Oregon lawmakers will have roughly $500 million less to work with for the next two-year budget cycle, according to the state’s latest economic and revenues forecast unveiled Wednesday in Salem. The uncertainty sparked by tariffs, slashed federal spending and immigration issues are clouding the state’s economic outlook, according to Oregon Chief Economist Carl Riccadonna. Also on Wednesday, the state released its latest jobs report. It showed that unemployment in Oregon rose to 4.7% in April, which is higher than the national average and marks a gradual increase over the past year.
Oregon Chief Economist Carl Riccadonna joins us for more details about the state’s economic outlook and the challenges ahead.
Note: The following transcript was transcribed digitally and validated for accuracy, readability and formatting by an OPB volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Oregon lawmakers will have roughly $500 million less to spend in the next two-year budget cycle than they’d previously thought. That’s according to the state’s latest revenue forecast, which was released yesterday. The big hits and the big uncertainty come from the federal government, with tariffs, federal spending cuts and immigration issues clouding the state’s economic outlook.
Carl Riccadonna is in charge of the forecast. He is Oregon’s chief economist. He joins us now to talk about what it’s like to give lawmakers a forecast for the next two years, when really no one knows what the next two weeks will bring. Carl Riccadonna, welcome back.
Carl Riccadonna: Thank you.
Miller: Why is this forecast, the one that came out yesterday, the most important one of the last two years?
Riccadonna: Well, Oregon operates on a biennial budget process and so the forecast that is produced in the May/June period basically sets the standard for, or the official guidelines for, state budgeters as they’re determining what spending will look like during the next biennium. So for legislators, it’s important for that reason. For the average Oregonian, this is the forecast that sets the benchmark for the kicker rebate, if revenues deviate from the forecast that we lay out in this projection.
Miller: If you are off, if you underestimate the revenues by more than 2%, then Oregonians get money back.
Riccadonna: Then they get a kicker.
Miller: Yeah.
Riccadonna: That’s right.
Miller: At the start of the year, you and your team were pretty bullish about Oregon’s trajectory, overall economy. Why? What looked good six months ago?
Riccadonna: So what we’ve done is comprehensively reviewed the forecasting models and whatnot, and tried to adjust for errors in the past. And as you highlighted in the prior segment, there has been a string of kickers, meaning that the office’s projections ultimately proved to be too conservative. So we’ve tried to make adjustments for that. So that was more of a structural change in how we think about the situation. But going back six months ago, we didn’t fully understand what trade wars and tariffs and all of these things would look like in the new administration. We had some sense that something was coming, but what ultimately was unveiled on April 2 was much larger than anticipated.
So, not only my own team, but forecasters pretty much across the board, from private sector forecasters to those at the Federal Reserve, have significantly reduced their expectations for the economy at the national level for 2025. And just to put a number around that, six months ago we were thinking the economy would grow about 2% this year. Those projections have now come down by more than half, so most forecasters are in the vicinity of 0.8% or 0.9%.
Miller: There have been enormous jolts to our economy in the last 17 years. There was the Great Recession and then there was COVID. One big difference between those times and now is that very few … Some people were betting short. There were some people who said there’s a crisis that’s coming famously, there’s books and movies about that. But, most people didn’t really see what was coming. Certainly that’s true for the pandemic. The uncertainty now, that the known unknowns – as your team wrote in a summary yesterday – seem different, that it’s clearer that something is happening that is confusing and cloudy.
But what do you do with that? What do you do as a forecaster when there are so many unknowns? And we can get to the specifics in a second, but broadly, how do you deal with such high levels of uncertainty?
Riccadonna: Sure, well, if we think of our confidence intervals around the forecast, it’s a shape of a bell curve. Ordinarily, as forecasters, we want that bell to be as tall and skinny as possible, meaning we have the greatest degree of confidence in our central forecast. In the current environment, there is much less certainty because trade headlines are changing on a tweet-by-tweet basis, on some days, and certainly on a daily and weekly basis – and this is changing the landscape. When there is heightened uncertainty about the outlook, then there can be less confidence towards that central forecast, so that tall skinny bell gets shorter and fatter. And the ends of that bell, those are the risk scenarios, things like a recession or a or a severe downturn, those have higher probabilities. As your central forecast is less confident, then there’s more probability for those outside scenarios. And that’s how we’re thinking about the current environment.
Of course, we don’t have a lot of templates to look at a significant increase in tariffs in modern history, right? Tariff rates right now are basically at levels last seen in the Great Depression. It was a very different economy at that time. Banks were not insured. There were ramps … all sorts of very different dynamics.
Miller: Most of our goods didn’t come from China.
Riccadonna: Exactly, exactly. So a very different landscape now. What we try to do is model these tariffs as an effective tax increase. And there’s lots of episodes in recent history where we can look at changes to tax policy and see how the economy responded.
Miller: How good is that as a template, just to say, OK, a tariff is a tax. I mean, what does that miss?
Riccadonna: Well, it misses who is paying that tax, for instance. So, often we hear a tariff is a tax paid for by consumers. That’s not always the case. And in fact, when we look back to 2018 and 2019, consumer inflation really did not change over that period. So that tax was paid, it just wasn’t paid by consumers. It was distributed up the supply chain.
Miller: But those tariffs, there were fewer of them and they were way lower. So that’s why your assumption is that this time it really will hit consumers’ pocketbooks in a more obvious way?
Riccadonna: Right. We shouldn’t assume that it’s all paid for by consumers. We’ve had data this week, the producer price index was out earlier this morning, much weaker than expected. The consumer price index was out yesterday morning, weaker than forecasters were anticipating. In fact, it was weaker than expected for the last three months. So that doesn’t guarantee that we’re gonna be able to whistle past the graveyard, so to speak. But I think it’s illuminating given that back in 2018, forecasters were crying bloody murder and thinking this would be a major inflationary shock. It didn’t come to pass in that way.
How it did show up was in activity. So rather than necessarily focusing on inflation, we should be focusing on employment trends, industrial production, economic output overall. There, very clearly, we can see there was an impact in 2018, and that was a big factor that went into our forecast for the upcoming biennium. A slower growth profile generates less tax revenue.
Miller: It’s striking that so far, even with all the federal chaos, there have still, at this point, only been relatively modest national or statewide effects that seem like they’re tied to all that chaos. Is that because it’s just too early for potentially baked in economic hits to be visible, or a sign of some kind of resilience?
Riccadonna: Well, I think it’s a combination of the two. The economy, both at the state level and the federal level, at national level, has demonstrated resilience to this point. The labor market is holding up. We are still producing jobs nationally, net positive. Yesterday we saw the state employment report, and again, we’ve had a string of positive gains at the state level as well. So in terms of hiring, it’s holding up. That doesn’t guarantee it will continue to hold up, but there is some resilience there and as we look at other indicators.
We, for instance, are tracking … As you drive down the interstate, you see all these trucks pulling off to the weigh stations, right? If we track weight/mile transactions in the state, in April, they are not showing us that the economy is rolling into recession. If we look at the new vehicle registrations, which is evidence of whether consumers are hunkering down or still spending on discretionary items, they were actually up in April.
So as we’re looking at these unconventional data sources to try to get a read, they’re still very much holding up. If we wait for the conventional hard economic data, things like GDP reports, job reports and whatnot, we won’t really get a good read until maybe June or July, or even later into the third quarter.
Miller: But lawmakers needed their information right now.
Riccadonna: We can’t wait for that. We have to act now.
Miller: What happens in your office? What happened just this week, Sunday and Monday, when China and the U.S. announced this huge 90 day reduction in tariffs? There was an immediate bump in the stock market, but you’re looking at the next two years. So how does a big news day like that affect the forecast that you were about to put out?
Riccadonna: Well, there are huge consequences. And just to put this in perspective, I’ve said we’ve been modeling tariffs as a tax increase. The effective tariff rate, had we had this interview last week at this time, was about 28%. Because of everything that happened with both the UK trade deal announced and also then, even more importantly, the negotiations over the weekend with the Chinese in Geneva, Switzerland, that lowered the effective tariff rate from 28% down to about 16% to 18%. At the national level, that’s worth about $400 [billion] or $500 billion. That moves the needle on the economy and, of course, then we have to take that into account.
So I think there’s been a lot of focus on, the revenue numbers look worse now relative to where we were in Q1. And I’m thinking in my own mind, oh my goodness, these look so much better than where we were two weeks ago. So I’m looking at an improvement, but relative to where we were in Q1, things have deteriorated.
Miller: Can you put that … I mean, just a ballpark figure. So as I mentioned at the beginning, $500 million less, largely because of an expected drop in individual income tax in the next two years. How much less money would lawmakers have had if it hadn’t been for that news?
Riccadonna: Sure. It could easily have been double that, because literally not adjusting the tariffs to a lower level than that was raising the probability of recession. So in our report we said probably about a 25% chance of recession. A week or two ago, the consensus among private forecasters was more like 40% chance of recession and some folks even had that as their baseline scenario. If you have a recession, that is going to clobber tax revenue, both corporate income taxes, the capital gains you’d be getting from the stock market. And of course, in a recession, the unemployment rate moves markedly higher, and that means less wage and salary generation, so personal income tax is down as well.
Miller: Now maybe this is about as big a single day’s news as you can imagine or at least on the upper end of momentous economic news, but this does show you, if the news had come out two weeks from now, you would have given the legislature a completely different forecast.
Riccadonna: A much weaker forecast. And of course, if it had been before the so-called “Liberation Day” tariff announcement on April 2, that it would walk back on April 9. We can see that there are big changes in the outlook because of these trade tensions.
Miller: OK, but it’s not just trade. Let’s turn briefly to federal taxes. Right now, congressional Republicans are trying to push through President Trump’s so-called “big, beautiful bill” that would be a mix of spending cuts to programs like Medicaid and food assistance, and a continuation of the president’s first term tax cuts. How much attention have you been paying to those negotiations and what are the various ways that this bill could play out in terms of Oregon’s tax revenue?
Riccadonna: Well, we’ve been paying very close attention to this. And of course this is a big assumption we have to address as we’re thinking about what the economy looks like over the next year or two.
Miller: You have to basically assume what Congress is going to do?
Riccadonna: We have to make a best estimate of what they’re going to do. We work with some national forecast providers and whatnot that can provide additional clarity there. But essentially, if we are extending the Trump tax cuts for households, maybe increasing the state and local tax deduction, the SALT deduction, which helps states like Oregon, for instance, we’re assuming that the corporate income tax actually is cut from about 21% down to 15%.
There’s lots of moving parts beneath the surface, and cutbacks to programs and whatnot. It’s not to make light of those issues, but essentially, if you say you have a tax cut coming, how much of it is paid for by cutting programs? And how much of it is not paid for, meaning we have to issue more debt or deficit spending at the federal level. That impacts how you think of the economic consequences. So whether you like the design of the tax policy or not, if it’s financed by deficits, in other words, it’s not paid for, that tends to have a stimulative impact on the economy in the near term. It might not be the best idea.
Miller: Oregonians would have more money to spend.
Riccadonna: Exactly. And if the national economy does better because there is a tax cut, even if it’s unfunded, we’ll have to pay for it eventually. So in the long term, I’m not advocating …
Miller: But that’s not your job. Your job is to say how the tax revenue is gonna come in the next two years.
Riccadonna: My job is to say how the economy is performing in the near term. If a tax cut means faster economic activity nationally, that will bleed into the Oregon economy. The Oregon economy is linked to the national trends, so there are consequences there.
The third leg of the stool … So there’s trade negotiations, which seem to be moving in a favorable direction. There’s tax cuts which will stimulate economic activity. The third leg of the stool is if the Federal Reserve can actually start lowering interest rates later this year. I already highlighted the favorable inflation news we’ve had to this point. The reason the Fed’s holding back, they’re saying, we’re not sure how inflationary these tariffs are going to be. If the inflation numbers continue to come in on the cool side, or at least on the measured side, there’s not a spike in price pressures and expectations of inflation start to come back down, that opens the door for the Fed to start taking its foot off the brake pedal, moving to lower interest rates. That helps things like interest sensitive spending and housing in particular.
Miller: Carl Riccadonna, thanks very much.
Riccadonna: My pleasure.
Miller: Carl Riccadonna is Oregon’s Chief State Economist. He joined us to talk about this crucial revenue forecast that he and his team gave lawmakers yesterday.
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