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WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
Economic & Revenue Outlook
Presented for2011 Yakima Economic Symposium
Lance CareyEconomist
July 8, 2011Yakima, Washington
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• The near term economic outlook has weakened since the March forecast.
• The impact from the devastation in Japan was worse than anticipated and the turmoil in the Middle East and North Africa has added to uncertainty in oil markets.
• We expect growth to pick up momentum later this year, as supply chain disruptions from Japan recede, and oil prices stabilize.
• This forecast changes expected GF–S revenues by
– Up $171 million this biennium (09-11)
– Down $183 million next biennium (11-13)
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Definition of a recession
Source: ERFC
Bad
Good
Time
Dec 2007
Jun 2009
Not to Scale
National Bureau of Economic Research (NBER) is the official arbiter of business cycles
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Economic & Revenue Outlook
08 July 2011
Slide 3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
This is the worst recession since WW II
RecessionPeak-to-trough decline Recession
DurationReal GDP Employmentpercent percent months
1948-49 1.6 5.0 11
1953-54 2.5 3.4 10
1957-58 3.1 4.2 8
1960-61 0.5 2.3 10
1969-70 0.2 1.2 11
1973-75 3.2 1.9 16
1980 2.2 2.3 6
1981-82 2.6 3.1 16
1990-91 1.4 1.4 8
2001 0.7 1.7 8
Average 1.8 2.6 10
2007-09 4.1 6.3 18
Source: NBER, ERFC
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 4 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Collections since March were $93 million above target because of the amnesty program
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
March Forecast Actual
Bil
lion
s,
US
D
Economic Amnesty Other Non-economic
$3.785
$3.878Amnesty:
March Forecast$85 Million
Collections$282 Million
Source: ERFC; data through June 10, 2011 Collections
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 5 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Excluding one-time factors, revenues were 3.8% below the March forecast
-6
-4
-2
0
2
4
6
1990 1994 1998 2002 2006 2010
Percen
tAverage Adjusted Monthly Variance
Source: ERFC; Based on collections through June 10, 2011
Including one time payments, overall revenue collections were $93 million above forecast
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 6 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The consensus near-term economic outlook has weakened since March
3.1
3.3
3.2
2.6
3.13.2
2.0
2.5
3.0
3.5
2011 2012 2013
Percen
tBlue Chip Consensus GDP forecast
March June
-0.5
-0.2
Source: Blue Chip Economic Indicators, data through June 2011
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 7 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Private sector job gains slipped in May
-50
0
50
100
150
200
250
300
January February March April May
Th
ou
san
ds
U.S. Monthly Employment Growth, 2011
Private Public
Source: BLS; data through May 2011
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 8 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
This has been the slowest recovery in U.S. employment
-10
-8
-6
-4
-2
0
2
4
6
0 5 10 15 20 25 30 35 40
Millio
ns
Months
U.S. Employment after Business Cycle Peak
1981-82 1990 2001 2007-09
Source: BLS, WA ESD, ERFC; data through May 2011
Peak to trough job losses
1981-82:
2.6% of labor force
This time:
5.7% of labor force
6.9 Million
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Economic & Revenue Outlook
08 July 2011
Slide 9 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Employment should pick up as labor productivity growth declines
-6
-4
-2
0
2
4
6
8
1991 1995 1999 2003 2007 2011
Percen
t ch
an
ge (
Y/
Y)
U.S. Employment & Labor Productivity Growth
Employment Productivity
Source: BLS; data through 2011 Q1
Any increase in final demand will translate to job growth
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 10 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Consumer demand is weak
-4
0
4
8
12
16
0 2 4 6 8 10 12 14
Cu
mu
lati
ve G
ro
wth
(p
ercen
t)
Quarters
U.S. Consumption after Business Cycle Peak
1981-82 1990 2001 2007-09
Source: BEA, ERFC; data through 2011 Q1
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Economic & Revenue Outlook
08 July 2011
Slide 11 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Exports are growing faster than imports
-20
-15
-10
-5
0
5
10
15
1993 1996 1999 2002 2005 2008 2011
Percen
t ch
an
ge (
Y/
Y)
Export growth minus Import growth
Export growth minus Import Growth 6 MMA
Source: Census Bureau, U.S. Balance of Payments Account; data through April 2011
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Economic & Revenue Outlook
08 July 2011
Slide 12 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
GDP and consumer spending growth slowed in Q1
-8
-6
-4
-2
0
2
4
6
2006 2007 2008 2009 2010 2011
20
05
$Percent growth, SAAR
Real GDP Real Consumer Spending
Source: BEA, data through 2011 Q1, third estimate
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 13 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Manufacturing and service sector growth is slowing
30
35
40
45
50
55
60
65
70
2001 2003 2005 2007 2009 2011
Institute of Supply Management Index
Services Manufacturing
Source: Institute of Supply Management; data through June 2011
An index greater than 50, implies growth
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 14 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Consumer confidence is showing signs of softening
25
50
75
100
125
150
1980 1985 1990 1995 2000 2005 2010
Index
Mich: 1966Q1 = 100, SAConf Board: 1985 =100, SA
U Mich Conf Board
Source: University of Michigan; Conference Board, data through June 2011
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 15 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Gas prices are retreating, but remain high
0
20
40
60
80
100
120
140
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1990 1993 1996 1999 2002 2005 2008 2011
Pric
e p
er b
arrel
Pric
e p
er g
all
on
U.S. Average Gas and WTI Crude Oil Prices
Gas Crude Oil
Source: U.S. Energy Information Administration; data through June, 2011
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Economic & Revenue Outlook
08 July 2011
Slide 16 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
-3.0
0.0
3.0
6.0
9.0
12.0
15.0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Percent
Consumer Price IndexY/Y Percent Change
All-items Core
Source: BLS; data through May 2011
All-items inflation is ticking up, but the “core” remains stable
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Economic & Revenue Outlook
08 July 2011
Slide 17 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. LMV sales slowed in May and June...
0
6
12
18
24
30
0
5
10
15
20
25
1990 1994 1998 2002 2006 2010
WA
New
Veh
icle
Reg
istr
ati
on
s,
Th
ou
san
ds,
3 M
MA
, S
A
Millio
n U
nit
s,
SA
AR
U.S. Light Trucks U.S. Cars WA New Vehicle Registrations
Source: Autodata Corporation, WA DOL; data through June 2011
U.S. LMV sales fell 10.4% in May
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Economic & Revenue Outlook
08 July 2011
Slide 18 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
... as Japanese brands were hit by supply chain disruptions
-15
-10
-5
0
5
10
15
20
25
2011 YTD June 2011
Percen
tY/Y percent Change in Car Sales
Big 3 Japanese All Other
Source: Autodata Corporation, data through June 2011
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Economic & Revenue Outlook
08 July 2011
Slide 19 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
This is WA’s worst downturn in non-residential construction in 30 years
-40
-30
-20
-10
0
10
20
30
40
50
1981 1985 1989 1993 1997 2001 2005 2009
Percen
tNon-Residential Contract Value
Annual Percent Change
Source: McGraw-Hill Construction, data through May 2011
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Economic & Revenue Outlook
08 July 2011
Slide 20 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Home prices continue to decline
-25
-20
-15
-10
-5
0
5
10
15
20
25
2001 2003 2005 2007 2009 2011
Percen
t
Case Shiller Home Price Index, SAYear-over-Year % Change
Seattle Composite 20
Apr 2011
U.S is down 3.9%
SEA is down 6.9%
Source: S&P/Case-Shiller; data through April 2011
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 21 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2008 2009 2010 2011
Percen
tSeriously Delinquent
Washington U.S.
Source: Mortgage Bankers Association® National Delinquency Survey, data through 2011 Q1
More foreclosures can be expected...
WA Rank:
2010Q4 : 252011Q1 : 23
Seriously Delinquent = 90+ Days Past Due or in foreclosure
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Economic & Revenue Outlook
08 July 2011
Slide 22 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0.0
1.0
2.0
3.0
4.0
5.0
2008 2009 2010 2011
Percen
t30 Days Past Due
Washington U.S.
Source: Mortgage Bankers Association® National Delinquency Survey, data through 2011 Q1
...but will eventually slow down
WA Rank:
2010Q4: 462011Q1: 47
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 23 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA multi-family building permits are gradually improving
0
5
10
15
20
25
30
35
40
45
50
1970 1975 1980 1985 1990 1995 2000 2005 2010
Th
ou
san
ds
Washington Housing Units Authorized by Building
Permits, 3MMA, SAAR
Multiple Single
Source: U.S. Census Bureau; data through May 2011
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Economic & Revenue Outlook
08 July 2011
Slide 24 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Boeing has over 7 years of commercial orders on its books
0
1000
2000
3000
4000
0
400
800
1200
1600
03 04 05 06 07 08 09 10 11
Backlo
g
Ord
ers &
Deli
verie
s
Net Orders Deliveries Backlog
Source: Boeing, data through May 2011
YTD
Excludes the military’s new refueling tanker
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 25 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Software publishing employment is growing
-10
-5
0
5
10
15
20
25
2000 2002 2004 2006 2008 2010 2012
Percent change, year ago
Source: ERFC Preliminary June 2011 forecast; actual through May 2011
Forecast
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Economic & Revenue Outlook
08 July 2011
Slide 26 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA export growth is strong, and will help state outperform in the recovery
-40
-20
0
20
40
60
80
1998 2000 2002 2004 2006 2008 2010
Exports
Percent Change, year ago
Total Total excluding Transportation Equipment
Source: Wiser Trade Data; through 2011 Q1
Total exports were up 12.4% y/y in Q1
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Economic & Revenue Outlook
08 July 2011
Slide 27 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Credit conditions for small business are improving, but remain tight
-18
-15
-12
-9
-6
-3
0
2004 2005 2006 2007 2008 2009 2010 2011
Availability of LoansNet Percent ("Easier" minus "Harder"), 3mma
Source: National Federation of Independent Business; data through May 2011
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 28 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA employment will recover slightly faster than the U.S.
0.85
0.90
0.95
1.00
1.05
2000 2002 2004 2006 2008 2010 2012
December 2007=1.0
Washington U.S.
Source: ERFC June 2011 forecast; actual through May 2011
Forecast
WA employment peaked 1 month after U.S. (Feb. 2008 vs. Jan. 2008)
Both WA and the U.S. reached a trough in Feb. 2010
WA is forecasted to reach its pre-recession peak in December 2013, the U.S. after 2013
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 29 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA personal income will recover faster than that of the U.S.
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
2000 2002 2004 2006 2008 2010 2012
2007Q4 = 1.0
Washington U.S.
Forecast
Source: ERFC June 2011 forecast; actual data through 2011Q1
Date of regaining peak:
WA:
Nominal 10Q2
Real 10Q3
U.S.:
Nominal 10Q2
Real 11Q1
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 30 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast changes: General Fund State, 2009-2011 Biennium
June 2011 Forecast
Collection Experience
Non-economic Change
Forecast Change Forecast
Total Change*
Dept. of Revenue
$94 $147 ($74) $26,769 $168
All other agencies
($1) $0 $5 $1,449 $3
Total GF-S $93 $147 ($69) $28,218 $171
* Detail may not add to total due to rounding
March Forecast:
$28,047 million
USD millions
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 31 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast changes: General Fund State, 2011-2013 Biennium
June 2011 Forecast
March 2011 Forecast
Non-economic Change
Forecast Change Forecast
Total Change*
Dept. of Revenue
$30,340 $33 ($217) $31,156 ($184)
All other agencies
$1,567 $7 ($6) $1,568 $1
Total GF-S $31,907 $40 ($223) $31,724 ($183)
* Detail may not add to total due to rounding
USD millions
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 32 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
General Fund* forecast by fiscal year
10
11
12
13
14
15
16
17
18
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
USD billions
Forecast
8.0% 1.2%
(9.6%)(4.1 %)
7.9%
Source: ERFC forecast, June 2011
* General Fund & Related Funds for FY 07-09
General Fund – new definition, for FY 10-13
YTD: 8.1%
4.6%
7.0%
GF-State
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 33 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• The U.S. economy has entered another soft patch in the recovery.
• The impact of the Japanese disaster was worse than anticipated and uncertainty in oil markets has increased.
• GDP growth will have to rely on private demand going forward.
• The recovery should pick up momentum in the third and fourth quarter of the year.
• Downside risks are four times as high as upside risks.
Lance Carey
Economic & Revenue Outlook
08 July 2011
Slide 34 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast Council1025 E. Union Avenue, Suite 544Olympia WA 98504-0912
www.erfc.wa.gov360-534-1560