Oregon Economic and Revenue Forecast - Sept 2010

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Department of Administrative Services

Scott L. Harra, Director

Office of Economic Analysis

Tom Potiowsky, State EconomistJosh Harwood, Senior Economist

Kanhaiya Vaidya, Senior DemographerDamon Bell, Senior Analyst

Josh Lehner, Economic AnalystSusan Daniels, Administrative Assistant

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___________________________________

TABLE OF CONTENTS___________________________________

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

I. ECONOMIC FORECAST ............................................................................................. 15

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

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

C. Western Region ................................................................................................................. 29

D. Oregon Economic Review and Forecast........................................................................... 35

II. REVENUE FORECAST ................................................................................................ 65

A. 2009-11 General Fund Revenues ...................................................................................... 65B. Extended General Fund Revenue Outlook ....................................................................... 67

C. Tax Law Assumptions....................................................................................................... 67

D. Forecast Risks ................................................................................................................... 68

E. Lottery Earnings Forecast ................................................................................................. 70

APPENDIX A: ECONOMIC FORECAST DETAIL ......................................................... 73

APPENDIX B: REVENUE FORECAST DETAIL ............................................................ 99

APPENDIX C: POPULATION FORECASTS BY AGE AND SEX ............................... 113

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EXECUTIVE SUMMARY

September 2010

Oregon Economic Forecast

The second quarter of 2010 eked out a seasonally adjusted growth of 0.5 percent, the secondconsecutive job growth quarter. So far, this recovery is living up to its billing as one of theslowest on record. On a year-over-year (Y/Y) basis, jobs decreased in the second quarter by 1.2percent, an improvement over last quarters Y/Y decline of 3.0 percent. To provide someperspective in numbers as to this weak recovery, we had seven consecutive quarters of annualized quarterly job losses and nine consecutive quarters (and still counting) of job losses ona Y/Y basis.

The unemployment rate for Oregon sits at 10.6 percent for July, essentially unchanged for thepast nine months. The unemployment rate tends to be one of the last measurements to improve

as the economy enters recovery.The second quarter was actually weaker than the numbers portray given the hiring of federalCensus workers during the quarter. [The job numbers are initial estimates and are subject torevisions which could marginally change the job picture.] The job changes are a mix bagthroughout the job markets with losses and gains both within manufacturing and the servicesectors. Manufacturing jobs were flat with increases in wood product jobs and other durablegoods and losses in other sectors. The service sector showed some disappointing job losses inprofessional and business services, health services, financial activities and retail trade with jobsgains in the other service areas. Depending on the outcome of further spending packages fromthe US Congress, we may see further large job cuts at the state and local government levels. Theexpected slowdown in US economic growth due to slowing stimulus spending and windingdown of manufacturing inventory cycle is similarly impacting the Oregon economy. Given therather lackluster employment picture, saying the recession is over gives little solace to those stilllooking for work.

Is this turning into a sequel of Jaws? The huge shark that shut down the economy of thesummer resort was finally blown to bits. Just when we all felt it was safe to go back into thewater, we start to hear that eerie music again.

The Conference Board Leading Indicators fell twice (April and June) in the last three months.The Boards Consumer Confidence Index fell in June erasing the gains of the previous twomonths. Retail sales are down for both May and June, even with the exclusion of auto sales.New home sales are down in May due to the expiration of the homebuyers tax credit but stillover 18 percent lower than May 2009. Both housing starts and permits in June are below theirlevels in March. The ISM manufacturing index declined in both May and June.

Not wanting to put up the Closed Beach Due to Shark Sighting signs, Fed Chief Ben Bernanketold Congress in late July that the Federal Reserve would take actions if the economy worsens,but for now, the economic outlook is unusually uncertain. Federal unemployment benefits

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were extended through November. As of July 23, the US Senate passed a bill dedicating $30billion to assist community banks to make business loans.

Not only is there uncertainty in the near-term outlook for the economy, but the debate as to howeconomic policy should move forward is just as uncertain. The center of the issue concerns the

efficacy of government stimulus programs. Hanging in the balance is the election yearpartisanship over the elimination of the Bush tax cuts and the size of the federal budget deficit.Academic discussion questions the relative multiplier impact of various government spendingand marginal tax rates on higher income households. This section cannot do justice as a reviewof the various points of view but to point out that uncertainty is certainly the word of the day.

Just as with the US economy, Oregon is also showing signs of a slowdown or pause ineconomic activity mid-way through this year. Economic activity measures from our office(Office of Economic Analysis), University of Oregon Index of Economic Indicators, and theFederal Reserve Bank of Philadelphias State Coincident Indexes all point to moderation.Oregon housing sales have slowed and total permits year to date (May) are lower. The June

employment report, after adjusting for the loss of temporary federal Census workers, showed aloss of jobs. The states June unemployment rate remains around 10.5 percent, where its beenfor the last eight months.

Major forecasting firms, such as IHS Global Insight and Moodys Economy.com, do not predicta double-dip recession for the US economy. Moodys lists Oregon as still in recovery and thechance of recession at 28 percent. Still, the recent slower news on the economy takes note thatthe risks have heightened for another downturn.

OEA forecasts a decline of 0.8 percent in total employment in the third quarter and a mildincrease of 0.2 percent in the fourth quarter of 2010. The second quarter of 2011 will seeimproving job growth approaching 2.0 percent. The Oregon economy does not enter a stronger

job growth period until the fourth quarter of 2011.

The wood products industry had the first job growth quarter in the second quarter of 2010 sincethe first quarter of 2006. Unfortunately, this sector is not expected to see stronger recovery untilthe second quarter of 2011 and is not expected to regain its previous employment level before therecession hit. This industry is projected to loose 3.8 percent of workers in 2010, and then addworkers at 4.0 percent in 2011 and 7.2 percent in 2012. Although these seems like high growthrates in 2011 and 2012, employment is still ten thousand less than jobs levels in 2006.

The computer and electronic product sector has seen a surge in its output and sales. Thecomputer and electronic product sector will continue to loose jobs on an annual average basis in2010 at the rate of 1.6 percent. Job growth picks up in 2011 and 2012 with growth rates of 4.5percent and 3.0 percent, respectively.

The transportation equipment sector has been especially hard hit through this recession. Jobloses will still be high this year at 11.4 percent followed by growth of 2.7 percent in 2011 and 4.2percent in 2012. But the heavy toll from the recession still leaves jobs down by over 45 percentfrom 2007 to 2012.

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The metals and machinery sector continues to be weak in 2010. Job loses are projected at 8.4percent for 2010. Weak job growth is forecasted for 2011 at 0.5 percent before stronger growthin 2012 at 5.9 percent.

Other durables sector has shown some job growth in the most recent quarters. This sectorincludes makers of glass, concrete, cement, small electrical appliances, medical equipment, andother small miscellaneous products. This sector will add jobs at a rate of 2.9 percent in 2010, 7.7percent in 2011, and 3.9 percent in 2012.

Food processing, a usually volatile job sector, has weathered the recession in relatively goodshape. The food processing sector is expected increase jobs by 5.7 percent in 2010, 1.2 percentin 2011, and 1.5 percent in 2012.

Other nondurables, which include paper and allied products, will lose 4.0 percent jobs in 2010,then gain 1.8 percent jobs in 2011 and 1.3 percent jobs in 2012.

Construction jobs are down almost 40,000 from the first quarter of 2007 to the second quarter of 2010, a drop of 38 percent. With the commercial real estate sector joining the residential homeconstruction collapse, this sector was impacted before the full strength of the recession hit andcontinues to be negatively impacted as the tepid economic recovery takes hold. Job loses of 12.5percent are projected for 2010 with continued job loses of 2.2 percent in 2011. Job growth willbe relatively weak for a recovery period in 2012 with job gains of 2.6 percent.

Trade, transportation, and utilities sector is projected to lose jobs at a rate of 0.2 percent in 2010,with improving growth of 1.3 percent in 2011 and 3.3 percent in 2012. Retail jobs are expectedto be flat with a 0.1 growth in 2010. Jobs will still grow slowly in 2011 at 0.6 percent beforebetter growth of 2.1 percent in 2012. Wholesale jobs are expected to slightly decline on 0.2percent in 2010, then add jobs at a rate of 1.9 percent in 2011 and 4.6 percent in 2012.

The information sector, which includes traditional publishers such as newspapers and publishersof software, is almost back to adding jobs year-over-year. The outlook for this sector is growthof 1.2 percent in 2010, 3.5 percent in 2011, and 2.2 percent in 2012.

The financial sector continues to be impacted by the fallouts from the residential and commercialreal estate market. The financial sector is projected to lose jobs at the rate of 2.4 percent in 2010,very slow growth of 0.5 percent in 2011, with improving growth of 2.4 percent in 2012.

Professional and business services will continue to lose jobs in 2010 at 1.9 percent. Job growthturns positive at 3.9 percent in 2011 and continues strong at 4.3 percent in 2012.

Education and health services will have one of its slowest job growth years at 0.6 percent in2010. Stronger growth commences in 2011 at 2.2 percent and 3.4 percent in 2012. Healthservices will have matched its slowest job growth year in over twenty years with 1.0 percent in2010. Stronger growth is forecasted for 2011 with 2.1 percent and in 2012 at 3.6 percent.

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Leisure and hospitality is still struggling with the drop in discretionary consumer spending. Jobgrowth will be mild in 2010 at 0.6 percent and in 2011 at 0.4 percent. Job growth improves in2012 at 1.8 percent.

The Census worker bump up in government employment is now winding down. Federal worker

employment in Oregon is expected to grow 3.3 percent in 2010 but reverse trend with a drop of 4.0 percent in 2011. State government is expects to have mild positive growth of 0.4 percent in2010, followed by a drop in jobs of 1.1 percent in 2011, and a return to mild growth of 0.6percent in 2012. Local government is projected to lose jobs at 1.3 percent in 2010 and 1.1percent in 2011. Job growth returns in 2012 at 1.1 percent.

Population growth has slowed with the economy and is projected to be below the U.S. growthrate in 2010 at 0.9 percent. Population growth picks up at 1.1 percent in 2011 and 1.2 percent in2012, but still below rates seen in 2005 through 2007.

Forecast RisksEconomist Frank H. Knight, in his book, Risk, Uncertainty, and Profit (1921), makes a distinctionbetween risk and uncertainty. Both concepts deal with the future but Knight defined risk as futureevents with measurable probability while uncertainty is an indefinite or incalculable state concerningthe likelihood of future events. So when a well-trained economist, like Ben Bernanke, says that theeconomic outlook is unusually uncertain, one takes pause as to the meaning of this phrase. IHSGlobal Insight sticks with risks as it places a 20 percent chance of pessimistic outcome compared to a15 percent chance for an optimistic outcome around their baseline economic outlook. But only a fewmonths ago, IHS Global Insight had these probabilities reversed: 15 percent pessimistic compared to20 percent optimistic. However one defines risk and uncertainty, the crystal ball for the economy iscloudier today.

Oregons economic outlook is tied to the U.S. economy. With a lackluster forecast for second half of 2010, Oregon will also see a non-starter recovery in terms of job growth. Weakness remains inhousing and commercial real estate and many financial institutions are still holding questionableassets. Export markets have been a bright spot but will the Pacific Rim economies sustain theirgrowth. For the Oregon economy, risks are stronger for a downturn, but the soft patch moving into2011 is still the most likely outcome.

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 . Credit markets are easing, butconsumers and businesses still have difficulty getting loans. To the extent that credit marketstake longer to come back to some sort of state of normalcy, the current recovery could beslower than projected or thrown off track. Housing and commercial real estate may take longerfor credit conditions to improve. Oregon will suffer the consequences along with the rest of thenation.

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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. ThoughOregon has been hit hard through this downturn, Oregons housing market is relatively betteroff compared to California, Nevada, Florida, and Arizona. Coupled with the recessionarystate of the economy, overbuilding and heightened credit standards will keep demand for

housing relatively low. Rather than the correction of the housing bubble further hurting theOregon housing market, it has been the deepening recession that caused further home pricedeclines and rising foreclosures. Unlike many parts of the economy, there is an upside risk here as well. If the recovery is stronger than forecasted, Oregons housing market shouldrevive better than the states that experienced the greater housing market bubbles.

Period of deflation . With the continuation of very low interest rates and the drop in houseprices, expectations could form for a period of deflation. Consumer spending would be greatlycurtailed for consumer durables and businesses would be reluctant to expand capitalexpenditures. Fears would build that the U.S. economy may enter a decade of no growthsimilar to Japan. With the nation, Oregon would be similarly impacted.

The temporary return of federal timber payments to Oregon counties . Included in the federalbailout was a provision to reinstate federal timber payments for four years. Oregon countieswill receive $254 million, down from the previous $282 million level and will be phased outover the four year window, through 2011. While this temporary reinstatement helps covershort term budgets for Oregon counties, finding or replacing this dwindling revenue source willbe imperative as any loss of public services could have adverse impacts on economic activity.

The extent of the global downturn . The U.S. economy has been an important engine of growthfor the global economy. The economic woes of the U.S. have been felt throughout the globalsupply chain and production process. Asian economies, exposed via trade to the U.S., have

begun a strong rebound. It is expected that Asian economies will lead the world out of recession, which is good news for Oregons exports. China is a top export market for Oregonsproducts and a strong Chinese expansion, along with other Pacific Rim countries will aid theOregon recovery. Financial stability is still a global question with the fiscal worries of Greeceand implications for the Euro Zone.

National and regional energy prices . Energy prices are generally lower coming into 2010compared to 2008. Changes in regional electric and natural gas prices are expected to be smallover the year. This comes at a welcomed time when businesses are looking for cost savings.The benefit from lower energy prices is most likely short-lived as the underlying demanddrivers will return once the world economies rebound from this recession.

Initiatives, referendums, and referrals . Generally, the ballot box brings a number of unknownsthat could have sweeping impacts on the Oregon economy. Another uncertainty facing theOregon economy is the impacts from the two tax measures which were passed on January 26.Studies on both sides of the issue from respectable sources derived very differentconclusions. Given the uncertain nature of the impact of these two tax measures, we will notincorporate possible impacts into the Oregon economic forecast. We will be monitoringclosely to see if any changes are warranted in future forecasts.

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Demographic Forecast

Oregons estimated population on July 1, 2009 reached 3,823,460. That was an increase of 0.85

percent over the 2008 population. The growth has slowed down since the highs of 2005 through2007 when it exceeded 1.5 percent on average. This is the first time in two decades that Oregonspopulation growth was lower than the U.S. average. Overall, population change since 2000 wasmuch slower than the rate of growth of well over 2.0 percent during the early 1990s. As a resultof recent economic downturn, Oregons population is expected to continue a slow pace of growthfor at least a couple of years. Based on the current forecast, Oregons population will reach4.2 million in the year 2017 with an annual rate of growth of 1.17 percent between 2009 and2017.

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 other statesand beyond. As Oregons total fertility rate remains below the replacement level and deathscontinue to rise due to ageing population, long-term growth comes from net in-migration.Working-age adults come to Oregon as long as we have good economic and employmentsituations. During the 1980s, that included a major recession and a net loss of population, netmigration contributed to 22 percent of the population change. On the other extreme, netmigration accounted for 73 percent of the population change during the booming economy of 1990s. This share of migration to population change declined to 57 percent in 2002 and it isdown to 48 percent in 2009. As a sign of slow to modest economic gain, the net migration willaccount for 50 to 65 percent of the population change in the near future. Although economy andemployment situation in Oregon look bleak, migration situation is not expected to replicate theearly 1980s pattern. Potential Oregon out-migrants have no better place to go since other statesare also in the same boat 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 2009-2017. It will also reflect demographics impacted by the depression era birth cohortcombined with diminished migration of the working age population and elderly retirees. After aperiod of slow growth in the past, the elderly population (65+) has picked up a faster pace of growth and will surge as the baby-boom generation starts to enter this age group. The averageannual growth of the elderly population will be nearly 4.0 percent during the forecast horizon asthe boomers continue to enter retirement age. The youngest elderly (aged 65-74) will grow at anextremely fast pace even exceeding 6 percent annual rate of growth due to the direct impact of the baby-boom generation entering retirement age. Reversing several years of shrinkingpopulation, the elderly aged 75-84 will start a positive growth as the effect of depression erabirth-cohort will dissipate. The oldest elderly (aged 85+) will continue to grow at a moderatelybut steady rate due to the combination of cohort change, continued positive net migration, andimproving longevity. However, the annual growth rate will continue to taper off as the depressionera small birth cohort transitions from the younger age group.

As the baby-boom generation matures, the once fast-paced growth of population aged 45-64 willgradually taper off to near 0 percent rate by 2012. The young adult population (aged 18-24) will

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remain virtually unchanged between 2009 and 2017, slowing from an averaging of 1.0 percentgrowth experienced between 2000 and 2009. Although the slow growth of college-agepopulation (age 18-24) tend to ease the pressure on public spending on college education, collegeenrollment typically goes up during the time of high unemployment and scarcity of well paying

jobs when even the older population flock back to college to better position themselves in a

tough job market. The growth rate for children under the age of five will remain below theoverall population growth rate. Since the change in the number of children before and after the2009 baseline population will remain low, the demand for child care services and pre-Kindergarten program will be additionally determined by the labor force participation of theparents. The growth in K-12 population (aged 5-17) will remain low which will translate intoslow growth in school enrollments. This school-age population has actually decline in size. The25-44 age group population has reversed the several year trend of decline and slow growth. Thedecline was mainly due to the exiting baby-boom cohort. This age group has seen positivegrowth starting in the year 2003 and will approach 1.2 percent annual growth by the year 2011.

Revenue Forecast

The forecast for General Fund revenues for 2009-11 is $12,307.2 million. This represents adecrease of $377.5 million from the June 2010 forecast. The forecast for the 2009-11 bienniumis now $1,269 million below the Close of Session forecast. The prolonged plunge in personalincome taxes more than accounts for the decrease associated with this forecast. These resultfrom the a significant downward revision in the expectation of how the economy will performover the near- and mid-term future. After incorporating a Rainy Day Fund transfer triggered bythe June forecast, total available resources amount to $12,471.3 million. Table B.1 in Appendix Bpresents detailed revenue information for the 2009-11 biennium.

Projected lottery earnings will total $1,081.9 million, an increase of $4.6 million from the priorforecast. Lottery revenues have generally stabilized with year-over-year growth returning formost of 2010 after nearly 18 months of steady decreases. The increased forecast is the result of the addition of $11 million of administrative savings offsetting slightly weaker expectations forconsumer spending. Including the beginning balance and other earnings, total availableresources equal $1,084.2 million.

Pursuant to Senate Bill 5555 from the 2009 Legislative Session and Senate Bill 5565 from the2010 Special Session, a total of $200 million will be transferred to the State School Fund fromthe RDF and ESF. At the close of fiscal year 2009, the balance in the ORDF equaled $112.5million. The ORDF is projected to reach a balance of $10.7 million by the end of 2009-11. TheESF balance was completely withdrawn at the end of 2007-09 in order to fill the budget shortfallfor 2007-09. By the end of 2009-11, available ESF funds will total $100.8 million.

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still being propped up by contract closings, they too will tumble by July. This picture suggests nounderlying pickup, despite rock-bottom mortgage rates, but rather a weak market that wastemporarily brought to life by the tax credit. There is as yet little help from the anemic labormarket. In the light of this evidence, we now believe that housing recovery will be a longerdrawn-out process than in our previous forecasts, and have sharply reduced our expectation for

2011 housing starts from 1.16 million to 0.96 million. That would still be a roughly 50% reboundfrom this year's level.

Business Equipment Spending Is a Ray of Light. Amid the recent gloom, one bright spot iscapital equipment. Business equipment and software spending surged 11.4% in the first quarter,and the evidence on capital goods shipments suggests that it did even better in the secondquarter, rising 19.5%. What's more, the trend in capital good orders is still pointing higher.Businesses are flush with cash, and are starting to address replacement needs neglected duringthe recession.

Inflation Is Not an Issue. Tumbling global commodity prices are showing up in reduced price

pressures reported in the ISM surveys, and will soon be clearly evident in lower producer pricesfor materials. Wage inflation remains very low. Core PCE price inflation is heading towards thebottom of the Federal Reserve's 12% comfort zone and could slip below it by year-end.

An Even Longer Wait for the Fed. With inflation so quiet, and growth likely to remain muted,we now assume that the Fed will delay any rate hike to the fourth quarter of 2011, rather thanmoving in the first quarter of 2011 as we assumed in our June forecast.

Excerpted from Nigel Gault, U.S. Economy: Current Situation: Forecast Flash , IHS Global Insight, Jul 2010

Figure N.1*

1Q 10 2Q 10 3Q 10 4Q 10 2009 2010 2011 2012 2013Real GDP (Percent change) 2.7 3.8 2.3 2.6 -2.4 3.1 2.7 3.0 2.7Federal Funds Rate (Percent) 0.13 0.19 0.16 0.16 0.16 0.16 0.23 2.28 3.50Ten-Year Treasury Yield (Percent) 3.72 3.49 3.05 3.18 3.26 3.36 3.34 4.13 4.68Oil Prices, WTI (Dollars/barrel) 79 78 72 75 62 76 83 89 93Consumer Price Index (Percent change) 2.4 1.8 1.1 0.8 -0.3 1.5 1.4 2.0 2.1Housing Starts (Millions) 0.62 0.61 0.62 0.70 0.55 0.64 0.96 1.35 1.55Consumer Sentiment (Univ. of Michigan) 74 74 72 74 66 73 78 78 79Unemployment Rate (Percent) 9.7 9.7 9.7 9.6 9.3 9.7 9.2 8.5 7.9

Quarterly Annual

* Figure N.1 was taken from Nigel Gault, U.S. Economy: Current Situation: Forecast Flash , IHS Global Insight, July 2010

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U.S. ECONOMIC HISTORY AND FORECAST

7.216 2.6362 3 2.91168 4 5 6.03219 6.3875 6.4017 6.6506 6.8659 6.9541

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

2.249 2.05 2.01 1.96 1.78 1.49 ## 1.24 ## ## 1.01 1.25 1.22 1.19 1.19 1.12 1.10 1.146.453 6.80 7.68 6.11 6.64 5.87 ## 7.22 ## ## 2.91 4.29 5.19 6.03 6.39 6.40 6.65 6.87

3.207902 4.18 4.07 3.98 3.51 1.67 ### 2.02 ## ### -0.51 1.08 2.04 2.33 2.16 1.78 1.55 1.563.97893 4.69 5.27 3.88 4.60 4.75 ### 4.56 ## ### 1.17 2.82 2.86 3.55 3.83 3.71 3.79 3.96

0.305983 3.84 4.18 3.62 4.42 0.70 ### 0.13 ## ### -3.43 -1.19 0.78 1.07 0.70 0.40 0.44 0.822.635818 3.90 2.71 3.53 4.30 4.17 ### 3.74 ## ### 2.00 3.58 2.92 3.39 3.24 2.81 2.68 2.764.073928 4.96 5.31 5.59 5.95 7.05 ### 7.96 ## ### 3.19 4.47 5.00 5.61 5.85 5.86 6.05 6.251.652886 2.87 2.96 3.37 3.93 5.92 ### 5.28 ## ### 1.44 3.00 2.68 3.14 3.30 3.18 3.21 3.361.953591 3.10 2.65 2.04 2.56 2.57 ### 2.17 ## ### -0.11 1.19 1.71 1.82 1.63 1.31 1.07 1.071.294445 1.21 1.19 1.17 1.20 1.17 ### 1.12 ## ### 0.94 0.87 0.86 0.85 0.84 0.83 0.82 0.82-0.144837 1.48 1.29 -0.05 1.05 0.82 ### -0.34 ## ### -4.69 -1.46 1.15 -0.14 -0.75 -1.09 -0.92 -0.544.556057 5.11 4.48 4.40 3.87 1.72 ### 2.34 ## ### 0.25 1.59 2.46 2.80 2.61 2.13 1.78 1.682.653234 3.87 3.39 2.86 3.32 3.23 ### 2.60 ## ### 0.51 1.85 2.06 2.39 2.22 1.85 1.53 1.49

31.8 33.4 37.0 41.7 46.7 47.7 ### 47.8 ## ### 41.4 42.6 44.6 45.3 45.7 46.2 46.7 47.437.6 38.7 37.7 37.2 37.9 36.8 ### 35.7 ## ### 31.5 30.9 31.1 31.3 31.4 31.5 31.6 31.6

165.43 1 83.6075 2 00.3575 216 2 29.9575 241 248. 6875 ## 2 74 286.2 415 299.7 681 312.0 301 326. 8946 343. 0362 360. 1616 377. 9351 395. 7143128.75 133.1583 135.2083 141.425 149.9167 158 167.61667 ## 184 200.56667 211.0506 214.4351 223.9009 233.1842 243.0206 253.4427 264.7599

Graph N. 1

CONSUMER PRICE INDEXALL ITEMS VS. ALL ITE MS LESS FOOD & E NERGY

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96:197:198:199:100:101:102:103:104:105:106:107:108:109:110:111:112:113:114:115:116:01 17:01

M i l l i o n s

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INTEREST RATES

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1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

STANDARD & POOR'S 500 INDEX

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B. International Review and Outlook

Introduction

With every region of the world currently in the recovery phase from the global recession, the

focus has turned to the durability and sustainability of the recovery moving forward. Already theworld is experiencing a multi-speed recovery with Asian economies, along with many emergingmarkets, continuing to grow strongly while the more advanced and developed economiesbeginning to show signs of slowing down. A recent Organization for Economic Cooperation andDevelopment (OECD) report shows GDP in its member country area growing 0.7 percent at anon-annualized rate in the second quarter, the same rate as the first quarter of the year. However,the OECDs composite leading indicator fell in June, a possible signal that peak growth hasalready occurred. That does not mean the world economy is about to fall into recession again,

just that growth rates in the near future will be lower than they have been the past few quarters.Country specific indicators from the OECD show continued growth at slower rates in France,Italy, China and India, among others.

The International Monetary Fund (IMF) is currently forecasting that the recovery will continue,although continued financial turbulence is to be expected. The IMF recently raised its globalGDP forecast to 2.5 percent for 2010, an increase of 0.25 percent, due to sustained strength inAsia. Industrial production in advanced economies has risen 10 percent from a low in March2009 through the most recently available data for April 2010. The recent increases have recoupedover half of the overall decline due to the recession. Similarly, retail sales in advancedeconomies, having fell 6.5 percent, have rebounded 5.4 percent, leaving the current level of salesonly 1.4 percent below their peak levels.

Graph I.1 illustrates the relativeperformance of many of thelargest economies in the worldsince the beginning of 2008.Each countrys GDP isnormalized to its 2008 Q1value and is tracked relative tothat value through the mostrecent quarter that data isavailable.

More export dependenteconomies, such as Germanyand Japan, experienced muchlarger declines in GDP duringthe depths of the global recession, than other advanced economies. Similarly, Germany andJapan have also exhibited larger rebounds over the past five quarters.

Graph I. 1In ternat ional GDP Comparison

United St ates (1)

Eurozone

Japan (2)

Germany ( 4)

France (5)

United Kingdom (6)

Canada (10)

90

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D P I n d e x

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Japan (2)

Germany (4) G

France (5)

United Ki ngdom(6)

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Table I.1 details the percentagedeclines in each countrys GDPand also where each country istoday, relative to peak GDP.

Japan experienced the largestdecline in peak to trough GDPamong the countries listed, at 8.7percent, however their stronggains have regained nearly half of the decline. Similarly,Germanys GDP fell 6.6 percentbut after a year of small gains and a very strong 2010 Q2, Germanys economy is now 2.6percent below peak level. As severe as the recession has been in the U.S., in GDP terms, the U.S.has performed better than most other advanced economies and is currently 1.1 percent belowpeak levels reached back in 2008 Q2. While second quarter GDP data has not been released for

Canada, it remains the best performing advanced economy and most likely, regained alleconomic losses, defined as GDP, due to the recession.

Table I. 1

CountrySize of GDP

RankingQuarter ofGDP Peak

Quarter ofGDP

Trough

Peak toTrough GDP

Decline

Peak toCurrent

GDP

United States 1 2008 Q2 2009 Q2 -4.1% -1.1%Eurozone NA 2008 Q1 2009 Q2 -5.2% -3.6%Japan 2 2008 Q1 2009 Q1 -8.7% -4.6%Germany 4 2008 Q1 2009 Q1 -6.6% -2.6%France 5 2008 Q1 2009 Q1 -3.9% -2.2%United Kingdom 6 2008 Q1 2009 Q3 -6.4% -4.2%Canada* 10 2008 Q3 2009 Q2 -3.3% -0.4%

G

*

DP rankings based on 2009 data published by the International Monetary Fund.

2010 Q2 GDP data not available by publication date

The key question in recent quarters has been to ask how durable or sustainable the recovery willbe. After a strong initial rebound, driven primarily by stimulus measures and the inventory cycle,the answer appears to be the recovery is not that durable. Yes, economic activity will continue togrow, however not at a strong enough pace to close the output gap for years to come, accordingto the consensus of the most recent forecasts. In a similar manner, exports, which generally tendto follow global economic growth, are expected to slow in the coming quarters as the globalrecovery levels off.

Recent Developments and Outlook for Oregon Export Markets

After being Oregons first or second largest export market for much of the past two decades,Japan has fallen to the fourth largest destination for most of the past two years. The actual valueof goods exported to Japan has remained relatively stable since the mid 1990s, however exportsto other countries, such as China and Malaysia, have grown significantly and displaced Japansrelative place in Oregons top destination list. As seen in Table I.1, Japan experienced one of thedeepest declines in GDP among industrialized countries. After growing 4.1 and 4.4 percent (AR)in fourth quarter 2009 and first quarter 2010, respectively, Japans GDP grew just 0.4 percent inthe second quarter, a very disappointing number for one of the worlds largest economies. Whendiscussing the Japanese economy, most individuals refer to the past 20 or so years as the LostDecade(s) and for good reason. Nominal (not inflation adjusted) GDP has been movingsideways for much of the time period, in fact the current level of GDP was first achieved in1991. Given the stagnating Japanese economy in recent years and the surging Chinese economy,it was only a matter of time before China overtook Japan as the worlds second largest economy,which happened in the second quarter. While the event was heralded as a milestone, it in factshould help the Japanese economy moving forward. Japan benefits from an economicallybooming China as businesses operate numerous production facilities in the country and China isquickly growing to become an extremely large consumer market. As China industrializes and

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citizens gain wealth, this will create an even larger market for Japanese (and other countries aswell) products, which will propel domestic production.

China continues to grow robustly, evidenced by the countrys 10.3 percent GDP growth in thefirst half of 2010. As mentioned above, China is now the worlds second largest economy and its

recent performance through the global downturn has cemented the countrys status as a majordriver of the world economy. Recent activities in China indicate a slowdown in economic output,partially a result of government measures to curb the surging real estate market and head off inflationary pressures. A record $1.4 trillion in new bank loans were issued in 2009, twice that of 2008, as the government pressured banks to lend aggressively to prop up the economy in the faceof a global financial crisis. The fear today is the surge in lending led to some wasteful projects,primarily high dollar valued infrastructure and real estate ones. Should these projects sour, thebanking sector (and local governments) are in poor shape to handle the losses. In response, thegovernment stiffened mortgage rates and increased down payment requirements for real estatepurchases. It is also trying to curb bank lending and in June, loan growth was around 18 percentY/Y, the lowest rate of expansion since the recession began. The government is also urging banks

to raise capital to cushion against future losses and, similar to the U.S. and Europe previously,stress test scenarios are being discussed. As a result, construction activity is down, indicating asleast some success of the recent policy decisions. A hard landing appears unlikely, however aslowdown in the Chinese economy will reverberate throughout the world, particularly among itsAsian neighbors.

Canadas recent economic performance has been quite strong. After GDP growth of 4.9 percent(AR) in 2009 Q4, the strongest since 2000, GDP expanded 6.1 percent in 2010 Q1. With suchstrong growth, that soundly surpasses that of the U.S., Canada has nearly regained the economicoutput losses due to the recession (see Graph I.1 above). The Bank of Canadas own forecastexpects 2010 Q2 GDP growth to show 3.0 percent when it is officially released August 31 st.Similar to that of advanced economies around the world, the pace of economic expansion isslowing in Canada as well, with forecasts calling for around 3 percent growth through theremainder of 2010. Given the stronger growth in the economy, the Bank of Canada has actuallyraised interest rates twice since June, with the overnight lending rate now at 75 basis points,whereas the U.S.s target rate remains in the 0 to 25 basis point range. The economy is beingsupported by a strong real estate market (even with some indications of a housing bubble), andincreased U.S. demand, however uneven it may be on a month to month basis. Given theuncertainty of the economic recovery worldwide and lack of strong consumer demand,businesses in Canada have resisted strong gains in investment, thus placing some downwardpressure on economic growth. Wholesale sales in the country have been essentially flatthroughout 2010, after regaining nearly all of the losses due to the recession. Core inflation,measured by the consumer price index, is hovering around 1 percent so far this year and theunemployment rate is holding relatively steady around 8 percent. The brightest spot regardingthe recovery has to be employment, which in June reached a new series high and has surpassedpre-recession levels. Canada has added 394,000 jobs between July 2009 and July 2010, anincrease of 2.3 percent. The U.S.s comparable figures are a decrease of 52,000 jobs, or -0.04percent. Given the stronger employment gains, workers are seeing stronger household balancesheets. Canadas banking sector is also much better capitalized compared to their neighbors tothe south. A result is an increase in Canadians purchasing distressed houses in the U.S., both as

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vacation properties and for investment purposes. Likewise, Canadian banks, currently sitting onlarge cash reserves, are looking into purchasing U.S. banks in need of assistance.

After declining 5.2 percent between 2008 Q1 and 2009 Q2, the Eurozone economy essentiallymoved sideways the following three quarters, indicative of a very weak economy that was not

recovering much at all. The Eurozone headline numbers masked the underlying trends in thedifferent countries: Germany and France were beginning to recovery somewhat, while Italy andSpain were seeing further declines. Furthermore, the sovereign debt crisis with the PIIGS painteda picture of negative, or at least extremely weak economic activity across the continent aneconomic area comparable in size to that of the U.S. Most of the narratives regarding theEurozone and the United Kingdom have switched with the release of 2010 Q2 GDP reports. TheEurozone overall increased 4.1 percent (AR), led chiefly by Germany, which rose anunprecedented 9 percent, the largest increase on record since reunification. Frances GDPincreased 2.5 percent, however the countrys decline in economic output was much less severethan other European countries and thus does not have as much ground to regain. The UnitedKingdoms GDP increased at a 4.5 percent pace. Germanys growth was primarily driven by

construction activities and exports, chiefly to emerging markets both in Eastern Europe andelsewhere in the world. Germanys unemployment rate is steadily falling, thanks to increasedexternal demand and the short-time working scheme. Under the scheme, basically, when a firmcuts employee hours the government backfills wages to the employee. While the plan has bothpros and cons, such as it increases labor market rigidities, it does reduce overall unemploymentas workers remain on the payroll, albeit part-time as opposed to full-time.

Table I.2 shows IHS Global Insights (GI) countryspecific economic forecast as of July 14, 2010. In itsglobal forecast, GI cites some issues to watch togauge future trends of the global economy. First,financial markets will continue to be worried aboutthe sovereign debt problems in Europe. While theSouthern European countries have the largest debt toGDP ratios, banks in Europes larger economies, suchas France and Germany, have exposure to theproblem. Second, growth in many of the worlds keyeconomies will slow in 2011. The fading orwithdrawal of stimulus measures, the winding downof the inventory cycle and lingering effects of the euro crisis all contribute to the globalslowdown.

Table I. 2

As of 7/14/2010 (Average)2009 2010 2011 2012-15

United States -2.4 3.1 2.7 2.9Canada -2.5 3.4 3.1 2.8Japan -5.3 3.2 1.6 1.7Eurozone -4.1 1.1 1.2 1.8Mexico -6.5 4.8 4.2 3.9South America -0.3 4.8 4.4 4.7Asia except Japan 5.1 8.1 6.7 6.9China 8.7 10.8 8.6 8.5World -1.8 3.8 3.5 3.8

Source: Global Insight, July 2010

Projected Growth Rates of Real GDP (Percent)

GIs July 2010 global forecast discusses regional highlights from around the world and also thePeoples Bank of Chinas June announcement to depeg the renminbi from the U.S. dollar. Theworld economy continues in its multi-speed recovery with Asia in the fast lane and Europedragging behind. Chinas exports continued to grow strongly in the first half of 2010, but thehousing market has slowed considerably after the government implemented tough, new measuresto curb speculation. Japans growth is projected to slow and industrial output has flattened inrecent months, along with a leveling off of exports. These events fuel lower demand for laborand thus rising unemployment. In Europe, the Greek debt crisis and contagion fears and effects

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are leading to fiscal policy tightening. Byundermining confidence and causingmarket turmoil, the sovereign debt issuesare also affecting economic activity.Chinas currency announcement marks the

most significant currency move since theglobal recession began and is the countryssecond exchange rate reform since 2005.Expectations are for a slow revaluation(appreciation) for the renminbi against theU.S. dollar, which will eventually bebeneficial to both China and the rest of theworld. By itself, currency appreciation willnot rebalance the world economy as it is anecessary but insufficient condition to doso.

Table I.3 summarizes the Blue ChipConsensus forecast (August 2010) forOregons major export markets. It isconsistent with the GI forecast shown inTable I.1, although, generally, moreoptimistic moving forward.

Table I. 3

Ranked by$ Value of U.S.Goods Ex orted

Rank $ mil. 2008 2009 2010 2011

Canada 3 1,897 0.4 -2.6 3.4 2.9Mexico 14 201 1.5 -6.5 4.5 3.7Japan 4 1,300 -1.2 -5.2 3.1 1.6United Kingdom 15 194 0.5 -4.9 1.3 1.8South Korea 6 707 2.3 0.2 5.9 4.1Germany 9 362 1.0 -4.9 1.9 1.8Taiwan 5 922 0.7 -1.9 6.4 4.3Netherlands 8 385 2.0 -4.0 1.4 1.6Russia 36 36 5.6 -7.9 4.7 4.5France 16 160 0.1 -2.5 1.4 1.6Brazil 20 117 5.1 -0.2 7.2 4.8Hong Kong 10 328 2.4 -2.7 5.4 4.6India 19 128 6.1 6.6 8.3 8.1China 1 2,969 9.6 8.7 10.1 8.9Australia 12 209 2.3 1.3 2.9 3.2Eurozone 0.5 -4.0 1.1 1.4U.S. 0.4 -2.4 2.9 2.8Source: Blue Chip Economic Indicators, August 2010

Oregon Export Data: WISER, August 2010

Projected Growth for Top U.S. Export Markets

Projected Changein Real GDP

OregonExports 2009

Oregon Exports

U.S. exports continue to increase each quarter, after reaching bottom in the first quarter of 2009.Exports increased 22.7 percent in the first half of 2010 year-over-year. From their peak in thesecond quarter of 2008, exports fell 37.5 percent, however over the past five quarters, exportshave rebounded sharply and are now just 7.3 percent below peak levels. Exports are expected tocontinue to follow the globaleconomy through the expansion,however, as economic expectationsbegin to falter and growth isprojected to slow, exports willlikewise continue to grow, albeit at aslower rate. Besides economicgrowth (and consumer demand),exchange rates are anothermechanism which will influenceexports moving forward. Should theU.S. dollar appreciate against ourmajor trading partners, exports willslow more, however should thedollar depreciate, exports shouldbenefit and see stronger growth.

Graph I. 2Oregon's Total Exports

(1Q 1997 - 2Q 2010, current dollars)

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Oregon typically experiences more volatile movements than the US overall during boomsexports increase more than the nation and during recessions they decrease more than the nation.Currently, through the first half of the year, Oregon exports are up 35.9 percent Y/Y, ranking 11 th best among all states. Since bottoming out in the first quarter of 2009, US exports have increased

27.5 percent while Oregons exports have rebounded 39.7 percent, thanks to renewed demand inhigh technology products. Graph I.2 illustrates Oregons total exports and the Y/Y percentchange from 1997 through 2010. Oregon exports have leveled off in the three most recentquarters, however they remain at high levels relative to history. 2010 Q1 ranked as the fourthlargest export quarter in history, while 2010 Q2 ranks as the sixth largest.

Table I.4 shows Oregonsexports and growth rates byindustry for the first half of 2010(Y/Y). These are the top fifteenindustries by export volume (in

value). Y/Y growth is positivefor fourteen of the top fifteenexport industries. The computerand electronics sector hasimproved substantially Y/Y andthe past three quarters have seensteady growth after a stronginitial rebound. This industry isOregons largest and mostimportant export sector. Theindustrys second quarter 2010exports are the second largestquarter in history and are nearly as large as they were just prior to the onset of the financial crisis(see Graph I.3 below). With its recent improvements Computer and Electronic Products nowcomprise 46.4 percent of total Oregon exports, or $4.18 billion in the first half of the year.

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

2009 Q2YTD

2010 Q2YTD

y/y %change

Share outof Total

Total All Industries 6,618.0 8,992.9 35.9% 100.0%

Computer And Electronic Products 2,844.1 4,175.7 46.8% 46.4%Agricultural Products 946.4 1,106.6 16.9% 12.3%Machinery, Except Electrical 514.1 790.7 53.8% 8.8%Chemicals 459.1 714.2 55.6% 7.9%Transportation Equipment 363.2 373.9 2.9% 4.2%Primary Metal Manufacturing 248.5 256.3 3.1% 2.8%Wood Products 139.9 242.7 73.5% 2.7%Food And Kindred Products 164.3 226.4 37.8% 2.5%Waste And Scrap 191.0 187.6 -1.8% 2.1%E lec trical Equipment, Appliances, And Compon ent 94 .2 156.0 6 5.7% 1.7 %Miscellaneous Manufactured Commodities 129.8 139.2 7.2% 1.5%Fabricated Metal Products, Nesoi 91.5 132.0 44.3% 1.5%Paper 110.8 122.6 10.7% 1.4%Plastics And Rubber Products 55.6 75.3 35.6% 0.8%Petroleum And Coal Products 67.0 68.4 2.0% 0.8%

Source: WISER, August 2010

Machinery, Chemicals, Wood Products, Food, Electrical Equipment, Fabricated Metal andPlastics and Rubber Products all recorded increases larger than 30 percent Y/Y through the firstsix months of 2010. These increases are indicative of the broad-based gains seen in many sectorsduring the initial phase of the recovery. Agricultural Products have declined two quarters in arow, mainly due to price decreases, however remain up Y/Y. Transportation Equipment exports,which contracted over 60 percent during the recession, have seen gains in three out of the pastfour quarters and are now seeing positive growth Y/Y for the first time since the summer of 2008.

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Graph I.3 illustrates quarterlyexports by major industry since1997. With another strong gain inthe second quarter, computer and

electronics have nearly regainedthe losses caused by the globalrecession. Agricultural exports, thebeneficiary and victim of commodity price swings, havereturned lower, but remain slightlylarger than their historical average.

Table I.5 charts exports of Oregonproducts to major destinations. Outof the top fifteen export markets,

only Costa Rica, Germany and theNetherlands saw decreases in trade Y/Y inthe first half of 2010. Exports to Chinacontinue to remain at extremely high levels,even with a slight decline in the most recentquarter (see Graph I.4 below). Computer andElectronic Product exports to China areseeing large increases, while many otherindustries have contracted in the most recentquarter, leading to the overall decline. Othercountries with large high technology sectors,such as Malaysia, have likewise seen largeexport increases. Exports to many of Oregons other major trading partnercountries have increased by more thandouble digits Y/Y in the first half of 2010.

Graph I.4 shows the quarterlyexport trend for Oregons top fivemarkets since 1997. Exports to alltop five destinations haveincreased Y/Y; howeverdevelopments in the most recentquarters vary across countries.Goods bound for China slowed inthe second quarter, however theyremain as the second largestquarter of exports to a singlecountry in Oregons history.Overall, China is, far and away,

Graph I. 3Oregon Exports by Major Industry


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Computer And Electronic Products

Agricultural ProductsMachinery, Except Electrical

Chemicals

Transportation Equipment

l l i o n

)

Table I. 5Oregon Exports to Major Trading Partners($ millions, current prices)

2009 Q2YTD

2010 Q2YTD

y/y %change

Share outof Total

Total All Countries 6,618.0 8,992.9 35.9% 100.0%

China 1,229.5 2,267.7 84.4% 25.2%Malaysia 662.9 1,281.4 93.3% 14.2%Canada 977.4 1,248.0 27.7% 13.9%Japan 689.3 746.9 8.4% 8.3%Korea, Republic Of 293.3 457.4 56.0% 5.1%Taiwan 348.0 355.1 2.1% 3.9%Costa Rica 362.1 297.4 -17.9% 3.3%Netherlands 190.9 185.0 -3.1% 2.1%Philippines 168.1 184.8 9.9% 2.1%Germany 184.5 172.1 -6.7% 1.9%

Singapore 71.9 168.0 133.5% 1.9%Hong Kong 133.0 136.6 2.6% 1.5%Australia 65.9 122.4 85.8% 1.4%Mexico 91.4 113.4 24.1% 1.3%Brazil 54.1 110.5 104.3% 1.2%Source: WISER, August 2010

Graph I. 4Oregon Exports by Country


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C. Western Region

This section of the September 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 fell 0.6 percent year-over-year in the secondquarter, which is a substantial improvement over recent quarters, although the numbers areaffected by the increase in temporary Census workers. On a quarter-over-quarter basis, nationalemployment increased in both the first and second quarters as jobs were added in five of the firstsix months of the year. The private sector has added jobs every month this year. Table W.1 detailsemployment by major sector for each of the western states and their respective year-over-year

changes. As with the nation, each states job losses have diminished relative to recent quartersand employment has improved most months or at least stabilized (see Graph W.1 on thefollowing page). In keeping with recent patterns, Utah remains the best performing western stateand has actually added jobs on a year-over-year basis.

Within employment, the goods producing sectors have been hit the hardest relative to the serviceindustry and the public sector. Construction, Natural Resources, Manufacturing and Trade,Transportation and Utilities have all see significant declines across all states. Given recent taxreceipts and the manner in which states budget, the public sector is beginning to shed jobs,which is expected to continue in the coming quarters, along with the decline due to Censusworkers completing their assignments. Just as every state did not enter into recession at the sametime, it will be interesting to see which state(s) emerge from recession earlier than other statesand what industry sectors take the lead.

Table W.1

Arizona California Idaho Nevada Oregon Utah Washington United StatesTotal Nonfarm 2,411.8 13,888.7 607.1 1,119.4 1,597.1 1,195.2 2,808.2 130,376.3

Y/Y Percent Change -0.8 -1.8 -0.5 -2.7 -1.1 0.3 -1.0 -0.6Natural Resources and Mining 11.2 25.0 3.0 11.8 7.3 10.5 5.5 718.0

Y/Y Percent Change 3.4 -3.5 -4.3 1.4 4.5 -3.4 -9.3 2.3Construction 115.0 549.8 29.4 62.4 65.3 67.8 137.7 5,607.7

Y/Y Percent Change -12.4 -13.0 -14.0 -24.9 -12.5 -4.5 -15.7 -8.2Manufacturing 149.5 1,241.9 53.9 39.1 162.7 106.9 258.3 11,659.3

Y/Y Percent Change -3.0 -3.8 -1.6 -2.9 -3.0 -5.5 -3.3 -2.2Trade, Transportation and Utilities 481.3 2,582.1 121.9 209.1 311.8 234.7 532.7 24,739.7

Y/Y Percent Change 0.0 -2.7 -0.6 -2.2 -0.4 -0.3 1.5 -1.0Information 37.3 447.3 9.7 12.2 33.3 29.8 103.4 2,721.0

Y/Y Percent Change -5.5 1.0 -2.7 -6.3 -0.2 0.7 -0.8 -3.4Financial Activities 161.5 779.7 29.4 52.9 93.3 71.1 137.2 7,601.0

Y/Y Percent Change -3.2 -2.5 -0.8 -5.3 -2.5 -0.7 -4.4 -2.2Professional and Business Services 343.8 2,041.9 74.7 136.6 175.2 154.2 329.6 16,663.0

Y/Y Percent Change -0.4 -0.7 0.4 2.0 -2.6 3.1 1.6 0.6Leisure and Hospitality Services 257.9 1,483.9 58.8 303.3 163.9 111.8 262.3 13,082.0

Y/Y Percent Change 0.4 -1.5 0.6 -1.7 0.5 0.3 -3.1 -0.2Other Services 94.0 477.5 20.5 34.4 56.8 34.7 107.7 5,334.3

Y/Y Percent Change -0.6 -2.4 -3.3 1.1 -1.3 1.5 0.6 -0.6Government 423.3 2,497.0 121.2 158.2 304.3 215.5 553.1 22,748.0

Y/Y Percent Change -0.3 -0.6 0.4 -0.3 1.4 0.3 -0.1 0.5

Employment by Sector (2010 Q2)

Source: U.S. Bureau of Labor Statistics, State employment in 000s, U.S. employment in millions

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While all westernstates have seenheavy job losses,their relativeperformance has

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

in each state. Forexample, Nevadasemployment peakedin the second quarter of 2007 and has declined for thepast twelve quarters. Graph W.1 illustrates thecumulative percentage of job losses in each statesince the first quarter of 2008. Each states respectiveemployment peak is noted in parenthesis in thegraphs legend, and also in column two in Table W.2.Over the past nine quarters, Oregons employmentfell 8.13 percent (approximately 141,400 jobs).Relative to other western states, Oregons job losseshave been less severe than Arizona, California, andNevada; however Idaho, Utah, Washington and the U.S. have seen lower levels of job loss.

Graph W.1

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%2008Q1 2008Q3 2009Q1 2009Q3 2010Q1

P

t J o

b

s f r o m

2 0 0 8 Q 1

U.S. (2008 Q1)

e r c e n

L o s

Arizona (2007 Q3)

California (2007 Q3)

Idaho (2007 Q4)

Nevada (2007 Q2)

Oregon (2008 Q1)

Utah (2007 Q4)

Washington (2008 Q1)

Table W.2 Quarter of Peak % Decline From

Employment 2008 Q1 to 2010 Q2Arizona 2007 Q3 -9.49%California 2007 Q3 -8.27%Idaho 2007 Q4 -7.26%Nevada 2007 Q2 -12.99%Oregon 2008 Q1 -8.13%Utah 2007 Q4 -5.27%Washington 2008 Q1 -5.54%United States 2008 Q1 -5.45%

Economic Coincident Index

One very useful state level economic indicator is the State Coincident Index, produced by theFederal Reserve Bank of Philadelphia. Each month the bank compiles and indexes data for eachstate that combines nonfarmpayroll employment, averagehours worked in manufacturing,the unemployment rate, and realwage and salary disbursements.As a coincident index, the data isdesigned to report currenteconomic conditions on amonthly basis, and is not aleading or a lagging indicator.

Table W.3

Index ValueQ/Q PercentChange (AR)

Y/Y PercentChange

5 Year PercentChange

Arizona 198.47 2.2% -1.2% -1.2%California 159.71 2.6% -0.2% 2.4%

Idaho 204.73 4.8% -2.2% -1.1%Nevada 204.58 -4.0% -5.8% -14.2%Oregon 187.20 1.6% 1.0% 3.0%

Utah 191.02 3.0% 0.1% 8.0%Washington 158.52 4.2% 0.5% 3.0%

United States 158.45 4.3% 0.5% 3.0%

Economic Coincident Index for 2010 Q2

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

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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 Nevada, Oregons index hasperformed worse than the other western states and the nation in the most recent quarter. Ouremployment level and unemployment rate have stabilized throughout 2010 so our growth is low.Oregons quarter-over-quarter growth of 1.6 percent ranks fortieth best nationally. Oregons year-

over-year increase of 1.0 percent ranks eleventh best nationally. While overall economic activityhas begun to grow once again, or at least stopped declining, employment growth is still projectedto remain weak in the coming months. With that being said, hours worked in manufacturing haveincreased over the past year, and the unemployment rate is holding steady, combining theseoccurrences with increased levels of sales bodes well for the economy and future employmentgrowth.

Housing Price Index

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

and subsequent bust. Table W.4shows the Federal HousingFinance Agencys home priceindex for each western state. Arizona, California and Nevada arethree of the worst poster childrenfor the bubble; however Californiaappears to be turning the corner totheir housing downturn. Housingprices and values in California declined for more than three years from mid-2006 to mid-2009,but have increased in two of the three most recent quarters. Californias index is actuallyshowing a positive value year-over-year and their markets appear to have at least stabilized in thepast year and a half. Other western states like Idaho, Oregon, Utah and Washington did not haveas large of price increases during the middle part of last decade, however prices have declinedsignificantly and continue to do so through early 2010.

Table W.4

IndexValue

Q/Q PercentChange (AR)

Y/Y PercentChange

5 Year PercentChange

Arizona 192.62 -13.0% -13.0% -20.5%California 168.77 -0.6% 2.8% -31.4%

Idaho 214.62 -17.3% -11.5% 6.1%Nevada 132.93 -11.8% -12.1% -44.7%Oregon 276.72 -10.4% -8.6% 7.3%

Utah 259.08 -12.5% -8.9% 13.3%Washington 241.33 -1.3% -5.3% 13.1%

United States 192.85 -7.4% -3.1% -2.9%

Housing Price Index (2010 Q1)

Graph W.2 showsthe FHFA HousingPrice Index for eachof the western statessince 2000. Pricesin Arizona doubledbetween 2000 and2006, while pricesin California andNevada more thandoubled during thesame time period.Oregon andWashington prices

Graph W.2Housing Price Index (2000 - 2010 Q1)

100

120

140

160

180

200

220

2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q

Arizona

California

Idaho

n d e x

V a

l u e ,

2 0 0 0 Q 1 =

1 0 0

Nevada

Oregon

Utah

Washington

United States

I

1

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increased about 80 percent, while nationwide prices increased 50 percent. The relatively betterperformance in the housing market in late 2009 and into the first half of 2010 is largely a resultof much lower prices, thus high housing affordability, and the first-time homebuyer credit. As thecredit expired for the second time, following the extension through mid-2010, expectations, bothin terms of level of sales and prices, remain weak in the near-term for most markets. Already, in

July, the level of home sales fell further than expected and prices are projected to continue todecline in the coming months. An oversupply of homes remains a concern plus additionalforeclosures are projected to continue to place downward pressure on prices in the face of weak buyer demand.

Housing Permits

With home prices continuing to decline across the nationand an oversupply of houses on the market, there has beenvery little new construction relative to historical levels. Onemeasure used to gauge new home construction is housing

permits issued, shown in Table W.5. In 2009 permits issuedfell quite substantially from their 2008 levels, which weredown significantly from their 2007 levels; however the firsttwo quarters of 2010 have seen increases for most westernstates on a year-over-year basis.

Oregons decline is a bit of an aberration as multi-familypermits continue to decline and the first half of 2009 was exceptionally strong in this categorymaking year ago comparisons tough. Oregon single-family housing permits have risen overthirty-one percent in the first half of the year. Overall, while the percent increases are sizable formost states, the level of permits remain the second weakest (only 2009 was weaker) during the1995 2010 period. The increases are a welcomed sign of improvement in the housing market,one which appears to bouncing along the bottom, but much stronger gains need to be seen beforethe housing industry returns to anything approaching normal.

Table W.5

PermitsY/Y PercentChange

Arizona 7,182 13.9%

California 21,178 25.0%Idaho 2,806 14.3%Nevada 4,019 22.7%Oregon 3,947 -1.7%

Utah 4,873 -13.1%Washington 10,480 31.0%

United States 314,065 13.6%

Source: U.S. Census Bureau

Housing Permits Issued (2010 Q2 YTD)

Exports

The global recession decimated international tradethroughout late 2008 and early 2009; however exports haverebounded sharply in recent quarters. As show in Table W.6,on a year-over-year basis most states and the nation overallare experiencing sizable increases in trade, with onlyWashington being an exception. The good news is mostwestern states have seen significant increases sinceinternational trade bottomed in early 2009. Oregon has seenthe second largest increase year-over-year at 30.9 percent,trailing only Idahos 53.3 percent growth which ranks 5 th bestin the U.S. Even with the sizable increases in recent months,the nation and western states exports remain slightly below their peak levels achieved during thesummer of 2008. Utah is an exception as their exports reached a new all time high in the first

Table W.6

Exports($ mill)

Y/Y PercentChange

Arizona $3,893 11.4%California $35,453 23.4%

Idaho $1,346 53.3%Nevada $1,483 8.2%Oregon $4,472 30.9%

Utah $3,048 26.9%Washington $11,958 -4.5%

United States $314,616 25.1%Source: WiserTrade, August 2010

Total Exports (2010 Q2)

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quarter, thanks to their primary metal manufacturing exports; however Utah exports declinedslightly in the second quarter. Washingtons negative figure is a result of transportationequipment (aircraft) exports declining to China and India on a year-over-year basis. Otherwise,Washingtons exports are experiencing growth similar to the other western states.

Tax Revenue

The recession has resulted in plummeting tax revenue for all states, with declines for much of the2007-2009 period and now into 2010 for many states. After registering a small Y/Y increase in2009 Q4, Arizona tax revenue returned to declines in the first quarter of 2010. California hasnow registered two consecutive quarters of positive tax revenue growth, primarily attributable toincreases in sales tax revenue and individual income taxes. All other Western states continue tosee declines. Sales taxes are mainly down year-over-year with only California and Nevadaregistering gains. Individual income tax revenues are down for all states, with California beingthe exception. Corporate income taxes are up significantly in Arizona, Oregon and Utah,following the national trend where many corporations currently have sizable profits and large

cash reserves. Overall, revenue declines have forced governments to cut spending, raise taxesand implement other cost saving measures to balance their budgets in the past few years.

Table W.7

Arizona California Idaho Nevada Oregon Utah WashingtonTotal Taxes 2,212,177 25,718,743 607,670 1,514,883 1,505,379 1,104,931 4,136,962

Y/Y Percent Change -5.4% 16.5% -4.2% -2.3% 7.7% -1.9% -0.2%Property tax 208,810 813,838 X 106,997 7,808 X 761,093

Y/Y Percent Change -7.4% 59.3% X 86.6% 53.6% X 1.7%General sales and gross receipts 1,219,168 8,494,620 267,996 646,114 X 408,210 2,340,715

Y/Y Percent Change -8.6% 15.4% -2.8% 0.1% X -5.4% -2.3%Motor fuel sales taxes 203,449 754,743 49,723 67,158 129,020 81,064 276,302

Y/Y Percent Change 11.3% -1.2% 2.7% -2.5% 43.1% -1.5% 4.0%Alcoholic beverages 17,290 73,771 1,847 9,975 3,265 11,022 69,668Y/Y Percent Change 5.2% -3.1% -5.8% 1.1% -25.1% -0.9% -0.5%

Public utilities 6,012 146,806 309 5,664 8,415 7,021 133,802Y/Y Percent Change -36.7% -0.7% -41.1% 32.2% -25.1% -3.3% 12.7%

Insurance 109,783 117,425 8,791 56,659 21,375 22,070 43,624Y/Y Percent Change -6.6% 18.9% -1.6% 1.4% 131.3% -31.7% -13.6%

Tobacco products 83,577 217,650 10,697 25,888 48,400 15,190 89,274Y/Y Percent Change -7.9% 9.3% -13.2% -14.6% -15.7% 8.3% -12.5%

Amusements 136 X X 276,290 48 X 0Y/Y Percent Change -4.2% X X -0.8% 182.4% X -100.0%

Motor vehicles 49,014 744,619 35,134 44,612 127,456 75,654 113,543Y/Y Percent Change -10.4% 10.1% -6.9% 10.4% 23.3% 16.8% -2.0%

Corporations in general 7,410 14,824 522 16,401 3,726 996 6,719

Y/Y Percent Change 27.6% -3.5% 3.4% 1.5% 50.3% 23.9% 1.5%Occupation and business licenses 28,460 1,109,555 18,260 157,458 76,872 11,434 60,241Y/Y Percent Change 15.8% 16.9% 8.9% -48.0% 47.8% 19.1% -1.5%

Individual income taxes 164,372 10,744,534 177,748 X 955,315 391,839 XY/Y Percent Change -8.7% 23.0% -6.9% X -4.7% -5.5% X

Corporation net income taxes 97,854 2,238,992 10,230 X 64,784 32,224 XY/Y Percent Change 29.3% 0.0% -39.3% X 247.5% 84.1% X

State and Local Tax Revenue (2010 Q1)

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

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D. Oregon Economic Review and Forecast

Summary of Recent Trends

Statewide Trends

The second quarter of 2010 eked out a seasonally adjusted growth of 0.5 percent, the secondconsecutive job growth quarter. So far, this recovery is living up to its billing as one of theslowest on record. On a year-over-year (Y/Y) basis, jobs decreased in the second quarter by 1.2percent, an improvement over last quarters Y/Y decline of 3.0 percent. To provide someperspective in numbers as to this weak recovery, we had seven consecutive quarters of annualized quarterly job losses and nine consecutive quarters (and still counting) of job losses ona Y/Y basis.

The second quarter was actually weaker than the numbers portray given the hiring of federalCensus workers during the quarter. [The job numbers are initial estimates and are subject to

revisions which could marginally change the job picture.] The job changes are a mix bagthroughout the job markets with losses and gains both within manufacturing and the servicesectors. Manufacturing jobs were flat with increases in wood product jobs and other durablegoods and losses in other sectors. The service sector showed some disappointing job losses inprofessional and business services, health services, financial activities and retail trade with jobsgains in the other service areas. Depending on the outcome of further spending packages fromthe US Congress, we may see further large job cuts at the state and local government levels. Theexpected slowdown in US economic growth due to slowing stimulus spending and windingdown of manufacturing inventory cycle is similarly impacting the Oregon economy. Given therather lackluster employment picture, saying the recession is over gives little solace to those stilllooking for work.

Figure O.1Nonfarm Job Growth by State

June 2010 over June 2009(Ranked by Percent Change)

Oregon: 44 th

Bottom 10 Middle 10Fourth 10 Second 10 Top 10Source: Blue Chip Job Growth Update, Bank One Economic Outlook Center, Arizona State University, July 2010

The most recent Blue Chip JobGrowth rankings place Oregon 44thin the nation for Y/Y job growth.Between June 2009 and June 2010,

jobs decreased by 15,700, or -0.97percent. The relative performanceof the fifty states is shown in FigureO.1.

New Hampshire moves into the 1 st ranked position in the nation with

job growth of 1.46 percent.California had job losses ranking at47th. Washingtons job losses havemoved the state from a rank of 26 th to a ranking of 36 th in the nation.Idahos job loss was 0.19 percent,ranking 26 th among the 50 states.

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OEAs forecast for second quarter annualized job growth was a positive 1.5 percent compared tothe reported positive 0.5 percent. Table O.1 provides details of actual second quarter growthcompared to the June 2010 forecast and shows annualized growth comparisons and Y/Y growth.Unless noted otherwise, all percentage rates discussed below reflect annualized rates of changefor the second quarter of 2010.

Table O.1Total Nonfarm Employment, 2nd quarter 2010(Employment in thousands, Annualized Percent Change)

Y/YChange

level % ch level % ch level % % ch

Total Nonfarm 1,595.4 0.5 1,599.8 1.5 (4.3) (0.3) (1.2)Total Private 1,292.2 (0.5) 1,298.6 1.4 (6.4) (0.5) (1.7)

Natural Resources and Mining 7.3 17.8 6.8 (10.6) 0.5 7.2 4.5Construction 65.1 (0.2) 63.2 (10.2) 1.9 3.0 (12.7)Manufacturing 162.7 0.0 163.8 2.7 (1.1) (0.7) (3.1)

Durable Goods 113.0 0.2 113.4 2.0 (0.5) (0.4) (4.7)Wood Product 20.2 6.7 19.8 (0.8) 0.4 2.1 (4.9)Metals and Machinery 29.2 (6.7) 29.9 1.5 (0.7) (2.2) (9.2)Computer and Electronic Product 34.8 (2.7) 35.2 1.6 (0.4) (1.2) (1.6)Transportation Equipment 8.8 (3.1) 8.9 2.9 (0.1) (0.6) (11.7)Other Durable Goods 20.0 12.2 19.7 6.2 0.3 1.3 1.1

Nondurable Goods 49.7 (0.5) 50.3 4.2 (0.6) (1.3) 0.8Food 25.0 0.7 25.4 7.1 (0.5) (1.8) 7.3Other Nondurable Goods 24.7 (1.6) 24.9 1.3 (0.2) (0.8) (5.0)

Trade, Transportation & Utilities 311.9 0.3 312.6 1.3 (0.8) (0.2) (0.4)Retail Trade 183.3 (1.4) 184.4 1.3 (1.1) (0.6) (0.2)Wholesale Trade 75.5 5.5 75.2 2.5 0.4 0.5 (0.4)Transportation, Warehousing & Utilities 53.0 (1.0) 53.1 (0.4) (0.1) (0.1) (1.1)

Information 33.3 6.1 33.1 2.5 0.3 0.8 (0.1)Financial Activities 93.2 (4.2) 93.9 (2.2) (0.7) (0.7) (2.6)Professional & Business Services 174.4 (1.2) 177.0 4.5 (2.7) (1.5) (3.0)Educational & Health Services 223.7 (2.3) 226.8 3.0 (3.1) (1.4) 0.3

Educational Services 29.7 0.7 30.0 5.6 (0.4) (1.2) (3.0)Health Services 194.1 (2.8) 196.8 2.6 (2.7) (1.4) 0.8

Leisure and Hospitality 163.8 1.3 164.2 2.6 (0.4) (0.3) 0.4Other Services 56.9 (1.6) 57.2 0.1 (0.3) (0.5) (1.1)

Government 303.2 4.7 301.2 1.9 2.0 0.7 1.0Federal 33.4 56.3 33.5 60.8 (0.1) (0.4) 8.5State 79.0 0.7 78.4 (2.2) 0.6 0.7 1.3

State Education 29.5 3.1 29.1 (2.1) 0.3 1.2 1.6Local 190.9 (0.5) 189.3 (3.9) 1.6 0.8 (0.3)

Local Education 102.7 1.7 101.4 (3.4) 1.3 1.3 0.2

Preliminary Forecast ErrorForecastEstimate

Although we have seen a slight rise in jobs during the first half of 2010, the employment level issimilar to the job level in the second quarter of 2004. If we go back further, it is similar to the

job level in the fourth quarter of 1999, more than ten years ago. This is a result of the Oregoneconomy going through two deep recessions in the last ten years.

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Taking out the government sector and the hiring of federal Census workers, total privateemployment lost 1,580 jobs from the first quarter for a 0.5 percent decline. Essentially all thedrop in private employment was due to job losses in the private non-manufacturing sector, orbroadly the service sector. With manufacturing jobs flat, the private non-manufacturing sector

declined 0.6 percent. The Y/Y employment for manufacturing is down 3.1 percent while thesame measure for private non-manufacturing is down 1.6 percent. The government sectorincreased 4.7 percent due mainly to temporary federal Census workers.

Within manufacturing, durable goods employment increased a slight 0.2 percent, the firstpositive job growth since the second quarter of 2006. Wood products increased jobs by 6.7percent, a sign that many downstream supply chain firms are rebuilding depleted inventories.This is expected to be temporary rather than a more long-term trend. Other durables, whichinclude electrical equipment, appliance, and furniture products, increased a healthy 12.2 percent,adding 560 jobs. Metals and machinery had a job loss of 6.7 percent. Computer and electronicproducts lost 240 jobs for a decline of 2.7 percent. Transportation equipment sector posted a loss

of 3.1 percent. Even though the housing downturn and deep recession battered other sectors indurable manufacturing, transportation equipment has the largest Y/Y decline at 11.7 percent.

The highly seasonal sector, food processing, increased jobs by 0.7 percent. No other sector hasweathered this recession is better shape, with a Y/Y growth of 7.3 percent.Other nondurable goods manufacturing, this includes paper and allied products, declined at therate of 1.6 percent.

In the private nonmanufacturing sector, construction continued to lose jobs at 0.2 percent, amuch better showing than the above twenty percent rate of last quarter. Construction is downalmost 40,000 jobs or 38.0 percent since the recent high employment in the first quarter of 2007.

Consumers continue to be cautious and retail sales have recently stagnated. The retail trade jobswere down 1.4 percent. The Y/Y growth for this sector is down only 0.2 percent. Wholesaletrade, on the other hand, increased jobs by 5.5 percent. Transportation, warehousing, and utilitiesdeclined by 1.0 percent.

Financial services cut jobs at a rate of 4.2 percent. Professional and business services reversedits first quarter positive growth with a decline of 1.2 percent. Information jobs, which includepublishers of software, added jobs at a rate of 6.1 percent. Leisure and hospitality increased jobsby 1.3 percent is now up by 0.4 percent in Y/Y growth.

Private education service is a volatile sector with wide swings in job changes. This sectormarginally added jobs at a rate of 0.7 percent. Although assumed to be immune from recessions,health services had an unusual drop in jobs at 2.8 percent. This is only the fourth quarterlydecline in the last 20 years and is the largest over this period.

The government sector increased jobs by 4.7 percent. The overwhelming reason was the 56.3percent jump in Federal jobs related to the temporary hiring of Census workers. State jobs are up0.7 percent and local government jobs are down 0.5 percent.

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Regional Trends

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Oregon Economic and Revenue Forecast - Sept 2010

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