WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
Washington and U.S. Economic Outlook
Presented toWashington Association of County Officials
Steve LerchChief Economist & Executive Director
February 6, 2019Olympia, Washington
Economic Outlook
February 6, 2019
Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• U.S. economic growth will slow but the baseline forecast does not contain a recession
• The forecast expects oil prices to stabilize at $60/barrel but prices have continued to decline
• The economic forecast for WA has higher personal income than in September but slower growth
• Downside risks to the baseline include uncertainty regarding trade and fiscal policy, geopolitical concerns and higher interest rates
• The near General Fund-State forecast for the 2017-19 biennium is increased by $163 million
Economic Outlook
February 6, 2019
Slide 2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast risks
Upside
• Elevated consumer, business confidence could translate into stronger growth
• Strong U.S., WA labor markets
Downside
• International trade and fiscal policy uncertainty
• Slowing global economic growth
• Impact of rising interest rates
• Maturing economic expansion
Economic Outlook
February 6, 2019
Slide 3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Consumer confidence has dipped recently but remains above pre-recession levels
0
25
50
75
100
125
150
2005 2007 2009 2011 2013 2015 2017 2019
Index
Mich: 1966Q1 = 100, SAConf Board: 1985 =100, SA
U. Michigan Conf Board
Sources: University of Michigan, Conference Board; data through January 2019
Economic Outlook
February 6, 2019
Slide 4 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Small business optimism has weakened recently but remains strong
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,
19
86
=1
00
3 m
on
th s
ale
s g
ro
wth
exp
ecta
tion
,
percen
t
NFIB Small Business Optimism Index
Sales Expectations Optimism Index
Source: National Federation of Independent Business; data through Dec. 2018
Economic Outlook
February 6, 2019
Slide 5 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA, U.S. unemployment rates are below pre-recession levels
3
4
5
6
7
8
9
10
11
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Percen
t
WA, U.S. unemployment rates SA
WA U.S.
Source: Bureau of Labor Statistics, ERFC; U.S. data through Jan. 2019, WA data through Dec. 2018
Economic Outlook
February 6, 2019
Slide 6 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0
1
2
3
4
5
6
7
8
9
10
0
50
100
150
200
250
300
350
400
450
500
2010 2011 2012 2013 2014 2015 2016 2017 2018
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
WA, U.S. job growth remain strong
Source: Bureau of Labor Statistics, ERFC; data through Dec. 2018
The U.S. added 304,000 jobs in January 2019; WA data for January are not yet available.
Economic Outlook
February 6, 2019
Slide 7 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Nominal wage growth has plateaued regardless of occupational skill level
0
1
2
3
4
5
6
7
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Percen
t
Year over year growth, 12 mon. moving avg.
High skill Low skill Mid skill
Source: Federal Reserve Bank of Atlanta, data through Nov. 2018
High: managers, professionals, technicians
Mid:office/admin, production, sales
Low: food prep & serving, cleaning, personal care, protective services
Economic Outlook
February 6, 2019
Slide 8 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Weekly wage growth in WA is outpacing the nation recently
-3
-1
1
3
5
7
9
2010 2011 2012 2013 2014 2015 2016 2017 2018
Percen
t
Year-over-year growth in average weekly wages
WA U.S.
Source: U.S. Bureau of Labor Statistics, quarterly data through 2018 Q2
Economic Outlook
February 6, 2019
Slide 9 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Three highest, lowest counties by median hourly wage: 2017
0%
1%
2%
3%
4%
5%
6%
$0
$5
$10
$15
$20
$25
$30
$35
Median Hourly Wage Growth in Median Hourly Wage
Source: WA Employment Security Dept.
Economic Outlook
February 6, 2019
Slide 10 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington Employment Trends
0 20 40 60 80 100
All Other
Aerospace Manufacturing
Financial Activities
Wholesale Trade
State, Local Govt Educ
Manuf ex Aerospace
Information
Admin & Support Services
Prof, Scientific, Tech Services
Health Care
Construction
Leisure & Hospitality
Retail Trade
Employment Change since Trough (thousands)
Washington has gained 615,000 nonfarm jobs since February 2010
Source: U.S. Dept. of Labor, BLS; ESD; ERFC; data through Dec. 2018
Economic Outlook
February 6, 2019
Slide 11 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Fraction of statewide employment change, Seattle vs. rest of state
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2012 2013 2014 2015 2016 2017 2018
Seattle metro Rest of state
Source: Bureau of Labor Statistics, WA Employment Security Dept., WA Office of Financial Management
The Seattle metro area is 40.3% of the state’s population
Economic Outlook
February 6, 2019
Slide 12 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
2018 metro area employment growth
0%
1%
2%
3%
4%
Source: Bureau of Labor Statistics, WA Employment Security Dept.
Economic Outlook
February 6, 2019
Slide 13 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA exposure to retaliatory tariffs
Based on 2017 export values:
• $3.7 billion of exports subject to retaliatory tariffs (6.1% of total exports)
• 8,300 direct export-supported jobs subject to retaliation
• 20,600 total export-related jobs subject to retaliation
Source: J. Parilla and M. Bouchet, “Which US communities are most affected by Chinese, EU and NAFTA retaliatory tariffs?”, Brookings Institution , Oct. 2018
Economic Outlook
February 6, 2019
Slide 14 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
After 10 quarters of decline, exports have grown in the last four quarters
-60%
-40%
-20%
0%
20%
40%
60%
80%
2011 2012 2013 2014 2015 2016 2017 2018
Year over year growth, quarterly WA exports
All Other Transp Equip Ag Products
Source: WISERTrade, data through 2018 Q3
Economic Outlook
February 6, 2019
Slide 15 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The IMF has revised its global GDP forecast down for 2019 and beyond
2.5
3
3.5
4
4.5
5
5.5
2010 2013 2016 2019 2022
IMF real annual global GDP growth forecast (%)
Actual Oct-17 Oct-18 Jan-19
Source: International Monetary Fund, World Economic Outlook; historic data through 2017
Economic Outlook
February 6, 2019
Slide 16 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Mortgage debt is slightly above its previous 2008 peak
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1
Million
s $
Mortgage debt outstanding
1-4 family residences Multifamily Nonfarm, nonresidential Farm
Source: Federal Reserve System Board of Governors, data through 2018Q3
Economic Outlook
February 6, 2019
Slide 17 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Home price growth appears to be slowing
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Case-Shiller home price index, year over year % change, SA
Seattle U.S.
The Case-Shiller index for Seattle has decreased for five consecutive months
Source: Case-Shiller, data through Nov. 2018
Economic Outlook
February 6, 2019
Slide 18 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Household recurring payments as share of disposable income have declined since the recession
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Household financial obligations as % disposable personal incomeFinancial
obligations include all debt and other recurring payments such as rent, auto leases and property taxes
Source: Federal Reserve Bank of St. Louis, data through 2018 Q3
Economic Outlook
February 6, 2019
Slide 19 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
By 2029, federal debt is expected to reach 93% of GDP
0
10
20
30
40
50
60
70
80
90
100
1980 1986 1992 1998 2004 2010 2016 2022 2028
Federal debt as % GDP
Forecast
Source: Congressional Budget Office: Budget and Economic Outlook, Jan. 2019
Economic Outlook
February 6, 2019
Slide 20 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
GDP growth is expected to average 1.9% in 2020 - 2023
-3
-2
-1
0
1
2
3
4
5
1990 1994 1998 2002 2006 2010 2014 2018 2022
History Forecast
Source: U.S. Dept. of Commerce, BEA, history through 2017; ERFC Nov. 2018 forecast
Economic Outlook
February 6, 2019
Slide 21 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
CBO estimates that the sustainable annual growth rate for U.S. economy averages 2% in 2019-23
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5A
vg
. A
nn
ual
% G
ro
wth
Potential Real GDP Growth (annual average)
Labor Force, Annual Avg. Growth Labor Productivity, Annual Avg. Growth
The components of potential real GDP growth are potential growth in the labor force and potential growth in the productivity of the labor force
Source: Congressional Budget Office: Budget and Economic Outlook, Jan. 2019
Economic Outlook
February 6, 2019
Slide 22 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil prices have declined recently
20
30
40
50
60
70
80
90
100
110
120
2007 2009 2011 2013 2015 2017 2019 2021 2023
Do
llars P
er B
arrel
Refiners’ Acquisition Price of Crude Oil
November September
Source: Energy Information Administration, IHS Markit, ERFC November 2018 forecast; data through Q3 2018Note: Vertical black line indicates last actual
Since the preliminary forecast, oil prices have dropped $8 per gallon for the 4th
quarter of this year.
Forecast
Economic Outlook
February 6, 2019
Slide 23 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is slightly higher than in September but grows more slowly
0
100
200
300
400
500
600
700
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Billio
ns o
f U
SDWashington personal income
November September
Source: ERFC November 2018 forecast; historical data through 2017
Personal income data were revised back to 1998 after the September forecast
Economic Outlook
February 6, 2019
Slide 24 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
State personal income will continue to grow faster than the U.S.
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
2007 2009 2011 2013 2015 2017 2019 2021
In
dex 2
00
7 Q
1 =
1.0
Real Personal Income, U.S. and WA
U.S. Washington
Source: ERFC November 2018 forecast; historical data through 2018Q3
Forecast
Economic Outlook
February 6, 2019
Slide 25 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment forecast is very similar to September
2,600
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
2007 2009 2011 2013 2015 2017 2019 2021 2023
ThousandsWashington Nonfarm Payroll Employment
November September
Source: ERFC November 2018 forecast; historical data through Q3 2018
Forecast
Economic Outlook
February 6, 2019
Slide 26 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment will continue to grow faster than the U.S.
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
2007 2009 2011 2013 2015 2017 2019 2021
In
dex 2
00
7 Q
1 =
1.0
0Nonfarm Employment, U.S. and WA
U.S. Washington
Forecast
Source: ERFC November 2018 forecast; historical data through 2018 Q3
Economic Outlook
February 6, 2019
Slide 27 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA housing permits forecast averages about 500 units lower per year for 2019 – 2023 compared to September
20
25
30
35
40
45
50
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Th
ou
san
ds
Washington Housing Permits
November September
Source: ERFC November 2018 forecast; historical data through 2017
Economic Outlook
February 6, 2019
Slide 28 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. Economic Expansions since 1945
120
12
58
174
0 25 50 75 100 125 150 175
Economic Expansions, months
This Forecast Average 1980 1990
Sources: NBER, ERFC November 2018 forecast
Economic Outlook
February 6, 2019
Slide 29 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Recession forecasts
Duke/U.S. CFO Magazine survey (Dec. 2018)
• 49% of CFOs expect recession by end of 2019
• 82% of CFOs expect recession by end of 2020
WSJ Economists Survey (Dec. 2018)
• 22% expect recession in next 12 months
IHS Markit (Dec. 2018)
• Recession risks low in 2019 but rise in 2020 and beyond
Economic Outlook
February 6, 2019
Slide 30 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Recession probabilities in next 12 months based on economic, financial and yield curve data
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Oct Nov Dec
Financial
Source: Moody’s Analytics, October – December 2018
The probabilities are derived from three different models developed by Moody’s Analytics
Economic
Yield Curve
Economic Outlook
February 6, 2019
Slide 31 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Leading economic indexes for WA, U.S. do not suggest a recession in near term
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
2000 2003 2006 2009 2012 2015 2018
WA U.S.
Source: Federal Reserve Bank of Philadelphia, data through Oct. 2018
Note that this was last updated in October; the closure of some federal agencies makes the next update uncertain
Economic Outlook
February 6, 2019
Slide 32 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
An inverted yield curve (short-term interest rates > long-term rates) is a consistent recession predictor
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
1982 1987 1992 1997 2002 2007 2012 2017
10 year – 3 month Treasury bond yields
Source: Federal Reserve Bank of St. Louis, data through Dec. 2018
As of Dec. 2018, 10 year Treasury bond yields were 0.42% above three month Treasury bill yields
Economic Outlook
February 6, 2019
Slide 33 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Revenue Act collections growth has been strong
Source: DOR and ERFC; monthly data through October 2018 activity
* Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act
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
Adjusted year-over-year collections growth (by quarter of activity):
2017Q4: 8.3%2018Q1: 8.2%2018Q2: 8.8%2018Q3: 7.6%
Economic Outlook
February 6, 2019
Slide 34 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Taxable REET activity may have peaked in Q1 2018
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 November 2018 preliminary
Taxable activity in residential sales has been on a downward trend since March.
Large commercial sales (>$10 million) have not slowed as much as residential sales.
Economic Outlook
February 6, 2019
Slide 35 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The rapid growth in cannabis revenue is likely over
0
5
10
15
20
25
30
35
40
2015 2016 2017 2018 2019
Millio
ns
Retail Cannabis Collections
Forecast Actual
Source: ERFC November 2018 forecast; historical data through December 2018
Economic Outlook
February 6, 2019
Slide 36 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Assessed value on existing properties increased between September, November forecasts
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2003 2006 2009 2012 2015 2018 2021
$ B
illio
ns
November September
Forecast
Source: ERFC November 2018 forecast
September forecast for growth in Market Value: 7.3%
Actual growth:10.9%
Every 1.0 percentage point increase in Market Value growth adds between $30-$40 million in revenue per year
Economic Outlook
February 6, 2019
Slide 37 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• WA personal income is higher than in September as a result of revisions to historic data
• As has been the case for some time, Washington’s economy is continuing to outperform the nation
• Near GF-S revenues are expected to grow 17.3% between the 2015-17 and 2017-19 biennia and 9.2% between the 2017-19 and 2019-21 biennia
• The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks
Economic Outlook
February 6, 2019
Slide 38 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast Council
www.erfc.wa.gov360-534-1560
