Oregon Economic Update: The Elusive Soft LandingOctober 2, 2023
The risk of a U.S. recession is still very real in the current inflationary climate; however, the consensus outlook among forecasters has shifted from an economic downturn next year to the rare ‘soft landing’, where the Federal Reserve’s interest rate hikes are just enough to slow the economy and tame inflation without triggering a recession. Successfully walking this tightrope between price stability and economic contraction last happened in the mid-nineties under the watch of Chair Alan Greenspan.
So far, so good. Inflation has slowed considerably this year, from 9% in the summer of 2022 to around 4% a year later. This is still above the Fed’s target rate of 2% but heading in the right direction. At the same time, the labor market has cooled but remains strong: In both Oregon and the nation, job openings have come off their post-pandemic highs and are approaching pre-pandemic levels; job growth has slowed to a more sustainable pace; and the unemployment rate remains near historic lows.
The latest forecast from Oregon’s Office of Economic Analysis (OEA) assumes a soft landing as the baseline scenario for the state going forward. Job gains will slow but stay positive at 2.0% in 2023 followed by 1.2% next year and 0.7% in 2025. Meanwhile, the unemployment rate will remain near 4%.
Employment Forecast By Industry
The industry composition of job growth over the next few years will differ from the recent past. During the pandemic and the initial recovery, consumers were spending more on goods (think cars, home remodels, exercise equipment) and less on services (e.g. restaurants, vacations, gyms).
Going forward, OEA anticipates household spending on goods will slow while spending on services will strengthen. Accordingly, job growth in manufacturing, transportation and warehousing, and wholesale and retail trade will decelerate, while health services and leisure and hospitality will add jobs more rapidly than the overall economy. OEA notes that some of these gains are due to certain sectors playing catchup. For example, employment in accommodations and restaurants (within the broader leisure and hospitality sector) has yet to recover all pandemic losses. Finally, the education sector (public and private) will contract due largely to the anticipated decline in the state’s K-12 population.
We’re not yet out of the woods. The impacts of interest rate hikes take months, if not longer, to work their way through the economy. Perhaps what currently appears to be a soft landing is instead the calm before the storm. This possibility is on OEA’s radar and is played out in their alternative, or ‘boom/bust’, forecast: Interest rate hikes (past and potential future ones) push the economy into a recession beginning in the second half of 2024. Oregon suffers three quarters of job losses totaling 3%, or 60,000 jobs. No industry is spared, but the goods-producing sectors (construction, manufacturing) experience relatively greater losses as they are more sensitive to high interest rates. The unemployment rises to nearly 7% by early 2025.
The OEA's complete report is available at www.oregon.gov/das/OEA/Pages/forecastecorev.aspx.