By Julia Shumway
After months of record revenue growth, Oregon economists now expect the state to enter a “mild” recession next summer.
State economists told a legislative panel on Wednesday that economic forecasters in Oregon and around the country anticipate a recession within the next year because inflation remains higher than the Federal Reserve wants it to be, with the Fed expected to continue raising interest rates. In a quarterly report released Wednesday, officials from Oregon’s Office of Economic Analysis likened the interest rate hikes to slamming on a car’s brakes.
“Slamming on the brakes of a speeding car will cause it to skid and even fishtail,” the report said. “The question is whether the driver is able to pull out of it or end up in the ditch. Most economists today believe a recession is likely, even if the exact path of the economy is uncertain.”
The forecasted recession envisions losing about 24,000 jobs, primarily in construction, manufacturing and related industries including finance and transportation. It would likely be rougher in the Portland suburbs and central Oregon, where rapid population growth means a significant portion of the local economy is tied to construction.
State economist Mark McMullen told lawmakers the signs of an upcoming recession are different this year than they have been in the past. It will be driven by a decline in housing and business investment due to high interest rates, he said. The current forecast calls for employment rates, which have risen quickly and steadily since plummeting in the early days of the pandemic, to dip in late 2023 and begin rising again the following year.
“It’s rather mild, at least from a historical perspective,” McMullen said.
There are three reasons to expect a mild recession, he said. First, businesses, financial markets and people expect inflation to slow. Second, the labor market has been so tight that employers aren’t likely to let go of workers even if their sales slow. And finally, many people still have higher savings from wage growth, stimulus payments and limited spending during the pandemic – though those savings are concentrated in higher-income households.
Some of the state’s urban areas are most at risk, forecasters said. Clackamas, Columbia, Deschutes, Jackson and Washington counties, along with rural Crook and Gilliam counties, are at highest risk because much of their economies depend on construction, manufacturing or transportation and warehousing. The Portland suburbs, Bend and Prineville are growing quickly with many jobs in housing construction, while 10% of Gilliam County jobs are in transportation or warehousing. That county’s largest employers are landfills.
Other rural counties used to have more volatile economies when they relied on the timber industry and mills would regularly shut down and reopen, McMullen said. Now, those rural counties don’t experience the same economic booms as the rest of the state, but they also don’t see the same downswings in bad economic times.
Meanwhile, Oregon lawmakers will begin drafting the state’s next two-year budget in a couple of months, and they’ll have about $3 billion less to work with than they did during the current two-year budget cycle. That’s because many wealthy Oregonians cashed out capital gains in 2021 and federal stimulus checks increased the amount of money collected in state income taxes.
The state will also pay out in 2024 a record “kicker” tax credit, which is triggered when the state collects more in personal income taxes than it budgeted. Oregonians who paid taxes in 2022 and 2023 will receive credits totalling $3.7 billion when they file their tax returns in 2024, with larger credits for those who paid more in taxes.
“We’ve never seen kickers like this,” McMullen said.
Lawmakers can reduce or eliminate the tax credit with a two-thirds vote – 20 senators and 40 representatives. They did so in the early 1990s, when the nation faced a recession tied to the Gulf War, and progressive groups have long pushed for legislators to reduce or reform the kicker.
But such a vote seems unlikely next year. Democrats will still have a majority in the Oregon House and Senate, though they lost their supermajorities in both chambers. Getting enough votes to suspend the kicker would require not just every Democrat but multiple Republicans in the House and Senate to vote for it, and GOP legislative leaders have consistently pledged to protect the kicker as is.
For the complete story, see the Oregon Capital Chronicle.