Changing economic conditions have pushed back the likelihood of a mild economic recession for Oregon. This is attributed to a few months of somewhat lower inflation, along with the Federal Reserve waiting for the impact of past interest rate increases to cool the economy, according to Josh Lehner, senior economist for the state.
“Any near-term recession fears are fading with each month of somewhat lower inflation and the continued economic boom,” Lehner said in the March edition of the Oregon Economic and Revenue Forecast.
“However, the Federal Reserve must still navigate the choppy waters of a tight labor market, fast wage growth, easing financial conditions and strong household finances and consumer spending. All of these are likely to keep the underlying trend in inflation above the Fed’s target for the foreseeable future.”
He added it is likely the Fed has more work to do, implementing additional interest rate increases and holding them higher for longer in an effort to cool demand and inflation.
“However, the clear near-term strength in the economy in terms of jobs, income and spending, along with the uncertainty of the exact timing of any potential recession, makes forecasting one so far in advance challenging, if not impossible. As Oregon heads into the upcoming 2023-25 biennium, the inflationary economic boom continues,” Lehner said.
With personal and corporate tax collections exceeding expectations, along with an improved economic outlook, he said policymakers should have additional General Fund revenues as they develop the 2023-25 budget during the current legislative session.
Lehner said as the biennium winds down, much more will be known when the May forecast is produced. It will determine the close of session forecast and be used to set the thresholds for the balanced budget and “any potential kicker calculations.”
In discussing inflation, Lehner said the important underlying driver of persistent inflation is income and spending growth.
“The tight labor market and faster wage gains are likely to keep upward pressure on inflation in the months and quarters ahead.”
He added that Oregon’s labor market is nearly back to where it was on the eve of the COVID-19 pandemic and nearly higher than any other point in the past 30 years. “Yes, Virginia, the labor market is tight.”
Labor income growth is expected to slow as job growth slows, due to the fact there are few people available for work who do not already have a job.
“To date we have seen labor income slow from double-digit growth rates during the reopening period to around 7 percent today (national figures are similar). And as job growth slows in a tight labor market, total income will as well, and back to something more consistent with historical periods and hopefully more consistent with 2 percent inflation.”
Bottom line, Lehner said the Fed is in a tough spot, not just due to possible banking concerns but to the “still hot inflation data.” Nominal growth continues to be strong and, from that perspective, he said the Fed still has more work to do.
“We shall see how they try to balance the near-term risks with the longer-term policy goals of maximum employment and price stability.”
To read more from Lehner and the Oregon Office of Economic Analysis, click here.