Presented to Washington Research Council Board...2019/10/10 · Timing of next recession: National Association of Business Economists survey 0% 10% 20% 30% 40% 50% 2019 2020 H1 2020

WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCILWASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL

Economic Outlook

Presented toWashington Research Council Board

Steve LerchExecutive Director

October 10, 2019Seattle, Washington

Economic OutlookOctober 10, 2019

Slide 1WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Summary

• U.S., WA forecasts similar to the June forecast; WA personal income slightly higher than in June

• Baseline forecast has slowing growth but no recession

• Forecast risks include the impact of trade disputes and a slowing global economy

• The Near General Fund-State forecast is increased by $27 million for the 2017-19 biennium and increased by $447 million for 2019-21 biennium



Data updates since preliminary forecast

U.S.• August employment: +130,000 jobs

• August Blue Chip GDP forecast: 2019 & 2020 slightly lower than preliminary

• Monetary policy: two additional 0.25% Federal Funds rate cuts are assumed in 2019, one of which occurred this month

• Washington• August employment: +4,000 jobs

• August unemployment rate remained at 4.6%



Selected forecast risks

Labor markets

• Unemployment rate, initial UI claims remain low

• Job growth slower than in 2018

737 MAX

• Currently, no impact on WA employment; forecast assumes gradual production increase over 2020 Q1 and Q2

International trade policy

• China – no agreement yet

• Europe – no agreement yet; potential for aircraft tariffs



The 10 year – 3 month yield curve has been inverted since May 23rd

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Per

cen

tDifference in interest rates: 10 yr. and 3 mo. Treasury

bonds

Source: Federal Reserve Bank of St. Louis, daily data through Oct. 4, 2019

The yield curve has inverted before the last three recessions but is not always a recession signal



OECD leading index suggests slowing growth in next 6 – 9 months

94

95

96

97

98

99

100

101

102

103

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

U.S. Composite Leading Indicator

Source: Organization for Economic Cooperation and Development, data through July 2019

The index is designed so the long-term average is 100.



Capacity utilization is typically at or above 80% before the start of a recession

65

70

75

80

85

90

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Capacity utilization, 12 mo. moving average

Source: Federal Reserve Bank of St. Louis, data through August 2019



Timing of next recession: National Association of Business Economists survey

0%

10%

20%

30%

40%

50%

2019 2020 H1 2020 H2 2021 H1 2021 H2 orlater

Per

cen

t of

res

pon

den

ts

Source: National Association of Business Economists, Oct. 2019 Outlook Survey



Relative to GDP, Federal debt is expected to reach levels last seen just after WW II

0

10

20

30

40

50

60

70

80

90

100

1980 1986 1992 1998 2004 2010 2016 2022 2028

Per

cen

tFederal debt as % GDP

Source: Congressional Budget Office, Update to Budget and Economic Outlook Aug. 2019, historic data through 2018

Forecast



Despite some volatility this year, consumer confidence remains at high levels

0

25

50

75

100

125

150

2005 2006 2007 2009 2010 2012 2013 2014 2016 2017 2019

Index Mich: 1966Q1 = 100, SAConf Board: 1985 =100, SA

U. Michigan Conf Board

Sources: University of Michigan, Conference Board; data through Sept. 2019



Small business optimism has declined but remains historically high

70

75

80

85

90

95

100

105

110

-40

-30

-20

-10

0

10

20

30

40

2006 2008 2010 2012 2014 2016 2018

Op

tim

ism

In

dex

, 1

98

6=

10

0

3 m

onth

sal

es g

row

th e

xpec

tati

on,

per

cen

t

NFIB Small Business Optimism Index

Sales Expectations Optimism Index

Source: National Federation of Independent Business; data through September 2019



U.S. retail sales have trended upward in 2019

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Year over year growth, %

Retail & food services sales

Source: U.S. Census Bureau data through August 2019 advanced release

August retail sales grew by 0.4% over July



U.S. employment change, January through September 2018 and 2019

0

50

100

150

200

250

300

350

Jan Feb Mar Apr May June July August Sept

Thou

san

ds

2018 2019

Source: U.S. Bureau of Labor Statistics, monthly data through Sept. 2019

Monthly employment growth in 2019 YTD has averaged 59,000 fewer jobs than for the same period last year.



U.S. unemployment rates remain low

3

5

7

9

11

13

15

17

19

2005 2007 2009 2011 2013 2015 2017 2019

Per

cen

t

Unemployment rate Alternative measure

Sources: U.S. Bureau of Labor Statistics; data through Sept. 2019

The alternative unemployment measure includes discouraged workers and those working part time for economic reasons.



WA employment change, January through August 2018 and 2019

-30

-20

-10

0

10

20

30

Jan Feb Mar Apr May June July August

Thou

san

ds

2018 2019

Source: Employment Security Dept., ERFC; monthly data through August 2019

WA employment does not show an obvious trend compared to 2018.

Feb. 2019 employment was impacted by severe weather.



WA Initial Unemployment Insurance claims, Jan. – Aug. 2018 and 2019

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan Feb Mar Apr May Jue July August

2018 2019

Source: Employment Security Dept.; monthly data through August 2019

WA initial UI claims are higher every month in 2019 compared to 2018 but differences are small with exception of February which was affected by severe weather.



So far this year, WA exports are down in many sectors

0

5,000

10,000

15,000

20,000

25,000

30,000$

Mill

ions

Jan - Aug 2018 Jan - Aug 2019

Source: WISERTrade, data through Aug. 2019

WA export growth, Jan-Aug 2018 to Jan-Aug 2019:

Transp Equip: -30%Ag Products: -10%Computer & Electronics: -8%Food Products: +1%Petrol & Coal: +6%Mach ex Elec: +6%Elec Equip & Appliances: -17%Paper: -6%Chemicals: -4%Fish & Shellfish: -8%



Largest WA export declines: detailed industry (4 digit NAICS): Jan-Aug 2019 compared to Jan-Aug 2018

INDUSTRY $ millionsAerospace Products & Parts -7,916Oilseeds & Grains -665Communications Equipment -187Timber & Logs -137Fruits & Tree Nuts -131Waste & Scrap -107Household Appliances & Misc Machines -93Semiconductors & Other Electronic Components -82Sawmill & Wood Products -62Oil & Gas -59Fish & Other Marine Products -57Electrical Equipment & Components

-49Miscellaneous Manufactured Commodities -47Industrial Machinery -39Iron & Steel & Ferroalloy -38

Source: WISERTrade, data through Aug. 2019



So far this year, WA exports to Japan are up but exports to China, Canada are down

-40

-30

-20

-10

0

10

20

China Canada Japan All other

YO

Y p

erce

nt

chan

ge

Year-over-year growth in export value, major trading partners

2014 2015 2016 2017 2018 2019 YTD

Source: WISERTrade; data through August 2019



Washington’s major trading partners are expected to have flat to slowing growth in 2019 and 2020

-10

-5

0

5

10

15

20

2005 2007 2009 2011 2013 2015 2017 2019

Per

cen

tReal GDP growth, annual

China Canada Japan South Korea

Source: OECD, Interim Economic Outlook, Sept. 2019; actual data through 2018

Since May, the OECD has revised down its 2019 and 2020 global GDP forecasts, in part due to trade and political tensions.



Oil prices adjusted for inflation remain low even after increases due to attack on Saudi oil facilities

0

10

20

30

40

50

60

70

2000 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

19

82

-84

$WTI, inflation adjusted price per barrel

Daily prices

Sept 3 -Oct 4

Source: U.S. Dept. of Energy, U.S. Bureau of Labor Statistics; monthly spot prices through Aug. 2019, daily spot prices Sept. 3 – Oct. 4

Attack on Saudi oil facilities



GDP is very similar to the June forecast

0

5,000

10,000

15,000

20,000

2013 2015 2017 2019 2021 2023

Bill

ion

s 2

01

2 $

U.S. real GDP

September June

Source: ERFC September 2019 forecast; historical data through 2018



The September forecast includes three additional 0.25% Federal Funds rate cuts compared to June

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Federal Funds interest rate

September June

Source: ERFC September 2019 forecast; historical data through 2019 Q3

ForecastThis forecast incorporates the 0.25% rate cuts which occurred in July and September and assumes an additional 0.25% cut in December.



Washington personal income is slightly higher than in June

0

100

200

300

400

500

600

700

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Bill

ion

s of

US

DWashington personal income

September June




Washington employment forecast is nearly unchanged from June

2,6002,7002,8002,9003,0003,1003,2003,3003,4003,5003,6003,7003,800

2007 2009 2011 2013 2015 2017 2019 2021 2023

Thou

sand

sWashington Nonfarm Payroll Employment

September JuneSource: ERFC September 2019 forecast; historical data through Q2 2019

Forecast



Washington housing permits forecast slightly higher compared to June

20

25

30

35

40

45

50

2013 2015 2017 2019 2021 2023

Thou

san

ds

Washington Housing Permits

September June


The slight forecast increase is due to stronger than expected multi-family permits since the June forecast.



Seasonally adjusted Revenue Act growth increased in the second quarter

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

2002 2004 2006 2008 2010 2012 2014 2016 2018

$millions SA

Revenue Act Collections 3-Month Moving Average

Source: DOR and ERFC; monthly data through July 2019 activity

* Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act

Adjusted collections for second quarter activity grew at 8.1% year over year after 5.6% growth in the first quarter.

$75.7 million of the YOY increase came from higher remittances (payments for activity outside of the quarter). Adjusted for these, YOY Q2 growth would have been 6.3%.



Taxable REET activity strong but leveling off

0

1

2

3

4

5

6

7

8

9

10

1996 1999 2002 2005 2008 2011 2014 2017

$Billions

Seasonally Adjusted Taxable Real Estate Excise Activity

Total Total excl. sales >$10M

Source: ERFC; Monthly data through August 2019

Large commercial sales (>$10 million) fell to $670 million in August after a $2 billion spike in July but could spike again to beat REET rate increase that takes effect January 1, 2020.

Residential sales are down from their May peak but still strong.



Cannabis revenue growth is expected to moderate

0

5

10

15

20

25

30

35

40

2015 2016 2017 2018 2019 2020

Mill

ion

sRetail Cannabis Collections

Forecast History

Source: ERFC September 2019 forecast; historical data through August 2019



Cannabis excise tax and license fee estimates

$Millions Cannabis Forecast

2017-19 2019-21 2021-23

GF-S share of excisetax and license fees $249 $279 $294

Non-GF $503 $546 $563

Total $752 $826 $858

Total change since June forecast:

• 2017-19+$0.0M

• 2019-21+$24.9M

• 2021-23+$20.2M

Detail may not add to total due to rounding Source: ERFC September 2019 forecast; historical data through August 2019



Forecast changes: Near General Fund-State, 2017-2019 biennium, cash basis

June2019 Forecast*

Non-economic Change**

Forecast Change

September2019 Forecast

Total Change#

General Fund-State

$44,042 $84 $18 $44,144 $102

Education Legacy Trust Account

$1,734 ($84) $4 $1,654 ($80)

WA Opportunity Pathways Account

$283 $0 $4 $288 $4

Total Near GF-S

$46,059 $0 $27 $46,086 $27

$Millions

*Forecast for the 2017-19 biennium adopted June 25, 2019**Transfer of GF-S property tax revenue to ELTA occurred in FY20 rather than FY19 as forecasted # Detail may not add to total due to rounding

$84 million of the statutory transfer of GF-S property tax into the Education Legacy Trust Account occurred in FY20 on a cash basis instead of in FY19 as forecasted.

The transfer still accrued to FY19 on a GAAP basis.



Forecast changes: Near General Fund-State, 2019-2021 biennium, cash basis

June2019 Forecast*

Non-economic Change**

Forecast Change

September2019 Forecast

Total Change#

General Fund-State

$49,804 ($84) $310 $50,030 $226

Education Legacy Trust Account

$899 $84 $135 $1,118 $219

WA Opportunity Pathways Account

$285 $0 $2 $286 $11

Total Near GF-S

$50,988 $0 $447 $51,435 $447

*Forecast for the 2019-21 biennium adopted June 25, 2019** Transfer of property tax revenue to ELTA occurred in FY20 rather than FY19 as forecasted # Detail may not add to total due to rounding

$Millions



Workforce Education Investment Account

Millions 2019-21 2021-23 2023-25

B&O tax receipts $380.0 $393.1 $451.3

Source: Department of Revenue, 2158 2S HB PL Fiscal Note, May 2019

• The Workforce Education Investment Account was established in the 2019 legislative session. The account is funded by a business and occupation tax surcharge on businesses in specified categories.

• The ERFC was tasked with forecasting B&O tax collections for the account in June 2019.

• The surcharge will take effect on January 1, 2020, with the first collections due on February 25, 2020. Until more data is available for forecasting purposes, we will continue to use the estimated revenue from the May 2019 fiscal note.



2019-21 Biennium alternative General Fund-State forecasts

2019-21Biennium

Difference From the baseline#

September 2019 Baseline (50%) $50,030

September 2019 Alternative Forecasts

Optimistic (15%) $51,708 $1,678

Pessimistic (35%) $48,037 ($1,994)

Probability Weighted Average $49,584 ($446)

GCEA* $50,063 $32

$Millions (cash basis)

*Based on the Governor’s Council of Economic Advisors’ economic assumptions#May not add to total due to rounding



10

12

14

16

18

20

22

24

26

28

30

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

$billions

Forecast

8.2%

Near General Fund-State* forecast by fiscal year

6.0%

*Near General Fund-State equals General Fund-State plus Education Legacy Trust and Washington Opportunities Pathway AccountsSource: ERFC forecast, September 2019

4.3%5.5%

Near General Fund-State Revenue

7.5%6.3%

10.1%

8.1%5.4%

3.8%3.2%

3.4%

1.7%



Conclusion

• Economic forecasts are only slightly changed from June

• Washington’s economy is continuing to outperform the nation but not as dramatically as in past

• Near GF-S revenues are expected to grow 18.0% between the 2015-17 and 2017-19 biennia and 11.6% between the 2017-19 and 2019-21 biennia

• The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks



Questions

Economic & Revenue Forecast CouncilPO BOX 40912Olympia WA 98504-0912

www.erfc.wa.gov360-534-1560

Documents

Presented to Washington Research Council Board...2019/10/10 · Timing of next recession: National Association of Business Economists survey 0% 10% 20% 30% 40% 50% 2019 2020 H1 2020