U.S. and Washington State Economic Outlook...Sep 14, 2017 · U.S. and Washington State Economic...

WASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCIL

U.S. and Washington State Economic Outlook

Presented toThe Institute for Real Estate Management

Steve LerchExecutive Director

September 14, 2017Seattle, Washington

Economic OutlookSeptember 14, 2017

Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Forecast summary

• The preliminary economic forecast for the U.S. is very similar to the June forecast; the impacts of Hurricane Harvey will be incorporated in the final September forecast

• The preliminary economic forecast for WA has slightly higher employment, personal income, and housing permits than in June

• Downside risks to the baseline include weak labor productivity growth, uncertainty regarding international trade policy and geopolitical concerns



Forecast risks

Upside

• Elevated consumer, business confidence could translate into stronger growth

• Stock market gains could translate into faster household consumption growth

• Stronger global economic growth

Downside

• Stagnant labor productivity inhibits wage growth

• Geopolitical risks: North Korea, Russia

• International trade policy uncertainty



Consumer confidence is at or above pre-recession levels

0

25

50

75

100

125

2005 2007 2009 2011 2013 2015 2017

Index

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

U. Michigan Conf Board

Sources: University of Michigan, Conference Board; data through August 2017



The stock market continues to grow

0

500

1000

1500

2000

2500

3000

1990 1994 1998 2002 2006 2010 2014

S&P 500

Source: Yahoo! Finance, data through August 2017



Global GDP growth is expected to improve gradually

-1

0

1

2

3

4

5

6

2005 2008 2011 2014 2017 2020

Percen

tReal global GDP growth

Source: International Monetary Fund, World Economic Outlook, July 2017; historic data through 2016



Labor productivity has remained low since 2011

-3

-2

-1

0

1

2

3

4

5

6

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Labor productivity, year over year % change

Source: U.S. Bureau of Labor Statistics, nonfarm businesses, data through 2017 Q2



WA portion of U.S. personal income and population

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Personal income Population

Source: U.S. Bureau of Economic Analysis, 2017 Q2



Year over year population growth: U.S., CA, WA, OR, ID

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2016 Q2 2016 Q3 2016 Q4 2017 Q1

U.S. CA WA OR ID

Source: U.S. Bureau of Economic Analysis



Year over year personal income growth: U.S., CA, WA, OR, ID

0

0.01

0.02

0.03

0.04

0.05

0.06

2016 Q2 2016 Q3 2016 Q4 2017 Q1

U.S. CA WA OR ID

Source: U.S. Bureau of Economic Analysis



0

1

2

3

4

5

6

7

8

9

10

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015 2016 2017YTD

Th

ou

san

ds

Th

ou

san

ds

Average monthly employment change

U.S. (left) WA (right)

So far in 2017, WA employment change slightly stronger than 2016

Source: Bureau of Labor Statistics, ERFC; U.S. data through August 2017, WA data through July 2017



Washington vs U.S. employment growth: July 2016 to July 2017

Total

Construction

Information

Retail Trade

Educ/Health

Services

Leisure/Hospitality

Prof/Business

Services

Manufacturing

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

U.S. WA

Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through July 2017



Washington electronic shopping employment is exploding

0

5

10

15

20

25

30

35

40

2001 2003 2005 2007 2009 2011 2013 2015 2017

Th

ou

san

ds

Washington Electronic Shopping and Mail Order

Employment

Source: Employment Security Department; Monthly data through August 2017



Wage growth in WA has been at or above national rates since 2011

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2002 2004 2006 2008 2010 2012 2014 2016

Year-over-year average weekly wage growth, 3

month average

U.S. WA

Source: U.S. Bureau of Labor Statistics, data through 2017 Q1



Average weekly wages, 2017 Q1: US, WA, selected WA counties

U.S.

WA

King

Snohomish

Benton

Skamania

San Juan

Okanogan

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Source: U.S. Bureau of Labor Statistics



Agricultural exports are showing some improvement, transportation equipment is declining

-60%

-40%

-20%

0%

20%

40%

60%

80%

2011 2012 2013 2014 2015 2016 2017

Year over year growth, quarterly WA exports

All Other Transp Equip Ag Products

Source: WISERTrade, data through 2017 Q2



U.S., WA housing permits trending up; U.S. remains below historical averages

0

10

20

30

40

50

60

70

80

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016

Th

ou

san

ds,

WA

Th

ou

san

ds,

U.S

.

U.S. WA

Source: U.S. Census Bureau, seasonally adjusted annual rates, data through July 2017



WA residential contract data shows continuing shift towards single family

5

10

15

20

25

30

20

30

40

50

60

70

2012 2013 2014 2015 2016 2017

Mu

lti-

Fam

ily

Sin

gle

Fam

ily

Square Footage of Residential Construction Contracts,

SAAR, 6MMA, Millions

Single Family Multi-Family

Source: Dodge, ERFC; data through June 2017

Single Family square footage is up 5% and Multi-Family is down 43% year over year (6mma).



AK

Washington ranks 3rd in year-over-year home price growth

-1.1 to 1.9%

2.0 to 4.7%

5.0 to 7.0%

7.1 to 12.8%

Source: Zillow, Data: ZHVI Summary, July 2016



Median home sale price growth for selected counties (2016 Q2 – 2017 Q2)

San JuanSkamania

ClarkKing

Whatcom

Statewide

Whitman

Grant

Ferry

Klickitat

Columbia

-25

-20

-15

-10

-5

0

5

10

15

20

25

Percen

t

Source: Runstad Center for Real Estate Research, University of Washington



Affordability has been decreasing in recent years, especially in King County

0

20

40

60

80

100

120

140

160

180

200

1994 1997 2000 2003 2006 2009 2012 2015

Affordability Index for Washington and King County

Washington King County

An index score of 100 means a median-income family can afford a median-priced home.

Source: Runstad Center for Real Estate Studies, University of Washington, data through 2017 Q2



Rental increases by metro area, March 2016 to March 2017

-20% -10% 0% 10% 20% 30% 40% 50%

Walla Walla

Ellensburg

Wenatchee

Bellingham

Everett

Mt. Vernon

Yakima

Tacoma

Olympia

Longview

Seattle

STATEWIDE

Pullman

Vancouver

Tri-cities

Bremerton

Spokane

Source: Runstad Center for Real Estate Research, University of Washington



Seattle area Class A office lease and vacancy rates, 2017 Q2

0%

5%

10%

15%

20%

25%

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Bellevue CBD Seattle

Downtown

Tacoma/Fife South King

Co.

Everett

Lease rate Vacancy rate

Source: CBRE, Puget Sound Office Marketview, 2017 Q2

Lease rate:

Annual, full service per square foot



Seattle area industrial lease and vacancy rates, 2017 Q2

0%

1%

2%

3%

4%

5%

6%

7%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

East King Co. Seattle South King Co. Tacoma/Fife

Lease rate Vacancy rate

Source: CBRE, Puget Sound Industrial Marketview, 2017 Q2

Lease rate:

Monthly, per square foot, NNN



WA commercial contract data has been trending down since mid-2016

0

5

10

15

20

25

30

2012 2013 2014 2015 2016 2017

Square Footage of Commercial Construction Contracts, SAAR, 6MMA, Millions

Source: Dodge, ERFC; data through June 2017

Commercial includes office, retail, food service, and motels/hotel.

Commercial square footage is down 19% year over year (6mma).



Real GDP is slightly higher than in the June forecast

14,000

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

19,000

2007 2009 2011 2013 2015 2017 2019 2021

Billio

ns o

f 2

00

9 D

ollars

Real GDP

September preliminary June

Real GDP at the end of 2021 is 0.2% higher than in the June forecast.

Source: ERFC September 2017 Preliminary forecast; data through Q2 2017



Oil prices are slightly higher compared to the June forecast

25

35

45

55

65

75

85

95

105

115

125

2007 2009 2011 2013 2015 2017 2019 2021

Do

llars P

er B

arrel

Average Price of Crude Oil

September Preliminary June

Source: DOE, ERFC September 2017 Preliminary forecast; historical data through Q2 2017



The U.S. nonfarm payroll employment forecast is slightly higher than in June

125

130

135

140

145

150

155

2007 2009 2011 2013 2015 2017 2019 2021

Millio

ns

U.S. Nonfarm Payroll Employment

September Preliminary June

By the end of 2021, U.S. employment is 0.4% higher than in the June forecast.

Source: ERFC September 2017 Preliminary forecast; data through Q2 2017



The Fed is expected to raise rates in December

0

1

2

3

4

5

6

2007 2009 2011 2013 2015 2017 2019 2021

Percen

tFederal Funds Rate

Source: Global Insight, ERFC September 2017 Preliminary forecast; data through Q2 2017Note: Vertical black line indicates last actual

The forecast assumesthe rate will rise gradually, eventually reaching 3.00%.



Washington personal income is slightly higher than in June

0

100

200

300

400

500

600

2013 2014 2015 2016 2017 2018 2019 2020 2021

Billio

ns o

f U

SDWashington personal income


Source: ERFC September 2017 Preliminary forecast; historical data through 2016

2017 YTD data were revised slightly higher. WA personal income is 1.2% higher in 2021 compared to the June forecast.



Washington employment forecast is slightly higher than in June

2,600

2,700

2,800

2,900

3,000

3,100

3,200

3,300

3,400

3,500

3,600

2007 2009 2011 2013 2015 2017 2019 2021

ThousandsWashington Nonfarm Payroll Employment


Source: ERFC September 2017 Preliminary forecast; historical data through Q1 2017

The WA nonfarm employment forecast is 43,000 jobs higher (1.2%) by 2021 compared to June.



Washington housing permits forecast is slightly higher compared to June

20

25

30

35

40

45

50

2013 2014 2015 2016 2017 2018 2019 2020 2021

Th

ou

san

ds

Washington Housing Permits


Source: ERFC September 2017 Preliminary forecast; historical data through 2016



Large commercial property sales made a comeback in the 2nd quarter

0

1

2

3

4

5

6

7

8

9

10

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

$Billions

Seasonally Adjusted Taxable Real Estate Excise Activity

Total Total excl. sales >$10M

Source: ERFC; Monthly data through July 2017 preliminary

Large commercial sales (>$10 million) totaled $5.2 billion in the 4th quarter of 2016, $1.8 billion in the 1st

quarter of 2017 and $2.9 billion in the 2nd

quarter.

Large commercial sales totaled $478 million (preliminary) in July while sales less than $10 million spiked.



The price of cannabis may be nearing a floor

5

10

15

20

25

30

Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul

Do

llars p

er g

ram

Price of Recreational Cannabis Sold at Retail Stores

Source: LCB, ERFC; data through July 2017



Cannabis revenue continues to be volatile

30

40

50

60

70

80

90

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

Millio

ns

Retail Cannabis Sales

Recreational Medical Forecast

Source: LCB, ERFC; data through July 2017

2017-19 revenue forecasts:

Cannabis revenue =$685 million

Total state general fund = $40.9 billion



Conclusion

• As has been the case for some time, Washington’s economy is continuing to outperform the nation

• Threats to economic expansion include slow labor productivity, geopolitical risks and uncertainty regarding international trade policy

• Home prices and residential rents continue to increase in many but not all parts of Washington

• Vacancy rates for central Puget Sound Class A office space have dropped from nearly 16% in 2012 to 11.3% in 2017 Q2

• Vacancy rates remain low for central Puget Sound area industrial property



Questions

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

www.erfc.wa.gov360-534-1560

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