Washington State Economic Update · 4/11/2019 · WASHINGTON STATE ECONOMIC AND REVENUE FORECAST...

WASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCILWASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCIL

Washington State Economic Update

Presented toRoundtable of Thurston County

Steve Lerch

Executive Director

April 11, 2019

Olympia, WA

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

WA State Economic Update

April 11, 2019Slide 1

Office of the

Governor

Director, OFM

Director, DOR

Economic and Revenue

Forecast Council

Member, Democratic

Caucus

Member, Republican

Caucus

Member, Democratic

Caucus

Member, Republican

Caucus

House of

RepresentativesSenate

Economic and Revenue Forecast Council Organization Chart

ERFC

Created in 1984 as part of Dept. of Revenue

Became separate agency in 1990

State

Treasurer




ERFC Forecast Process

National Economic Forecast

Preliminary Washington State Economic Forecast

Review by Work Group

Review by Governor’s Council of Economic Advisors &

Economic and Revenue Forecast Council

Final National and Washington Economic Forecast

Review by Forecast Council

Final Washington General Fund Revenue Forecast

ERFC and Revenue-Generating Agencies Create Revenue Forecasts

The national economic forecast is based on a modified version of the IHS Markitmodel of the U.S. economy




Summary

• U.S., WA forecasts similar to the November forecast

• Baseline forecast has slowing growth but no recession

• Wage growth and inflation remain moderate

• Downside risks to the baseline include uncertainty regarding trade and fiscal policy, geopolitical concerns and a maturing economic expansion

• Potential impact of 737 MAX grounding adds a new downside risk

• The Near General Fund-State forecast is increased by $307 million for the 2017-19 biennium and by $554 million for 2019-21 biennium




Selected forecast risks

Labor markets

• Unemployment rate, initial UI claims low

• Job growth has been strong until February

737 MAX

• Currently, impact on WA employment and personal income unclear

International trade policy

• China – U.S. trade deal no longer seems imminent




Consumer confidence dipped in late 2018 but has partially recovered, remains strong

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 March 2019




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

tio

n,

percen

t

NFIB Small Business Optimism Index

Sales Expectations Optimism Index

Source: National Federation of Independent Business; data through Feb. 2019




Job openings continue to grow at a strong pace

-50

-40

-30

-20

-10

0

10

20

30

40

2002 2004 2006 2008 2010 2012 2014 2016 2018

Percen

t C

han

ge

U.S. Job Openings, Year over Year Growth (SA)

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

An average of 5.7 million jobs were open in 2018




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 2015 2016 2017 2018

Percen

t

WA, U.S. unemployment rates SA

WA U.S.

Source: Bureau of Labor Statistics, Employment Security Dept.; WA data through Feb. 2019, U.S. data through Mar. 2019




0

1

2

3

4

5

6

7

8

9

10

0

50

100

150

200

250

300

350

400

450

500

2011 2012 2013 2014 2015 2016 2017 2018 2019

YTD

Th

ou

san

ds

Th

ou

san

ds

Average monthly employment change

U.S. (left) WA (right)

U.S. job growth slowed in February but picked up in March

Source: Bureau of Labor Statistics, Employment Security Dept.; WA data through Feb. 2019, U.S. data through Mar. 2019




Nominal wage growth has averaged 3.3% in last 12 months regardless of educational level

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Percen

t

Year over year growth, 12 mon. moving avg.

High school or less AA degree Bachelors degree or higher

Source: Federal Reserve Bank of Atlanta, data through Feb. 2019




Exports to China are declining

-35

-25

-15

-5

5

15

25

35

45

55

65

75

85

China Canada Japan South Korea All Other

YO

Y p

ercen

t ch

an

ge

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

partners

2018Q2 2018Q3 2018Q4

Source: WISERTrade; data through 2018 Q4

After four quarters of year over year growth, WA exports declined in 2018 Q4




After four consecutive quarters of growth, WA exports declined in the fourth quarter of 2018

-80%

-40%

0%

40%

80%

120%

160%

200%

2005 2007 2009 2011 2013 2015 2017

WA exports, year over year growth

Transp Equip Agriculture All other

Total Export Growth

2017Q4: 0.6%2018Q1: 3.9%2018Q2: 3.7%2018Q3: 2.6%

2018Q4: -2.7%

Source: WISERTrade; data through 2018 Q4




Home price growth is slowing

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Percen

t

Case-Shiller home price index, year over year % change,

SA

Seattle U.S.

The Case-Shiller index for Seattle rose by 0.3% in January after decreasing for six consecutive months.

Source: Case-Shiller, data through January 2019




Relative to population, WA residential construction activity is stronger than the U.S.

0

1

2

3

4

5

6

7

8

9

10

2000 2003 2006 2009 2012 2015 2018

Residential building permits per 1,000 population

U.S. WA

Source: U.S. Census Bureau, ERFC; data through 2018 Q4




Washington vs U.S. employment growth: Feb. 2018 to Feb. 2019

Total

Information

Constr.

Educ/Health

Services

Manufacturing

Leisure/

Hospitality

Prof/Business

Services

Retail Trade

-1%

0%

1%

2%

3%

4%

5%

6%

7%

U.S. WA

Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through Feb. 2019




WA personal income growth has outpaced the U.S. in 26 of last 36 quarters

-15

-10

-5

0

5

10

15

20

2010 2011 2012 2013 2014 2015 2016 2017 2018

U.S. and WA personal income growth

U.S. WA

Source: U.S. Bureau of Economic Analysis, data through 2018 Q4

WA personal income growth is expected to average 4.8% per year for 2019 - 2023




U.S. retail sales growth has slowed recently

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 January 2019




Business investment trended down in last five months of 2018

45,000

50,000

55,000

60,000

65,000

70,000

75,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

$ m

illion

sNew orders: nondefense capital goods excluding aircraft

(SA)

Source: U.S. Census Bureau; data through Feb. 2019




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




Leading economic indexes for WA, U.S. dipped recently but 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 Dec. 2018




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 Jan. 2019

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




An inverted yield curve (short-term interest rates > long-term rates) is a consistent recession predictor

-1

0

1

2

3

4

5

1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

Percen

t10 yr. Treasury rate – 3 mo. Treasury rate

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

Although not apparent with the monthly averages shown here, the yield curve inverted from Mar. 22nd until Mar. 28th




Timing of next recession: National Assoc. of Business Economists survey

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2019 2020 2021 After 2021 No opinion

Percen

t o

f resp

on

den

ts

Source: National Association of Business Economists, Economic Policy Survey, Feb. 2019




Wall Street Journal economists’ survey shows recession probability rising but below 25%

10

12

14

16

18

20

22

24

26

Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

Probability of recession in next 12 months

Source: Wall Street Journal economists’ survey, data through Mar. 2019

GCEA members:

Average probability of recession in next 12 months = 36%




Recession probabilities in next 12 months based on economic and financial markets data

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Oct Nov Dec Jan Feb

Financial

Source: Moody’s Analytics, October 2018 – February 2019

The probabilities are derived from models developed by Moody’s Analytics

Economic




U.S. real GDP growth has slowed

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2015 2016 2017 2018

Percen

t

Source: U.S. Bureau of Economic Analysis. Data through Q4 2018

Due to the partial Federal government shutdown, 2018 Q4 data, which was released Feb. 28th, was not available for the ERFC March forecast.




Many forecasters expect U.S. economic growth to slow further

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2018 2019 2020 2021

Actual ERFC IHS-Markit Federal Reserve Economy.com

Sources: U.S. Bureau of Economic Analysis, ERFC Mar. 2019 forecast, IHS-Markit, Federal Reserve Board, Economy.com




GDP is slightly lower than in November

0

5,000

10,000

15,000

20,000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

U.S. GDP

March November

Source: ERFC March 2019 forecast; historical data through 2018




Oil prices are slightly lower than in the November forecast

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

March November

Source: Energy Information Administration, IHS Markit, ERFC; data through Q4 2018Note: Vertical black line indicates last actual




The Federal Reserve is not expected to raise interest rates as high as anticipated in November

0

1

2

3

4

5

6

2007 2009 2011 2013 2015 2017 2019 2021 2023

Percen

t

Federal Funds Interest Rate

March November

Source: ERFC March 2019 forecast; historical data through Q4 2018




U.S. nonfarm payroll employment growth is very similar to the November forecast

125

130

135

140

145

150

155

160

2007 2009 2011 2013 2015 2017 2019 2021 2023

Millio

ns

U.S. Nonfarm Payroll Employment

March November

Source: IHS Markit, ERFC; data through Q4 2018Note: Vertical black line indicates last actual




Washington personal income is slightly lower than in November

0

100

200

300

400

500

600

700

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Billio

ns o

f U

SD

Washington personal income

March November





Washington employment forecast is slightly lower than in November

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

March November


Forecast




Online retail employment forecast consistent with press comments about future hiring plans

0

10

20

30

40

50

60

70

80

2007 2009 2011 2013 2015 2017 2019 2021 2023

Th

ou

san

ds

WA electronic shopping employment





Permits forecast for 2019 – 2023: average unchanged, timing slightly different compared to November

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

March November





Revenue Act collections growth has been strong

Source: DOR and ERFC; monthly data through January 2019 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%2018Q4: 7.4%




Rev Act collections still growing faster than personal income

-15%

-10%

-5%

0%

5%

10%

1984 1988 1991 1995 1998 2002 2005 2009 2012 2016

Year-Over-Year Rev Act* Growth Less State Personal

Income Growth

YOY Rev Act Less Income Growth Long-Term Average

Source: ERFC; Quarterly revenue data through Q4 2018, March 2019 income estimates

Adjusted Rev Act growth YOY:

18Q1: 8.2%18Q2: 8.8%18Q3: 7.6%18Q4: 7.5%

November personal income YOY growth estimates:

18Q1: 7.3%18Q2: 7.0%18Q3: 6.9%18Q4: 6.2%

*Adjusted for large one-time payments and refunds and payments under the amnesty program




Taxable REET activity declined in February but remained strong

0

1

2

3

4

5

6

7

8

9

10

2000 2003 2006 2009 2012 2015 2018

$Billions

Seasonally Adjusted Taxable Real Estate Excise Activity

Total Total excl. sales >$10M

Source: ERFC; Monthly data through February 2019 preliminary

There were $1.0 billion in large commercial sales (>$10 million) in February, down from $1.87 billion in January.




Assessed value on existing properties increased between November, March 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

March November

Forecast


November forecast for growth in Market Value: 10.9%

Actual growth:12.6%

Every 1.0 percentage point increase in Market Value growth adds between $30-$40 million in revenue per year




Cannabis revenue growth is expected to moderate

0

5

10

15

20

25

30

35

40

2015 2016 2017 2018 2019 2020

Millio

ns

Retail Cannabis Collections

Forecast Actual

Source: ERFC March 2019 forecast; historical data through February 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 $247 $272 $291

Non-GF $501 $527 $545

Total $749 $799 $836

Total change since November forecast:

• 2017-19+$0.02M

• 2019-21+$1.67M

• 2021-23-$2.85M

* Detail may not add to total due to rounding




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

November 2018 Forecast*

Non-economic Change

Forecast Change

March 2019 Forecast

Total Change#

General Fund-State

$43,926 $0 $256 $44,182 $256

Education Legacy Trust Account

$1,591 $0 $51 $1,642 $51

WA Opportunity Pathways Account

$282 $0 $0.2 $282 $0.2

Total Near GF-S

$45,799 $0 $307 $46,106 $307

$Millions

* Forecast for the 2017-19 biennium adopted November 20, 2018# Detail may not add to total due to rounding

As of March 11, General Fund-State collections were $245.0 million higher than the November forecast.




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

November 2018 Forecast*

Non-economic Change

Forecast Change

March 2019 Forecast

Total Change#

General Fund-State

$49,064 $115 $430 $49,609 $545

Education Legacy Trust Account

$672 $0 $1 $673 $1

WA Opportunity Pathways Account

$266 $0 $8 $274 $8

Total Near GF-S

$50,002 $115 $439 $50,555 $553

* Forecast for the 2019-21 biennium adopted November 20, 2018# Detail may not add to total due to rounding

$Millions




Near GF-S forecast changes by source

-$50

$50

$150

$250

$350

$450

$550

2017 - 19 2019 - 21 2021 - 23

Millio

ns

Rev Act ex SSB 5581 SSB 5581 Prop Tax REET All Other

+$307 M +$554 M +$564 M

Source: ERFC March 2019 forecast




2017-19 Biennium alternative General Fund-State forecasts

2017-19

Biennium

Difference From the baseline#

March 2019 Baseline (70%) $44,182

March 2019 Alternative Forecasts

Optimistic (15%) $44,413 $231

Pessimistic (15%) $43,938 ($243)

Probability Weighted Average $44,180 ($2)

GCEA* $44,198 $17

$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

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, March 2019

4.3%5.5%

Near General Fund-State Revenue

7.5%

6.3%

10.1%

8.2%3.1%

4.6%3.4%

3.4%

1.7%




Conclusion

• Economic forecasts are only slightly changed from November

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

• Threats to economic expansion include concerns about international trade and fiscal policy, geopolitical risks and a maturing expansion

• GF-S revenues are expected to grow 15.3% between the 2015-17 and 2017-19 biennia and 12.3% 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

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