Oregon Office of Economic Analysis

As a new year begins, our office is taking a three-part look at the economic outlook. Last week was a look at the U.S. economy. Today we dig into the Oregon economy. In two weeks we will look at the Oregon housing market.

In recent years our office has talked a lot about labor and capital being the key drivers of economic growth. So far this cycle Oregon has experienced good overall economic and income gains. However the composition of the growth is a little bit different in that Oregon’s employment growth is in the middle of the pack across all states, while our productivity has been stronger than most states. The combined result is that overall good growth. Looking forward it will be important to see how these factors change and how Oregon differs from other states.

Let’s start first with capital. There are five main types of capital — financial, human, natural, physical, and social — all of which can and do make workers more productive. In terms of something like GDP we tend to focus primarily on business investment in physical capital (plants, equipment, software, etc), although we know all sources of capital are important and a more skilled workforce provides broader economic gains and the like.

As of a month ago, Oregon’s productivity gains had been among the strongest in the nation. However recent data revisions have brought Oregon closer to the pack. In particular, the BEA did their comprehensive historical revisions, along with a few tweaks to the methodology, and when those filtered down to the state data, Oregon’s GDP did see a sizable downward revision to the previous estimates. If we look at 2022 and early 2023, only Wisconsin saw a larger negative revision than Oregon did. These downward GDP revisions for Oregon were entirely about manufacturing and real estate.

That said, something like real GDP per worker still shows Oregon having strong gains, just not as strong as previously estimated. As we highlighted in our most recent forecast, in the previous estimates with data through 2023q1, Oregon’s real GDP per worker was the 5th strongest nationwide. In the revised data, including using the latest employment data as well, Oregon’s gains are 17th fastest across the nation. From 2019q4 through 2023q3 Oregon’s real GDP per worker increased 5.3% overall, compared with the median state at 3.1%, and the U.S. overall at 4.9%. Encouragingly, Oregon remains above the pre-pandemic trend.

Note that while real GDP per worker is a crude measure of productivity, better metrics like the BLS’ labor productivity by state is available only once per year. As of 2022, Oregon’s productivity growth ranked 3rd best among all states over the cycle. The 2023 state data will not be available until May. And it must be noted that the BEA GDP estimates for goods-producing industries are used in the BLS measures (which are then also adjusted for hours worked, etc) so it is possible Oregon’s relatively rankings will be lower as well, but we shall see.

All of that said, ongoing business investment alongside increased skills of the workforce are needed to grow Oregon’s economy given the outlook for labor. Just in terms of the mechanics of growth, net job gains are likely to be slow to minimal in the year(s) ahead. The reason is twofold. First, demographics are mediocre at best. The large Baby Boomer generation continues to retire and replacing them in the labor force is a combination of Gen Z (smaller in Oregon than the Millennials), and the slower population outlook. Second, employment rates are high and unemployment rates are low. Nearly all Oregonians who want a job, have a job, or can more readily find one with the strong economy and tight labor market. Cyclically, there is no slack in the economy meaning businesses typically have a small pool of candidates when looking to hire.

This next chart takes the monthly employment numbers from the Oregon Employment Department, and compares them to our office’s estimate of the potential labor force. You can see that Oregon is near a record high by this measure today. This is a clear indicator of the tight labor market, as are other items like age-adjusted employment rates and so on. It is harder to find workers simply due to the fact that most everyone you would expect to have a job, actually has a job.

Given this, our forecast for employment growth moving forward is essentially tied to working-age demographics. For example, in our most recent forecast, our employment outlook from 2023q4 to 2024q4, so measuring the changes over the course of the year, was just 0.7%. That’s entirely based on demographics, and the modest rebound in population growth we have in the baseline (more on that in a minute). Also of note is that we had 2023q4 as the last quarter where job gains outpaced the underlying demographics a bit. Given the latest employment report for November which showed job losses in Oregon, it’s possible this process of slow gains tied to fundamentals once you reach full employment and you hit that labor constraint have kicked in a few months earlier than we had built into the forecast. We shall see.

So what are firms looking to hire supposed to do? They can increase their business investment to make their workers more productive, and they can also dig a bit deeper into the resume stack, hiring workers with an incomplete skill set and increase on-the-job training and the like. Of course they have to be able to find the applicants first.

That’s where Oregon’s Latent Labor Force comes in. We may be at the typical labor force constraint today, but that does not mean there are no more potential workers entirely. See our previous report for more details, but this untapped potential from reducing historical disparities remains, and can provide a boost to the labor outlook in the years ahead.

In updating Oregon’s latent labor force outlook, it finds that there remains a sizable pool of potential workers already living in Oregon when it comes to addressing and reducing disparities based on sex, race and ethnicity, and educational attainment. Now, a bit of good news here is that these updated estimates of the latent labor force are a bit smaller than the last time we did this. Partially this is due to a slower population outlook (not the good news), but also this is because these disparities are smaller than a few years ago, meaning some progress has been made, and the gaps still needed to be reduced are smaller.

In order for Oregon to see stronger employment and labor force gains this year, we need to see a stronger rebound in migration and/or increased employment rates on a demographically-adjusted basis. Such gains would likely be part of the latent labor force already living in the state.

If population growth does not rebound as expected, increased business investment and the latent labor force will take on an even greater importance for local businesses looking to expand. Given the new 2023 Census population estimates, and the work our office has been doing on a zero migration demographic alternative scenario over the past year, next week we will post that here on the site. It provides another potential look at the growth path(s) of the state, and is the reason why the housing outlook is coming in two weeks time.

Finally, an open question heading into the new year is to what extent we see income inequality decline. During the pandemic income inequality increased initially with booming capital gains and the loss of many, generally lower-wage jobs. (Remember that the recovery rebates were technically advanced federal tax refunds, which boost disposable income but not earned income which matters tremendously depending upon the data set you are looking at.)

Since then, we have continued to see the strongest wage growth among lower-paying industries. Here in Oregon, 17 of the 20 lowest-paying sectors have seen above-average wage gains since 2019. And nationally there has been a clear wage compression in the data. Wage inequality is smaller today.

However, as of the 2022 ACS data, this stronger wage growth has not translated into less income inequality at the household level. Income growth from 2019 to 2022 is relatively uniform across the income distribution, albeit lowest at the lowest incomes, and in Oregon at least higher at the highest incomes. At what point does the strong labor market, especially for lower wage workers, translate into improved household figures as well? Or to what extent do we see other factors, like increased household formation that lowers each newly formed household’s income, or the impact of retirements which drop more households down the distribution as we tend to earn less in retirement than in our working years and the like swamp the labor market effects? That’s what I’m watching for, and will continue to dig into, this cornucopia of socio-economic factors influencing the topline data we care about.

Happy New Year everyone!