Oregon Presented by: Office of Economic Analysis Date: November 19, 2010 Economic and Revenue...

OregonPresented by: Office of Economic Analysis

Date: November 19, 2010

Economic and Revenue ForecastDecember 2010

House & Senate Revenue Committees

2

Economic and Revenue Forecast

OREGON PRELIMINARY ECONOMIC FORECAST

OREGON FINAL ECONOMIC FORECAST

PERSONAL INCOME TAX MODELS

CORPORATE INCOME TAX MODELS

Forecaster Judgement LEGISLATIVE & POLICY CHANGES

FINAL REVENUE ESTIMATE

U.S. Economic History and Forecast (Global Insight, Inc.)

Oregon Economic History

Oregon Corporate Income Tax History

Oregon Personal Income Tax History

Governor’s Council of Economic Advisors

DAS Advisory Committee

OREGON ECONOMIC MODEL Governor’s Council of Economic Advisors “Pre-Meeting”

Council of Revenue Forecast Advisors

Non-income tax revenue projections

33

Ever Changing Picture for the US Economy…

Office of Economic Analysis

“The pace of recovery in output and employment in the U.S. economy looks a little slower now than it did three months ago, according to 43 forecasters surveyed by the Federal Reserve Bank of

Philadelphia. The forecasters also predict weaker recovery in the labor market. ” November 15, 2010

44

-8

-6

-4

-2

0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Baseline (60%) Pessimistic (25%) Optimistic (15%)

(Percent change, annual rate)

Real GDP Growth in Alternative Scenarios

Copyright © 2010 Global Insight, Inc.

July Baseline (15%)(20%)

55

Bottom Line for US Economy• The “recovery-recession” is in its second year. Technical recession

in the U.S. ended last summer, with the unemployment rate toping out at 10.1% in the fourth quarter of 2009. The labor market will remain weak with unemployment averaging 9.7% in 2010.

• Credit markets are slowly returning to pre-Lehman collapse days but risk premiums are still present. Residential and commercial real estate still tight.

• The housing market will continue to remain fragile. Housing starts marginally improved in the past year off their historic lows. But recent months point to a bumpy road this year. Prices will continue to decline throughout 2010.

• Inflation is not a threat today or even next year but the stage is set for carefully executed exit strategies to avoid inflation in the future.

• After an initial surge of economic growth in the fourth quarter 2009 and first quarter 2010, the economy is waning. GDP growth was revised down for the second quarter and will remain below potential through 2011.

Copyright © 2010 Global Insight, Inc. Office of Economic Analysis

6

• 10.5% unemployment rate for October 2010 (Oct US rate is 9.6%) is down from the highest rate of 11.6% in May and June 2009, but essentially unchanged the past twelve months.

• 38th fastest job growth at -0.3% for all states for Sept 2010 over Sept 2009.

• Total nonfarm employment dropped -0.4% year-over-year for the 3rd quarter of 2010. S.A. job gains in five of first ten months of 2010. Total nonfarm up 11,800 since Dec with the private sector up 10,000 (0.78%).

• 2.3% personal income growth for 2nd quarter of 2010 over 2nd quarter of 2009. Annualized 2nd quarter 2010 growth at 2.5%.

• Oregon exports increased 25.1% in the first nine months of 2010 compared to the same period last year and have regained the majority of their losses from late 2008 and early 2009.

Recent Oregon Economy Facts

7

Intel Announcement

• The expenditure of $6 to $8 billion dollars (most of which is likely in Oregon) is approximately 2 percent of the total investment on industrial and other equipment and manufacturing structures expected to be spent in the U.S. in 2010.

• Expectation for jobs– 6,000 to 8,000 construction jobs in OR and AZ over 2+ years– 800 to 1,000 permanent high tech jobs in OR and AZ

• Issues:– How many construction workers are shifted from other jobs?– How many construction workers are hired over 2+ years? (Surely not

5,000 on day one and kept on until the end of the project)– How many high tech jobs are shifted from existing positions?– Direct, indirect, and induced jobs?

8

2009 1982 1949 1954

1957

1981

1958

1961

1975

1952

1953

1970

1960

1967

1971

1948

1950

1955

1951

1959

1965

1972

1977

1978

1980

1991

1966

1973

1976

1979

1988

1989

1983

1999

2001

2002

2003

2008

1974

1985

1986

1992

1998

2000

1956

1962

1963

1964

1968

1969

2004

2005

2006

2007

1984

1987

1990

1993

1994

1995

1996

1997

-7.5% to -6%

-6% to -4.5%

-4.5% to -3%

-3% to -1.5%

-1.5% to 0%

0% to 1.5%

1.5% to 3%

3% to 4.5%

4.5% to 6%

6% to 7.5%

7.5% to 9%

Oregon Annual Employment Growth 1947-2010*

Average: 2.23%Median: 2.86%

2010

*2010 estimate based on December forecast

9

Leading Indicators3 of 11 Indicators are Positive

Oregon Index of Leading Indicators(Six-Month Annualized Percent Change, through September 2010)

-30%

-20%

-10%

0%

10%

20%

30%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-10.0%

-6.7%

-3.3%

0.0%

3.3%

6.7%

10.0%

Leading Index (Left Axis) Diffusion Index <50 Nonfarm Employment (Right Axis)

10

Initial Claims(through October 2010)

Initial Unemployment Claims per 1,000 Labor Force (SA)

0

1

2

3

4

5

6

7

8

Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Oregon

United States

11

Forecast Changes

Oregon Total Nonfarm Employment (000s)

1,575

1,625

1,675

1,725

1,775

1,825

1,875

1,925

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10

Q1

20

10

Q3

20

11

Q1

20

11

Q3

20

12

Q1

20

12

Q3

20

13

Q1

20

13

Q3

20

14

Q1

20

14

Q3

20

15

Q1

20

15

Q3

20

16

Q1

20

16

Q3

20

17

Q1

20

17

Q3

Mar-08 Sep-08Dec-08 Mar-09May-09 Sep-09Dec-09 Mar-10Jun-10 Sep-10Dec-10

12

Total Non-farm Employment(Annual Percent Change)

Total Nonfarm Employment (Annual Percentage Change)

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Per

cen

t C

han

ge

Oregon U.S.

13

COMPARISON OF LAST THREE FORECASTSJun 2010 Sep 2010 Dec 2010

PERSONAL INCOME GROWTH

-2

0

2

4

6

8

10

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Perc

ent

EMPLOYMENT GROWTH

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Perc

ent

Forecast Comparisons

14

Risks to the Forecast…

▲Upside▲Financial markets return more quickly to normal▲Quicker, stronger release of pent-up demand▲More robust global growth

▼Downside▼Housing downturn continues▼Aftershocks from the financial crisis▼China bubble? Euro Zone Financials?

►Other Considerations►Impact of Measures 66 and 67►Health care reform

1515

Bottom Line for the Oregon Economy

• The “technical” recession in Oregon ended late last summer or fall. The “jobless” recovery has taken hold.

• Job losses will continue into the third quarter of 2010, with only mild job growth through 2011.

• Housing prices will still decline throughout 2010 but looking more like a bottom has been reached in housing permits (even with the July drop following the expiration of the tax credit).

• Housing will not lead during the recovery. First sectors likely to come back: profession and business services, health care services, computer and electronic products, retail.

16

General Fund Revenue Forecast

• Forecast tracking slightly behind September forecast– Generally, a “mixed bag” with weak estimated

payments in FY11 Q1

• 2009-11 up $61.9 million relative to September forecast– Reflects withholding guidance changes effective Jan 1,

2011

• 2011-13 down $272.7 million

17

Recent PIT Revenue Performance

• Withholding

– Strengthening since the spring, solid Y/Y gains

• Total PIT up year-over-year the past two quarters

– Improvements Y/Y in withholding, estimated, refunds

• Economic improvement, M66 contributing as well

18

Personal Income Tax Forecast

• Up $97.7 million in 2009-11

– Minor weakness in near term however withholding guidance and subsequent table changes drive the forecast increase

• Decreased by larger amounts for out-years of forecast, reflecting view of weaker growth through forecast period, plus refund adjustment due to withholding changes

19

PIT Growth

Personal Income Tax Collections(Quarterly, Year-over-year percent change)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

20

Corporate Income Tax/Other GF Revenue Forecast

• Corporate income taxes decreased $18.7 million in 2009-11 BN

– Roughly $7 million above kicker threshold (current kicker estimate at $23.6M)

• Other changes (up $39.9 million):

– Estate & Insurance taxes, Interest Earnings lower– Tobacco taxes higher– $57M in one-time transfers (Amnesty $31M)

21

Corporate Growth

Corporate Income Tax Collections(Quarterly, Year-over-year percent change)

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

22

2009-11 GF Revenue

Personal Income Tax $11,545.7 $10,345.3 $10,443.0 $97.7 -$1,102.7

Corporate Income Tax $831.6 $873.9 $855.2 -$18.7 $23.6

Other Revenues $1,198.4 $1,088.1 $1,128.0 $39.9 -$70.4

Total GF Resources $13,575.7 $12,307.2 $12,426.2 $119.0 -$1,149.5

Less: Anticipated Administrative Actions $43.7 $15.7 $15.7 $0.0 -$28.0

Plus: Legislative Actions $0.0 $180.0 $123.0 -$57.0 $123.0

Proj. Expenditures $13,298.1 $12,849.0 $12,471.5 -$377.5 -$826.6

Ending Balance $233.8 -$557.5 $61.9 $619.4 -$171.9

General Fund Resources

2009-11 Biennium

General Fund(Millions)

COSForecast

Sep 2010 Forecast

Dec 2010 Forecast

Change from September

Change fromCOS 2009

23

Budgetary Reserve Outlook

(Millions)2007-09

Biennium2009-11

Biennium2011-13

Biennium

Rainy Day FundBeginning Balance $0.0 $112.5 $10.6Net Deposits3 $94.3 -$103.4 $61.9Interest $18.3 $1.5 $3.6Ending Balance1 $112.5 $10.6 $76.1

Education Stability FundBeginning Balance $178.9 $0.1 $102.1Net Deposits -$178.9 $102.0 $193.8Interest2 $17.2 $1.5 $10.5Triggered Withdrawals -$17.1 -$1.5 -$10.5Ending Balance $0.1 $102.1 $296.0

Total Reserves $112.6 $112.7 $372.1

Oregon's Budgetary Reserves

24

Revenue Issues/Risks

• Forecast Complications with New Tax Measures

– Tracking difficult, especially in near-term

– Increased volatility

• Impact of Federal Changes on taxpayer behavior

25

Lottery Revenue Forecast

• Baseline near-term forecast held steady

– Additional administrative savings of $9 million relative to September.

• Out-years decreased slightly

– Lower expectations for consumer spending

26

Lottery Revenue Forecast

Sep 2010 Dec 2010

(Millions) Forecast Forecast Amount Percent

Beginning Balance $1.4 $1.4 - 0.0%Earnings $1,061.6 $1,060.3 (1.2) -0.1%Administrative Savings $20.4 $29.3 9.0 Other Resources1

$0.8 $0.9 0.1 15.6%

Total Resources $1,084.1 $1,091.9 7.8 0.7%

Allocations 1,076.8 1,070.5 (6.3) -0.6%

Ending Balance $7.3 $21.4 14.2 195.4%

Lottery Resources(Millions of Dollars)

Change from Sep

2009-11Biennium

2727

For More Information

Office of Economic Analysis155 Cottage Street NE, U20Salem, OR 97301-3966(503) 378-3405

Email: [email protected]

Website: http://oregon.gov/das/oea

Blog: http://oregoneconomicanalysis.wordpress.com/

Twitter: http://twitter.com/OR_EconAnalysis

Oregon Presented by: Office of Economic Analysis Date: November 19, 2010 Economic and Revenue...

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