WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
Economic and Revenue Update
Presented toWashington State CCIM Chapter
Steve LerchExecutive Director
April 12, 2017Bellevue, Washington
Economic & Revenue Update
April 12, 2017
Slide 1
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast Process in Washington State
ERFC
Council hires Executive Director for three year term
Director hires staff
Total staff of five
Economic and Revenue
Forecast Council
Office of the
Forecast CouncilGovernor's Council
of
Economic Advisors
Forecast
Work Group
Economic & Revenue Update
April 12, 2017
Slide 2
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• Our forecast continues to call for moderate U.S. economic growth
• We anticipate two additional interest rate hikes by the Federal Reserve this year
• The WA economy continues to outperform the U.S. economy
• Seattle area inflation remains above the national average due to housing costs
• Risks to the baseline include slow global and U.S. economic growth, weak labor productivity growth and uncertainty regarding fiscal and trade policy
Economic & Revenue Update
April 12, 2017
Slide 3
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Economic news continues to suggest risks to forecast
- Employment continues to expand
- Consumer spending growing at
moderate pace
- Small business optimism improving
- Manufacturing, business investment
showing improvement
- Slower 2016 economic growth in
developed countries
- Negative impact of stronger dollar on
exports
- Declining labor force participation
- Slow growth in labor productivity
Economic & Revenue Update
April 12, 2017
Slide 4
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0
1
2
3
4
5
6
7
8
9
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016 2017
YTD
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
WA job creation very strong in 2016; for U.S., slightly weaker than 2015
Source: Bureau of Labor Statistics, ERFC; data through Feb. 2017
Economic & Revenue Update
April 12, 2017
Slide 5
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Inflation-adjusted U.S. wage growth remains slow
-8
-6
-4
-2
0
2
4
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
% c
han
ge
Year-over-year Growth in U.S. Real Hourly Wages and Total Weekly Hours
Total weekly hours Real hourly wages
Source: U.S. Bureau of Labor Statistics; data through Feb. 2017
Economic & Revenue Update
April 12, 2017
Slide 6
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
February U.S. retail and food service sales were 5.7% above February 2016
250,000
300,000
350,000
400,000
450,000
500,000
2005 2006 2007 2009 2010 2011 2013 2014 2015 2017
$ m
illion
s
Monthly U.S. sales, SA
Retail & food services Excluding Autos
Source: U.S. Census Bureau, data through February 2017
Economic & Revenue Update
April 12, 2017
Slide 7
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Small business optimism and sales expectations jumped in December, remains elevated
70
75
80
85
90
95
100
105
110
-40
-30
-20
-10
0
10
20
30
40
2006 2008 2010 2012 2014 2016
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 February 2017
Economic & Revenue Update
April 12, 2017
Slide 8
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
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 Mar. 2017
Economic & Revenue Update
April 12, 2017
Slide 9
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Manufacturing: slowing in
Washington, improving nationally
25
30
35
40
45
50
55
60
65
70
75
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
In
dex,
50
+ =
gro
wth
Institute of Supply Management Index
Washington United States
Source: ISM; U.S. data through Mar. 2017; WA data through Feb. 2017
Economic & Revenue Update
April 12, 2017
Slide 10
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Developed country economies slowed in 2016
-4
-3
-2
-1
0
1
2
3
4
5
6
7
2002 2004 2006 2008 2010 2012 2014 2016Percen
t ch
an
ge
Annual real GDP growth
Developed economies World
Source: Organization for Economic Cooperation and Development; data through 2016
Economic & Revenue Update
April 12, 2017
Slide 11
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The dollar has increased in value relative to currencies of U.S. trading partners
80
90
100
110
120
130
140
2010 2011 2012 2013 2014 2015 2016 2017
Trade-weighted Dollar, 1997 = 100
Source: Federal Reserve; data through March 2017
Economic & Revenue Update
April 12, 2017
Slide 12
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA exports have declined for two consecutive years
-25
-20
-15
-10
-5
0
5
10
15
20
25
China Canada Japan All other
Y-O
-Y p
ercen
t ch
an
ge
Year-over-year growth in export value
2013 2014 2015 2016
Source: WISERTrade; data through December 2016
Economic & Revenue Update
April 12, 2017
Slide 13
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Components of change in labor force participation rate, 2007Q4 to 2016Q4
-4% -3% -2% -1% 0% 1% 2%
Total
Aging population
In school
Health problems
Want job, not looking
Later retirement
Source: U.S. Bureau of Labor Statistics, Federal Reserve Bank of Atlanta
Labor force participation rate = % of population age 16+ working or looking for a job
Economic & Revenue Update
April 12, 2017
Slide 14
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Labor productivity growth 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, nonfarm business, year over year % change
Source: U.S. Bureau of Labor Statistics, data through 2016 Q4
Economic & Revenue Update
April 12, 2017
Slide 15
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington vs U.S. employment growth: Feb. 2016 to Feb. 2017
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
U.S. WA
Source: Employment Security Dept., ERFC; data through February 2017
Economic & Revenue Update
April 12, 2017
Slide 16
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Personal income has been growing faster in WA than for U.S. as a whole
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
2005 2006 2007 2008 2010 2011 2012 2013 2015 2016
20
05
Q1
= 1
.0
Growth in WA, U.S. personal income since 2005Q1
WA U.S.
Source: U.S. Bureau of Economic Analysis, data through 2016 Q3
Economic & Revenue Update
April 12, 2017
Slide 17
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Employment growth varied widely across state metro areas
0%
1%
1%
2%
2%
3%
3%
4%
4%
2016 employment growth by metro area
Source: WA State Employment Security Department
Economic & Revenue Update
April 12, 2017
Slide 18
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
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
3,000
3,500
4,000
2000 2002 2004 2006 2008 2010 2012 2014 2016
Th
ou
san
ds,
WA
(S
AA
R)
Th
ou
san
ds,
U.S
. (S
AA
R)
U.S. WA
Source: U.S. Census Bureau, data through February 2017
Economic & Revenue Update
April 12, 2017
Slide 19
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA population growing faster than U.S. due to in-migration
0.95
1
1.05
1.1
1.15
1.2
2007 2009 2011 2013 2015 2017 2019 2021
In
dex,
20
07
= 1
.0
WA, U.S. population growth since 2007
WA U.S.
Source: ERFC March 2017 forecast
Forecast
Economic & Revenue Update
April 12, 2017
Slide 20
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Seattle home prices have been rising much faster than prices nationally
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016
Year-over-year house price change, SA
Seattle U.S.
Source: S&P/Case-Shiller; data through Jan. 2017
Economic & Revenue Update
April 12, 2017
Slide 21
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Construction accounts for a larger share of employment in WA than the U.S.
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Construction share of nonfarm employment
U.S. WA
Sources: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through Feb. 2017
Economic & Revenue Update
April 12, 2017
Slide 22
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA apartment construction activity has moderated after an unusually strong 2016 Q4
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2008 2009 2010 2011 2012 2013 2014 2015 2016
Square
feet,
thousands (
SAAR)
Tota
l valu
e,
$ m
illions (
SAAR)
Construction contracts - apt. buildings , 3 MMA, SAAR
Total value Square feet
Source: Dodge, ERFC; data through Feb. 2017
Economic & Revenue Update
April 12, 2017
Slide 23
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA commercial construction activity heading up during last half of 2016, slowed in February
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2008 2009 2010 2011 2012 2013 2014 2015 2016
Sq
uare f
eet,
th
ou
san
ds (
SA
AR
)
$ m
illio
ns (
SA
AR
)Construction contracts – nonresidential commercial,
3 MMA, SAAR
Value Sq. feet
Source: Dodge, ERFC; data through Feb. 2017
Includes office, retail, hotels, restaurants, warehouses
Economic & Revenue Update
April 12, 2017
Slide 24
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
GDP growth is expected to improve from last year’s 1.6% growth rate
-4
-3
-2
-1
0
1
2
3
2007 2009 2011 2013 2015 2017 2019 2021
Percen
tReal U.S. GDP Growth Rates
History March Forecast
Source: U.S. Bureau of Economic Analysis, ERFC March 2017 forecast; historical data through 2016
Economic & Revenue Update
April 12, 2017
Slide 25
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil prices are slightly lower in 2018-2021 compared to November
20
30
40
50
60
70
80
90
100
110
120
2007 2009 2011 2013 2015 2017 2019
Do
llars P
er B
arrel
Average Price of Crude Oil
March November
Source: DOE, ERFC March 2017 forecast; historical data through 2016Q4
Forecast
Economic & Revenue Update
April 12, 2017
Slide 26
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Two more Federal Reserve interest rate increases assumed for this year
3
3.5
4
4.5
5
5.5
6
6.5
2007 2009 2011 2013 2015 2017 2019 2021
30 year fixed mortgage rates
March November
Forecast
Source: ERFC March 2017 forecast, historical data through 2016
Economic & Revenue Update
April 12, 2017
Slide 27
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is slightly higher compared to the November forecast
200
250
300
350
400
450
500
550
2013 2014 2015 2016 2017 2018 2019 2020 2021
Billio
ns o
f D
ollars
Washington Personal Income
March November
Source: ERFC March 2017 forecast; historical data through 2015
Economic & Revenue Update
April 12, 2017
Slide 28
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment forecast is slightly higher 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
2007 2009 2011 2013 2015 2017 2019 2021
ThousandsWashington Nonfarm Payroll Employment
March November
Source: ERFC March 2017 forecast; historical data through 2016
The WA nonfarm employment forecast is 26,000 jobs higher by 2021 compared to November
Economic & Revenue Update
April 12, 2017
Slide 29
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington Employment Trends
0 10 20 30 40 50 60 70 80
All Other
Aerospace Manufacturing
Local Govt. ex Education
Other Services
Financial Activities
Wholesale Trade
Transp. & Warehousing
Information
Manuf ex Aerospace
State, Local Govt Education
Admin & Support Services
Health Care
Prof, Scientific, Tech Services
Construction
Leisure & Hospitality
Retail Trade
Employment Change since Trough (thousands)
Washington has gained 477,000 nonfarm jobs since February 2010
Source: U.S. Dept. of Labor, BLS, ESD, ERFC; data through Feb. 2017
Economic & Revenue Update
April 12, 2017
Slide 30
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington housing permits forecast is higher in the near term compared to November
20
25
30
35
40
45
2013 2014 2015 2016 2017 2018 2019 2020 2021
Th
ou
san
ds
Washington Housing Permits
March November
Source: ERFC March 2017 forecast; historical data through 2016
Fourth quarter 2016 saw a spike in multi-family building permits which is expected to moderate
Economic & Revenue Update
April 12, 2017
Slide 31
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
After slowing slightly in the last half of 2016, Revenue Act collections for January activity were strong
Source: DOR and ERFC; monthly data through estimated January 2017 activity
* Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act
650
750
850
950
1,050
1,150
1,250
2002 2004 2006 2008 2010 2012 2014 2016
$millions SA
Revenue Act Collections 3-Month Moving Average
Economic & Revenue Update
April 12, 2017
Slide 32
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Large commercial property sales continue to have major impact on REET collections
-
5
10
15
20
25
1990 1993 1996 1999 2002 2005 2008 2011 2014
$ B
illio
ns
Taxable real estate sales, SA
Excl. Comm'l. Sales >$10M WA total
Source: ERFC, data through 2016 Q4
Large commercial property sales over $10 million totaled $563 billion in January and $573 million in February.
Economic & Revenue Update
April 12, 2017
Slide 33
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Both the number of real estate transactions and the average value per transaction are trending up
40
50
60
70
80
90
100
$50
$100
$150
$200
$250
$300
$350
1990 1994 1998 2002 2006 2010 2014
Th
ou
san
ds o
f Tran
sacti
on
s
Avg
. $
per t
axab
le s
ale
, th
ou
san
ds
Taxable real estate transactions
Value per transaction Transactions
Source: ERFC, data through 2016 Q4
Economic & Revenue Update
April 12, 2017
Slide 34
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The price of cannabis has continuedto fall
6
8
10
12
14
16
18
20
22
24
26
Jul-14 Jul-15 Jul-16
Do
llars p
er g
ram
Retail Price (includes 37% excise tax)
Source: LCB, ERFC; data through February 2017
Economic & Revenue Update
April 12, 2017
Slide 35
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Cannabis sales growth has stalled
30
35
40
45
50
55
60
65
70
75
80
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
$ M
illio
ns
Retail Cannabis Sales (pre-tax)
Recreational Medical
Source: LCB, ERFC; data through January 2017
Economic & Revenue Update
April 12, 2017
Slide 36
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• WA personal income and employment forecasts are slightly higher than in November; WA and U.S. housing are lower
• As has been the case for some time, Washington’s economy is continuing to outperform the nation
• Operating budget revenues are expected to grow 13.5% between the 2013-15 and 2015-17 biennia and 6.8% between the 2015-17 and 2017-19 biennia
• The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks
Economic & Revenue Update
April 12, 2017
Slide 37
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast CouncilPO BOX 40912Olympia WA 98504-0912
www.erfc.wa.gov360-534-1560