Economist Tim Duy uses the "R" word

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Tuesday, July 01, 2008

Recession: an inconvenient truth


TimDuy BY TIM DUY

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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