Since late August, Oregon has been facing a $373 million budget deficit. But now, the state’s latest economic forecast shows Oregon may only be about $63 million in the hole.
A brightening picture for the nation’s economy and some higher-than-expected corporate tax revenues for the state helped close the gap. But that doesn’t tell us much about the health of Oregon’s economy, as the recent government shutdown hampered the collection and release of important economic data.
Oregon state economist Carl Riccadonna joins us to make sense of the latest forecast.
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. About three months ago, we talked to state economist Carl Riccadonna about Oregon’s latest economic forecast. It was not great. He was projecting a $373 million deficit for the current two-year budget. Well, the latest forecast came out this week, and it is less dire. The hole is down to $63 million. Carl Riccadonna joins us now to talk about what has changed. It’s good to have you back on the show.
Carl Riccadonna: Thanks, Dave.
Miller: As I mentioned, from $373 million, the estimated shortfall for this current two-year cycle, down to $63 million. What happened?
Riccadonna: There’s two main factors at play here. First of all, the economy outperformed moderately relative to our expectations. Given the ongoing layoffs and deceleration in the economy, we thought that, for example, personal income taxes would be decelerating over that period, and really, they have held up in a surprisingly resilient fashion. Now, this does not mean that every household in Oregon is doing well, but this means at the top line, we are seeing some resilience in personal income taxes that due to a labor market, at least in some parts of the economy, some sectors [are] still being resilient. Also, of course, part of personal income taxes is financial market performance, and the stock market continues to hit record high after record high. November’s been a bit bumpy, but we’re still up about 12% for the year, and that’s a meaningful part of the tax bill for those upper income households.
That’s part number one, and of course that resilience also has factored into corporate income tax payments as well. If the economy is holding up, then both personal income and corporate are holding up. The other part of that was just the usual volatility around the forecasting process, and one of the most volatile components of our revenue model is corporate income taxes. We saw a big increase in the fourth quarter and that helped to shrink that hole as well. I would say there’s nothing particularly out of the ordinary happening there. This is within the usual kind of statistical volatility that we see in that series. We kind of aim for a straight line, but you have, especially in corporate taxes, big swings around that trend line.
Miller: Does this seem to you to be an overall underlying economy improvement or a kind of a one-time blip? It seems like maybe there’s two different categories.
Riccadonna: As a microeconomist, I get to say both, right?
Miller: And the corporate tax increase is more of the one-time boost and income taxes, personal income taxes, is more underlying improvements?
Riccadonna: Exactly. That’s the right way to interpret the outcome this quarter.
Miller: I want to turn to the employment picture because you were talking about it in relatively careful terms there. Is it fair to say that higher earners have been faring better than lower earners, not just in terms of making more money, but doing better…
Riccadonna: In terms of realized economic conditions, I think that’s a very fair assessment.
Miller: Why?
Riccadonna: First of all, we know that upper income households are more exposed to financial markets. If we’re in a period where the financial markets are doing well, or home prices are holding up and whatnot, of course, that asset appreciation is realized by upper income households. However, the economic set at the ground level or wage trends, something you’ll increasingly hear in the coming months and quarters, is the notion of the K-shaped economy.
If we picture the letter “K,” one arm goes up, one arm goes down. The experience post pandemic, the economy was roaring into the reopening of the economy. The rising tide lifted boats of all sizes, leaky or not, and that was true across industries, across states, and of course across the income spectrum as well. As we slow down, then we start to see more signs of different economic realities. So if we are looking at wages, for example, by income quartile, we can see that upper income households are kind of trending sideways, whereas lower income households are facing weaker economic conditions, and so they’re seeing some wage deceleration at a time where we still have sticky and persistent inflation pressures. It’s two very different economic narratives. When we’re forecasting revenue, we’re looking at the top line, so we take both of those into consideration.
Miller: That’s about wages. There’s also the question of just the pure number of jobs. You showed lawmakers a chart yesterday that showed that since 1980, every time the state has lost more jobs than it’s created over a given year, it has been in a recession. We lost 18,000 jobs in a recent 12-month period, that was August 2024 to 2025. And yet you peg the chance of Oregon slipping into a recession at “only” 25%. What am I missing here?
Riccadonna: In an ordinary year, those recession risks would be about 10% so we’re still elevated. But we’ve come down from where we were earlier this year, especially after the initial announcement of those tariffs back on April 2. There’s lots of mixed signals in the economic data, so the challenge as a forecaster is always to read the tea leaves and not dwell excessively on one particular data point or whatnot. That being said, we are in a jobs deficit, to this point, or at least through the data reported up to August, so we’ll be watching for those delayed economic reports to maybe show us otherwise.
Of course, the August jobs report for Oregon was a very strong jobs report. We produced almost 7,000 jobs in that month alone, and even beleaguered sectors like manufacturing, showed job gains. So it’s not just all bad news and all deceleration. But from a jobs perspective, it’s very unusual to see a jobs deficit and not be in recession. Although nationally, we’re not in recession. It’s also unusual for the state to be in a recession if the national economy is not in a recession. This kind of illustrates the tension between those data points.
When we’re looking at tax revenue, typically either personal income taxes or corporate income taxes, would be declining in a recession environment. That’s not the case at the moment. It’s a fine line, it’s subject to interpretation. But if we looked at only jobs data, we would say recession. If I looked at filings for unemployment benefits, I’d say not a recession. If I look at tax revenue, I also say not a recession.
Miller: You wrote about a “partial blackout of vital economic statistics stemming from the federal government shutdown.” That was one of the lines from the recent report. What information from the federal government would you normally have gotten in advance of this latest revenue forecast that you did not get?
Riccadonna: The Bureau of Labor Statistics closed for business. The Bureau of Economic Analysis closed for business. The Federal Reserve, the statistical data they produce, also missing this time around. Things like monthly jobs reports, GDP, both national, at the state level, inflation reports, industrial production, all of these things have gone dark temporarily, because of the government shutdown.
Miller: Can you put that in perspective? That’s a lot of important acronyms of government agencies that provide people like you, and people in the private sector, a lot of information. You didn’t have that. How significant was that to not have those numbers?
Riccadonna: Well, it’s a big challenge, right? It’s like a pilot trying to land the plane and half of the dashboard goes dark. You still have to land the plane, and you have to make judgment calls, and so we have to be a little bit more creative in the way we look at data, so we focus more on private sector data. There’s nothing that can replace the monthly jobs report. We got one of those delayed reports just this morning, but in the absence of that, we will focus on those applications for unemployment insurance or private sector survey data like ADP, the payroll processing firm, also produces a monthly job statistic. It’s not a perfect replacement, but in the absence of the real thing, you lean on these alternative measures to try to assess the direction of the economy.
Now, we’re in a dangerous moment because the economy has been decelerating over the course of this year. When your data screen goes dark as you’re going into a landing, that’s a critical period. In the next couple of weeks, we will have a veritable fire hose of economic releases to digest, as really three months of data all get reported during the course of one month to try to understand what’s happening. Of course, this is happening not only in the Oregon Office of Economic Analysis, but all the way up to the Federal Reserve decision making. The Fed chair at his last press conference said when you’re driving through the fog, slow down and be more incremental. That’s kind of the approach we adopted this forecasting cycle.
Miller: It seems that there’s two ways to think about federal data right now. One is the shutdown shutting down the production of some of that data. The other is for the data that is released, how much can we trust it now? The reason people have been bringing up this question in ways I’ve never seen in my lifetime is because of the fear of interference from the administration. For example, when jobs data came out that the president didn’t like, he said there’s something wrong with the woman in charge of the agency that’s putting it out. So let’s get somebody new there. To put it really simply, how much do you trust all of this data right now given fears of interference?
Riccadonna: Taking a step back in the pandemic, we had big questions about data collection, of course, because people weren’t leaving their houses. Also in the post-pandemic period, we’ve seen response rates around these surveys dwindle, so there had already been some question marks about, is this data as reliable now as it had always been? Of course there were budget cuts too, to the statistical agencies over the years. All of these factors are contributing to some question marks around the data. Then there’s now questions about political interference, especially what happened to the head of the BLS after that jobs report.
Miller: So just to be clear, before, from 2020 onwards, there were more sort of methodological questions?
Riccadonna: Yes.
Miller: And now you still have those and political ones?
Riccadonna: An example of that is response rates around the employment survey. The BLS is calling up different businesses and asking about the total payrolls, on record and whatnot, and the response rates were down. Anytime you’re conducting a survey, if you can poll 1,000 people, it’s better than polling 100 people. Of course, you get more reliable results with less margin of error.
Miller: Sort of like, almost like the economic version of what we’ve been hearing about political polling for a while.
Riccadonna: Exactly, exactly.
Miller: They’re not calling cellphones.
Riccadonna: The same sort of thing is happening. The challenge for forecasters then is to observe whether there is a deviation between these historical relationships. So that ADP private sector survey, that’s produced by a company, not federal employees. Is that tracking differently relative to payrolls? Or the unemployment filings are a great forecasting input into those employment forecasting models. Is that relationship changing? I will say to this point, we’re not really seeing those changes yet. There are questions about could there be political interference, what would that look like? Ultimately in the data, we’re not really seeing that at this point in time. I will say I still have confidence in those data releases, when they actually are reported, of course, and we had to make a big leap of faith over the last two months with the lack of government reports.
Miller: Carl, thanks very much.
Riccadonna: My pleasure.
Miller: That’s Carl Riccadonna. He is the Oregon state economist.
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