oregon economic forecast - march 2011

8/7/2019 Oregon Economic Forecast - March 2011

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Department of Administrative Services

Kris Kautz, Acting Director

Office of Economic Analysis

Tom Potiowsky, State EconomistMark McMullen, Senior Economist

Kanhaiya Vaidya, Senior DemographerDamon Bell, Senior Analyst

Josh Lehner, Economic AnalystSusan Daniels, Administrative Specialist

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___________________________________

FOREWORD___________________________________

This document contains the Oregon economic and revenue forecasts. The Oregon economicforecast 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 agroup 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 a 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 Economic

Analysis by telephone at 503-378-3405.

Kris Kautz, Acting DirectorDepartment of Administrative Service

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___________________________________

TABLE OF CONTENTS___________________________________

EXECUTIVE SUMMARY ............................................................................................................. 7Extended General Fund Revenue Outlook.................................................................................... 15I. ECONOMIC FORECAST ................................................................................................ 18A. National Economic Review and Forecast ......................................................................... 18B. International Review and Outlook .................................................................................... 24C. Western Region ................................................................................................................. 32D. Oregon Economic Review and Forecast ........................................................................... 38II. REVENUE FORECAST .................................................................................................. 63A. 2009-11 General Fund Revenues ...................................................................................... 63B. Extended General Fund Revenue Outlook ....................................................................... 65C. Tax Law Assumptions ....................................................................................................... 66D. Forecast Risks ................................................................................................................... 67E. Lottery Earnings Forecast ................................................................................................. 69APPENDIX A: ECONOMIC FORECAST DETAIL ................................................................ 73APPENDIX B: REVENUE FORECAST DETAIL ................................................................... 98APPENDIX C: POPULATION FORECASTS BY AGE AND SEX ...................................... 113

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EXECUTIVE SUMMARY

March 2011

Oregon Economic Forecast

The fourth quarter of 2010 brings the year to a positive end. The preliminary estimate of thefourth quarter job gain in Oregon is 1.3 percent at an annualized rate. Thus 2010 finishes asexpected, with recovery in jobs but at a slow rate compared to past recoveries. On a year-over-year (Y/Y) basis, jobs increased 0.7 percent, the first positive Y/Y growth since the first quarterof 2008. The unemployment rate remained stubbornly stuck at around 10.6 percent throughout2010.

The unemployment rate for Oregon sits at 10.6 percent for December, essentially unchanged forthe past fourteen months. The unemployment rate tends to be one of the last measurements toimprove as the economy enters recovery.

Finally, we are seeing more sectors with positive job growths. Manufacturing still had job losseslead by wood products and transportation equipment. Strong job gains in the service sectorswere lead by retail trade, information, professional and business services, and educationalservices. Job losses were less prevalent in the service sectors with construction, wholesale trade,transportation, warehousing, and utilities, and government recording the job losses.

On a monthly basis, December 2010 employment is 11,900 above the year ago level inDecember 2009. Although in the right direction, this job increase is very weak. We will nothave the advantage of seeing the yearly benchmarking of the job data from the OregonEmployment Department by the time this report is issued. Its possible that the job numbers,once revised, may show a bit more growth last year.

Warnings of a double-dip recession are heard less on the streets. The US economy got twoinsurance cards played to keep the recovery going. Federal stimulus policy not only extendedthe Bush tax cuts for two years, but also cut employee payroll tax rates by two percent andallowed bonus depreciation expensing into 2011 and 2012. From the Federal Reserve, we haveQE II (Quantitative Easing Part II) with the $600 billion Treasury purchases expected to continuethrough mid-2011.

Oregon still faces risks which are national and international in scope. With strong trading ties toChina, any faltering due to inflation or asset bubbles could negatively impact Oregon exports.Housing remains one of the key risks for this year as the oversupply still has room to decline.Oregon will also benefit if business outlooks improve and our traded industries find greaterdemand for their goods and services. Stronger growth in consumer spending will spill over intoOregon businesses with further expansions and job hiring.

Although the outlook is mixed with both downside and upside risks, the addition of the upsiderisks is a welcome change. The forecast continues with a relatively jobless recovery whereemployment rises slowly in 2011 before picking up steam in 2012.

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OEA (Office of Economic Analysis) forecasts an increase of 1.8 percent in total employment inthe first and second quarters of 2011. The second half of the year will marginally be stronger andjust above 2.0 percent growth in 2012.

The year average for 2011 is an employment increase of 1.4 percent. Although the quarterly job

growth is greater than this, the slow growth is not strong enough to boost the yearly averagehigher than 1.4 percent. Job growth is projected to continue in 2012 at 2.0 percent and 2.1percent in 2013.

The wood products industry appears to have reached a bottom and the climb out will take sometime. The wood products industry is projected to lose 2.1 percent of its jobs in 2011. Theoutlook improves with job growth of 4.3 percent in 2012 and 6.4 percent in 2013. Although theoutlook has relatively strong employment growth, the job level in 2013 is still well below the joblevel in 2008.

Computer and electronic product sector will see mild growth in 2011, but not enough to lift the

yearly average into positive territory. The computer and electronic product sector is projected tolose jobs at a rate of 1.2 percent in 2011. Job growth will turn positive at the end of 2011 leadingto an annual growth rate of 2.2 percent in 2012 and 3.1 percent in 2013.

The transportation equipment sector is expected to lose 53 percent of its employment from 2006to 2011 on an annual average basis. This sector is still expected to be down 45.4 percent in 2017from its recent high employment in 2006. The outlook for the transportation equipment sector isfurther jobs losses of 1.7 percent in 2011. The job outlook improves with gains of 3.3 percent in2012 and 3.8 percent in 2013.

The metals and machinery sector managed to add a small amount of employment at the end of2010. For 2011, this sector should be adding jobs at the rate of 1.6 percent. Job growthimproves with rates of 3.8 percent in 2012 and 3.7 percent in 2013.

Other durables have been adding workers though most of 2010. This sector includes industriesinvolved in electrical equipment, appliance, and component manufacturing, furniture and cabinetmaking, and other types of manufacturing such as medical and dental equipment. This sector isprojected to have job growth of 4.3 percent in 2011, 3.3 percent in 2012, and 0.9 percent in 2013.

Food processing, while highly seasonal, has continued to add jobs through the recession on anannual basis. This sector is expected to be relatively flat in 2011 with a slight loss of jobs at 0.5percent. Growth continues with 1.5 percent in 2012 and 1.1 percent in 2013.

Other nondurables which include paper and allied products is projected to have job increase of2.2 percent in 2011, 1.1 percent in 2012, and 0.7 percent in 2013.

Constructions jobs should finally turn up in 2011. Construction jobs are expected mildlyincrease by 0.6 percent in 2011 and 2012 before picking up steam with growths of 6.0 percent in2013.

Trade, transportation, and utilities sector lost jobs in 2010 at a rate of 0.4 percent. This sector isprojected to gain jobs at 1.6 percent in 2011, 2.9 percent in 2012, and 2.4 percent in 2013. Retail

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employment declined in 2010 at a slight 0.1 percent and will decrease in 2011 at a 1.2 percentrate with further increases in 2012 with 1.6 percent growth and 1.9 percent in 2013. Wholesaletrade jobs were down in 2010, and are expected to rise 2.0 percent in 2011, followed by 4.1percent in 2012. Growth of 2.5 percent in projected for 2013.

The information sector, which includes traditional publishers such as newspapers and publishersof software, added jobs at a rate of 2.9 percent in 2010. This sector had a strong second half of2010 which is projected to continue into 2011 with growth of 7.3 percent. Job growth shouldcontinue at 3.0 percent in 2012, and then level off with a slight decrease of 0.3 percent in 2013.

The financial activities sector is starting to shake off the after effects of the financial crisis andrecession. The fourth quarter of 2010 was this first positive job gains since the first quarter of2007. This sector will have job growth of 2.4 percent in 2011, 3.6 percent in 2012, and 1.7percent in 2013.

Professional and business services lost employment by 1.4 percent in 2010, even though is

finished the year on a strong job gain. This sector is expected to rebound in 2011 with projectedgains of 4.3 percent. The industry will continue to show job gains with 2.1 percent in 2012followed by 4.3 percent growth in 2013.

Education and health services have survived the downturn better than any other sector (exceptfor food processors). Job growth was relatively weak at 0.4 percent in 2010 but still quite anaccomplishment for such a large employment sector. Job growth is expected to be 2.3 percent in2011, 2.8 percent in 2012, and 1.7 percent in 2013. Private education is forecast to increase jobgrowth to 3.7 percent in 2011 with growth tapering off at 1.1 percent in 2012 and then flat with aslight decline of 0.1 percent in 2013. The growth rate in the health services industry is projectedto be 2.1 percent in 2011, 3.0 percent in 2012, and 2.0 percent in 2013.

Leisure and hospitality is starting to recover from the decrease in household discretionaryspending during the recession. Leisure and hospitality is forecasted to increase jobs by the rateof 2.0 percent in 2011, 1.9 percent in 2012, and 1.3 percent in 2013.

The government sector employment increased by 0.4 percent in 2010. Government employmenttypically lags during recessionary times and is expected to lose jobs at a rate of 2.3 percent in2011. Job growth will be flat with a decline of 0.1 percent in 2012, increasing to 0.7 percent in2013. State and local government are expected to shed jobs in 2011 as they attempt to balancebudgets.

Population growth in the state is forecasted to increase 0.7 percent in 2011, and grow at a slightlyfaster rate in 2012 at 0.9 percent and 1.0 percent in 2013.

Forecast Risks

Fears of a double-dip recession are fading. Recently, IHS Global Insight has changed theirprobabilities of their optimistic and pessimistic scenarios. They now have the chances of theoptimistic scenario higher than the chances of the pessimistic scenario. The continuation of theFederal Reserve QEII (Quantitative Easing Part II) and fiscal policy extensions of tax cuts, bonusdepreciation, and unemployment benefits will help boost activity in 2011. Near term economic

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signals point to continued economic growth in 2011 and beyond. Although this year looks verypromising, the risk of headwinds still lingers on the horizon.

Oregons economy generally follows the U.S. and same issues apply. Wood productsemployment has been decreasing over time and is impacted by both cyclical and structural

factors. Transportation equipment manufacturing appears to have structural factors and the RVsector will not likely come back to its former self as the recovery continues. Will electrical carmaking possibly replace these lost jobs? The Intel announcement has very positive short termimprovements for construction and high tech jobs but also has longer term implications for hightech to play a major role in the Oregon economy. Intel is also a firm that could expand almostanywhere it chooses in the world. Its expansion plans in Oregon is in many ways a statementthat this state has many advantages for businesses to locate and expand. Only time will tell ifthese intangibles will play out in real positive numbers for the state.

We will continue to monitor and recognize the potential impacts of risk factors on the Oregoneconomy. We have identified the major risks now facing the Oregon economy in the list below:

Contagion of the credit crunch and financial market instability. As more time passes, thisdownside risk becomes less likely to occur. Credit markets are easing, but consumers andbusinesses still have difficulty getting loans. To the extent that credit markets take longer tocome back to some sort of state of normalcy, the current recovery could be slower thanprojected or thrown off track. Housing and commercial real estate may take longer for creditconditions to improve. Oregon will suffer the consequences along with the rest of the nation.

Prolonged housing market instability. Signs are starting to emerge that the housing markethas hit bottom, at least in terms of housing starts, but prices may have further to fall.Foreclosures and delinquency rates are still relatively high. Oregon, with the rest of the

nation, will still see corrections to the housing market in 2011. The question is whether the job growth will kick in to alleviate the downward pressures from declining housing pricesand oversupply of homes. The housing market appears to be the biggest threat to a sustainedeconomic recovery in Oregon.

Commodity price inflation. With world economies starting to recover and emerging marketsstill strong, the stage is set for higher commodity prices. Food prices are near their 2008 highs.Oil prices are approaching $100 a barrel. Industrial metals are also on the rise. This could be arepeat of commodity price spikes that took place in 2007-2008. The risk is how disruptive thiswill be on businesses and whether the commodity price inflation will lead to general inflation.With a weak recovery that needs to build strength, the commodity inflation could through this

off track. Then again, if this is only a change in relative prices and wages costs do notaccelerate, this commodity inflation could be short lived.

The temporary return of federal timber payments to Oregon counties. Included in the federalbailout was a provision to reinstate federal timber payments for four years. Oregon countieswill receive $254 million, down from the previous $282 million level and will be phased outover the four year window, through 2011. 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.

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population, 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 is further down to 30 percent in 2010. As a sign of slow to modest economic gain, the ratioof net migration-to-population change will increase gradually and will reach 73 percent by the

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 2010-2017. 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 growth during the early years of the current decade, the elderly population (65+)has picked up a faster pace of growth and will surge as the baby-boom generation starts to enter

this age group. The average annual growth of the elderly population will be 4.2 percent duringthe forecast period as the boomers continue to enter retirement age. However, the youngestelderly (aged 65-74) will grow at an extremely fast pace for some years during the forecastperiod, even exceeding 6 percent annual rate of growth due to the direct impact of the baby-boom generation entering retirement age. Reversing several years of shrinking population, theelderly aged 75-84 will start a positive growth as the effect of depression era birth-cohort willdissipate. The oldest elderly (aged 85+) will continue to grow at a moderately but steady rate dueto the combination of cohort change, continued positive net migration, and improving longevity.However, the annual growth rate will continue to taper off as the depression era small birthcohort 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 recovery starts after that year. The young adult population(aged 18-24) will decline by 0.9 percent between 2010 and 2017, reversing from an averageannual rate of 0.9 percent growth experienced between 2000 and 2010. Although the slowgrowth of college-age population (age 18-24) tend to ease the pressure on public spending onhigher education,, college enrollment typically goes up during the time of high unemploymentand scarcity of well paying jobs when even the older people flock back to college to betterposition themselves in a tough job market. The growth rate for children under the age of fivewill remain below zero percent in the near future and will see positive growth only after 2014.Although the number of children under the age of five will decline slightly in the near future, thedemand for child care services and pre-Kindergarten program will be additionally determined bythe labor force participation of the parents. The growth in K-12 population (aged 5-17) willremain low which will translate into slow growth in school enrollments. This school-agepopulation has actually decline in size. The 25-44 age group population has reversed severalyears of declining trend during the early part of the last decade and before. The decline wasmainly due to the exiting baby-boom cohort. This age group has seen positive growth starting inthe year 2004 and will increase by 1.0 percent annual average rate during the forecast horizon.

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Revenue Forecast

General Fund Revenues

The recovery in General Fund tax collections is sticking to script. Growth among Oregons

primary revenue sources has now turned the corner, with personal income tax collections finallygrowing at a rate consistent with their long-run historical average. For the next several months,overall collections are expected to expand at very strong rates as personal income tax revenuesbegin to climb out of the large hole that the recession put them in.

The outlook for the 2009-11 biennium is virtually unchanged from the December 2010 forecast.Uncertainty remains, however, as the bulk of year-end tax filings will be processed in the comingweeks. There is potential for an upside surprise among April personal income tax filings, whilethe risks facing corporate income tax payments lay predominantly on the downside.

For fiscal year 2012 and beyond, the revenue outlook has changed somewhat from December,

due to an evolving policy landscape and changes in the underlying economic forecast. Generally,assumptions about growth in personal and business income have become stronger in the lateryears of the forecast, leading to more expected revenue over the extended forecast horizon.However, taxable corporate profits are now expected to be weaker over the next several months,which together with changes to the structure of taxes, have led to a more pessimistic overallrevenue outlook for the 2011-13 biennium.

Many of the tax policy changes that have contributed to the revised outlook for 2011-13 andbeyond are not set in stone. Tax policies enacted during the last legislative session are now beingfolded into the baseline revenue outlook. Changes to some of these laws are now beingconsidered by policymakers. In particular, sunset dates for many large tax credits were scheduledlast session. As credits are allowed to disappear, considerable support is lent to the revenueoutlook in the outer years of the forecast. Similarly, there is a significant revenue impactassociated with reconnecting to federal tax laws in 2011.1

1 For current information on tax credit sunsets, contact the Joint Committee on Tax Credits(http://www.leg.state.or.us/committees/). House Bill 2535 deals with reconnecting to federal tax law in 2011.

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The forecast for General Fund revenues for 2009-11 is $12,429 million. This represents anincrease of $3.3 million from the December 2010 forecast. The forecast for the 2009-11biennium is now $1,146 million below the Close of Session forecast. The prolonged plunge inpersonal income taxes, particularly those related to nonwage forms of income, accounts for mostof the decrease relative to the Close of Session forecast. Personal income tax collections were

revised upward relative to the December forecast. However, gains in personal income taxcollections were largely offset by a downward revision to the near-term outlook for corporateincome taxes. After incorporating the use of Rainy Day Funds and other legislative transfers,total available resources amount to $12,537 million.

Table R.1

(Millions)

2009 COS

Forecast

December 2 010

Forecast

March 2011

Forecast

Change from

Prior Forecast

Change from

COS Forecast

Structural Revenues

Personal Income Tax $11,545.7 $10,443.0 $10,458.2 $15.2 -$1,087.5

Corporate Income Tax $831.6 $855.2 $841.3 -$13.9 $9.7

All Other Revenues $1,198.4 $1,128.0 $1,130.0 $2.0 -$68.4

Gross GF Revenues $13,575.7 $12,426.2 $12,429.4 $3.3 -$1,146.2

Administrative Actions1 -$43.7 -$15.7 -$15.7 $0.0 $28.0

Legislative Actions $0.0 $123.0 $123.0 $0.0 $123.0

Net A vail able Resources $13,532.0 $12,533.5 $12,536.7 $3.3 -$995.3

Confidence Intervals

67% Confidence +/- 1.7% $211.3

95% Confidence +/- 3.4% $422.6

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

2009-11 General Fund Forecast Summary

$12.22B to $12.64B

$12.01B to $12.85B

Personal Income Tax

On a cash basis, personal income tax collections totaled $1,275.0 million for the second quarter

of fiscal year 2011, $42.7 million above the latest forecast. Withholding receipts of $1,196.2million came in $3.2 million below the forecast. Estimated and final payments exceed theforecast by $22.1 million and $8.7 million respectively. Refunds were $15.2 million smaller thanexpected. Compared to the year-ago level, total personal income tax collections were up 6.1percent.

The forecast for total personal income tax receipts during the current biennium was increased$15.2 million from the December forecast. This was largely due to the strength of recentcollections. Under the updated outlook, personal income tax collections during the currentbiennium will be 3.6% lower than in 2007-09.

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Corporate Income Tax

Corporate income taxes equaled $106.9 million for the second quarter of fiscal year 2011, $11.0million lower than the December forecast. Quarterly corporate receipts were 111% higher than

figures from a year ago.

Corporate profits, and associated tax collections, have risen rapidly throughout much of thecurrent biennium, and remain near record highs. The corporate income tax forecast for thebiennium as a whole is now $9.7 million above the Close of Session forecast. If this outlook isrealized, collections would fall below the 2% kicker threshold, leading to no corporate kickercredits to be claimed during the 2011-13 biennium.

Non-income Tax Sources of Revenue

All other revenues will total $1,130 million for the biennium, an increase of $2.0 million from

the prior forecast. Most of the forecast changes for non-income tax sources of revenue weretechnical in nature. Aside from technical changes, the outlook for tobacco taxes has been revisedupward in light of strong demand, and the forecast for interest earnings has been reviseddownward in keeping with the small size of reserve funds and persistently low interest rates.

Extended General Fund Revenue Outlook

Table R.2 exhibits the long-run forecast for General Fund revenues through the 2015-17biennium. General Fund revenues will total $13,774 million in 2011-13, an increase of 10.8percent from the prior period, and $81 million below the December forecast. In 2013-15, revenuegrowth will accelerate to 17.1%, followed by 10.1% growth in 2015-17. Revenues in both 2013-15 ($400 million) and 2015-17 ($324 million) are expected to be significantly larger than in theDecember forecast.

The forecast for total personal income tax receipts during the 2011-13 biennium was reduced by$19.7 million from the December forecast. The revenue impacts of changes to the tax structureare largely responsible. The most recent estimates of the revenue effects of reconnecting to thefederal tax code in fiscal year 2011 suggest personal income tax collections will be reduced bymore than $50 million during the biennium. The bulk of this impact is the result of bonusdepreciation and section 179 expensing provisions in the federal tax code. Under the updatedoutlook, personal income tax collections during the 2011-13 biennium will be 15.1% higher thanin 2009-11.

The forecast for total personal income tax receipts during the 2013-15 and 2015-17 budgetperiods was revised upward significantly from the December forecast ($227.4 million, and$112.6 million, respectively). These changes were due to a somewhat stronger economic outlookand large estimated revenue impacts for the scheduled expiration of income tax credits. Underthe updated outlook, personal income tax collections will increase by 17.0% during the 2013-15biennium, followed by 11.0% growth in 2015-17.

The forecast for total corporate income tax receipts during the 2011-13 biennium was reduced by$68.3 million from the December forecast. A large downward revision to the economic forecast

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for underlying business profits, together with the revenue impacts of changes to the tax structure,accounted for the change to the outlook. Although profit margins are expected to remain healthyfor most businesses, they will narrow somewhat going forward as firms incur additional costs asthey spend more on workers and equipment. The most recent estimates of the revenue effects ofreconnecting to the federal tax code in fiscal year 2011 suggest corporate income tax collections

will be reduced by around $50 million during the biennium. The bulk of this impact is the resultof bonus depreciation and section 179 expensing provisions in the federal tax code. Under theupdated outlook, corporate income tax collections during the 2011-13 biennium will be 6.7%higher than in 2009-11.

The forecast for corporate income tax receipts during the 2013-15 and 2015-17 budget periodswas also revised upward significantly from the December forecast ($160.6 million, and $194.9million, respectively). These changes were due to large estimated revenue impacts for thescheduled expiration of income tax credits, and a strong estimated response to Measure 67reforms in the recent collections data. Under the updated outlook, corporate income taxcollections will increase by 28.8% during the 2013-15 biennium, followed by 3.4% growth in

2015-17.

Table R.2

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

Forecast Forecast Forecast Forecast Forecast

2007-09 % 2009-11 % 2011-13 % 2013-15 % 2015-17 %

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

Personal Income Taxes 10,090.6 -8.6% 10,458.2 3.6% 12,032.7 15.1% 14,077.5 17.0% 15,621.5 11.0%

Corporate Income T axes 684.5 -18.9% 841.3 22.9% 897.9 6.7% 1,156.2 28.8% 1,195.3 3.4%

All Others 948.9 10.6% 1,130.0 19.1% 843.8 -25.3% 898.1 6.4% 949.0 5.7%

Total General Fund 11,723.9 -8.0% 12,429.4 6.0% 13,774.4 10.8% 16,131.8 17.1% 17,765.9 10.1%

Kicker Distributions 1,084.2 - - - -

Total Revenue 12,808.1 0.5% 12,429.4 -3.0% 13,774.4 10.8% 16,131.8 17.1% 17,765.9 10.1%

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

January 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, January 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

Looking Up

The U.S. economy is steadily improving with stronger signs for the private-sector. Business andconsumer confidence are up as are employment and consumer spending. The recovery is startingto move to the desired self-sustaining stage. Fiscal policy will provide a boost to 2011 thatextend beyond keeping the Bush tax cuts for another two years. Employee payroll taxes will becut by two-percentage points in 2011 along with full expensing of depreciation this year and 50percent bonus depreciation in 2012. IHS Global Insight has raised their GDP growth forecastfrom 2.4 percent to 3.2 percent for 2011 and a slight lowering of 2012 to 2.9 percent as thestimulus effects fade.

News on the Economy Continues to Improve. On the business side, surveys continue to pointto improvement. Hiring is picking up and initial insurance claims are lower, and though theinitial November labor report was disappointing, both November and October were revised upand December job numbers were slightly more than 100,000. On the household side, consumerconfidence is trending higher even though the reading for December was weak. IHS GlobalInsight forecasts real consumer spending to grow 4.3 percent in the fourth quarter of 2010compared to the 2.4 percent growth in the third. Holiday retail sales appear to up more than 5percent on a year-over-year basis in nominal dollars. Consumers are still somewhat cautious sospending will still be somewhat restrained with consumer spending growth of 3.2 percent in2011, up from 1.8 percent in 2010.

Solid Fourth Quarter GDP Growth. Fourth quarter growth is expected at 3.7 percent[advanced estimate for fourth quarter real GDP is 3.2 percent], better than the 2.6 percent in thethird. Inventory accumulation will not add to growth but a drop in imports will help the foreigntrade sector boost up growth.

Not Quite Firing on All Cylinders. The housing sector remains as a key downside risk for2011. An oversupply still exists and housing prices continued to decline in the second half of2010. The tax credit program for house buying mainly shifted home sales rather than increasethem over time. House prices are expected to further decline by 5 percent in 2011. Although

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housing remains the greatest risk against the recovery, the impact on the economy is not asstrong today as in the past and chances of re-igniting the financial crisis are not as great.

Better Balance Growth in 2011. The inventory cycle contribution to growth in 2010 will giveway to a more balanced base of growth in 2011. Final sales should come in at 3.2 percent. Along

with stronger consumer spending, business spending on equipment should have another goodyear helped by tax incentives related to depreciation expensing. The foreign sector will add togrowth through continued improvement in emerging market economies, a weaker US dollar, andthe slowing of the inventory cycle which will slow the growth of imports.

Fed Expected to Stay the Course on QE II. Although the economy is improving and new fiscalstimulus is set for the next two years, the Fed will continue with its $600 billion Treasurypurchases through mid-2011. Inflation will slightly pick up but not at an alarming rate so the Fedwill not move to raise interest rates until 2012.

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U.S. ECONOMIC HISTORY AND FORECAST

7 .2 16 2 . 6 36 2 3 2 .9 11 7 4 5 6 .0 32 2 6 . 38 75 6 . 4 01 7 6 . 65 06 6 . 8 65 9 6 . 95 41

2.0 -0.8 ## -0.5 # ## 2.3 2.2 1.8 1.6 1.6 1.6

2.249 2.05 2.01 1.96 1.78 1.49 ## 1.24 # ## 1.01 1.25 1.22 1.19 1.19 1.12 1.10 1.14

6.453 6.80 7.68 6.11 6.64 5.87 ## 7.22 # ## 2.91 4.29 5.19 6.03 6.39 6.40 6.65 6.87

3.207902 4.18 4.07 3.98 3.51 1.67 ### 2.02 ## ### -0.51 1.08 2.04 2.33 2.16 1.78 1.55 1.56

3.97893 4.69 5.27 3.88 4.60 4.75 ### 4.56 ## ### 1.17 2.82 2.86 3.55 3.83 3.71 3.79 3.9

0.305983 3.84 4.18 3.62 4.42 0.70 ### 0.13 ## ### -3.43 -1.19 0.78 1.07 0.70 0.40 0.44 0.8

2.635818 3.90 2.71 3.53 4.30 4.17 ### 3.74 ## ### 2.00 3.58 2.92 3.39 3.24 2.81 2.68 2.7

4.073928 4.96 5.31 5.59 5.95 7.05 ### 7.96 ## ### 3.19 4.47 5.00 5.61 5.85 5.86 6.05 6.2

1.652886 2.87 2.96 3.37 3.93 5.92 ### 5.28 ## ### 1.44 3.00 2.68 3.14 3.30 3.18 3.21 3.3

1.953591 3.10 2.65 2.04 2.56 2.57 ### 2.17 ## ### -0.11 1.19 1.71 1.82 1.63 1.31 1.07 1.07

1.294445 1.21 1.19 1.17 1.20 1.17 ### 1.12 ## ### 0.94 0.87 0.86 0.85 0.84 0.83 0.82 0.8

-0.14484 1.48 1.29 -0.05 1.05 0.82 ### -0.34 ## ### -4.69 -1.46 1.15 -0.14 -0.75 -1.09 -0.92 -0.54

4.556057 5.11 4.48 4.40 3.87 1.72 ### 2.34 ## ### 0.25 1.59 2.46 2.80 2.61 2.13 1.78 1.6

2.653234 3.87 3.39 2.86 3.32 3.23 ### 2.60 ## ### 0.51 1.85 2.06 2.39 2.22 1.85 1.53 1.4

31.8 33.4 37.0 41.7 46.7 47.7 ### 47.8 ## ### 41.4 42.6 44.6 45.3 45.7 46.2 46.7 47.4

37.6 38.7 37.7 37.2 37.9 36.8 ### 35.7 ## ### 31.5 30.9 31.1 31.3 31.4 31.5 31.6 31.6

165.43 183.6075 200.3575 216 229.9575 241 248.6875 ## 274 286.2415 299.7681 312.0301 326.8946 343.0362 360.1616 377.9351 395.7143

128.75 133.1583 135.2083 141.425 149.9167 158 167.6167 ## 184 200.5667 211.0506 214.4351 223.9009 233.1842 243.0206 253.4427 264.7599

Graph N. 1

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CONSUMER PRICE INDEXALL ITEMS VS. ALL ITEMS LESS FOOD & ENERGY

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Percent Ch ange in Real Consumer Spending -Left Scale

University of Michigan Index of Consumer Sentiment (Feb 1966=1) Right Scale

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B. International Review and Outlook

The global recovery remains intact; however it is a multi-speed recovery with many developingnations continuing to grow robustly and the advanced economies lagging behind. In its updatedWorld Economic Outlook, the International Monetary Fund (IMF) notes that overall economic

growth in 2011 should be somewhat slower than 2010 as private demand replaces fiscal andmonetary policy as the primary drivers of growth. The IMF goes on to report that stronger thanexpected consumer spending in both the United States and Japan in the second half of 2010 werean added positive for the global economy, however unemployment remains at high levels in mostadvanced economies and eurozone worries remain a downside risk to the expansion. Conversely,emerging markets continue to grow briskly and should do so throughout 2011, partially a resultof strong consumer demand and also the fact that many of these countries have few scars fromthe financial crisis. With emerging markets economic growth returning to potential (at least),policy makers in those countries need to prevent an overheating economy and ensure appropriatepolicy tightening when warranted.

The fact that the world economy is expanding and many, large emerging markets, such as Chinaand India, are experiencing strong growth is now placing upward pressure on commodity prices.Worldwide demand is strong for both raw materials and final goods, even if a number of major,developed economies continue to languish with large output gaps. With commodity pricessoaring (see Graph I.1), this along with renewed growth is leading to higher inflation rates inmany emerging markets. The natural question that follows is if and when these highercommodity prices flow through into higher inflation in advanced economies, such as the UnitedStates. The concern is, if or when such events unfold, higher prices will put pressure onconsumers and the overall economy. According to conventional theory, this will lead tocontinued, high levelsof inflation, theeconomy stalling outor both (stagflation).However for a trueprice/wage spiral,labor needs to be ableto generate continuedwage increases andwith unemploymentover 9 percent inEurope and the U.S.,wage pressures remainsubdued and areexpected to remain sofor the foreseeablefuture. The primaryconcern is ifproducers are able to pass on these commodity price increases to consumers, will this cause analready cautious consumer to retrench and economic growth to slow or not? A furtherrepercussion of high inflation in advanced economies is that such an occurrence would putcentral banks in a tough position. If economic growth is average and unemployment high, centralbanks, ideally, will continue to have an accommodative policy position, however if prices rise

Inflation Measures (Y/Y Percent Change)

-60%

-40%

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0%

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U.S. Core Inflation (Right Axis)

Graph I.1

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too much, central bankers may be forced to raise interest rates to head of inflation, which willslow economic growth as well.

Given the above, Graph I.2 illustrates the key interest rate central banks target in their respectivecountry. Take China for example (the top, dashed line). As strong growth has returned over the

past year or so and inflationary pressures are well above ideal, the Peoples Bank of China hasnow raised its key interest rate three times in the past five months for a total increase of 75 basispoints. A similar pattern is playing out in many Southeast Asian economies (Taiwan andMalaysia to name two). An outlier among Asian economies would be Japan, which actually cutinterest rates further in October 2010 (from 0.1 percent to 0.0 percent). While largely a symbolicmove to indicate that the Bank of Japan will do all it can to aid the recovery, the decision reflectsthe common predicament of most advanced economies central banks. That predicament wouldbe sluggish growth and a heavily damaged labor market. As seen in the graph, the United States,the United Kingdom and the European Union have all cut interest rates dramatically in 2008 andhave kept rates at historic lows for nearly two years. Among advanced economies, Canada standsout as it has actually raised its interest rate 50 basis points during June and July of 2010. The

reasons for such moves were primarily strong economic growth, including a much healthier labormarket that its neighborto the South and also astrong surge in realestate prices in thecountry. Canada largelymissed the financialcrisis and real estateboom/bust cycle thatpreceded it in manyparts of the world,however more recentevents have lead tostrong home priceappreciate in thecountry. The Bank ofCanadas decisions toraise rates werepartially a result to headoff a true housing bubble.

Graph I.2

Global Central Bank Rates

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Overall, central banks need to be accommodative for the recovery, especially in the developedworld, but also watchful for signs of inflation and take the necessary steps to prevent anoverheating economy. Right now there are no immediate signs of runaway inflation in manyadvanced economies, so those central banks can accommodate. Strong growth coupled withelevated inflation is causing developing nations central banks to begin tightening rates. Eacheconomy is different and each central bank will act in its own economic best interest movingforward.

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Oregon Dollar Index

A dollar index serves many purposes, however it generally acts as an indicator of internationalcompetitiveness for exports and can be used as a leading indicator in terms of employment intrade-dependent locales. As the dollar appreciates, export growth slows or even declines, and as

the dollar depreciates, exports expand further. While this is true at both the national and locallevel, most currency indexes are produced at the national level. For example, in the U.S. theFederal Reserve produces three main U.S. Dollar indexes based on the exchange rates of theU.S.s trading partners. While a national index is informative, it can be modified to match theexact specifications for local areas.

The Office of Economic Analysis calculates an Oregon specific trade-weighted dollar index forthis purpose. Our offices index is one of the eleven leading indicators used in the Oregon Indexof Leading Indicators (OILI) and the Oregon Dollar Index also matches Oregon exportsinversely. What follows is a brief look into how our index is constructed and how it compareswith the major currency dollar index produced by the Federal Reserve (Graph I.3).

Given Oregon's industrialmakeup (the state'smanufacturing locationquotient for 2009 was1.143, with durable goodsregistering a 1.309) andgeographic location, thestate has long been amajor exporter andinternational trade is apillar of the state'seconomy. According toresearch, Oregon is thefifth most trade-dependentstate in the U.S. and arecent Brookings Institutereport shows that thePortland-Vancouver MSAis the second most trade-dependent metro in the country behind only Wichita, KS. (Wichita is the "Air Capital of theWorld" and has long been a major player in the aircraft industry with operations by Boeing,Airbus, Learjet and Cessna, among others.) Seeing that exports play a major role in Oregon'seconomy and international trade is influenced by exchange rates, tracking the internationalcompetitiveness of Oregon's exports is important to determine the economic health of the stateand also to help gauge future trends. It also stands to reason that for a trade-dependent state, suchas Oregon, a dollar index is a leading indicator for local employment. As the dollar becomesmore competitive, it will boost Oregon exports, which in turn will lead to increased employmentas the exporting firms need to hire additional workers to fill orders and the ports will hireadditional workers to load/unload the products onto ships, barges and airplanes.

Graph I.3Oregon Dollar Index (March 1995 = 100)

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Oregon Dollar Index Fed Weighted Exchange Index

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and Brazil will see the most pronounced slowing trends as fiscal and monetary tightening withineach country will cool growth, while India and Russia will not suffer as much (if at all).

Oregon Exports

U.S. exports continued to increase through the end of 2010. In fact, national exports haveincreased quarter-over-quarter since early 2009 and the fourth quarter of 2010 set a new record interms of the total dollar value of U.S. exports. Oregon exports followed the same general patternof the past 18 months; however Oregons exports actually declined during the third quarter. Witha strong rebound in the fourth quarter, Oregon exports are now at the same levels reached inearly 2010 and also early 2008. For 2010 as a whole, U.S. exports increased 21.0 percent andOregon exports increased 18.6 percent. Exports are expected to continue to follow the globaleconomy through the expansion, however, as economic expectations change, exports willsimilarly grow either faster or slower along with economic conditions. Besides economic growth(and consumer demand), exchange rates are another mechanism which will influence exportsmoving forward. Should the U.S. dollar appreciate against our major trading partners, exports

will slow more, however should the dollar depreciate, exports should benefit and see strongergrowth. Likewise, Oregon exports are expected to move more in line with the Oregon DollarIndex which accounts for the differences in the trading patterns between the U.S. and Oregon(see previous section for more detail).

Graph I.5 illustrates Oregons totalexports and the Y/Y percent changefrom 1997 through 2010. For 2010,Oregons exports growth ranked31

stbest among all states. Prior to

the decline in the third quarter,Oregons exports were boomingand ranked among the growthleaders in the country. Oregontypically experiences more volatilemovements than the US overall during booms exports increasemore than the nation and duringrecessions they decrease more thanthe nation. Oregon exports have,more or less, leveled off in 2010following the initial surge ingrowth after the recession. This is a result of of the economy a lull, or slowdown during thesummer months. Even with a decline in the third quarter, Oregon exports total dollar valueremains near historic levels. The historical rankings of the four quarters of 2010 are fourth,seventh, tenth and sixth largest, respectively.

Graph I.5Oregon's Total Exports

(1Q 1997 - 4Q 2010, current dollars)

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Table I.4 charts exports of Oregon productsto major destinations. Out of the top fifteenexport markets, only Taiwan, Costa Rica, theNetherlands and Hong Kong saw decreasesin trade Y/Y in 2010. Exports to China were

strong in 2010; however the fluctuationsquarter to quarter recently have been large.After declining nearly 35 percent between2010 Q1 and 2010 Q3, exports to Chinarebounded strongly in the fourth quarter at30.4 percent growth, quarter-over-quarter.Driven by gains in high technology products,exports to Malaysia increased substantiallyin 2010 and for the year total, they reachedan all-time high. It should also be noted thateven with the turbulence of the past year in

exports to China, 2010 marked a historic high for exports to the country and also for exports toany single country for a year. Exports to many of Oregons other major trading partner countrieshave increased by more than double digits Y/Y in 2010.

Table I.4Oregon Exports to Major Trading Partners

($ millions, current prices)

2009

Total

2010

Total

y/y %

change

Share out

of Total

Total All Countries 14,907.4 17,682.7 18.6% 100.0%

China 2,969.5 4,046.2 36.3% 22.9%

Malaysia 1,930.5 2,667.6 38.2% 15.1%

Canada 1,897.4 2,419.7 27.5% 13.7%Japan 1,296.0 1,379.8 6.5% 7.8%

Korea, Republic Of 704.5 936.7 32.9% 5.3%

Taiwan 920.8 669.9 -27.2% 3.8%

Costa Rica 678.8 505.3 -25.6% 2.9%

Germany 362.3 363.0 0.2% 2.1%

Netherlands 384.7 339.3 -11.8% 1.9%

Singapore 201.5 324.9 61.3% 1.8%

Philippines 296.7 323.1 8.9% 1.8%

Brazil 117.5 311.3 165.0% 1.8%

Hong Kong 326.5 299.8 -8.2% 1.7%

Australia 209.1 255.1 22.0% 1.4%

Mexico 200.4 233.0 16.3% 1.3%Source: WISER, February 2011

Graph I.7 shows the quarterlyexport trend for Oregons top fivemarkets since 1997. Exports to alltop five destinations increased in2010 compared to 2009; howeverdevelopments in the most recentquarters vary across countries.Goods bound for China, Japan andSouth Korea increased, whileexports to Malaysia and Canadafell. After reaching an all-timehigh in the third quarter, exports toMalaysia cooled off slightly in thefourth quarter to a level that hasbeen relatively consistent the pastyear and a half. Given the fact that96 percent of Oregon exports to Malaysia in 2010 were Computer and Electronic Products,fluctuations within this industry drive total exports to the country. A welcomed development isthe rebound in exports to Canada in 2010 (+27.5 percent). As Oregons largest export market formuch of the past two decades, the Great Recession took a heavy toll of Canadian bound exportsas the dominant industries have traditionally been transportation equipment and wood products,two industries hit especially hard.

Graph I.7Oregon Exports by Country

(1Q 1997 - 4Q 2010, current dollars)

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C. Western Region

This section of the March 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

At the national level, total nonfarm employment increased 0.5 percent year-over-year in thefourth quarter, which is the second consecutive positive value. This marks the first time since2007 Q4 and 2008 Q1 that employment has improved year-over-year for two consecutivequarters. On a quarter-over-quarter basis, national employment increased in the first and secondquarters, however they declined slightly in the third quarter as the temporary Census workersfinished their assignments, and then increased again in the fourth quarter. Overall, jobs increased

in six of the months of 2010 and the private sector added jobs in ten of the months (every onesince March). Table W.1 details employment by major sector for each of the western states andtheir respective year-over-year changes. As with the nation, each state has either seen its joblosses diminish in recent quarters or have actual employment expand (see Graph W.1 on thefollowing page). On a year-over-year basis, Arizona, California, Oregon, Utah and Washingtonhave seen employment increases, while Idahos employment is unchanged. Nevada continues tosee negative numbers. Utah, typically the best performing Western state in recent quarterscontinues to be up, however strong gains in recent months in both Arizona and Washington nowhave each of those states increasing by at least one percent.

Within employment, the goods producing sectors have been hit the hardest relative to the serviceindustry and the public sector. Construction continues to decline in most states, however, in goodnews; Manufacturing appears to have bottomed out around the country. Natural Resources andTrade, Transportation and Utilities have seen some increases across the different states. Givenrecent tax receipts and the manner in which states budget, the public sector is now beginning toshed jobs, which is expected to continue in the coming quarters.

Table W.1

Arizona Ca lifo rnia Idaho Nevada Oregon Utah Wash ing ton Un ited Sta tes

Total Nonfarm 2,417.8 13,883.7 604.5 1,105.6 1,600.5 1,192.0 2,808.8 130,117.3Y/Y Percent Change 1.2 0.3 0.0 -2.0 0.7 0.7 1.0 0.5

Natural Resources and Mining 11.9 24.9 2.9 12.2 7.3 10.6 5.3 733.3Y/Y Percent Change 12.2 2.5 -6.4 6.1 6.0 2.9 -10.7 10.8

Construction 115.4 535.3 27.6 58.7 65.4 68.0 139.4 5,501.0Y/Y Percent Change 0.3 -6.8 -15.0 -20.3 -5.0 -1.8 -4.8 -3.3

Manufacturing 148.7 1,239.9 54.7 37.8 160.8 110.5 257.9 11,553.7Y/Y Percent Change 0.2 0.1 3.0 -2.3 -1.3 1.7 -0.2 0.6

Trade, Transportation and Utilities 488.5 2,575.9 120.3 208.4 312.5 231.7 532.7 24,698.7Y/Y Percent Change 2.7 -0.4 0.0 -0.4 1.0 -0.5 2.8 0.5

Information 36.5 446.5 9.9 12.3 35.4 29.2 104.1 2,698.3Y/Y Percent Change -4.6 -0.4 1.7 -3.0 8.3 -1.4 2.4 -2.0

Financial Activities 162.6 782.4 30.3 52.0 92.9 70.7 137.7 7,616.3Y/Y Percent Change -1.3 -0.2 3.5 -4.5 -1.7 -2.3 -2.1 -0.9

Professional and Business Services 354.0 2,078.6 74.5 138.0 179.0 154.7 334.2 16,833.7Y/Y Percent Change 3.4 2.9 -0.4 0.1 3.0 2.9 3.5 2.4

Leisure and Hospitality Services 255.3 1,495.3 59.3 300.6 164.3 107.8 264.6 13,064.7Y/Y Percent Change 0.5 1.1 -0.4 -0.7 1.3 0.7 1.5 0.7

Other Services 88.6 473.6 21.1 35.0 58.4 34.8 105.1 5,417.7Y/Y Percent Change -2.9 0.2 2.1 3.8 3.2 2.8 -2.7 1.8

Government 408.5 2,458.5 118.6 151.0 298.8 215.3 542.7 22,272.7Y/Y Percent Change -1.5 -0.7 -1.0 -2.0 0.0 0.0 -0.3 -1.1

Employment by Sector (2010 Q4)

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While all westernstates have seenheavy job losses,their relativeperformance has

varied to somedegree. Graph W.1and Table W.2compare job lossesacross the states.Different statesemploymentreached its peak atdifferent timeperiods based onthe unique

economies in eachstate. For example,Nevadas employment peaked in the second quarter of 2007 and has declined for the pastfourteen quarters. Graph W.1 illustrates the cumulative percentage of job losses in each statesince the first quarter of 2008. Each states respective employment peak is noted in parenthesis inthe graphs legend, and also in column two in Table W.2. Over the past twelve quarters, Oregonsemployment fell 7.95percent (approximately138,200 jobs). Relative toother western states,Oregons job losses havebeen less severe thanArizona, California, andNevada; however Idaho,Utah, Washington and theU.S. have seen lower levelsof job loss.

Graph W.1

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 % Decline from % Increase from

Employment Employment Peak to Trough Trough to CurrentArizona 2007 Q3 2010 Q1 -10.82% 1.24%California 2007 Q3 2010 Q1 -8.85% 0.30%

Idaho 2007 Q4 2010 Q1 -8.11% 0.19%Nevada 2007 Q2 2010 Q4* -14.67% 0%*

Oregon 2008 Q1 2009 Q4 -8.57% 0.67%

Utah 2007 Q4 2010 Q1 -6.44% 0.97%Washington 2008 Q1 2009 Q4 -6.45% 0.99%United States 2008 Q1 2010 Q1 -6.23% 0.62%* Nevada's employment has yet to reach a confirmed trough as it continues to decline.

Table W.3

Index Value

Q/Q Percent

Change (AR)

Y/Y Percent

Change

5 Year Percent

ChangeArizona 180.10 1.9% 1.2% -6.5%

California 149.98 1.7% 1.5% -0.8%Idaho 187.04 -2.6% 0.5% -7.3%

Nevada 172.86 -3.2% -4.0% -21.6%Oregon 181.81 3.1% 2.3% -1.6%

Utah 179.72 -0.5% 0.5% 2.7%Washington 151.28 0.6% 1.0% 0.0%

United States 150.67 2.2% 2.1% 0.0%

Economic Coincident Index for 2010 Q3

Source: Federal Reserve Bankof Philadel hia, Index = 100 inJul 1992

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3

U.S. (2008 Q1)

Arizona (2007 Q3)

California (2007 Q3)

Idaho (2007 Q4)

Nevada (2007 Q2)

Orego n (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. Outside of Oregon, all other western states

underperformed the U.S. average over the past year. Oregons index, after growing slowlythrough the first half of 2010, has turned strongly positive in recent months. Oregons 2.3 percentgrowth in the past year betters all other western states and also the U.S. average. Oregonsquarter-over-quarter growth ranks fifth best nationally, Oregons year-over-year increase ranksfourteenth best nationally and Oregons five year percentage change ranks twenty-sixth bestnationally.

Housing Price Index

Many of the western states havebeen hit hard by the housing boom

and subsequent bust. Table W.4shows the Federal Housing FinanceAgencys home price index for eachwestern state. Arizona, Californiaand Nevada are three of the worstposter children for the bubble.While all states are moving towardnon-declining home prices (somemore quickly than others),California home prices actually increased three of the past five quarters. While the states pricesare down in the most recent quarter, the fact that one of the largest bubble states have seen soperiodic improvements is good news overall for the housing market. Other western states likeIdaho, Oregon, Utah and Washington did not have as large of price increases during the middlepart of last decade, however prices have declined significantly and continue to do so through thefirst three quarters of 2010.

Table W.4

Index

Value

Q/Q Percent

Change (AR)

Y/Y Percent

Change

5 Year Percent

Change

Arizona 183.43 -9.7% -9.3% -35.7%California 163.01 -9.8% -1.5% -39.7%

Idaho 207.62 -6.2% -9.8% -4.4%Nevada 128.66 -9.4% -6.7% -50.0%Oregon 266.30 -15.5% -8.1% -6.1%

Utah 254.66 -10.7% -5.7% 3.7%Washington 233.63 -5.7% -4.0% -0.2%

United States 190.59 -6.2% -3.2% -8.4%

Housing Price Index (2010 Q3)

Graph W.2 shows theyear-over-year percentchange in the FHFAHousing Price Indexfor each of thewestern states since2000. Prices inArizona doubledbetween 2000 and2006, while prices inCalifornia and Nevadamore than doubledduring the same timeperiod. Oregon andWashington pricesincreased about 80 percent, while nationwide prices increased only 50 percent.

Graph W.2

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

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

Year-Over-Year

Change

ArizonaCaliforniaIdahoNevadaOre on

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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. In 2009 permitsissued fell quite substantially from their 2008 levels, whichwere down significantly from their 2007 levels; however2010 have been a mixed bag relative to 2009.

Oregons decline is attributable to the multi-family market asthose types of permits were especially strong in early 2009and have fallen substantially in the past few years. Single-family permits in Oregon, which wereincreasing well over double digits through the first six months, fall to only positive 2.3 percentyear-over-year for 2010. A large reason is the first expiration of the first time homebuyer tax

credit in the fall 2009, which increased construction (permits) and home sales in late 2009, thusrendering year ago comparisons more difficult. A similar pattern has emerged in other states.California and Washingtons overall increases are largely due to increased levels of multi-familypermits in the past few months. Californias increased 99 percent year-over-year, whileWashingtons increased 39 percent, helping to drive the total permit numbers higher.

Table W.5

Permits

Y/Y PercentChange

Arizona 12,235 -13.4%California 43,128 27.6%

Idaho 4,584 -13.4%Nevada 6,402 -5.2%Oregon 7,302 -5.0%

Utah 9,441 -11.2%Washington 20,235 20.8%

United States 598,033 4.5%

Source: U.S. Census Bureau

Housing Permits Issued (2010 Total)

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 Nevada andWashington being an exception. The good news is mostwestern states have seen significant increases sinceinternational trade bottomed in early 2009. After very stronggrowth in late 2009, Oregons export growth has cooled off inthe past few quarters. While the fourth quarter 2010 over thefourth quarter 2009 growth is just 3.1 percent, the total exportvalue for the year increased 18.5 percent in Oregon. Even with the sizable increases in recentmonths, the nation and western states exports remain slightly below their peak levels achievedduring the summer of 2008. Utah is an exception as their exports reached a new all time high,thanks to their primary metal manufacturing exports.

Table W.6

Exports ($mill)

Y/Y PercentChange

Arizona $15,653 11.6%California $143,269 19.3%Idaho $5,150 32.7%

Nevada $5,911 4.2%Oregon $17,683 18.5%

Utah $13,571 31.3%Washington $53,244 2.9%

United States $1,277,504 21.0%

Source: WiserTrade, February 2011

Total Exports (2010 Total)

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D. Oregon Economic Review and Forecast

Summary of Recent Trends

Statewide Trends

The fourth quarter of 2010 brings the year to a positive end. The preliminary estimate of thefourth quarter job gain in Oregon is 1.3 percent at an annualized rate. Thus 2010 finishes asexpected, with recovery in jobs but at a slow rate compared to past recoveries. On a year-over-year (Y/Y) basis, jobs increased 0.7 percent, the first positive Y/Y growth since the first quarterof 2008. The unemployment rate remained stubbornly stuck at around 10.6 percent throughout2010.

Finally, we are seeing more sectors with positive job growths. Manufacturing still had job losseslead by wood products and transportation equipment. Strong job gains in the service sectors werelead by retail trade, information, professional and business services, and educational services.Job losses were less prevalent in the service sectors with construction, wholesale trade,transportation, warehousing, and utilities, and government recording the job losses.

Figure O.1On a monthly basis, December2010 employment is 11,900above the year ago level inDecember 2009. Although in theright direction, this job increaseis very weak. We will not havethe advantage of seeing theyearly benchmarking of the jobdata from the OregonEmployment Department by thetime this report is issued. Itspossible that the job numbers,once revised, may show a bitmore growth last year.

The most recent Blue Chip JobGrowth rankings place Oregon16th in the nation for Y/Y jobgrowth. Between November 2009 and November 2010, jobs increased by 15,900 or 0.99 percent(pre-benchmark data and before the December job release which also lowered the Novemberestimate). A year ago Oregon ranked 46th. The relative performance of the fifty states is shownin Figure O.1.

U.S. employment growth during this period was up 0.64 percent. A year ago, the nation wasdown 3.90 percent growth. Arizona and Montana had the most dramatic changes, with Arizonamoving to a rank of 11 from 49th ranked position a year ago. Montana moved in the exactopposite direction. New Hampshire was ranked 1

stat 2.75 percent job growth. Washington

ranked 17th, and California was 38th. While Washington and Oregon moved up, Idaho movedslightly down from 33rd to 36th among the 50 states, with 0.16 percent job growth.

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the growth of OILI. The fact that the Index has turned significantly positive in recent monthsbodes well for future employment growth in Oregon. Expectations are for moderate employmentgains throughout 2011 as the recovery continues.

Short-Term Outlook

Overview

Warnings of a double-dip recession are heard less on the streets. The US economy got twoinsurance cards played to keep the recovery going. Federal stimulus policy not only extended theBush tax cuts for two years, but also cut employee payroll tax rates by two percent and allowedbonus depreciation expensing into 2011 and 2012. From the Federal Reserve, we have QE II(Quantitative Easing Part II) with the $600 billion Treasury purchases expected to continuethrough mid-2011.

IHS Global Insight lists their top-10 risks for 2011. One needs to keep in mind that besides

downside risk, there are also upside risks. This forecasting firm has recently switched itsweighting on risks so now the probability of upside risks is 20 percent and downside risks is 15percent. Here are a few of the risks:

Policy Mistakes, Especially Too Much Fiscal or Monetary Tightening

Deeper Housing Corrections

Higher Inflation in Emerging Markets

Equity and Property Bubbles

Spikes in the Prices of Oil, Food, and Other Commodities

Strong Growth in Consumer Spending in the United States, Europe, and Asia

Greater Business Optimism and Spending

Oregon faces these same risks which are national and international in scope. With strong tradingties to China, any faltering due to inflation or asset bubbles could negatively impact Oregonexports. Housing remains one of the key risks for this year as the oversupply still has room todecline. Oregon will also benefit if business outlooks improve and our traded industries find

greater demand for their goods and services. Stronger growth in consumer spending will spillover into Oregon businesses with further expansions and job hiring.

Although the outlook is mixed with both downside and upside risks, the addition of the upsiderisks is a welcome change. The forecast continues with a relatively jobless recovery whereemployment rises slowly in 2011 before picking up steam in 2012.

OEA (Office of Economic Analysis) forecasts an increase of 1.8 percent in total employment inthe first and second quarters of 2011. The second half of the year will marginally be stronger andjust above 2.0 percent growth in 2012.

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The year average for 2011 is an employment increase of 1.4 percent. Although the quarterly jobgrowth is greater than this, the slow growth is not strong enough to boost the yearly averagehigher than 1.4 percent. Job growth is projected to continue in 2012 at 2.0 percent and 2.1percent in 2013.

Table O.2 compares OEAs forecast to other published forecasts. OEAs forecast for employmentfollows the trends from the national forecasting firm IHS Global Insight. For 2011, allforecasters have a stronger employment outlook compared to OEA. Some of the local forecastinggroups have not finalized their 2012 forecasts. With the limited comparison, employment growthtrends higher moving into 2012, with only Wells Fargo & Co. having lower job growth outlookcompared to OEA. Of note is the robust job growth of 2.9 percent forecasted by Portland GeneralElectric for both 2011 and 2012.

Table O.2

Oregon Total Nonfarm Employment and Personal Income Growth

Forecaster 2011 2012 2013 2011 2012 2013

IHS Global Insight January 2011 1.7 2.4 2.4 5.8 4.1 5.2

Wells Fargo & Co. January 2011 1.5 1.7 N/A 4.0 4.2 N/A

John Mitchell January 2011 1.7 N/A N/A 4.9 N/A N/A

Conerly Consulting January 2011 1.6 3.0 N/A 3.3 4.8 N/A

Portland General Electric January 2011 2.9 2.9 N/A 5.4 5.9 N/A

OEA January 2011 1.4 2.0 2.1 4.0 4.4 4.7

Consensus* January 2011 1.8 2.4 N/A 4.3 4.8 N/A

*Consens us forecast from Western Blue Chip forecast

Date of Forecast

Employment Personal Income

The IHS Global Insight forecast is incorporated into the OEA forecast. IHS Global Insight has aslightly higher growth path in 2011 compared to OEA which continues into 2012 and 2013.

Personal income growth trend is somewhat similar for IHS Global Insight and Wells Fargo & Co.IHS Global Insight has a strong bounced back in 2011 with more moderate growth in 2012, thenstronger growth of 2013. OEAs forecast builds over time but is still less than IHS GlobalInsights forecast for 2013.

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Table O.3

Oregon Forecast Summary

2010:4 2011:1 2011:2 2011:3 2011:4 2009 2010 2011 2012 2013 2014

Nominal Pers onal Income 143.7 145.3 146.9 148.4 150.1 138.2 142.0 147.7 154.2 161.4 170.1

% change 3.2 4.3 4.4 4.4 4.5 (0.7) 2.8 4.0 4.4 4.7 5.4

128.8 129.7 130.8 131.7 132.6 126.5 127.8 131.2 134.9 138.8 143.4

% change 1.3 2.9 3.2 2.9 2.9 (0.9) 1.0 2.7 2.8 2.9 3.3

Nominal Wages and Salaries 72.4 73.5 74.3 75.1 76.0 70.4 71.4 74.7 78.2 82.0 86.1

% change 3.6 6.3 4.4 4.5 4.9 (5.1) 1.4 4.7 4.7 4.8 5.0

Per Capita Income ($1,000) 37.3 37.6 37.9 38.2 38.6 36.1 36.9 38.1 39.4 40.8 42.5

% change 2.5 3.7 3.7 3.2 3.6 (1.5) 2.2 3.2 3.4 3.6 4.2

Average Wage rate ($1,000) 44.6 45.1 45.4 45.7 46.0 43.0 43.9 45.5 46.8 48.0 49.3

% change 5.9 4.4 2.6 2.8 2.8 0.9 2.1 3.7 2.8 2.7 2.7

Population (Millions) 3.9 3.9 3.9 3.9 3.9 3.8 3.8 3.9 3.9 4.0 4.0

% change 0.6 0.6 0.7 1.1 0.9 0.8 0.6 0.7 0.9 1.0 1.2

Housing Starts (Thousands) 7.5 7.2 7.4 7.6 7.8 7.6 7.6 7.5 8.7 11.2 14.7

% change 9.1 (14.2) 8.6 14.1 7.9 (40.8) 0.6 (1.2) 16.0 28.8 30.8

Unemployment Rate 10.5 10.4 10.2 10.0 9.8 11.0 10.6 10.1 9.0 7.9 7.0

Point Change (0.0) (0.1) (0.2) (0.2) (0.2) 4.5 (0.4) (0.4) (1.1) (1.1) (0.9)

Total Nonfarm 1,600.5 1,607.6 1,614.9 1,622.0 1,630.8 1,612.4 1,596.9 1,618.8 1,651.1 1,686.1 1,724.8

% change 1.3 1.8 1.8 1.8 2.2 (6.2) (1.0) 1.4 2.0 2.1 2.3

Private Nonfarm 1,301.7 1,311.8 1,320.3 1,329.0 1,337.7 1,312.5 1,295.8 1,324.7 1,357.3 1,390.1 1,425.6

% change 2.4 3.1 2.6 2.6 2.6 (7.6) (1.3) 2.2 2.5 2.4 2.6

Construction 65.4 65.9 66.2 66.3 66.2 73.9 65.7 66.2 66.6 70.6 77.8

% change (7.1) 3.1 2.3 0.7 (0.8) (21.5) (11.0) 0.6 0.6 6.0 10.2

Manufacturing 160.8 161.2 162.1 163.0 164.0 167.3 161.8 162.6 166.9 171.4 174.6

% change (0.4) 1.0 2.3 2.1 2.5 (14.2) (3.3) 0.5 2.7 2.7 1.9

Durable Manufacturing 112.0 112.2 112.8 113.4 114.3 117.8 112.8 113.2 116.8 120.9 123.7

% change (3.6) 0.5 2.2 2.2 3.0 (17.5) (4.2) 0.3 3.3 3.5 2.3

Wood Product Manufacturing 19.1 19.1 19.2 19.3 19.5 20.9 19.7 19.3 20.1 21.4 22.9

% change (12.2) 0.5 1.8 2.7 3.8 (21.6) (5.8) (2.1) 4.3 6.4 7.1

High Tech Manufacturing 34.5 34.4 34.4 34.3 34.4 35.5 34.8 34.4 35.1 36.2 36.2

% change (4.4) (0.9) (0.7) (0.4) 1.4 (8.7) (1.9) (1.2) 2.2 3.1 0.0

Transportation Equipment 8.6 8.5 8.6 8.6 8.7 10.0 8.7 8.6 8.9 9.2 9.5

% change (6.2) (1.6) 1.7 2.4 3.2 (33.9) (12.3) (1.7) 3.3 3.8 3.1

Nondurable Manufacturing 48.8 49.0 49.3 49.6 49.7 49.5 49.0 49.4 50.0 50.5 50.9

% change 7.2 2.2 2.4 1.9 1.3 (5.3) (1.1) 0.9 1.3 0.9 0.7

Private nonmanufacturing 1,140.9 1,150.6 1,158.2 1,166.0 1,173.7 1,145.2 1,134.1 1,162.1 1,190.4 1,218.7 1,251.0

% change 2.8 3.4 2.7 2.7 2.7 (6.6) (1.0) 2.5 2.4 2.4 2.7

Retail Trade 184.7 185.1 185.4 185.7 186.4 183.6 183.4 185.7 188.7 192.4 194.8

% change 6.4 0.8 0.8 0.7 1.5 (6.7) (0.1) 1.2 1.6 1.9 1.3

Wholesale Trade 75.0 75.5 76.2 77.0 77.9 75.5 75.2 76.6 79.8 81.8 83.3

% change (2.8) 2.4 3.9 4.2 5.1 (6.2) (0.4) 2.0 4.1 2.5 1.8

Information 35.4 35.9 36.2 36.7 37.2 33.1 34.0 36.5 37.6 37.5 37.2

% change 9.1 5.8 3.5 6.0 5.6 (7.0) 2.9 7.3 3.0 (0.3) (0.9)

Professional and Business Services 179.0 180.7 183.3 185.0 186.4 178.8 176.3 183.9 187.7 195.8 208.0

% change 6.6 3.7 6.0 3.6 3.2 (8.8) (1.4) 4.3 2.1 4.3 6.3

Health Services 195.0 196.8 197.6 198.9 200.7 192.9 194.5 198.5 204.5 208.6 213.9

% change 3.4 3.7 1.7 2.7 3.6 1.9 0.8 2.1 3.0 2.0 2.5

Leisure and Hospitality 164.3 166.4 166.8 167.7 168.5 163.1 164.1 167.4 170.6 172.8 173.5

% change (1.5) 5.4 0.9 2.3 1.8 (5.6) 0.6 2.0 1.9 1.3 0.4

Government 298.8 295.8 294.5 293.0 293.1 299.9 301.0 294.1 293.8 296.0 299.2

% change (3.1) (3.9) (1.8) (2.0) 0.2 0.6 0.4 (2.3) (0.1) 0.7 1.1

Personal Income ($ billions)

Other Indicators

Employment (Thousands)

Annual

Real Personal Income (base year=2005)

Quarterly

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The information sector, which includes traditional publishers such as newspapers and publishersof software, added jobs at a rate of 2.9 percent in 2010. Navis, a software developer in Bend,doubled its workforce to 75 employees. This sector had a strong second half of 2010 which isprojected to continue into 2011 with growth of 7.3 percent. Job growth should continue at 3.0percent in 2012, and then level off with a slight decrease of 0.3 percent in 2013.

The financial activities sector is starting to shake off the after effects of the financial crisis andrecession. The fourth quarter of 2010 was this first positive job gains since the first quarter of2007. This sector will have job growth of 2.4 percent in 2011, 3.6 percent in 2012, and 1.7percent in 2013.

Professional and business services lost employment by 1.4 percent in 2010, even though isfinished the year on a strong job gain. This sector is expected to rebound in 2011 with projectedgains of 4.3 percent. The industry will continue to show job gains with 2.1 percent in 2012followed by 4.3 percent growth in 2013.

Education and health services have survived the downturn better than any other sector (exceptfor food processors). Job growth was relatively weak at 0.4 percent in 2010 but still quite anaccomplishment for such a large employment sector. Job growth is expected to be 2.3 percent in2011, 2.8 percent in 2012, and 1.7 percent in 2013. Private sector education, which sawtremendous job leading up to the recession, had its largest drop in employment with a 2.2 percentdecline in 2010 over the period back to 1990. Private education is forecast to increase job growthto 3.7 percent in 2011 with growth tapering off at 1.1 percent in 2012 and then flat with a slightdecline of 0.1 percent in 2013. In the health services industry, Santiam Memorial Hospital inStayton will expand facilities and add up to 50 jobs. The growth rate for this sector is projectedto be 2.1 percent in 2011, 3.0 percent in 2012, and 2.0 percent in 2013.

Leisure and hospitality is starting to recover from the decrease in household discretionaryspending during the recession. Hot Lake Springs near La Grande will open following renovationsand provide about 60 full- and part-time jobs. Jeld-Wen has found buyers for resorts in Centraland South Central Oregon which should preserve jobs for current employees. Black Bear Dineris opening in Grants Pass in March with around 50 to 70 employees. Johns Incredible Pizza willopen in Beaverton in March and employ 185 people. Leisure and hospitality is forecasted toincrease jobs by the rate of 2.0 percent in 2011, 1.9 percent in 2012, and 1.3 percent in 2013.

The government sec

oregon economic forecast - march 2011

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