WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL Model Overview and September Forecast Update...

WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL

Model Overview and September Forecast Update

Presented toSeattle Economics Council

Steve LerchChief Economist & Executive Director

October 10, 2012Seattle, Washington

October 10, 2012 Washington State Economic and Revenue Forecast Council

MODEL OVERVIEW


ERFC’s US economic model

ERFC U.S. Forecast

Blue chip consensus

GDP

Global Insight model

Brent & WTI

futures prices


ERFC’s Washington economic model

U.S. Economic Forecast

Other Exogenous

EmploymentWage Rates Nonwage Income

Wage & Salary Disbursements

Population & Housing

Personal Income

This model was reviewed by Global Insight in 2007-08


Revenue Act model overview

QBR data on taxable activity (5 month lag)

DOR data on credits, refunds, remittances

(1 month lag)State and National Economic Models

Quarterly forecast of activity

Bimonthly forecast of credits, refunds

remittances

Bimonthly forecast of receipts

(1st through 10th, 11th through EOM)

B&O, RST, Use and Public Utility are broken into 40 components (some small sources like semiconduct-ors and nuclear waste disposal are forecasted exogenously)

Liquor tax forecast is a work in progress due to recent privatization


Any recent changes to modeling?

• Kalman filter applied to state employment data (as of March 2011)

• Include both West Texas Intermediate and Brent futures prices to forecast “refiner’s acquisition” price

• Revising liquor tax model

• Re-examining potential for greater aggregation in revenue model


Oct Nov Dec Jan Feb Mar-4

-2

0

2

4

6

8

10

Monthly WA Private Employment Change

Benchmark ERFC Unfiltered Kalman Filtered

Th

ou

sa

nd

s

Source: WA State ESD, ERFC; data through August 2012

Filtering has improved estimates

Kalman filtered data has been closer in 16 out of 18 months

Average absolute error is 700 jobs lower in filtered data


Filtered estimates show less employment

Nov Dec Jan Feb Mar Apr May Jun Jul Aug2,830

2,840

2,850

2,860

2,870

2,880

2,890

Washington Total Nonfarm Employment, SA

Filtered Unfiltered

T h o u s a n d s

Source: WA State ESD, ERFC; data through August 2012

Filtered estimates are 6,000 lower in August

4,200 of the difference is from the June estimate


Global Insight expects oil prices to normalize soon but the futures markets do not

2007

2007Q2

2007Q3

2007Q4

2008

2008Q2

2008Q3

2008Q4

2009

2009Q2

2009Q3

2009Q4

2010

2010Q2

2010Q3

2010Q4

2011

2011Q2

2011Q3

2011Q4

2012

2012Q2

2012Q3

2012Q4

2013

2013Q2

2013Q3

2013Q4

2014

2014Q2

2014Q3

2014Q4

2015

2015Q2

2015Q3

2015Q4

-10

-5

0

5

10

15

20

25

Oil Price Spreads

GI (Avg. Imported less WTI) Futures (Brent less WTI)

Dollars

Per

Barr

el

The mechanisms for prices to return to normal include the reversal of the Seaway oil pipeline beginning today and expanding through mid-2014 plus construction of the southern leg of the Keystone pipeline by late 2013.

Global Insight’s forecast shows that they expect prices to be normal by mid-2013 but the futures market show inverted prices through 2015 at least.

Source: CME Group, IntercontinentalExchange, Inc., Global Insight, ERFC; data through first quarter, 2012


Global Insight expects a sharp drop in oil prices this year

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

2015

2015

2015

2015

25

50

75

100

125

Average Refiner’s Acquisition Priceof Crude Oil

Sept. Global Insight September June

Dollars

per

barr

el

Forecast

Source: DOE, ERFC September 2012 forecast; historical data through 2012Q2

The average refiner’s acquisition price is the oil price variable that affects the overall forecast. It is driven mainly by global prices but is also affected by the WTI price.

The latest futures prices indicate that oil will decline sooner and more rapidly than expected in February. Of course, the outlook for oil remains fluid.


Revenue for liquor sales has been volatile

2006 2007 2008 2009 2010 2011 201210000

12000

14000

16000

18000

20000

22000

24000

Liquor Sales and Liter Taxes, SA

Actual June Forecast

M il li o n s o f d o ll a r s

Source: DOR, ERFC; data through August 2012

We have raised our forecast by $10.9 million this biennium

Revenue was $4.0 million (6.4%) above the June forecast


When it came to the Great Recession, forecasters were all in the same boat

Two German economists put together a database of 50 economic models, including models that are used at institutions like the IMF, ECB and the Fed, and in academia

These are forecasts of real GDP growth produced by the models based on the data available at the given dates compared to the actual growth through 2010


Data revisions create forecasting difficulties

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

245

250

255

260

265

270

275

Washington Personal Income

recession 2 Years Ago Year Ago

Billions

of

USD

Source: BEA; data through 2012 Q2


Forecast errors: economic vs. revenue model?

Forecast Analysis: Major Tax Sources, 2009-11 Biennium, $ Millions

(Retail sales, business & occupation, use, public utility, real estate excise)

Forecast Error

Forecast Date

Actual Forecast*

Forecast w/ June 2011 Economic

Data*

Actual Collections

less Amnesty

Total Economic Other

Nov-08 25,422 21,608 20,801 4,621 3,814 807

Nov-09 22,999 21,311 20,801 2,198 1,688 510

Nov-10 21,134 21,314 20,801 333 -180 513

*Corrected for subsequent non-economic changes excluding amnesty program


FORECAST UPDATE


The state’s risk matrix shows most risks from outside state

Wash

ing

ton

’s

Eco

nom

y

EUROPESovereign Debt

EUROPEBanks

U.S.Banks

• Fiscal Cliff • Election cycle• Iran’s effect on oil

Housing and construction, Exports

State of Washington

PlusesAerospaceSoftware

MinusesState & Local Government

Source: ERFC

EuropeanRecession

AsiaSlowdown

U.S.Trade


U.S. GDP Forecast Slightly Lower

2011 2012 2013 2014 201512,500

13,000

13,500

14,000

14,500

15,000

Blue Chip Consensus Real GDP forecast

June September

Billions

of

2005 D

ollars

Source: BEA, Blue Chip Economic Indicators September 2012; historical data through 2011


WA Personal Income Forecast Slightly Higher

2011 2012 2013 2014 2015240

250

260

270

280

290

300

310

Washington Real Personal Income

June September

Billions

of

2005 D

ollars

Source: BEA, ERFC September 2012 Forecast; historical data through 2011


WA Employment Forecast Slightly Higher

2011 2012 2013 2014 20152,700

2,750

2,800

2,850

2,900

2,950

3,000

3,050

3,100

Washington Nonfarm Payroll Employment

June September

Thousa

nds

Source: WA State ESD, ERFC September 2012 Forecast; historical data through 2011


The decline in employment has been severe

0123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657

-200

-150

-100

-50

0

50

100

150

200

250

Washington Employment after Business Cycle Peak

1990 2001 2007-09Months

Thousands

Source: WA ESD, ERFC; data through August 2012

83K


Oil prices are expected to decline

2005

2005

2005

2005

2006

2006

2006

2006

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

2015

2015

2015

2015

25

50

75

100

125

Average Price of Crude Oil

September June

Dollars

per

barr

el

Forecast

Source: DOE, ERFC September 2012 forecast; historical data through 2012Q2


Small business optimism is slowly improving

2006 2007 2008 2009 2010 2011 201275

80

85

90

95

100

105

Small Business Optimism IndexIn

dex, 1986=

100

Source: National Federation of Independent Business; data through August 2012


Consumers continue to deleverage

1980

1981

1983

1984

1986

1987

1989

1990

1992

1993

1995

1996

1998

1999

2001

2002

2004

2005

2007

2008

2010

2011

14

15

16

17

18

19

20

Total U.S. Household Debt Service and Financial Obligations as % of Disposable Personal Income

Perc

ent

Source: Board of Governors of the Federal Reserve System, data through 2012Q2


Washington construction employment will remain below trend throughout the forecast

19901990199019901991199119911991199219921992199219931993199319931994199419941994199519951995199519961996199619961997199719971997199819981998199819991999199919992000200020002000200120012001200120022002200220022003200320032003200420042004200420052005200520052006200620062006200720072007200720082008200820082009200920092009201020102010201020112011201120112012201220122012201320132013201320142014201420142015201520152015100

125

150

175

200

225

Washington Construction Employment

Trend, 1990-2012:2 Employment

Thousa

nds

Forecast

Source: ERFC September 2012 forecast; historical data through 2012Q2


State and local government employment will remain weak

19901990199019901991199119911991199219921992199219931993199319931994199419941994199519951995199519961996199619961997199719971997199819981998199819991999199919992000200020002000200120012001200120022002200220022003200320032003200420042004200420052005200520052006200620062006200720072007200720082008200820082009200920092009201020102010201020112011201120112012201220122012201320132013201320142014201420142015201520152015300

325

350

375

400

425

450

475

500

Washington State and Local Government Em-ployment

Trend, 1990-2012:2 Employment

Thousa

nds

Forecast

Source: ERFC September 2012 forecast; historical data through 2012Q2


Housing permits relative to population will still be below historic levels in 2015

1969 1972 1976 1980 1984 1987 1991 1995 1999 2002 2006 2010 20140

2

4

6

8

10

12

14

16

18

20

Washington Housing Permits per 1,000 People

Source: U.S. Census Bureau, ERFC September 2012 Forecast; historical data through 2012 Q2

Forecast


Revenue collections have been weak compared to past recoveries

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19-15

-10

-5

0

5

10

15

20

25

30

35

Revenue Act Collections after Business Cycle Peak

1990 2001 2007-09Quarters

Cum

ula

tive G

row

th (

perc

ent)

Source: ERFC; data through 2012 Q2


Revenue Act collections are still on an upward trend

Source: DOR and ERFC; monthly data through estimated July 2012 activity

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

2002200220022002200220022002200220022002200220022003200320032003200320032003200320032003200320032004200420042004200420042004200420042004200420042005200520052005200520052005200520052005200520052006200620062006200620062006200620062006200620062007200720072007200720072007200720072007200720072008200820082008200820082008200820082008200820082009200920092009200920092009200920092009200920092010201020102010201020102010201020102010201020102011201120112011201120112011201120112011201120112012201220122012600

700

800

900

1000

$millions SA

Revenue Act Revenue 3-Month Moving Average

Collections were up 3.4% year-over-year in the August 11 - September 10, 2012 collection period.

Collections through September 10 were $15 million (0.5%) lower than forecasted.


WA sales tax growth still moderate

2004 2005 2006 2007 2008 2009 2010 2011 2012450

500

550

600

650

700

Washington Retail Sales Tax Receipts

Retail Sales Tax 3-Month Moving Average

$Millions, SA

Source: ERFC; Monthly data through July 2012 preliminary activity

Adjusted for large payments/refunds, amnesty payments and taxpayer reporting frequency change

Preliminary seasonally adjusted sales tax receipts were up 4% year-over-year for July activity.


B&O tax growth has slowed from its prior pace

2004 2005 2006 2007 2008 2009 2010 2011 2012160

180

200

220

240

260

280

300

Washington B&O Tax Receipts

B&O Tax 3-Month Moving Average

$Millions, SA

Adjusted for taxpayer frequency shift, amnesty payments, and recent large refunds

Source: ERFC; Monthly data through July 2012 preliminary activity

Preliminary seasonally adjusted business and occupation tax receipts were up 6% year-over-year for July activity.


REET activity since April has been boosted by large commercial sales

1996 1998 2000 2002 2004 2006 2008 2010 20120

1

2

3

4

5

6

7

8

9

10

Seasonally Adjusted Taxable Real Estate Excise Activity$Billions

Source: ERFC; Monthly data through August 2012 preliminary


Forecast changes: General Fund State, 2011-2013 Biennium

September Forecast

Collection Experience

Forecast Change Forecast

Total Change*

Dept. of Revenue

$20 $24 $28,824 $44

All other agencies

$1 ($16) $1,646 ($15)

Total GF-S $21 $8 $30,469 $29

* Detail may not add to total due to rounding

June Forecast:

$30,440 million

USD millions


Forecast revisions to the 2011-13 biennium

Feb-10

Jun-10

Sep-10

Nov-10

Mar-11

Jun-11

Sep-11

Nov-11

Feb-12

Jun-12

Sep-12

Forecast

27,000

29,000

31,000

33,000

35,000

32,224

30,469

1,858

669

809

698 183

1,413 122

96 156 29

USD, millions

Source: ERFC September 2012 forecast

GF-S

New Definition


Forecast changes: General Fund State, 2013-2015 Biennium

September Forecast

Non-economic Change

Forecast Change Forecast

Total Change*

Dept. of Revenue

$0 $39 $31,114 $39

All other agencies

$0 ($15) $1,535 ($15)

Total GF-S $0 $23 $32,649 $23


June Forecast:

$32,626 million

USD millions


Initial Forecast: General Fund State, 2015-2017 Biennium

USD Millions


Forecast ($millions)

Dept. of Revenue $34,102

All other agencies $1,416

Total GF-S $35,518

The 2015-17 biennial forecast is 8.8% higher than the 2013-15 forecast


General Fund* forecast by fiscal year

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY1710000

11000

12000

13000

14000

15000

16000

17000

18000

19000

20000$billions

Forecast

8.0%1.2%

(9.6%)(4.1 %)

7.9%

*General Fund & Related Funds for FY 07-09, General Fund – new definition for FY 10-13Source: ERFC forecast, September 2012

1.6%4.7%

General Fund-State RevenueFY 2011 revenues were boosted by the tax amnesty program and one-time transfers of non-GF-S funds into the GF-S

2.3%

4.8%

3.9%

4.5%


Real Per Capita General Fund*-State Revenue

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17$1,000

$1,500

$2,000

$2,500

Per Capita GF-S*, $2005

Forecast3.8%

(11.7%)

(6.1%)

4.7%

Source: ERFC forecast, September 2012

(2.0%)1.5%

(3.2%)

* General Fund & Related Funds for FY 2007-2009

General Fund – new definition, for FY 2010-2015

1.5 %(0.7%)

0.6 % 1.3 %


Conclusion

• The forecast for the 2011-13 Biennium is $29 million higher than in June

• The forecast for the 2013-15 Biennium is $23 million higher than in June

• Revenues are expected to grow 8.0% between the 2009-11 and 2011-13 biennium and 7.2% between the 2011-13 and 2013-15 biennium

• As in June, an extended period of slow economic and job growth is expected for both the national and state economies

• The level of uncertainty in the baseline remains extremely high, and downside risks outweigh upside risks


Questions

Economic & Revenue Forecast Council1025 E. Union Avenue, Suite 544Olympia WA 98504-0912

www.erfc.wa.gov360-534-1560

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WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL Model Overview and September Forecast Update...

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