Oregon Economic Update: Growth amid Risks and Challenges

by Amy Vander Vliet

June 27, 2022

The current state of the economy is a story of strength and challenge. On one hand, job growth remains solid; incomes are rising; consumers are spending; and business investment is accelerating. On the other hand, inflation is the highest in 40 years; the war in Ukraine has generated an oil shock; and China’s recent pandemic-related shutdowns threaten already-stressed supply chains.

Nonetheless, the economy is expected to persevere. Growth will continue this year despite these challenges, and both the state and nation will make a full jobs recovery by this fall according to the latest forecast from the Office of Economic Analysis (OEA).

Inflation

At 8.6% in May, inflation hasn’t been this high since Ronald Reagan was in office. OEA considers it the biggest risk to economic growth for the following reasons:

  • Rising prices strain household budgets. The most vulnerable tend to be fixed- and lower-income households, who might need to dip into savings or take on debt in response to higher costs.
  • Inflation erodes some of the wage gains Oregonians have made over the past few years. According to OEA, the average wage in Oregon increased by 17% since the start of the pandemic. Adjusting for inflation, that figure drops to just 5%.
  • Inflation can lead to what economists call ‘demand destruction’. When prices get too high, people buy (demand) less. In response, employers will produce less and thus need fewer workers. OEA doesn’t see this happening currently but still considers it a risk.
While rising prices can lead to mounting debt, declining disposable income, dampened demand, and layoffs, the good news is that OEA believes inflation is set to improve. They list three major reasons:
  • The Federal Reserve is tightening monetary policy. They’ve raised the interest rate three times already this year with more expected. The latest increase in June was 0.75 percentage points; the largest hike in 28 years. By aggressively increasing the cost of borrowing money, the Fed hopes to cool excess demand – which has overwhelmed supply – thus alleviating upward pressure on prices.
  • The supply chain is improving and businesses are able to increase production. At the same time, consumers are still spending but the pandemic surge has eased. More supply and easing demand should lessen pressure on prices, if not reduce the cost of some goods.
  • Growth in household income will decelerate as job growth slows. In addition, consumer spending will ease as the rate of savings decline and as households take on more debt – both of which are starting to happen. Finally, the decline in the stock market reduces household wealth and stifles spending. Slowing or declining income leads to less spending which alleviates some upward pressure on prices as demand becomes better aligned with supply.
The combination of Fed policy, slowing price increases, and less disposable income should slow inflation this year and next. The ultimate risk is that the latter two won’t be enough and that the Fed will have to act more aggressively which would increase the risk of a boom/bust cycle. However, OEA doesn’t see this as the most likely scenario.  

Ukraine and China

The war in Ukraine has sent oil prices soaring. Pandemic-induced shutdowns in China have again disrupted supply chains. However, OEA believes these shocks are temporary. Even if oil and gas prices remain high, their contribution to inflation has already been incorporated. And production issues in China should ease in the coming months.

Labor Shortage

While inflation is a risk to economic growth, the current labor shortage is a challenge. The share of prime working age Oregonians that have a job is back to where it was in late 2019. The labor market is nearing full employment, where essentially everyone who wants a job has one. Yet businesses are still looking to hire more workers. Employers reported 100,000 vacancies according to the Oregon Employment Department’s latest Job Vacancy Survey.

OEA points to three structural changes contributing to today’s labor shortage:
  • Pandemic deaths resulted in 2,500 fewer people in Oregon’s labor force (adjusting for age).
  • The number of foreign born, prime working age residents in Oregon is 55,000 fewer relative to expectations.
  • Baby boomers are retiring and will continue to over the coming years. There aren’t enough new, younger entrants to the labor force to fully replace them. This is the biggest factor affecting Oregon’s labor supply.
In an economy nearing full employment, employment growth will slow.

Caveat and Alternative Scenarios

OEA acknowledges that forecasts are never certain. They discuss the possibility of a recession triggered by inflation, but they don’t factor one into their baseline scenario. They expect the Fed will be able to engineer a soft landing, walking the fine line between tightening too much and not enough.

The OEA's complete report is available at www.oregon.gov/das/OEA/Pages/forecastecorev.aspx.

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