UO: Economy improves, but recession may be near

The University of Oregon Index of Economic Indicators signals that a recession is possible.

Timothy Duy, director of the Oregon Economic Forum at the UO, said the index rose 0.2 percent in December to 102.6, with the majority of index components improving during the month.

The index is based on a 1997 benchmark of 100.

Despite the December gains, the behavior of the index in recent months remains consistent with a substantial risk of recession in the near future, Duy said.

Compared with six months ago, the UO index slid 1.1 percent (annualized), while the six-month diffusion index, a measure of the proportion of components that are rising, stood at 50 percent of the components improved over the past six months.

As a general rule, a decline in the index of greater than 2 percent over six months (annualized), coupled with a decline in more than half of its components, signals that a recession is likely imminent, Duy said.

Oregon labor market data was generally softer in December. Nonfarm payroll growth slowed sharply, with Oregon firms adding just 900 employees, compared with the 10,300 added the previous two months. Likewise, help-wanted advertising in Oregon newspapers posted a small gain during the month.

More concerning, said Duy, however, is the continued rise in initial unemployment claims that pushed upward to a weekly average of 8,059 -- a rise in claims to this level preceded the 2001 recession.

A reversal of recent relative weakness in the job market would help the economy avoid recession, he added.

Residential building permits were largely unchanged in December; the monthly average during the third quarter was 1,438 permits, down 27 percent and 45 percent from the fourth quarters of 2006 and 2005, respectively.

Housing markets are likely to remain soft for the foreseeable future, said Duy. Consumer confidence also largely stabilized in December following a significant decline that began last July.

Oregon's weight-distance tax, a measure of trucking activity, gained in December, signaling underlying economic growth. New orders for nondefense nonaircraft capital goods rebounded in December; the stability of this indicator is consistent with slow but not recessionary growth. The yield spread -- the difference between short- and-long term interest rates -- narrowed sharply as the Federal Reserve continued to cut interest rates in December. In addition, policymakers cut rates another 1.25 percentage points in January.

Recent economic indicators in general are mixed, with labor, housing and confidence measures weak, while manufacturing and trucking activity are still solid. In total, this suggests sluggish economic activity with substantial risk of recession.

(Source: Portland Business Journal)