 (seasonally adjusted) Oregon: 9.5% 6.3-8.9% 9.0-10.9% 11.0-12.9% 13.0-15.6% Source: Oregon Employment Department Office of Economic Analysis

Unemployment Rate Change, Dec ‘09 to Jul ‘11 (seasonally adjusted) Oregon: -1.5% Dec 09: 11.0% July 11: 9.5% -2.6% to -2.0% -1.9% to -1.0% -0.9% to 0.0% 0.0% to 0.6% Employment Dept.’s grouping Source: Oregon Employment Department Office of Economic Analysis

Oregon Indexes Still Showing Growth (Data through June 2011) 14 14 14

Hours Worked Holding Steady 15 15 15

Exports Non Computer and Electronic Product exports continue to do well Agricultural Products benefit from higher commodity prices Computer and Electronic Product exports coming down off of record levels China, Malaysia, Costa Rica 16 16 16

Two Main Drags on Growth 17 17 17

Drag #1: Housing Housing Price Declines Starts Return to Average Baseline -5.4% 2015 Q4 Optimistic -2.9% 2015 Q1 Pessimistic -11.3% 2016 Q2

Drag #2: Government 19 19 19

State Employment

Local Employment

Employment Outlook 22 22 22

Long Run Forecasting

Working Age Cohort Declining

Labor Force Participation Rates

Expansions’ Average Growth

Revenue Outlook

Revenue Growth Is a Mixed Bag April-June Quarter, % change vs. year ago 28

CIT Collections Hit the Wall Corporate Income Tax Collections % change year ago, 3 month moving sum

PIT Collections Bounce Back Personal Income Tax Collections % change year ago, 3 month moving sum

Q4 Total General Fund Forecast Errors (Total General Fund Revenues, % error, April-June quarter) +2 Standard Deviations (6.8%) +1 Standard Deviation (3.4%) -1 Standard Deviation (-3.4%)

Forecast Changes Difference from May forecast, millions 32 32

2011 Close of Session 33 33 33

September Forecast 34 34 34

Reserves 35 35 35

Accounting for the Decline 36 36 36

Capital Gains Outlook Tax years, March 2011 revenue forecast 2011 Wilshire 5000: 14,000, 18% growth 7% 33% 63%

Personal Income Tax Forecast $ billions, 4 quarter moving sum 2 2011-13 -$167 (million) 2013-15 -$220.5 2015-17 -$299.1 2017-19 -$324.1 2020-21 -$368.2

Corporate Taxes and Profits Percent change year ago, tax years

Corporate Income Tax Forecast $ millions, 4 quarter moving sum 2011-13 $12.2 (million) 2013-15 -$14.1 2015-17 -$22.2 2017-19 -$3.9 2019-21 -$14.4

Biennial Revenue Growth 41 41

For More Information Standard Contact: 155 Cottage Street NE Salem, OR 97301 (503) 378-3405 oea.info@state.or.us www.oregon.gov/das/oea Social Media: oregoneconomicanalysis.wordpress.com @OR_EconAnalysis 42