JULY 2008: THE STATE WE'RE IN
Recession: an inconvenient truth
BY TIM DUY
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Is Oregon in recession? I have been startled by the
unwillingness of many to accept the obvious fact that the
Oregon economy has shifted gears markedly. Without a doubt,
incoming data is consistent with a substantial slowdown in
aggregate economic activity, with a notable impact on the labor
market.
Job growth in Oregon has actually decelerated more quickly than
in the rest of the nation, falling from a year-over-year rate
3.3% in June of 2006 to just 0.6% in April, a 2.7 percentage
point swing. Over that same period, national job growth swung
just 1.4 percentage points, from 1.7% to 0.3%. And
Oregon’s economy lost jobs for two consecutive months in
March and April; the last time we experienced two or more
months of job losses was in 2003, at the end of the weakness
associated with 2001 recession. If not soon reversed, the
decline in payrolls is certainly consistent with at least a
mild recession.
Oregon simply is not immune to the same forces weighing on the
nation as a whole. While there is a persistent myth that local
housing markets were driven upward due only to immigration and
constrained land supply, it is increasingly evident that easy
financing played a role just as in many other parts of the
nation. Lenders were making mortgages available on the basis of
expected appreciation rather than the traditional metrics of
cash flow and ability to pay. The breakdown of conventional
lending standards swelled home prices throughout the state, and
contributed to a clear bubble in Bend where prices rose from
three to six times the median family income. Prices are now
falling in most of the state, even in the vaunted
recession-proof Portland region.
I understand the desire to cheer for the home team; no one
wants to be seen as “talking down” the economy. But
when we avoid telling uncomfortable truths, we do not help our
citizens. Indeed, we also contribute to their problems —
steady praise for the housing market drives people to purchase
homes they cannot afford on the fear that if they don’t
buy now, they will never be able to buy a home. Encouraging
reckless behavior is simply not good policy. And how can
trumpeting the rise in housing prices to unaffordable levels be
good public policy in the first place?
An unwillingness to embrace the entire range of economic
developments in the state, warts and all, runs the risk of
appearing as if policymakers and commentators are out of touch
with the average Oregonian. Just randomly ask people you meet
on the street if they are better off now compared to 2000, the
peak of the previous business cycle. For too many families, the
answer, sadly, is no. Despite a period of sustained economic
growth, median family incomes have stagnated.
For a time, households could hide their relative poverty behind
a fiction that endless home-price appreciation would offset the
financial limitations imposed by flat incomes. But an era of
falling home prices and tighter credit has shattered the
illusion that families can borrow their way into prosperity,
revealing a reality of economic hardship for many, including
stagnant job growth, soaring food and energy prices,
increasingly inaccessible health care, and an underfunded
education system. For so many families, a debate over the finer
details of what defines a recession is essentially meaningless;
they know a recession when they see one, and this is it.
Looking forward, the collapse of the housing bubble will
continue to weigh on the Oregon economy. Still, I do not
anticipate job losses will be as severe as in the 2001-2003
period; solid export growth is supporting the manufacturing and
agricultural industries and minimizing job losses. But the
housing-dependent sectors of the economy will continue to
struggle. Stricter lending conditions ensure that the bubble
will not magically reflate in the months ahead. Consequently,
housing-related industries will undergo a fundamental
restructuring to align capacity with a more sustainable pace of
housing activity.
Policymakers need to accept that the economic push provided by
housing is fading — and recognize that they can no longer
expect rising home equity to paper over the problem of stagnant
living standards for many Oregonians.
TIM DUY is an adjunct
professor of economics at the University of Oregon and director
of the Oregon Economic Forum. His views do not represent the
views of the University of Oregon.
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