Oil prices have doubled since Oregon’s top economists last met with reporters and lawmakers to discuss the state’s economic outlook, creating a “new economic reality.”
The latest forecast, which economists Carl Riccadonna and Michael Kennedy previewed for reporters Tuesday evening ahead of a Wednesday meeting with the House and Senate revenue committees, is a sharp departure from February’s. Then, higher-than-expected corporate profits, consumer spending and new federal tax cuts had provided a buffer against what was expected to be a steep drop in state income tax revenue from sluggish job growth and wage stagnation plaguing not just Oregon, but the nation.
But President Donald Trump launched the ongoing U.S.-Israeli war with Iran in late February, oil prices have soared from $50 to more than $100 a barrel, driving up inflation, tanking the nation’s economic growth estimates for the year and further eroding wages and hiring. Economic growth from last summer’s federal tax and spending megalaw was expected to accelerate the nation’s GDP by 1% in the first half of 2026. That expectation has been completely dropped in the last three months.
“Rising energy prices basically impose a tax on households and businesses,” Riccadonna explained. “Often there’s not a lot of flexibility around energy consumption, which means when prices move, that very quickly translates into a new economic reality, and that’s very much what we’re grappling with in this forecast update.”
Potential homebuyers and budding business owners who hoped interest rates would drop soon will be further waylaid.
“One quarter ago, we were talking about the Fed continuing this cycle of interest rate reductions,” Riccadonna said of rates, which the Federal Reserve incrementally lowered by 2% over the past year. “Now it looks like, at best, they’re on an extended hold, and in fact the market is now starting to price in the possibility of the Fed raising interest rates by the end of this year,” he said.
In a statement, Gov. Tina Kotek said she is focused on keeping the state budget whole and policies that will ease the pain households are feeling as costs rise.
“Oregonians are feeling the financial pressure from high fuel prices and escalating inflation driven by the Trump administration’s conflict with Iran, so I’m thankful that Oregon is maintaining a balanced budget to protect core services,” she said.
State Republican lawmakers did not touch at all on rising fuel prices. Instead, House Minority Leader Rep. Lucetta Elmer, R-McMinnville, blamed it on “a concerning economic trend brought on by pro-regulation, anti-business policies coming out of Salem.”
Few winners
The only winners in the current economy are corporations raking in rising profits and wealthy individuals heavily invested in a booming stock market, Riccadonna and Kennedy explained. A small handful of tech “hyperscalers” are driving the perceived gains, such as AI processing and data centers selling cloud computing and data storage and management, and the semiconductors needed for the server farms.
“We’ve just gotten a bunch of tax returns for 2025 in, throughout the filing season, and one of the things they’re showing is weaker wage growth than we would have expected, but much stronger dividend growth, capital gains growth, IRA growth, everything that’s market sensitive, market-based growth,” Kennedy said.
Although income tax revenue generated from capital gains taxes on the sale of stocks is buffering overall earned-income losses in Oregon, at least $23 million of income tax revenue state lawmakers expected to have on hand when they walked out of the Capitol at the end of the short legislative session in March has been lost due to declining wages and stagnant employment.
When they ended the session, lawmakers thought they were sitting on an end balance of $368 million. Today, that’s more like $345 million, Kennedy said, and that $345 million exists mostly because Democratic lawmakers voted to detach the state tax code from three of 115 provisions of the new federal tax code, a decision state Republican lawmakers oppose and have vowed to send to Oregon voters via ballot referral in November.
Private sector forecasters recently put the likelihood of recession this year at about 30%, Oregon’s economists said, though they themselves forecast a likelihood closer to 22%, up from 20% three months ago.
Their modeling shows that if oil goes up to $150 per barrel for at least three months, a recession is imminent.
“What we’ve done is repeatedly shocked our macroeconomic model with higher and higher energy prices to see at what tipping point it basically pushes the economy into recession,” Riccadonna said. “We’re not at that level, but that doesn’t mean in the shades of gray period, in the interim, that it doesn’t eat into our growth forecast.”
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