Corporate profits, consumer spending reverse Oregon’s deficit but budget challenges remain

This is a developing story and may be updated.

Oregon lawmakers meeting at the Capitol to balance the state’s budget are staring down a much rosier economic forecast than expected.

Lawmakers will have $300 million more to work with than expected, an 80% increase from the $63 million budget deficit they were expected to be grappling with following the last economic forecast in November, and a near-full turnaround from the $373 million deficit they were told to expect in August.

Oregon’s chief economist, Carl Riccadonna, and senior economist, Michael Kennedy, presented the surprising news and the state’s latest quarterly economic forecast on Wednesday to House and Senate revenue committees and previewed some of their findings on a call with reporters Tuesday evening.

Riccadonna said the gap between market forecasts and actual revenues has been a problem not just for state economists but national ones during the last year. Data showing strong economic output in the midst of market uncertainty from tariffs, an anemic labor market and rising unemployment has confounded economists nationwide.

“This is the conundrum that forecasters are dealing with. Normally there’s a tight relationship between growth and employment. At the moment, that has broken down,” Riccadonna said.

Whether that’s due to a rebalancing in hiring that boomed after the COVID pandemic, or due to the proliferation of artificial intelligence in the workplace meant to replace human labor, or both, is too difficult to know for certain right now, Riccadonna said.

“It’s probably contributions from both factors, but understanding the weighting — is it a little AI or a lot AI? — has huge implications as we’re trying to put together a personal income tax forecast. Time will tell and that’s the only way to understand what’s happening here. This is a conundrum my team’s dealing with,” he said.

The biggest chunk of the $300 million boost to Oregon’s general fund is simply from money that went unspent during the last budget cycle.

Lawmakers will be able to use $147 million during the next 18 months that they did not use during the last two-year budget. About $106 million of the boost is from corporate income tax revenues and other revenues coming in higher than expected, though personal income taxes are down more than $40 million from the previous quarter. Another $50 million that lawmakers will have to work with comes from lottery and corporate activity taxes that came in higher than expected.

Overall, the state is looking at more revenue than expected in the quarter ahead due to several factors, Riccadonna explained:

– Spending stimulated by the Republican tax and spending cut megalaw and from the Federal Reserve lowering interest rates by about 2% over the last year.

– Less uncertainty related to tariffs than at the start of 2025. The U.S. Supreme Court will decide in the next few months whether President Donald Trump can continue ordering them by executive fiat.

– High corporate profits, business activity and stock market valuations driven by the “hyperscalers” such as AI processing and data centers selling cloud computing and data storage and management, and the semiconductors needed for the server farms.

“The fact of the matter is that the corporate profits environment is strong. Financial market valuations are close to record high levels, and so this offsets a lot of the weakness that we would see in wages and salaries, especially in the lower tier households,” Riccadonna said.

Democratic lawmakers expressed relief that they’ll have more money to work with to shore up nearly $1 billion in federal revenue losses from the Republican tax and spending cuts, and frustration that the economic boosts seem to indicate healthy corporate, rather than household, budgets.

“While modestly good news at the state level, most Oregonians won’t be impacted by what we learned in the revenue forecast today. Many will wake up tomorrow and still struggle to pay skyrocketing healthcare costs, rising rent, and growing grocery bills,” House Majority Leader Ben Bowman, D-Tigard, said in a statement.

“Oregon’s economy continues to show signs of resilience, even though President Trump’s economic policies are exacerbating inflation pressures and cost of living challenges for Oregonians,” Gov. Tina Kotek said in a statement. “My focus remains on driving solutions for people struggling to make ends meet and defending Oregon’s values in the face of federally-driven cuts to essential services.”

Economy continues to split

During the last revenue forecast, Riccadonna told lawmakers that Oregonians are experiencing the current economy differently based on their income bracket, creating a K-shaped economy where upper income-earners see their money grow while low-income households see theirs fall.

On Tuesday, Riccadonna said the split is becoming even more pronounced. Capital gains taxes are on the rise from the sale of stocks, but overall income taxes are down, indicating low wages and lost jobs or low job growth.

The national unemployment rate decreased slightly in recent months, but Federal Reserve Chair Jerome Powell has characterized this period as one of “low hiring, low firing,” leaving many trapped outside of labor markets or stuck in jobs with little mobility.

Oregon’s unemployment rate seems to be plateauing after reaching the highest level — outside a recession or recovery period — in a decade, according to the Oregon Employment Department.

Filings for unemployment insurance have slowed compared to the same time last year, signaling that maybe labor conditions will begin to meet growing economic output, Riccadonna said.

There is strong growth in production and the national output of durable goods, Riccadonna said, but it’s not being reflected in the labor market. Among the strangest relationships is growing output from the manufacturing sector, coupled with large manufacturing job losses, especially in Oregon.

“It’s unusual,” he said. “In normal economic conditions, if the economy grows faster, you have more job gains to go along with that.”

Economists at the Federal Reserve recently changed their assessment of economic activity from “modest” to “solid,” and Riccadonna characterised it as “sturdy.”

SUBSCRIBE: GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX