Oregon Output Soars as Job Growth Stutters

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Tech investments having disproportionate impact says economist

A California economist told a Bend audience of business and community leaders that recent data revealed a remarkable surge in Oregon’s economic output – but not one that is producing the typical concurrent rise in jobs in its wake.

In his Third Quarter 2012 Oregon Outlook Report, Cal Lutheran University Center for Economic Research & Forecasting (CLUCERF) associate professor Bill Watkins said the state was missing a broad-based recovery, and instead seeing huge investment in relatively small tech sectors producing comparatively little employment.

Watkins said: “The big economic story for Oregon is the recent revisions to gross domestic product history. These revisions were massive, particularly in 2010.

“As a result, it appears that Oregon’s output has been much higher than previously thought. Indeed, the estimated 8.1 percent growth for 2010 is phenomenal for any state. It’s in the range we normally associate with China!

“But such strong economic growth has not been accompanied by strong job growth. In 2010, Oregon actually lost jobs.”

The answer to the seeming conundrum lies in the preponderance of capital-heavy technology investment primarily by international powerhouse Intel, which has its most advanced research presence in Washington County, and by companies like Facebook via the proliferation of “server farms” in the state. The value of construction in terms of contributions to GDP is booked the year the investment is made and facilities built.

Watkins said the economic impact of Intel, which has had a presence in Oregon since 1973, was “difficult to overestimate.” With over 16,000 employees, it is the state’s largest employer and an ECONorthwest report estimated the firm’s Oregon economic impact at over $17 billion in 2009 or 5.6 percent of the total economy, while it generated 3.9 percent of Oregon’s jobs in the same year.

Watkins said: “The disparity between 5.6 percent of economic activity and 3.9 percent of jobs is part of the explanation of Oregon’s dramatic output growth and weaker job performance.

“Intel employees are very productive, producing far more output per worker than the typical Oregon worker. This is, in part at least, due to huge capital invested for each worker.”

And Intel’s plans pretty much guarantee it will continue to be a source of new economic growth and high-productivity jobs, with the company in the midst of a $6-8 billion expansion expected to be completed in 2012 or 2013.

The construction process creates high-value-added construction jobs, as many as 6,000 according to company estimates, but when the project is completed, the buildings will house around 1,000 workers.

Server farms, or data centers, tell a similar story regarding the technological explanation for Oregon’s disparate output and jobs performance.

Areas of rural Oregon like Prineville turn out to be a great fit to house server farms, with relatively abundant and affordable electricity and a mild climate that helps minimize cooling costs associated with the massive amounts of heat generated.

Watkins said: “Cooling farms have huge value, create huge value, and employ few people, which is to say their economic output growth rate exceeds their job growth rate.

“For example, Facebook’s $210 million, 300,000 square foot facility in Prineville employs less than 50 people, based on published reports we’ve seen.”

Right now, Eastern and Central Oregon have several major server farms. Google has been in The Dalles since 2006 and continues to expand, Facebook has completed its first 300,000 square foot facility in Prineville, with another in progress, and Apple has broken ground on its initial 10,000 sq ft data center nearby, with the expectation of more to come on the 160 acres it purchased in Crook County.

Watkins added: “These facilities generate huge positive economic externalities during construction, but few permanent jobs.

“That’s not a complaint. The permanent jobs are generally well-paying, high productivity, jobs, but it does go a long way to explain the different output and jobs trends.”

And many of those jobs will likely go to people who don’t currently live in Oregon, partly because the state presently ranks 49th in the nation in college enrollment, and Watkins said further investment in science and technology education was needed to stem the tide.

He added: “Capital investment is good thing – let’s hope we see more of it. Still, while this adds a huge boost to all sectors of Oregon’s economy, tech alone is unlikely to solve Oregon’s employment challenges.

“The high GDP growth rate should not lure policy makers into complacency. The state still needs to focus on jobs for the less-educated and improving educational outcomes.”

On a macro level, in his opinion “people don’t feel as if this is a recovery” partly because job growth has been anemic and unemployment has fallen only because millions have left the workforce.

Though in many ways Oregon should be well positioned for a vigorous recovery including having housing as affordable as it has been in decades, Watkins said that was not the forecast.

He anticipated the state’s GDP growth would continue to be very rapid – in the range of 3.7 per cent – in the next few quarters, but forecast relatively weak growth rates for jobs (around 1.3 per cent) and wage and salary income because the above-described type of economic expansion, though creating multiple benefits through the “multiplier effect,” was not one that generates a lot of jobs.

Much of the GDP growth represent returns to capital not owned by Oregonians, and he envisaged wealth gains, like job growth, coming slowly to the state.

For Oregon to enjoy a broader recovery and expansion of the base of its economic growth, he advocated several long-term steps, including:

-          “Stop screwing up” – the fiascos associated with the Facebook tax abatement u-turn and with a nixed Mercedes auto advertisement did “huge damage” by generating negative publicity that could see the state removed from potential investor short lists.

-          An overhaul of the tax structure. Watkins said: “Propositions 66 and 67 were also unnecessary mistakes. Oregon matched the nation’s highest top marginal income tax rates. The predictable result was that income was moved from Oregon to other, lower tax, states.”

-          Vastly increase the educational opportunities available to Oregon citizens. Watkins suggested Oregon probably has enough courses that end in “studies” and what was needed was training for STEM (Science, Technology, Engineering, and Mathematics) jobs, though funding such a move could be challenging, again because of the “inefficient, and sometimes counter-productive, tax structure.”

-          He also backed the campaign for a four-year university in Bend, adding that the economic benefit to the region would be huge.

Watkins reiterated his contention of the damage caused by Oregon’s tax structure, which was biased to income taxes, and thus “excessively progressive.”

He called the twin measures 66 and 67 “blunders” as by raising the top tax rates, Oregon lost high-income taxpayers – taxpayers “who are now no longer taxable by Oregon at any tax rate” and he suggested the much-vaunted sales tax question should be revisited.

On the national front, major hurdles to recovery included persistently high unemployment, and the drag of a massive deficit which has seen government spending soar to 10.2 per cent of GDP – at an even higher level than during WWII – primarily due to spending on entitlement programs.

Measures he suggested to mitigate the situation included increasing legal immigration, addressing regulation such as repealing the major financial institution “too big to fail” rules, increasing the national energy independence potential promised by technological breakthroughs, and an overhaul of the federal tax structure.

External risk factors included continuing Euro debt crisis ructions, unrest in areas like the Middle East, and slowing growth rates in India, China, affecting the global picture, but domestically there were encouraging signs in the real estate market, with home ownership approaching a more sustainable 65 per cent and US markets turning, especially at the lower end.

Though unemployment rates remained persistently high, median home price were expected to recover relatively quickly, with evidence in Central Oregon that prices may be “bumping along the bottom” and potentially poised for a small increase.

Reflecting on the wider state of Oregon real estate, Watkins said: “Prices are still soft and sales volumes relatively weak. This is a clear indication that Oregon’s residential real estate markets are not yet ready for a vigorous recovery.

“That will have to wait until Oregon starts creating jobs at a much faster pace. Even then, prices may lag as homeowners who have been waiting for market strength before selling enter the market. Call this pent-up supply.

“The flip side of soft prices is that Oregon’s housing affordability is now higher than it has been in decades. This, if accompanied by appropriate policy, could contribute to a more vigorous recovery in Oregon.

“We’ve recently seen a nice pickup in residential building permits, another indication that

markets are firming.

“As the recovery progresses, differences in Oregon’s regional markets will be amplified.

Those regions where job recovery is strongest will see earlier recovery and stronger

markets. Some lagging regions may see persistently weak markets.

“The conclusion that we take away from the data is that Oregon’s residential markets are

finally ready or near ready for the recovery. Foreclosures need to be worked through

and jobs need to start growing. Then, we’ll see something that most would agree was a

recovery.”

Watkins presented his forecast as part of an ongoing analysis and informational program organized by the Deschutes Economic Alliance

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