state economic & revenue outlook apr 2009 · 10/10/2018 · seasonally adjusted taxable real...

WASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCILWASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCIL

Current Forecast

Presented toCitizens’ Commission on Salaries for

Elected Officials

Steve Lerch

Executive Director

October 10, 2018

Olympia, Washington

Commission on Salaries

October 10, 2018

Slide 1

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Summary

• The economic forecast for the U.S. is very similar to the June forecast

• The economic forecast for WA has higher personal income and employment than the June forecast

• 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 $348 million


October 10, 2018

Slide 2


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

• Geopolitical risks: North Korea, China, Russia, Iran, Venezuela

• Impact of rising interest rates

• Maturing economic expansion


October 10, 2018

Slide 3


Consumer confidence remains at an elevated level

0

25

50

75

100

125

150

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 September 2018


October 10, 2018

Slide 4


Household net worth reached a record $107 trillion in second quarter of 2018

500

550

600

650

700

750

2000 2003 2006 2009 2012 2015 2018

Percen

t

Household net worth as % of disposable personal income

Source: Federal Reserve Bank of St. Louis, data through 2018 Q2


October 10, 2018

Slide 5


Small business optimism and sales expectations remain above pre-recession levels

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 August 2018


October 10, 2018

Slide 6


Both WA and U.S. initial unemployment claims remain low

4

6

8

10

12

14

16

18

20

150

250

350

450

550

650

750

2007 2008 2010 2011 2013 2015 2016 2018

WA

Th

ou

san

ds

U.S

.Th

ou

san

ds

Weekly initial unemployment claims, SA

U.S. WA

Source: U.S. Bureau of Labor Statistics, WA Employment Security Dept., data through Sept. 29, 2018


October 10, 2018

Slide 7


Washington vs U.S. employment growth: August 2017 to August 2018

Total

Construction

Information

Prof/Business

Services

Leisure/

Hospitality

Educ/Health

Services

Retail Trade

Manufacturing

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

U.S. WA

Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through August 2018


October 10, 2018

Slide 8


Adjusted for inflation, hourly wage growth remains weak

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2007 2008 2009 2010 2011 2013 2014 2015 2016 2017

Year-over-year growth in U.S. real average hourly wages

Source: U.S. Bureau of Labor Statistics, monthly data through August 2018


October 10, 2018

Slide 9


So far this year, WA exports to Canada, Japan are up but exports to China are down

-25

-20

-15

-10

-5

0

5

10

15

20

25

China Canada Japan All other

YO

Y p

ercen

t ch

an

ge

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

2013 2014 2015 2016 2017 2018 YTD

Source: WISERTrade; data through July 2018

Total exports declined 3.9% in 2017 but increased 0.6% in fourth quarter 2017 and 3.9% in first quarter 2018 and 3.7% in second quarter 2018


October 10, 2018

Slide 10


Tariffs imposed on selected WA exports as of August 23rd

Product Country TariffWA 2017 exports

(millions)Ultrasonic Scanning Apparatus China 25% $ 281.5

Wheat China 25% $ 248.2

Apples, Fresh Mexico 20% $ 125.6

Apples, Fresh China 25% $ 17.6

Wood pulp China 25% $ 119.2

Iron or Non-alloy Bars, Rods Canada 25% $ 111.5

Hay, Clover, Vetches China 25% $ 101.9

Cherries, Fresh China 25% $ 99.7 Aluminum Plates Etc. >.2 mm EU 25% $ 78.8

Aluminum Plates Etc.> .2 mm Canada 10% $ 43.1 Aluminum Casks, Etc.< 300 Liters Canada 10% $ 56.9

Potatoes, Frozen China 25% $ 54.4

Potatoes, Frozen Mexico 20% $ 36.9 Source: WiserTrade, Economy.com


October 10, 2018

Slide 11


Interest rates are expected to rise gradually over the forecast period

0

1

2

3

4

5

6

7

2007 2009 2011 2013 2015 2017 2019 2021 2023

Percen

t30 year mortgage, Federal Funds Rates

30 yr mortgage Fed funds

Source: IHS Markit, ERFC September 2018 forecast; data through Q2 2018Note: Vertical black line indicates last actual

The forecast assumesthe rate will rise gradually, with mortgage rates eventually reaching 5.2% and Fed funds 3.4% in 2020.


October 10, 2018

Slide 12


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

-1.50

-0.50

0.50

1.50

2.50

3.50

4.50

1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

10 year – 3 month Treasury bond yields

Source: Federal Reserve Bank of St. Louis, data through Sept. 2018

As of September 2018, 10 year Treasury bond yields were 0.8% above three month Treasury bond yields


October 10, 2018

Slide 13


In recent survey, most economists saw downside risks to their forecast over the next 12 months

Forecast Risk, Next 12 Months

Balanced Upside Downside

Source: Wall Street Journal monthly economist survey, August 2018


October 10, 2018

Slide 14


WA employment growth continues to exceed the U.S.

0.95

1.00

1.05

1.10

1.15

1.20

1.25

2005 2006 2007 2009 2010 2011 2013 2014 2015 2017 2018

In

dex,

Jan

. 2

00

5 =

1.0

U.S. WA

Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through August 2018


October 10, 2018

Slide 15


WA personal income growth continues to grow faster than the nation as a whole

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2005 2006 2008 2009 2011 2012 2014 2015 2017

In

dex,

20

05

Q1

= 1

.0

U.S. WA

Source: U.S. Bureau of Economic Analysis; data through 2018 Q2

WA personal income grew by 4.8% in 2017 compared to a 3.1% growth rate for the U.S.


October 10, 2018

Slide 16


The real GDP forecast is very similar to the June forecast

15,000

16,000

17,000

18,000

19,000

20,000

21,000

2007 2009 2011 2013 2015 2017 2019 2021 2023

Billio

ns o

f 2

01

2 D

ollars

Real GDP

September

June

The level of real GDP is slightly higher than in June due to the comprehensive revision of the national income and product accounts.

The growth rates are virtually unchanged from the June forecast in 2018-23.

Source: IHS Markit, ERFC September 2018 forecast; data through Q2 2018Note: Vertical black line indicates last actual


October 10, 2018

Slide 17


Oil prices are very similar to the June 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

Refiners’ Acquisition Price of Crude Oil

September June

Source: Energy Information Administration, IHS Markit, ERFC September 2018 forecast; data through Q2 2018Note: Vertical black line indicates last actual


October 10, 2018

Slide 18


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 2022 2023

Billio

ns o

f U

SDWashington personal income

September June

Source: ERFC September 2018 forecast; historical data through 2017

First quarter 2018 personal income data were revised up after the June forecast


October 10, 2018

Slide 19


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

3,700

3,800

2007 2009 2011 2013 2015 2017 2019 2021 2023

ThousandsWashington Nonfarm Payroll Employment

September June

Source: ERFC September 2018 forecast; historical data through Q2 2018

The nonfarm employment forecast is 14,800 jobs higher (0.4%) this year and 29,000 jobs higher (0.8%) by 2023 compared to June.


October 10, 2018

Slide 20


Washington housing permits forecast is lower this year, higher for 2019 –2023 compared to June

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

September June

Source: ERFC September 2018 forecast; historical data through 2017


October 10, 2018

Slide 21


Federal tax cuts, Marketplace Fairness Act likely contributing to strong Rev Act growth this year

0%

2%

4%

6%

8%

10%

12%

2013 2014 2015 2016 2017 2018

Revenue Act, year-over-year growth (SA)

YOY growth Avg., 2013 to date

* Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act; DOR and ERFC, data through Sept. 2018 activity


October 10, 2018

Slide 22


Revenue Act collections growth has been strong

Source: DOR and ERFC; monthly data through July 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

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%

September 10, 2018 collections: 10.0%


October 10, 2018

Slide 23


Taxable REET activity may have peaked in Q1 2018

0

1

2

3

4

5

6

7

8

9

10

1996 2000 2004 2008 2012 2016

$Billions

Seasonally Adjusted Taxable Real Estate Excise Activity

Total Total excl. sales >$10M

Source: ERFC; Monthly data through August 2018 preliminary

Taxable activity in residential sales has been on a downward trend since March.

Large commercial sales (>$10 million) have slowed but have been over $2 billion per quarter in 2018.


October 10, 2018

Slide 24


The rapid growth in cannabis revenue is likely over

0

5

10

15

20

25

30

35

2015 2016 2017 2018 2019

Millio

ns

Retail Cannabis Collections

Forecast Actual

Source: ERFC September 2018 forecast; historical data through August 2018


October 10, 2018

Slide 25


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

June 2018 Forecast*

Non-economic Change

Forecast Change

September 2018 Forecast

Total Change#

General Fund-State

$43,532 $0 $275 $43,808 $275

Education Legacy Trust Account

$1,498 $0 $65 $1,563 $65

WA Opportunity Pathways Account

$258 $0 $8 $266 $8

Total Near GF-S

$45,288 $0 $348 $45,636 $348

$Millions

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

As of September 10, General Fund-State collections were $147 million higher than the June forecast.


October 10, 2018

Slide 26


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

June 2018 Forecast*

Non-economic Change**

Forecast Change

September 2018 Forecast

Total Change#

General Fund-State

$48,520 $38 $317 $48,875 $355

Education Legacy Trust Account

$582 $0 $87 $669 $87

WA Opportunity Pathways Account

$261 $0 $1 $262 $1

Total Near GF-S

$49,363 $38 $405 $49,806 $443

* Forecast for the 2019-21 biennium adopted June 19, 2018** Estimated increase in sales tax collections due US Supreme Court ruling of June 21, 2018.# Detail may not add to total due to rounding

$Millions


October 10, 2018

Slide 27


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 $268 $317

Non-GF $501 $530 $530

Total $749 $798 $847

Total change since June forecast:

• 2017-19+$0.1 M

• 2019-21-$0.2 M

• 2021-23-$4.0M

* Detail may not add to total due to rounding


October 10, 2018

Slide 28


2017-19 Biennium alternative General Fund-State forecasts

2017-19

Biennium

Difference From the baseline#

September 2018 Baseline (70%) $43,808

September 2018 Alternative Forecasts

Optimistic (15%) $44,402 $594

Pessimistic (15%) $43,138 ($669)

Probability Weighted Average $43,796 ($11)

GCEA* $43,619 ($189)

$Millions (cash basis)

*Based on the Governor’s Council of Economic Advisors’ economic assumptions#May not add to total due to rounding


October 10, 2018

Slide 29


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, September 2018

4.3%5.5%

Near General Fund-State Revenue

7.5%

6.3%

10.1%

6.1%

3.7%

4.5%3.5%

3.4%

1.7%


October 10, 2018

Slide 30


Conclusion

• WA personal income and employment are higher than in June

• 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 16.9% between the 2015-17 and 2017-19 biennia and 9.1% between the 2017-19 and 2019-21 biennia

• The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks


October 10, 2018

Slide 31


Questions

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

www.erfc.wa.gov360-534-1560

state economic & revenue outlook apr 2009 · 10/10/2018 · seasonally adjusted taxable real...

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