Thursday, June 5, 2008

Economic Weakness Consistent With A Mild Recession

Professor Duy released the U of O Index of Economic Indicators for April this week and Oregon’s economy continues to slump.

The University of Oregon Index of Economic Indicators™ extended its decline in April, falling 0.9 percent to 101.0 (1997=100). Only two indicators—the interest rate spread and core manufacturing orders—improved.
Remaining indicators held roughly steady or deteriorated. Compared to six months ago, the index declined at an annualized 3.1 percent rate, the third decline greater than 2 percent in the past four months. Such persistent weakness is consistent with at least a mild recession.

As a general rule of thumb, a decline of 3.5 percent over six months, coupled with a decline in more than half of its components, signals that a recession is likely imminent.

On the job market
Labor markets softened further in April. Notably, firms shed 1,600 employees in April, extending March’s 2,700 decline. The last time the Oregon economy lost jobs for two or more consecutive months was April 2003, at the end of the period of weakness following the 2001 recession. Moreover, initial unemployment claims continue to hover around a weekly average of 8,000, indicating continuing weakness in labor markets.
The two consecutive months of declining nonfarm payrolls, if not soon reversed, suggest that Oregon tipped into recession territory in March. If the economy is in recession, we would expect to see additional job declines in the months ahead. While monetary and fiscal policy is supportive of firming economic activity by the end of this year, labor markets could remain weak for a protracted period, similar to 2001–3.

On Housing Starts
Housing markets continued to weigh on economic activity, with residential building permits falling to just 807 units authorized (seasonal adjusted), down 53 percent from 1,702 in April 2007. In comparison, the monthly average in 2005 was 2,605 permits. The sharp decline in building activity clearly indicates that Oregon is not immune to national trends, and it suggests further job losses in the construction industry in the months ahead. Moreover, declining home prices in many parts of the state will place downward pressure on consumer spending as households become deprived of home equity as a source of spending power.