As businesses in Clatskanie, Rainier and throughout the District of Columbia struggle to cope with recent price increases, the current state of Oregon’s economy is a strong and critical issue.
On the one hand, job growth remains strong; money is rising; consumers are spending; and business investment is increasing. On the other hand, inflation is the highest in 40 years; the war in Ukraine has caused oil panic; and China’s recent pandemic-related lockdowns threaten the already anxious movement.
However, the economy is expected to continue. Growth will continue this year despite these challenges, and the state and the nation will resume employment by this fall, according to forecasts from the Office of Economic Analysis (OEA).
At 8.6% in May, inflation has not been the highest since Ronald Reagan was in office. The OEA considers it to be the biggest threat to economic growth for the following reasons:
- Rising prices affect the family budget. The most vulnerable are the stable and low-income families, who may need to save or take out loans due to rising costs.
- Inflation is taking away some of the savings Oregonians have made over the past few years. According to the OEA, the average wage in Oregon has increased by 17% since the beginning of the pandemic. Adjusted for inflation, this number drops to 5%.
- Inflation can cause what economists call ‘desirable demand.’ When prices are high, people buy (demand) less. As a result, employers will produce less and therefore need fewer workers. OEA does not see this happening at this time but still considers it dangerous.
While inflation can lead to higher debt, lower disposable income, lower demand, and job losses, the good news is that the OEA believes inflation is on the mend. He cites three main reasons:
- The Federal Reserve restricts monetary policy. They raised interest rates three times already this year and more is expected. The latest increase in June was 0.75 percent; the largest increase in 28 years. By sharply increasing the cost of borrowing, the Fed hopes to cool excess demand – which has already increased – and thereby slow inflation.
- Supply chains are improving and businesses are able to increase production. At the same time, consumers are still spending money but the number of outbreaks has decreased. Increased availability and slower demand should reduce pricing pressure, if not reduce the cost of other products.
- The growth of household income will slow down if the growth of employment slows down. In addition, consumer spending will decrease as incomes decrease and households take on more debt – both of which are starting to happen. Finally, a decline in the stock market reduces domestic wealth and inhibits spending. Slowing or falling incomes lead to less spending which reduces inflation because demand is more closely related to supply.
A combination of Fed policy, increased interest rates, and lower interest rates should reduce inflation this year and next. The main risk is that the latter two will not be enough and that the Fed will have to act aggressively which could increase the risk of a boom/bust cycle. However, the OEA does not see this as a possibility.
The war in Ukraine has caused oil prices to rise. The shutdown caused by the pandemic in China has also disrupted supply chains. However, the OEA believes that these disruptions are temporary. Although oil and gas prices are still high, their contribution to inflation has already been compounded. And manufacturing issues in China should ease in the coming months.
While inflation is a threat to economic growth, the current unemployment rate is a problem. The working age share of Oregon’s employed population is back to where it was at the end of 2019. The labor market is close to hiring, where virtually everyone looking for a job has one. However, businesses are still looking to hire more workers. Employers reported 100,000 jobs according to the Oregon Employment Department’s most recent Job Vacancy Survey.
The OEA identifies three changes that are contributing to today’s unemployment:
- The death toll caused a 2,500-job loss in Oregon (adjusted for years).
- The number of foreign-born, working-age residents in Oregon is 55,000 fewer than expected.
- Baby boomers are retiring and will continue to do so for years to come. There are not enough new ones, much less those entering the workforce to replace them. This is the biggest factor affecting the labor force in Oregon.
In a stagnant economy, job growth slows down.
Caveats and Alternatives
The OEA acknowledges that forecasts are uncertain. They discuss the possibility of a recession resulting from inflation, but they do not put one in their starting point. He hopes the Fed will be able to create a slippery slope, walking the fine line between tightening too much and not enough.
Amy Vander Vliet is an economist with the Oregon Employment Department. He can be reached at 971-804-2099.