oregon state budget forecast, may 2011

8/6/2019 Oregon State Budget Forecast, May 2011

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Oregon Economic andRevenue Forecast

May 2011 Volume XXXI, No. 2

Michael Jordan John A. Kitzhaber, MD Prepared By:Chief Operating Officer Governor Office of Economic AnalysisDAS Director Department of Administrative Services


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Department of Administrative Services

Michael Jordan, 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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Foreward

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 of Administrative 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 JordanChief Operating OfficerDAS Director


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Table of Contents

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

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

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

C. Western Region ................................................................................................................. 27

D. Oregon Economic Review and Forecast ........................................................................... 32

II. REVENUE FORECAST .................................................................................................. 61

A. 2009-11 General Fund Revenues ...................................................................................... 61

B. Extended General Fund Revenue Outlook ....................................................................... 64

C. Tax Law Assumptions ...................................................................................................... 65

D. Forecast Risks ................................................................................................................... 65

E.

Lottery Earnings Forecast ................................................................................................. 67

F. Overview of Budgetary Reserves ..................................................................................... 68

APPENDIX A: ECONOMIC FORECAST DETAIL ................................................................ 70

APPENDIX B: REVENUE FORECAST DETAIL .................................................................. 96

APPENDIX C: POPULATION FORECASTS BY AGE AND SEX ..................................... 112


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EXECUTIVE SUMMARY

May 2011

Oregon Economic Forecast

Job growth surged in the first quarter of 2011. The preliminary estimate of the first quarter jobgain in Oregon is 5.2 percent at an annualized rate. With the new industry classification systemthat takes data back to 1990, this is the third strongest quarterly job growth. On a year-over-year(Y/Y) basis, job growth is up 1.8 percent. This the best Y/Y growth rate since the first quarter of 2007. The unemployment rate has edged down slowly and stands at 10.0 percent for March, afull percentage point below the March 2010 rate of 11.0 percent.

The job gains in the first quarter are broad based with virtually all sectors seeing strong growth.Natural resources, construction, manufacturing, and services experienced healthy growth. Thegovernment sector on net had positive job gains but less so compared to the private sector. Still,

some individual sectors struggled in the first quarter. Job losses were reported at wood products,other durable and nondurable goods, and the federal government.

The strong boost in the first quarter came mainly from Februarys job gains. Jobs increased9,700 in February - the largest monthly increase since November 1996. For the last six months,

job gains have been averaging over 4,500 jobs per month. Compared to the first six months of job recovery following the previous recession, job gains averaged over 3,300 per month fromJuly to December 2003. If Februarys job gains were half as strong, then the average monthly jobincreases would be comparable to the second half of 2003

In this space for the March 2011 forecast, we had a list of risks, both downside and upside, thatare likely to face the US economy in 2011. Nowhere on that list will you find earthquake. Therisk list does contain oil prices but not the wave of protests in the Middle East. Just as the USeconomy appears to be on firmer footing, events beyond anyones control adds a touch of uncertainty to the economic outlook.

Similar to the US economy, the Oregon economy appears to be on firmer footing. The jobgrowth picture has improved since last September, even though the March 2011 job report was abit disappointing. Oregon had the 7 th fastest job growth Y/Y for March among the 50 states. Theunemployment rate is now a full percentage point below a year ago. Various state leadingeconomic indicators point to continued improvement in the economy.

Impacts from the natural disaster in Japan are expected to have small but temporary impact onOregons economy. Japan exports are 7.8 percent of Oregons total exports in 2010 and these areexpected to be temporarily disrupted as port activity is delaying shipping into Japan. Once thereconstruction phase begins, Oregon could see a small and temporary bump up in exports toJapan. Supply chain disruptions may occur for various firms but Intel states that their productionprocess should be able to continue with short-term sourcing from other suppliers, if that needarises.

The other two headwinds, Middle East and Europe, have the same cautious impacts for theOregon economy as for the US economy. Gasoline prices taking up a greater portion of


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household budgets, inflation and higher interest rates slow economic growth and add pressure toa struggling real estate market.

Against this background, OEA (Office of Economic Analysis) forecasts an increase of 2.6percent in total employment in the second quarter and 2.2 percent in the third quarter of 2011.

The year 2001 ends with growth above 2.0 percent and continues into 2012.The year average for 2011 is an employment increase of 2.4 percent. This growth pattern ismaintained through 2012 and 2013 with job growth of 2.5 and 2.4 percent, respectively.

The wood products industry will slowly recover along with the housing sector, but will notregain all the lost jobs during the recession over our forecast period (forecast out to 2021). Thewood products industry is still projected to lose 3.3 percent of its employment in 2011. Ashousing starts to slowly rebound, jobs will grow 2.8 percent in 2012 and reach 6.7 percentgrowth in 2013. But even with this more robust growth for 2013, wood product jobs are stilldown 35.4 percent compared to their recent high in 2005.

Computer and electronic product sector is set to add jobs in 2011 after 4 years of job declines.The computer and electronic product sector is projected to add jobs at a rate of 2.5 percent in2011. Job growth will continue at an annual rate of 2.9 percent in 2012 and 3.6 percent in 2013.

The transportation equipment sector has been especially hard hit by the recession. A rebound isforecasted to begin this year with job growth of 3.4 percent. Job growth continues to climb withrates of 6.1 percent in 2012 and 8.0 percent in 2013. The growth rates in the next two yearsappear to be quite strong but do little to raise the level of employment. Job levels are expected toreach an average of 12,100 in 2013 compared to 17,400 in 2007 just before the start of therecession.

Metals and machinery job levels increased during 2010 as the manufacturing sector was doingmarginally better. This sector will add jobs at a healthy clip in 2011 with growth of 7.5 percent.Job growth continues with rates of 5.7 percent in 2012 and 2.0 percent in 2013.

Other durables are forecasted to add jobs at a rate of 0.9 percent in 2011. Job growth increases to3.7 percent in 2012 and 3.1 percent in 2013. This sector includes industries involved in electricalequipment, appliance, and component manufacturing, furniture and cabinet making, and othertypes of manufacturing such as medical and dental equipment.

Employment in food processing is forecast to increase 1.0 percent in 2011. Employment isexpected to fall at a rate of 2.1 percent in 2012 and return to job growth of 1.6 percent in 2013.This sector is subject to wide employment swings due to seasonal factors.

Other nondurables, which includes paper and allied products, is projected to have job declines of 3.7 percent in 2011, then increases of 1.3 percent in 2012 and 0.8 percent in 2013.

Construction is expected to follow the housing market with slow improvements over the nextcouple of years. With a relatively weak growth expected for housing and commercial real estate,the federal and state stimulus dollars directed at highways and other public works is winding


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down. This sector is projected to add jobs at the rate of 1.7 percent in 2011, 1.9 percent in 2012,and 5.5 percent in 2013.

Trade, transportation, and utilities, is projected to add jobs at a rate of 2.5 percent in 2011, 3.2percent in 2012, and 2.5 percent in 2013. Retail trade job growth will be 2.9 percent in 2011, 1.8

percent in 2012, and 1.7 percent in 2013. Wholesale trade will see job growth of 1.3 percent in2011, 5.1 percent in 2012, and 3.1 percent in 2013.

The information sector, which includes traditional publishers such as newspapers and publishersof software, will add jobs at a rate of 5.5 percent in 2011. This sector had a strong start to 2011and is expected to carry this into 2012. Job growth is forecasted at 4.8 percent in 2012 and 1.5percent in 2013.

The financial sector, which includes banks, real estate, and rental activities, will see a slowrecovery this year. Financial activities are projected to gain jobs at 1.4 percent rate in 2011followed by growth of 3.4 percent in 2012. Growth continues in 2013 with job gains of 3.6

percent.Professional and business services are projected to strongly increase 6.2 percent in 2011, withcontinued increases of 3.8 percent in 2012, and 2.5 percent in 2013.

Education and health services was the only broad job sector to add jobs every year through therecession. This sector was not immune from the recession as job growth did slow during theseyears. This sector is projected to add jobs at a rate of 3.3 percent in 2011, 3.5 percent in 2012,and 3.2 percent in 2013.

Leisure and Hospitality had a strong initial start to 2011 after a rough time through the recession.This sector is projected to increase 4.4 percent in 2011 and 3.4 percent in 2012. Job growth willcontinue in 2013 with growth of 2.0 percent.

The government sector will decline by 1.4 percent in 2011 and 1.1 percent in 2012, beforeadding jobs at 0.5 percent in 2013. The government sector is a relatively late comer torecessions. State government is forecasted to grow 0.6 percent in 2011, mainly due to increaseddemand at state higher education. Job losses are expected at 1.0 percent in 2012 and relativelyflat growth of 0.3 percent in 2013. Local government is expected to lose jobs at the rate of 1.3percent in 2011 and 1.1 percent in 2012. Mild job growth returns in 2013 with 0.8 percent.

Population growth will slowly pick up along with the economic recovery. Population growth isforecasted to be 0.7 percent in 2011, 0.9 percent in 2012, and 1.0 percent in 2013.


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Forecast Risks

In a speech to the New England Society (December 22, 1876), Mark Twain commented on theweather: In the spring I have counted one hundred and thirty-six different kinds of weatherinside of four-and-twenty hours. Economic conditions seem to follow the old adage that sprang

from this speech: If you dont like the weather, just wait a minute. But we liked the economicconditions last January and in just a short three months, a very sunny outlook has become a bitmore clouded. IHS Global Insight increased their pessimistic outlook chances from 15 percent to20 percent, matching the optimistic outlook. One would have been hard pressed to find anyarticles discussing a double-dip recession back in January. That search is easier today.

What may have seemed an isolated event in Tunisia in early January quickly spread like firethroughout the Middle East. Nature unleashed its deadly force in early March as the earthquakeand ensuing tsunami swept through Japan. The stability of the European Union is beingchallenged by sovereign debt issues in Greece, Ireland, and Portugal. The oversea headwinds arefinding their way to the US economy. And at home, we still have questions about the health of our housing market and the resiliency of the economy as federal rescue programs come to anend. The weak advanced measure of 1.8 percent first quarter real GDP growth is confirming ourfears of commodity inflation impacting households budgets.

Although the above passage paints a picture of concern, not all is doom and gloom. Its hard toimagine that oil prices can continue to rise if wages and salaries are not going up at the samepace. Both the US and Oregon economies have been producing better job gains the last fewmonths. Even though the Federal Reserve has announced the end to the Quantitative Easing PartII this summer, financial markets have barely budged. The resiliency of the US economy hasfooled forecasters in the past and this recovery may have better strength than realized.

The Oregon economy is facing the same headwinds. We know that some industries will notcome back during this recovery while others may surge ahead. The Oregon housing market willlikely be slow to recovery compared to other parts of the economy. Unknowns still exist as to theoversupply of houses and degree of foreclosures yet to come. Still, the job performance among anumber of sectors in the first quarter of 2011 is nothing short of impressive. Once again, theprospective look forward is more cautionary but not without hope. The recovery is happening,but the green go ahead has a bit more yellow caution.

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


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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 have topped a $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 throw this off track. Then again, if this is only a change in relative prices and wages costs do not accelerate,this commodity inflation could be short lived.

Loss of federal timber payments to Oregon counties . President Obama included a reducedfederal timbers payment package in the 2012 federal budget. The amount has been reduced by

10 percent and reduces by 20 percent over five years. Questions remain as to whether this itemwill survive further budget changes from Congress. If the federal timber payments do notsurvive, the last payments to counties will be this October. While this temporary reinstatementhelps cover short term budgets for Oregon counties, finding or replacing this dwindlingrevenue source will be imperative as any loss of public services could have adverse impacts oneconomic activity.

Global Spillovers Both Up and Down. The international list of risks seems to change by theday. Sovereign debt problems in Europe, equity and property bubbles in places like SouthAmerica and Asia, political unrest in the Middle East, and commodity price spikes andinflationary pressures in emerging markets. The natural disaster in Japan may cause some

supply chain disruptions to Oregon firms but the coming reconstruction phase may bring newbusiness. Also internationally we have economies recovering, incomes rising, and demand forU.S. and Oregon exports are rising. Whether the downside risks will dissipate and therecoveries take hold will influence the direction of strength of U.S. and Oregon economicrecoveries. With China now the top destination for Oregon exports, the state of the Chineseeconomy has spillover effects to the Oregon economy.

State and Local Governments . The Center on Budget and Policy Priorities finds that 44 statesand the District of Columbia are projecting budget shortfalls totaling $125 billion for fiscalyear 2012 which generally starts this summer. Local government budget shortfalls add to thistotal. Oregon is among 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 mixedprivate-public economy, this will be a drag on the economic recovery. The question is whetherthe building strength of the private sector will be enough to continue the recovery through thestate and local government budget 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 moreserious economic downturn. But the clean up after the storm can have its own risks to theeconomy. Exit strategies will have to be carefully implemented to prevent premature tightening


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and choking off the 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 unknownsthat could 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. Slow populationgrowth during the most recent decade due to double recessions probably cost Oregon oneadditional seat in the U.S. House of Representatives. Actually the decennial population growthrate during the most recent decade was the second lowest since 1900. The slowest was during the1980 when Oregon was hit hard by another recession. As a result of recent economic downturnand slow pace of recovery, Oregons population is expected to continue a slow pace of growth in

the near future. Based on the current forecast, Oregons population will reach 4.29 million in theyear 2020 with an annual rate of growth of 1.1 percent between 2010 and 2020.

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 netin-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 of 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 was further down to 28 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 76 percent bythe end of the forecast horizon. Although economy and employment situation in Oregon look stagnant 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 growth during the first half of the last decade, the elderly population (65+) haspicked up a faster pace of growth and will surge as the baby-boom generation continue to enterthis 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 during the forecast period, evenexceeding 6 percent annual rate of growth due to the direct impact of the baby-boom generationentering retirement age. Reversing several years of shrinking population, the elderly aged 75-84will start a positive growth as the effect of depression era birth-cohort will dissipate. The oldestelderly (aged 85+) will continue to grow at a moderately but steady rate due to the combination


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of cohort change, continued positive net migration, and improving longevity. However, theannual growth rate will continue to taper off as the depression era small birth cohort transitionsfrom the younger age group.

As the baby-boom generation matures out of oldest working-age cohort combined with slowing

net migration, the once fast-paced growth of population aged 45-64 will gradually taper off to abelow zero percent rate by 2012 and will remain at slow growth phase for several years. Theyoung adult population (aged 18-24) will remain virtually unchanged for several years into thefuture. Although the slow or stagnant growth of college-age population (age 18-24) tend to easethe pressure on public spending on higher education, college enrollment typically goes up duringthe time of high unemployment and scarcity of well paying jobs when even the older peopleflock back to college to better position themselves in a tough job market. The growth rate forchildren under the age of five will remain below zero percent in the near future and will seepositive growth only after 2014. Although the number of children under the age of five willdecline slightly in the near future, the demand for child care services and pre-Kindergartenprogram will be additionally determined by the labor force participation of the parents. The

growth in K-12 population (aged 5-17) will remain low which will translate into slow growth inschool enrollments. This school-age population has actually declined in size. The 25-44 agegroup population has reversed several years of declining trend during the early part of the lastdecade and before. The decline was mainly due to the exiting baby-boom cohort. This age grouphas seen positive growth starting in the year 2004 and will increase by 1.1 percent annualaverage rate during the forecast horizon. Overall, elderly population over age 65 will increaserapidly whereas population groups under age 65 will experience slow growth in the comingdecade.

Revenue Forecast

Summary

The recovery in Oregons general fund revenues is well under way. Personal income taxcollections have grown at double-digit rates since the beginning of the year. Although manyhouseholds are still struggling, payrolls are now expanding in the states largest populationcenters. As a result, long-awaited growth in taxable wages has arrived to supplement theconsiderable gains in profits and other nonwage forms of taxable income that local investors andfirms earned throughout tax year 2010.

The revenue recoverys fast start comes as no surprise given Oregons experiences over the pasttwo decades. The states volatile income tax collections have spiked when buoyed by acombination of job gains and growth in asset prices. Collections in the current biennium areexceeding those in most other states. For Oregon, revenues are tracking close to the aggressiveoutlook assumed in the March and November forecasts.

Looking forward into the 2011-13 biennium and beyond, the improved outlook for job growthhas resulted in an upward revision to the revenue forecast. In particular, withholdings of personalincome taxes out of paychecks are now expected to be larger. However, these additionalcollections out of labor income will be offset to some degree by a weaker outlook for a widerange of asset-based income sources (e.g. profits, inheritance, individual retirement accounts andcapital gains). Although the overall upward revision to the revenue outlook for future years is a


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significant one, it is not large enough to make much of a dent in the budget pressures currentlyfaced by Oregons policymakers.

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 population

cohort 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.


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I. ECONOMIC FORECAST

May 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, April 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 andnot IHS Global Insight. In addition, Table N.1 provides a quick look at the annual rates. TableN.2 provides a look at the forecast change from the last forecast. Graph N.1 provides a graphicU.S. history and forecast.

A. National Economic Review and Forecast

Forecast Flash

Facing the Twin Shocks

Two recent shocks are impacting the U.S. economy: higher oil prices and the natural disaster inJapan. Up to this point, the U.S. appeared to be gaining strength both through manufacturingoutput and at long last, the growth of jobs with the unemployment rate dropping a full percentagepoint since November. Although the twin shocks are not strong enough to stop this recovery,nonetheless the U.S. economy does not entirely escape unscathed. The GDP forecast for 2011 islowered from 3.2 percent to 2.8 percent while the 2012 forecast remains at 2.9 percent.Adjustments to the forecast are related to three factors:

Oil prices are rising faster than previously predicted. The conflict in Libya continues withlittle indication of ending any time soon. Oil prices in the forecast have been raised forthe second quarter of this year helping to soften the near term outlook for GDP.

The natural disaster in Japan will cause some temporary supply chain disruptions, mostlikely in the automotive industry.

First quarter GDP estimates are lowered due to labor market and survey evidence.

First-Quarter GDP Growth Projection Scaled Back Again. Looking back to March, the tradedeficit is wider, consumer spending a bit slower, capital goods shipments weaker, andconstruction data still disappointing. Not all is bad or overwhelming to this recovery. Prospectslook better for the second half of the year with growth coming from trade and inventories along

with help from the manufacturing sector.Rebound Probably in Second Half Rather Than the Second Quarter. Second quarter GDP isalso reduced. Inventories are assumed to drop in the second quarter due to greater thananticipated build up in the first quarter. Supply chain disruptions from the disaster in Japan willtemporary impede production, especially in the automotive industry. With incomes not raisedenough compared to the rise in gasoline prices, households will curtail some of their spending onother goods and services. Some of these items will reverse in the second half of the year leadingto some bounce back.


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Headline Inflation Climbing. CPI inflation could be heading for 2.8 percent this year comparedto 1.6 percent in 2010. Although employed households are getting the benefit of reduced payrolltax this year, the inflation is taking it away. Core inflation is showing some evidence of rising.At the moment, wage growth does not appear to be accelerating and thus the rise in core inflationwill be held back.

Fed Expected to Stay the Course on QE II . Although the economy is improving and somewarning signs on the inflation front, the Fed will continue with its $600 billion Treasurypurchases through mid-2011. The Fed will not move to raise interest rates until the first half of 2012.


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Graph N.1Graph N.1

U.S. Economic History and Forecast

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B. International Review and Outlook

Introduction

The global recovery remains intact even with the introduction of new risks in recent months such

as natural disasters, high oil prices and political unrest; however it is a multi-speed recovery withmany developing nations continuing to grow robustly and the advanced economies laggingbehind. China has seen GDP expand by over 9 percent in 2010 and into early 2011, India hasseen growth above 8 percent in five out of the past six quarters and other emerging markets havelikewise seen strong gains. Advanced economies continue to experience sub-par growth with theU.S. expanding at a 2.9 percent pace in 2010, which was actually substantially betterperformance than that of Western Europe where the Eurozone countries grew 1.7 percent and theUnited Kingdom just 1.4 percent. Initial estimates of growth for the first quarter of 2011 show noreal improvement upon these rates for advanced economies.

Higher oil and commodity prices are expected to weigh on the consumer and economic activity

in the near term, but the overall outlook for the world economy remains bullish. PurchasingMangers Indexes, both for manufacturing and services, have shown continued strength in largeeconomies, particularly the U.S., China and Europe. Japans have fallen due to the recentearthquake and economic activity there will be depressed in the near term however it will turninto a positive effect on GDP as the rebuilding gets underway later this year. Furthermore, stock markets continue to rise around the world. On the downside, political unrest in the Middle Eastand North Africa has helped contribute to the increase in oil prices as some supply has beendisrupted, particularly in Libya which accounts for approximately 2 percent of worldwide oilproduction. Even with oil prices falling somewhat in recent weeks, oil remains up considerablyover the past year, let along since the depths of the recession, as economic growth in bothemerging markets and developed economies results in increased oil demand and usage. Furtherdownside risks remain, including sovereign debt crises in peripheral European countries, the so-called P.I.I.G.S., where patchwork agreements between European Union member countries haveprovided only short term fixes to these issues. Further bailouts and/or debt restructuring,especially for Greece and probably for Portugal, are more likely than not.

Given the dichotomy between advanced and emerging economies, each type faces its own issuesand also its own policy prescriptions. Advanced economies are experiencing slow to moderateeconomic growth, these countries typically have large debt to GDP ratios, central bank policyinterest rates are at or near zero percent and the economies are vulnerable to stagnation. Movingforward, these countries need to reduce government deficits, restrain healthcare costs as theirpopulations continue to age, and help the long-term unemployed. Obviously, these items areeasier to list than to fix, however the issues plaguing advanced economies can more easily beresolved in a robust economic environment. A policy (either fiscal or monetary) that spurseconomic growth, job creation and/or increases aggregate demand will likewise help with thesolution to the larger and longer term issues facing these countries. On the other hand, emergingmarket economies are seeing robust economic growth, manageable debt levels and rising interestrates; however the primary risks include an overheating economy and potentially asset bubbles.These economies have a different set of issues that need to be addressed, including increasingexchange rate flexibility, reducing export dependence for growth and upgrading infrastructure.As inflation heats up in many developing countries, one mechanism through which inflation canbe alleviated is through currency appreciation. Given that these economies typically rely heavily


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on exports for economic growth, currency appreciation would hurt growth unless is coincideswith increased domestic consumer spending. A number of large emerging markets, China,Brazil, Russia to name three, have denounced U.S. economic policy and the Federal Reserve asthese countries have seen substantial increases in inflation. The Federal Reserve sets policybased on the economic realities of the U.S. and given its current state, low interest rates are the

prescription. Blaming the Fed for international inflation is misplaced and these countries haveboth monetary and fiscal policy tools which can and would help to rebalance the global economyif they so choose to do. An overall economic rebalancing in which advanced economies exportedmore goods and services and developing economies increased domestic consumption would bebeneficial for the world economy. Given the current economic and political realities, suchrebalancing will not happen overnight but will be a gradual process.

GDP Growth Comparisons

Graph I.1 illustrates the relative performance of many of the largest economies in the world sincethe beginning of 2008. Each countrys GDP is normalized to its 2008 Q1 value and is tracked

relative to that valuethrough 2010 Q4, themost recent quarterthat data is availablefor all countries.

It is interesting to seethe different economicpaths each countryundertook during therecession. More exportdependent economies,such as Germany andJapan, experiencedmuch larger declines inGDP. Similarly,Germany and Japanhave also exhibitedlarger rebounds overthe past two years.

Table I.2 details the percentage declines in each countrys GDP and also where each country istoday relative to peak GDP prior to theGreat Recession.

Japan experienced thelargest decline inpeak to trough GDPamong the countrieslisted, at 10.0 percent,an increase after

Graph I.1

Table I.1Country

Size of GDPRanking

Quarter ofGDP Peak

Quarter ofGDP Trough

Peak to TroughGDP Decline

Peak toCurrent GDP

United States 1 2008 Q2 2009 Q2 -4.1% 0.2%Eurozone NA 2008 Q1 2009 Q2 -5.3% -2.9%Japan 2 2008 Q1 2009 Q1 -10.0% -4.2%Germany 4 2008 Q1 2009 Q1 -6.6% -1.4%France 5 2008 Q1 2009 Q1 -3.9% -1.6%United Kingdom 6 2008 Q1 2009 Q3 -6.4% -4.5%Canada 10 2008 Q3 2009 Q2 -3.3% 1.3%GDP rankings based on 2009 data published by the International Monetary Fund.


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revisions over the originally estimated decline of 8.7 percent. Japans strong gains over the pasttwo years have resulted in over half of this decline being regained, however the recentearthquake in the country will result in a drop in economic activity in the current time period. Allother countries listed saw GDP declines of 3.3 to 6.6 percent. Canada and the U.S. both faredsignificantly better than their European counterparts over the course of the business cycle and

both countries have surpassed their previous peaks in GDP. In the fourth quarter of 2010, Canadaset a new record for the level of real GDP which is now 1.3 percent larger than before therecession. The U.S likewise set a new record, but only by 0.2 percent. Note that including thefirst estimate of 2011 Q1 growth for the U.S., real GDP is currently 0.6 percent larger than thepre-recession peak.

Recent International Developments

Table I.2 shows IHS Global Insights (GI) countryspecific economic forecast as of April 13, 2011. In itsglobal forecast, GI cites some issues to watch to gauge

future trends of the global economy. First, the politicalunrest in Libya is important to follow. If the oil supplydisruption were to spread to the major oil exportingcountries, oil prices would increase further. Second, thenuclear disaster in Japan was recently upgraded to Level7, with estimates showing radiation releases so far of around 10 percent of those emitted from the Chernobylaccident. Finally, the retooling of the Eurozones bailout

pact was initially viewed upon favorably byfinancial markets. Expectations are for abumpy road moving forward, however, on

paper, there appears to be coordination andagreement in principle among EUcountries.

Table I.3 summarizes the Blue ChipConsensus forecast (April 2011) forOregons major export markets. It isconsistent with the GI forecast shown inTable I.1, although, generally, moreoptimistic moving forward.

GIs April 2011 global forecast discussesregional highlights from around the world.In the major Southeast Asian economies,such as China, Hong Kong, Singapore andTaiwan, real estate markets are lookingespecially frothy. Chinese governmentpolicies to try and rein in property priceincreases have been unsuccessful to date.Some of these attempts include requiringlarger down payments and the introduction

Table I.2

As of 04/13/2011 (Average)2010 2011 2012 2013-16

United States 2.8 3.2 2.9 3.0

Canada 3.1 2.9 3.0 2.7Japan 4.0 0.0 3.6 1.4Eurozone 1.7 1.7 1.6 1.9Mexico 5.5 4.0 3.6 3.8South America 5.9 4.7 4.9 4.7Asia except Japan 8.4 7.1 7.2 7.3China 10.3 9.4 8.6 8.6World 4.1 3.5 4.0 4.0

Source: Global Insight, April 2011

Projected Growth Rates of Real GDP (Percent)

Table I.3

Ranked by$ Value of U.S.Goods Exported

Rank ($ mil.) 2009 2010 2011 2012

Canada 3 2,420 -1.1 3.2 2.9 3.0Mexico 15 233 -6.1 5.5 4.1 3.9Japan 4 1,380 -6.3 3.9 0.7 2.5United Kingdom 16 226 -4.9 1.3 1.7 2.2South Korea 5 937 0.2 6.1 4.3 4.3Germany 8 363 -4.7 3.5 2.7 2.3Taiwan 6 670 -1.9 10.8 4.5 4.9Netherlands 9 339 -3.9 1.7 1.8 1.8Russia 29 58 -7.9 4.0 4.5 4.5France 18 177 -2.5 1.5 1.8 2.0Brazil 12 311 -0.6 7.5 4.4 4.8Hong Kong 13 300 -2.8 6.5 4.9 4.5India 22 118 8.0 8.5 8.0 7.7China 1 4,046 9.2 10.3 9.0 9.0Australia 14 255 1.3 2.7 3.0 3.6Eurozone -4.0 1.7 1.7 1.9U.S. -2.6 2.9 2.9 3.2Source: Blue Chip Economic Indicators, April 2011

Oregon Export Data: WISER, February 2011

Projected Growth for Top U.S. Export Markets

Projected Changein Real GDP

OregonExports 2010


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of annual property taxes. While China has raised interest rates 100 bps since October, it has notbeen large enough increases to head off further strong gains in property prices. Given the factthat Chinas interest rate increases have been small and the country has rising inflation, real(inflation-adjusted) interest rates are negative which further fuels investment and some may sayspeculation. Also, GI notes, similar to the IMF, that economic growth in 2011 will slow

somewhat, even in emerging markets. A slowdown (not a contraction, just lower growth rates) inEurope and Japan will place downward pressure on emerging market growth. Among the biggestemerging markets, China and Brazil will see the most pronounced slowing trends as fiscal andmonetary tightening within each country will cool growth, while India and Russia will not sufferas much (if at all).

Oregon Exports

** Please note that export data for 2011 Q1 is unavailable by publication date. Please contact the Office of Economic Analysis after May 16 th for the updated data and information. **

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 recordin terms of the total dollar value of U.S. exports. Oregon exports followed the same generalpattern of the past 18 months; however Oregons exports actually declined during the thirdquarter. With a strong rebound in the fourth quarter, Oregon exports are now at the same levelsreached in early 2010 and also early 2008. For 2010 as a whole, U.S. exports increased 21.0percent and Oregon exports increased 18.6 percent. Exports are expected to continue to followthe global economy through the expansion, however, as economic expectations change, exportswill similarly grow either faster or slower along with economic conditions. Besides economicgrowth (and consumer demand), exchange rates are another mechanism which will influenceexports moving 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 seestronger growth. Likewise, Oregon exports are expected to move more in line with the OregonDollar Index which accounts for the differences in the trading patterns between the U.S. andOregon (see previous section for more detail).

Graph I.2 illustrates Oregons totalexports and the Y/Y percent changefrom 1997 through 2010. For 2010,Oregons exports growth ranked 31 st best among all states. Prior to thedecline in the third quarter, Oregonsexports were booming and rankedamong the growth leaders in thecountry. Oregon typically experiencesmore volatile movements than the USoverall during booms exportsincrease more than the nation andduring recessions they decrease morethan the nation. Oregon exports have,more or less, leveled off in 2010following the initial surge in growth

Graph I.2Oregon's Total Exports

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

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after the recession. This is a result of of the economy experiencing 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.

Table I.4 shows Oregons exportsand growth rates by industry for the2010 annual totals (Y/Y), whileGraph I.3 illustrates quarterlyexports by major industry since1997. For Table I.3, these are thetop fifteen industries by exportvolume (in value). Y/Y growth ispositive for all of the top fifteenexport industries. Computer andelectronic products in 2010 showed

a strong gain compared to 2009while exports in the industry haveactually declined each of the pasttwo quarters. Exports in theindustry are down to the top ninepartner countries, including the top two China and Malaysia, which account for nearly 70percent of the industry total. High tech exports to China fell 31 percent between the second andthird quarters of 2010 (accounting for 76.1 percent of the overall decline), and remainedessentially flat between the third and fourth quarters. One known event that may be affecting thisdecline is Intels recent expansion in China, where the companys first chip plant opened inOctober 2010. While the plants construction began as long ago as 2007, the semiconductor fabdid not become operational until a few months ago. Overall, this industry is Oregons largest andmost important export sector, driven by the states cluster of high technology firms andaccounted for 44 percent of all exports in 2010.

Machinery, Chemicals, PrimaryMetals, Wood Products, Paper,Electrical Equipment, FabricatedMetals, and Leather Products allincreased over 30 percent in 2010,compared to 2009. These increasesare indicative of the broad-basedgains seen in many sectors duringthe recovery. Agricultural Productstend to follow commodity pricesthrough the boom/bust cycle. Withrecent increases in commodityprices, especially grains whichOregon exports primarily in thiscategory, fourth quarter AgriculturalProducts increased 71.8 percentfrom the third quarter. Overall, Agricultural Products increased nearly 8 percent in 2010.

Table I.4Oregon Exports by Industry($ millions, current prices)

2009Total

2010Total

y/y %change

Share outof Total

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

Computer And Electronic Products 6,757.7 7,788.3 15.3% 44.0%Agricultural Products 2,114.1 2,280.4 7.9% 12.9%Machinery, Except Electrical 1,136.8 1,507.4 32.6% 8.5%Chemicals 1,023.9 1,394.2 36.2% 7.9%Transportation Equipment 739.6 824.1 11.4% 4.7%Primary Metal Manufacturing 435.3 582.4 33.8% 3.3%Wood Products 323.9 475.7 46.8% 2.7%Food And Kindred Products 372.3 459.3 23.4% 2.6%Waste And Scrap 420.4 447.0 6.3% 2.5%Paper 234.6 314.9 34.2% 1.8%Electrical Equipment, Appliances, And Component 197.9 287.3 45.2% 1.6%Miscellaneous Manufactured Commodities 270.6 279.8 3.4% 1.6%Fabricated Metal Products, Nesoi 194.2 261.0 34.4% 1.5%Plastics And Rubber Products 128.5 163.3 27.1% 0.9%Leather And Allied Products 109.1 142.0 30.2% 0.8%

Source: WISER, February 2011

Graph I.3Oregon Exports by Major Industry

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

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C. Western Region

This section of the May 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 0.9 percent year-over-year in the firstquarter, which, after revisions, is the second consecutive positive value. This marks the first timesince 2007 Q4 and 2008 Q1 that employment has improved year-over-year for two consecutivequarters. On a quarter-over-quarter basis, national employment increased in three out of the pastfour quarters, however they declined slightly in the third quarter of 2010 as the temporaryCensus workers finished their assignments. On a monthly basis, total nonfarm jobs have

increased the past seven months (private sector the past fourteen months) and 2011 Q1 is thestrongest quarter since 2007 Q1. Table W.1 details employment by major sector for each of thewestern states and their respective year-over-year changes. As with the nation, each state haseither seen its job losses diminish in recent quarters or have actual employment expand. On ayear-over-year basis, California, Idaho, Oregon, Utah and Washington have seen employmentincreases, while Arizonas employment is unchanged. Nevada continues to see negativenumbers. Oregons strong job gains in recent months have the state ranked seventh best in thecountry in year-over-year percentage change for the month of March.

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 turned the corner and added jobs in recent months. Giventhe manner in which states budget, the public sector is now beginning to shed a sizable numberof jobs, which is expected to continue in the coming quarters.

Table W.1

Arizona California Idaho Nevada Oregon Utah Washington United StatesTotal Nonfarm 2,381.8 14,028.8 609.3 1,114.6 1,622.6 1,191.6 2,802.8 130,529.

Y/Y Percent Change 0.0 1.2 1.2 -0.4 1.8 1.5 1.1 0.Natural Resources and Mining 10.9 27.2 3.5 12.4 6.9 10.8 5.9 746.

Y/Y Percent Change 0.0 4.2 7.1 5.1 3.3 6.3 1.7 10.Construction 109.4 572.2 31.2 57.0 68.4 64.2 138.1 5,502.

Y/Y Percent Change -4.0 -0.5 -4.3 -9.6 0.9 -1.6 -4.3 -1.Manufacturing 148.6 1,248.6 53.9 36.2 166.9 114.3 260.7 11,645.

Y/Y Percent Change 0.0 0.5 1.4 -5.7 2.5 3.5 1.5 1.Trade, Transportation and Utilities 470.7 2,643.7 121.9 206.4 311.9 230.2 521.3 24,767.Y/Y Percent Change 0.4 1.3 0.7 -1.6 1.5 0.5 1.2 0.

Information 36.2 444.0 9.5 12.6 32.8 29.2 102.8 2,684.Y/Y Percent Change -1.5 4.3 -3.4 0.9 2.2 0.2 0.1 -1.

Financial Activities 162.5 757.4 29.4 50.7 93.2 66.7 136.9 7,607.Y/Y Percent Change -1.1 -0.4 1.4 -4.4 -0.2 -2.3 0.8 -0.

Professional and Business Services 332.6 2,123.6 74.3 137.5 187.0 156.3 342.9 17,008.Y/Y Percent Change -2.1 3.9 0.6 2.5 4.0 4.5 6.5 2.

Leisure and Hospitality Services 257.9 1,514.0 60.1 312.1 165.9 111.5 268.7 13,115.Y/Y Percent Change 2.6 2.0 4.9 1.1 2.8 1.8 1.5 1.

Other Services 85.9 481.6 21.5 34.2 58.5 34.2 102.1 5,431.Y/Y Percent Change -3.4 -0.5 1.6 2.1 2.6 1.0 -2.2 2.

Government 413.4 2,398.3 118.0 153.0 298.4 216.2 543.0 22,190.

Employment by Sector (2011 Q1)


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While all western stateshave seen heavy joblosses, their relativeperformance has varied tosome degree. Graph W.1

and Table W.2 compare job losses across thestates. Different statesemployment reached itspeak at different timeperiods based on theunique economies in eachstate. Graph W.1illustrates the cumulativepercentage of job losses ineach state since the first

quarter of 2008. Eachstates respectiveemployment peak is noted in parenthesis in the graphs legend, and also in column two in TableW.2. Relative to other western states, Oregons job losses have been less severe than Arizona,California, and Nevada;however Idaho, Utah,Washington and the U.S. haveseen lower levels of job loss.Now that each state hasregistered positive employmentgains, at least for one recentquarter, Oregons gains haveoutpaced both the nationalaverage and all other westernstates.

Economic Coincident Index

One very useful state level economicindicator is the State Coincident Index,produced by the Federal Reserve Bank of Philadelphia. Each month the bank compiles and indexes data for each statethat combines nonfarm payrollemployment, average hours worked inmanufacturing, the unemployment rate,and real wage and salary disbursements.As a coincident index, the data is designedto report current economic conditions on amonthly basis, and is not a leading or alagging indicator.

Table W.2 Peak Trough % Decline from % Increase from

Employment Employment Peak to Trough Trough to CurrentArizona 2007 Q3 2010 Q1 -11.70% 0.62%California 2007 Q3 2010 Q1 -8.79% 1.19%Idaho 2007 Q4 2010 Q1 -8.44% 1.34%Nevada 2007 Q2 2010 Q4 -14.26% 0.33%Oregon 2008 Q1 2009 Q4 -8.46% 1.93%Utah 2007 Q4 2010 Q1 -7.00% 1.48%Washington 2008 Q1 2009 Q4 -6.80% 1.14%United States 2008 Q1 2010 Q1 -6.23% 0.93%

Table W.3

Index ValueQ/Q PercentChange (AR)

Y/Y PercentChange

5 Year PercentChange

Arizona 178.65 2.6% 0.5% -9.9%

California 152.13 5.2% 2.7% -0.4%Idaho 188.78 3.4% 1.5% -8.9%

Nevada 177.29 4.3% -0.5% -22.4%Oregon 187.29 8.4% 4.6% -2.4%

Utah 182.93 3.0% 2.1% 1.0%Washington 149.77 3.2% 1.8% -1.4%

United States 152.59 3.3% 2.8% -1.2%

Economic Coincident Index for 2011 Q1

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

Graph W.1

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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)

Employment by Sector (2011 Q1)


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On a year-over-year basis, Nevada continues to be the worst performing western state, a result of continued job losses and high unemployment rate. Outside of Oregon, all other western statesunderperformed 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 4.6 percentgrowth in the past year betters all other western states and also the U.S. average. Oregons

quarter-over-quarter growth ranks fourth best nationally, Oregons year-over-year increase ranksfifth best nationally and Oregons five year percentage change ranks thirtieth best nationally.

Housing Price Index

Many of the western states have been hithard by the housing boom andsubsequent bust. Table W.4 shows theFederal Housing Finance Agencyshome price index for each western state.Arizona, California and Nevada are

three of the worst poster children for thebubble. While all states are movingtoward non-declining home prices(some more quickly than others),California home prices actuallyincreased three of the past six quarters.After beginning to level out by early to mid-2010, housing prices in the U.S. and also westernstates have continued on their downward trajectory. It was first believed that a bottom had beenreached, however prices indicate that a double-dip in the housing market is much more likelythan near-term stability.

Graph W.2 shows the year-over-year percent change in theFHFA Housing Price Index foreach of the western states since2000. Prices in Arizona doubledbetween 2000 and 2006, whileprices in California and Nevadamore than doubled during thesame time period. Oregon andWashington prices increasedabout 80 percent, whilenationwide prices increasedonly 50 percent.

Table W.4

IndexValue

Q/Q PercentChange (AR)

Y/Y PercentChange

5 Year PercentChange

Arizona 172.47 -16.9% -13.4% -42.5%California 160.59 -5.9% -4.7% -42.3%

Idaho 190.69 -22.3% -15.8% -16.5%Nevada 127.43 -4.5% -6.5% -52.8%Oregon 255.16 -12.4% -10.0% -14.0%

Utah 250.17 -6.1% -6.5% -2.3%Washington 225.92 -11.6% -6.8% -6.8%

United States 188.37 -3.3% -4.0% -11.5%

Housing Price Index (2010 Q4)

Source: Federal Housing Finance Agency (FHFA)

Graph W.2

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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 is housingpermits issued, shown in Table W.5. It appears that eachpassing year brings worse news for new home construction.2009 was worse than 2008 which was worse than 2007. After amixed bag in 2010, expectations were for at least somesemblance of stability in 2011, however the first quarter figuresfor permits indicate no such stability as the numbers aresubstantially lower than early 2010 numbers.

Oregons increase is entirely attributable to the multi-family market and is partially a result of low multi-family permits in early 2010, which make year-ago comparisons easier. Single family

home permits are down 21.4 percent in the first quarter, while multi-family increased over 250percent. Other states are seeing similar declines in single-family permits (larger than 15 percent),however their multi-family gains are less, for example Californias increased 10 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 Nevada andWashington being an exception. The good news is most westernstates have seen significant increases since international tradebottomed in early 2009. After very strong growth in late 2009,Oregons export growth has cooled off in the past few quarters.While the fourth quarter 2010 over the fourth quarter 2009growth is just 3.1 percent, the total export value for the yearincreased 18.5 percent in Oregon. Even with the sizable increases in recent months, the nationand western states exports remain slightly below their peak levels achieved during the summerof 2008. Utah is an exception as their exports reached a new all time high, thanks to theirprimary 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)

Table W.5

PermitsY/Y PercentChange

Arizona 2,961 -26.8%California 9,159 -9.9%

Idaho 715 -44.4%Nevada 1,496 -27.8%Oregon 1,860 5.9%

Utah 1,491 -32.4%Washington 3,635 -25.4%

United States 127,327 -12.6%

Source: U.S. Census Bureau

Housing Permits Issued (2011 Q1)


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Tax Revenue

The recession has resulted in plummeting tax revenue for all states, with declines for much of the2007-2009 period and into early 2010 for many states. The last three quarters of 2010 broughtgood news to most state coffers as they saw positive revenue growth. Revenue in Nevada

continues to remain down, a result of a still sluggish (at best) economy that has hit especiallyhard this economic cycle and also the fact that visitors and their gambling dollars have not fullyreturned to Las Vegas evidenced by the 15.1 percent decline year-over-year in amusement taxrevenue for Nevada. Outside of Nevada and Utah, every other Western state experienced positiverevenue growth, with most seeing growth in three consecutive quarters. Sales taxes are up year-over-year for all states that levy such taxes including sizable increases in Arizona, California andUtah. Individual income tax revenues are likewise up for all states that levy them. Corporate netincome tax revenues are a mixed bag as some states are seeing increases, Oregons are affectedby Measure 67, while other continue to see declines. Expectations are for revenue to continue togrow along with the economy, however, even with revenues returning to growth, expectationsare for upcoming state budgets to continue to reflect the economic hardship of recent years.

Current levels of revenue are still down relative to the expected levels forecasted and/orbudgeted in previous years, which will result in further program reductions or slower increases atthe state and local level.

Table W.7

Arizona California Idaho Nevada Oregon Utah WashingtonTotal Taxes 2,975,542 27,925,128 773,594 1,452,549 1,903,664 1,306,576 3,908,358

Y/Y Percent Change 17.7% 16.8% 7.1% -2.3% 14.0% -1.3% 7.8%Property tax 208,810 799,490 X 95,165 9,835 X 191,123

Y/Y Percent Change 0.0% 0.6% X -8.0% 37.9% X 18.4%General sales and gross receipts 1,347,121 8,163,840 288,749 657,187 X 440,683 2,602,253

Y/Y Percent Change 26.2% 0.8% 5.5% 5.1% X 1.4% 9.7%Motor fuel sales taxes 203,449 1,457,598 64,825 78,435 100,988 95,394 237,870Y/Y Percent Change 0.0% 85.0% 3.7% -24.6% 58.3% 13.6% -19.7%

Alcoholic beverages 16,188 86,265 1,971 10,237 4,291 10,109 80,177Y/Y Percent Change -6.5% 4.1% 9.1% 4.8% 7.2% 6.9% 17.4%

Public utilities 6,012 152,664 326 7,519 2,858 7,159 105,041Y/Y Percent Change 0.0% -13.3% -27.4% 69.0% 76.6% -4.6% 8.9%

Insurance 109,783 548,968 8,699 61,293 21,378 26,367 97,908Y/Y Percent Change 0.0% -19.6% -13.3% 6.7% 249.1% -12.6% 0.5%

Tobacco products 80,027 230,291 12,586 27,535 66,847 40,997 125,554Y/Y Percent Change -4.2% -2.2% 1.4% -2.3% 2.9% 204.5% 22.6%

Amusements 136 X X 209,948 10 X 0Y/Y Percent Change 0.0% X X -15.1% -23.1% X NA

Motor vehicles 49,041 744,619 30,056 37,723 138,525 36,913 110,300Y/Y Percent Change 0.1% 0.0% 1.1% -12.9% 8.0% -47.7% -3.2%

Corporations in general 7,410 14,824 461 17,013 6,051 930 7,233Y/Y Percent Change 0.0% 0.0% 1.1% 1.9% 175.4% -11.5% 13.6%

Occupation and business licenses 28,460 1,109,555 15,404 153,642 130,730 11,434 57,215Y/Y Percent Change 0.0% 0.0% -3.6% -3.3% 43.3% 0.0% 0.7%

Individual income taxes 812,520 12,204,347 288,670 X 1,275,015 571,553 XY/Y Percent Change 13.0% 31.0% 6.5% X 6.1% 4.9% X

Corporation net income taxes 81,419 2,164,696 27,314 X 106,890 24,229 XY/Y Percent Change 1755.1% 33.0% 24.5% X 111.1% -67.2% X

State and Local Tax Revenue (2010 Q4)

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


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Figure O.1

D. Oregon Economic Review and Forecast

Summary of Recent Trends

Statewide Trends

Job growth surged in the first quarter of 2011. The preliminary estimate of the first quarter jobgain in Oregon is 5.2 percent at an annualized rate. With the new industry classification systemthat takes data back to 1990, this is the third strongest quarterly job growth. On a year-over-year(Y/Y) basis, job growth is up 1.8 percent. This the best Y/Y growth rate since the first quarter of 2007. The unemployment rate has edged down slowly and stands at 10.0 percent for March, afull percentage point below the March 2010 rate of 11.0 percent.

The job gains in the first quarter are broad based with virtually all sectors seeing strong growth.Natural resources, construction, manufacturing, and services experienced healthy growth. Thegovernment sector on net had positive job gains but less so compared to the private sector. Still,

some individual sectors struggled in the first quarter. Job losses were reported at wood products,other durable and nondurable goods, and the federal government.

The strong boost in the first quarter came mainly from Februarys job gains. Jobs increased9,700 in February - the largest monthly increase since November 1996. For the last six months,

job gains have been averaging over 4,500 jobs per month. Compared to the first six months of job recovery following the previous recession, job gains averaged over 3,300 per month fromJuly to December 2003. If Februarys job gains were half as strong, then the average monthly jobincreases would be comparable to the second half of 2003.

The most recent Blue Chip JobGrowth rankings place Oregon7th in the nation for Y/Y jobgrowth. Between March 2010and March 2011, jobs increasedby 29,000 or 1.84 percent. Ayear ago Oregon ranked 32 nd.The relative performance of thefifty states is shown in FigureO.1.

U.S. employment growthduring this period was up 1.03percent. A year ago, the nationwas down 1.98 percent growth.North Dakota had the 1 st ranked spot at 4.21 percent jobgrowth while Kansas ranked50 th at -0.40 percent. Only twostates reported job losses for this period. Our neighbors to the north and south went up in therankings with California at 13 th and Washington at 24 th. Idaho dropped slightly to rank 30 th.


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Table O.1 shows a comparison of preliminary estimates for first quarter Oregon employment

growth compared to the March 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. Unlessnoted otherwise, the employment figures are seasonally adjusted, and all percentage ratesdiscussed below reflect annualized rates of change for first quarter 2011. When the preliminaryestimate is lower than OEAs forecast, forecast error is shown as negative. Positive forecast errorthen means that the preliminary estimate came in higher than OEAs forecast.

The first quarter forecast was considerably stronger than the preliminary estimate for totalnonfarm employment. Consequently, most sectors were under forecasted. The errors in the

Table O.1

Total Nonfarm Employment, 1st quarter 2011(Employment in thousands, Annualized Percent Change)

Y/YChange

level % ch level % ch level % % chTotal Nonfarm 1,622.6 5.2 1,607.6 1.8 15.0 0.9 1.8

Total Private 1,324.2 6.2 1,311.8 3.1 12.4 0.9 2.3Natural Resources and Mining 6.9 9.6 7.3 (3.3) (0.4) (5.6) 3.3Construction 68.4 4.0 65.9 3.1 2.5 3.8 0.9Manufacturing 166.9 5.2 161.2 1.0 5.7 3.5 2.5

Durable Goods 116.3 5.4 112.2 0.5 4.1 3.6 1.9Wood Product 19.2 (2.1) 19.1 0.5 0.1 0.3 (4.6)Metals and Machinery 32.3 11.8 29.4 2.2 2.9 9.9 6.2Computer and Electronic Product 35.8 7.6 34.4 (0.9) 1.4 4.0 2.5Transportation Equipment 10.3 5.1 8.5 (1.6) 1.8 21.3 1.8Other Durable Goods 18.6 (0.7) 20.7 1.4 (2.1) (10.1) 0.7

Nondurable Goods 50.7 4.7 49.0 2.2 1.6 3.3 4.1Food 26.8 24.6 23.8 1.6 3.0 12.6 13.7Other Nondurable Goods 23.9 (13.1) 25.2 2.8 (1.4) (5.4) (5.0)

Trade, Transportation & Utilities 311.9 2.6 313.6 1.4 (1.7) (0.6) 1.5Retail Trade 186.9 3.0 185.1 0.8 1.8 1.0 2.5Wholesale Trade 72.2 0.6 75.5 2.4 (3.3) (4.4) (0.9)Transportation, Warehousing & Utilities 52.9 3.8 53.1 2.0 (0.2) (0.4) 1.8

Information 32.8 5.3 35.9 5.8 (3.1) (8.6) 2.2Financial Activities 93.2 5.0 94.1 5.1 (0.9) (0.9) (0.2)Profess ional & Business Services 187.0 10.7 180.7 3.7 6.3 3.5 4.0Educational & Health Services 232.8 5.3 227.4 3.2 5.4 2.4 2.6

Educational Services32.0 6.5 30.6 (0.3) 1.4 4.6 2.1Health Services 200.7 5.1 196.8 3.7 3.9 2.0 2.6

Leisure and Hospitality 165.9 11.9 166.4 5.4 (0.5) (0.3) 2.8Other Services 58.5 8.0 59.3 6.4 (0.9) (1.5) 2.6

Government 298.4 1.0 295.8 (3.9) 2.6 0.9 0.0Federal 28.4 (6.6) 29.3 (1.4) (0.9) (3.0) (4.1)State 80.8 2.7 79.7 (1.0) 1.0 1.3 2.1

State Education 30.9 5.0 30.4 0.9 0.4 1.4 5.6Local 189.3 1.5 186.8 (5.5) 2.4 1.3 (0.2)

Local Education 99.7 1.6 99.6 (4.0) 0.1 0.1 (1.3)

EstimatePreliminary Forecast ErrorForecast


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forecast are difficult to interpret since the March forecast used job numbers before the annualbenchmarking by the Oregon Employment Department. The forecast changes use differentstarting numbers compared to the benchmarked preliminary estimate changes, and can lead tocontradictions when comparing the two. To get a sense of the forecast errors for this first quarter,one should compare the forecast growth rates with the preliminary estimate growth rates.

Total private sector employment raised 19,750 jobs for an increase of 6.2 percent. This is thelargest quarterly growth rate since the fourth quarter of 1993. The Y/Y increase was 2.3 percentand was the largest increase since the first quarter of 2007. Manufacturing grew by 5.2 percentwhich follows a strong 2010 fourth quarter growth rate of 3.5 percent. Government added 730

jobs for a growth of 1.0 percent.

Within manufacturing, all sectors but three had strong job growth. Metals and machinery are up11.8 percent, computer and electronic products are up 7.6 percent, and transportation equipmentis up 5.1 percent. Food processing, a highly seasonal sector, reported job gains of 24.6 percent.Wood products declined 2.1 percent along with other durable goods down 0.7 percent and other

nondurable goods down 13.1 percent. Other durable goods include electrical equipment,appliances, and furniture products while other nondurable goods include paper and alliedproducts.

In the private nonmanufacturing sectors, construction gained 700 jobs for an increase of 4.0percent. This is the best job increase for construction since the first quarter of 2007. This job gainis welcome news to a sector that is still down 35.0 percent from its peak in the first quarter of 2007.

Retail trade and wholesale trade both added jobs at 3.0 percent and 0.6 percent, respectively.Retail trade Y/Y growth moved up to 2.5 percent, the second consecutive quarter of over 2percent growth. The last time retail trade Y/Y growth was above 2 percent was the secondquarter of 2006. Transportation, warehousing, and utilities had strong job growth of 3.8 percent.

Information, which includes publishers of software, had strong job gains of 5.3 percent and Y/Ygrowth is 2.2 percent. Financial activities had job gains of 5.0 percent, the first quarterly job gainsince the first quarter of 2007.

Professional and business services were up a strong 10.7 percent. This sectors strong growthwas pushed up by temporary help workers, some of the first to be hired in recoveries.

Health services appear to have moved out of its soft patch during the recession with job growthof 5.1 percent. Private educational services had a large increase of 6.5 percent and are up Y/Y by2.1 percent. This sector has been very volatile in the past few years.

Leisure and hospitality jobs have been languishing since the first quarter of 2008. This sectors job growth of 11.9 percent is one of the strongest quarterly growth rates on record.

Other services that include personal, repair, and maintenance increased by 8.0 percent. Thisreverses the fourth quarter decline of nearly 5 percent.


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The government sector increased jobs by 1.0 percent. Federal jobs declined by 6.6 percent whilestate jobs are up 2.7 percent and local jobs are up 1.5 percent. Both state and local government

jobs were bolstered by education hiring, more so for state government.

Regional Trends

Total nonfarm employment in Oregon increased 1.8 percent from the first quarter of 2010 to thefirst quarter of 2011. The state employment trend turned positive in the fourth quarter of 2010,which showed a slight increase over the year after nine consecutive quarters with a year-over-year decline. Many rural regions of Oregon endured longer declines. Generally, regionalemployment losses were most severe in the second and third quarters of 2009. Losses moderatedduring 2010, and by the first quarter of 2011 every region gained at least a few jobs over theyear.

Non-seasonally adjusted regional unemployment rates in the first quarter ranged from a low of 9.6 percent in the Portland area to a high of 14.1 percent in Central Oregon. In every region,

unemployment rates were lower than the prior year. Statewide, the unadjusted March 2011unemployment rate was 10.5 percent.

Mixed Changes 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, employmentgrowth resumed with a slight job gain over the year. Nonfarm job counts in the first quarter of 2011 were 1.5 percent above the level in the first quarter of 2010.

By county, first quarter employment growth was fastest in Washington (+2.2%) and Yamhill(+1.4%). Slower growth took hold in Clackamas (+0.8%) and Multnomah (+0.6%). ColumbiaCounty faced its 10th consecutive quarter of decline (-1.6%).

Of 11 broad industry sectors, eight showed employment gains in the Portland area from March2010 to March 2011. Professional and business services and manufacturing are growing fastest,and together added over 5,000 jobs. Education and health services also gained a significantnumber of jobs (+2,320), as did leisure and hospitality (+1,270). Construction grew 1.2 percentover the year, adding 430 jobs.

Financial activities and government had lower job counts in March 2011 than one year earlier,declining 0.8 percent and 1.3 percent, respectively.

The unemployment rate in the Portland region was 9.6 percent in the first quarter of 2011; thelowest rate in the state. The rate dropped 1.2 percentage points from the year prior.

Willamette Valley Flat Over the Year: Benton, Lane, Linn, Marion, and Polk counties

The Willamette Valley posted

oregon state budget forecast, may 2011

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