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Economist Joe Cortright: "Fasten your seatbelts"

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Archives - November 2008
Saturday, November 01, 2008


YOU REMEMBER THE FEELING from when you were a kid: Just past the top of the highest point of the track, the roller-coaster car falls away, taking the pit of your stomach with it. Your brain frantically struggles to sense where the bottom might be. That’s what it’s like to have been an investment banker for the past few months.

The question for 2009 is not whether the U.S. economy is headed for a recession — it is — but whether, like mortgage-backed bonds, Lehman Brothers and AIG, it is headed for a massive pileup.

It’s clear the nation’s economy is caught in a downdraft as a result of the compounded effects of higher gas prices, the collapse of the housing market and the current financial crisis. How will this play out in Oregon?


Memories of the 2001 recession are still vivid here: Oregon took one of the worst hits of any state in that downturn. Unemployment was the first- or second-highest in the nation, topping out at 8.5%, and the state had to repeatedly cut its budget to cope with falling tax revenues. There’s a reason for that queasy feeling in the pit of our collective stomach.

While it is impossible at this point to know how severe this recession will be, it appears that Oregon is far better positioned than it was seven years ago, and much better positioned relative to other states.

Each of the key drivers of this recession is likely to hit Oregon less hard than other states. Housing markets here haven’t overshot as much as in California and Florida, and housing prices are down about 6% over the past year, compared to a nationwide decline of more than 17%. Defaults and foreclosures are well below the national average. That said, Bend and Medford — both closely tied to the California market — are experiencing a much more severe correction.

The run-up in gas prices — still more than double the price of three years ago — is hurting consumer spending everywhere, but less so in Oregon, where gasoline consumption per capita is about 14% less than the U.S. average. Our more frugal driving habits saved Oregonians upward of $500 million annually that they would have paid in higher gas prices if they drove as much as the average American. Being green turns out to be an economic advantage.

The declining value of the U.S. dollar over the past two years has cut our buying power, but has the silver lining of making exports more competitive. Oregon is particularly poised to benefit because it ranks eighth in exports per capita among U.S. states. Oregon exports have nearly doubled since 2000 and are on track to reach $20 billion this year.

And since 2001 Oregon has worked hard to put its fiscal house in order. Unlike the last downturn, the state has salted away $600 million in rainy-day funds, which can help buffer any downturn. And despite what some critics of our fiscal system would say, Oregon has also been fortunate in this cycle not to have a sales tax: nationwide, state sales-tax receipts are flat over the past year while income taxes have continued to grow at a 4% rate. California and Washington, among others, both face serious budget shortfalls, largely because of stagnant sales-tax revenues.

Our best economic guess — the September 2008 Oregon Economic Forecast — predicted that this downturn would be far more mild than in 2001 and that Oregon would continue to perform better than the nation, growing employment at slightly less than 1% in both 2008 and 2009, before returning to a strong growth phase in 2010. In light of the recent turmoil in financial markets, that may turn out to be too optimistic a reading of our likely economic path. But even if the downturn is sharper and more prolonged, it seems likely that Oregon is much better positioned to weather this downturn than it was the last time.

Hold on tight, though. It’s going to be an exciting ride.

Joe Cortright is vice president and economist with Portland consulting firm Impresa.


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