Tactics: Looking Forward With Josh Lehner

Jason E. Kaplan

State economist describes his economic outlook for 2023 

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In November, the Oregon Office of Economic Analysis released its quarterly economic forecast. The news wasn’t good, but it wasn’t disastrous or surprising: The office predicted a “mild recession” would hit Oregon in 2023, taking full effect in the summer. Economists at the national level made similar predictions as 2022 came to a close.

Now, Josh Lehner — who has worked for the state office since 2008 — says he’s not sure Oregon’s economy is as likely to shed jobs this summer. Lehner’s office was created in the late 1970s; its primary directive is to forecast how much revenue the state will receive through taxes and other funds (like lottery dollars) in the coming years. That means keeping a close eye on private-sector activity, demographic shifts and other variables that can affect the state budget.

Oregon Business spoke with Lehner in December about that forecast, his shifting outlook on 2023 and the downward shift in Oregon’s population.

This interview has been edited for space and clarity.

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You’ve written recently about population decline in Oregon. Can you talk about the causes of that and what that means for the state’s economy?

There is no net positive from population decline. Maybe if you’re looking for an apartment or a house right now, a little less competition might help you a little bit, right? If you’re applying for a job, there’s fewer people applying for the job. Those are maybe the best-case scenarios of population decline. But everything else is bad. People talk about the climate impact, saying that Oregon will produce less carbon and our climate situation will improve. Well, it’s not that growth isn’t happening, it’s just not happening in Oregon. Given our land-use system, our transportation system, our renewable-energy situation in Oregon, that growth is most likely going to occur in a more carbon-intensive state as well. So it’s not going to be a net positive for the climate overall, either. There’s nothing that is good about population declines.

So why do we care about it? Our job, at our office, is to do 10-year forecasts for the population, the economy, and then the tax revenue that we expect to see or come out of that. Oregon tends to grow faster than the typical state over the entire business cycle. We tend to have deeper recessions but faster economic expansions. There are two reasons for that. One is our industrial structure: We’re still a state that makes things, with a larger manufacturing sector than other states. Manufacturing and construction and things like that are more volatile and have more boom-bust cycles. Another factor would be population growth. People tend to move more in good economic times and hunker down during bad economic times. If we have a faster population growth in the labor force, it means local businesses can hire and expand at a faster rate than in the typical state. And if we’re hiring and expanding economic activities faster, that means associated public revenues are growing faster as well, which is ultimately what we send to the Legislature to incorporate into their budgeting process.

You have joined a majority of working economists in predicting a recession in 2023. What are the most worrying indicators that are on your radar?

The evolution in the economy in the last 18 months was such that, by this fall, it looked like a recession was more likely than not because inflation hadn’t slowed at all. The Federal Reserve would have to continue to raise interest rates higher and faster than anticipated, which will cool the economy. The question is can it cool the economy just enough to slow inflation? We’d still see overall growth. But historically the pattern has been we raised interest rates high enough that the economy kind of crashes and we have a recession. That brings down inflation, and then we grow again, and hopefully not have the inflation as high as it had been.

As of the fall, I think it’s fair to say that the odds were more likely than not there would be a recession. Our next forecast comes out in February; I don’t know what that’s going to show exactly, but I think it’s fair to say that now that we have two months of slower inflation, and financial markets that are anticipating better economic conditions and lower interest rates than the Federal Reserve is saying they’re going to do, the odds of recession have dropped since Thanksgiving. Whether it’s still, you know, 50% or 60% or something like that, I can’t answer.

So the forecast could be totally different by the time this issue comes out in February.

It could be. Here’s the thing that’s kind of crazy, and we had a really hard time messaging back in November with our forecast: There’s a possible recession, and that sounds scary, that’s really bad news. Then if you look at the actual numbers for a mild recession, it really didn’t move the numbers that much. The fallout from it, from a state-budget perspective, ultimately, is really minimal. If you look at our September forecast and our December forecast together — the differences between our two official forecasts — they were on net basically zero difference. I think it was down $13 million, which for you and me is crazy, but not for the state budget. Out of 20-some odd billion dollars for the two-year, general fund budget, $13 million as a percentage change is really, really minor.

So even with a mild recession in the numbers, the numbers didn’t really move. So if ultimately we ended up reversing that and saying no recession, you know, it’s not like the budget’s going to go crazy. And that’s kind of weird. That’s because of the nature of the recession.

What sectors do you see being most affected by a potential downturn?

With higher interest rates, it’s anything that we finance that takes a hit. It’s big-ticket, durable goods. That’s housing. That’s manufacturing. That’s going to be computers, that’s going to be cars. That’s going to be metals and airplanes and all sorts of stuff that we tend to finance. It’s harder to pay for it at a higher interest rate.

The nature of the recession would be larger job losses in construction and manufacturing, and then transportation and warehousing as well. We saw this massive boom in e-commerce, a massive boom in warehousing activity in Oregon, with a lot of new, massive distribution centers in recent years. It’s not so much that those are going to shrink, but it’s just going to stop growing.

Whether there’s a recession or not, we’ve certainly seen the housing market slow down tremendously.

You mentioned job losses in construction. Our understanding is that home construction is already starting to slow because of increased interest rates, and home prices are dropping. What are you seeing in housing in general in the coming year?

I think a lot of it is going to be related to interest rates. We saw mortgage rates surge to over 7%. That’s really what kind of pushed the market off a cliff. We’ve already seen price declines; we’re going to see more price declines. We’ve seen those volumes of activity drop significantly already. It’s going to take some time before those all come back.

Now interest rates are back down. That’s starting to revive some activity nationally. When I talk to local folks, they’re not seeing any pickup at all. Maybe the phone’s ringing a little bit more, but there’s no pickup in fundamental activity yet in Oregon.

If we don’t have the official recession, then some of these housing declines will be a little bit less severe. But single-family housing starts are down 30% from 2020. Home prices are going to fall by 10% or 15%, most likely. Eventually those construction jobs will decline, but we only have a 3% decline in construction jobs coming off of these record highs. That’s because the weakness in housing so far is limited to single-family housing; the new-permit activity, new-construction activity for multifamily is pretty strong. Nonresidential is strong, and public works will be accelerating with the federal packages that were passed during the pandemic, with the inflation-reduction act in a bipartisan infrastructure deal, that’s going to be really accelerating over the next five years. And so that’ll keep construction activity strong, even if single family is still down quite a bit because of the interest-rate problem.

Is there anything else that we should be looking at when we’re looking at the year ahead?

I think the No. 1 thing we’re watching is the inflation. We can’t do a single thing about inflation in Oregon; we’re just a small state. If we have two months in a row of normal, slow inflation at the Federal Reserve’s target, if not below, the Federal Reserve is going to really stop slamming on the brakes on the economy. That would increase the likelihood of no recession. I think that’s ultimately going to be the decider. Monetary policy at the Federal Reserve is going to be the key thing to watch — how they react to the inflation data that comes out.

I do think there’s going to be likely good news this year, and ongoing growth for most sectors will still be pretty good, even if we have some isolated weakness due to the high interest rates, for sure. So I’m more optimistic today than I was a month ago, but we’ll see.

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