Washington State Economic and Revenue Forecast Council Washington State Economic & Revenue Outlook...

Washington State Economic and Revenue Forecast Council

Washington State Economic & Revenue Outlook

Presented toCommunity & Technical Colleges Board

Arun RahaChief Economist & Executive Director

September 24, 2009Seattle, Washington

Arun RahaWA Economic & Revenue Outlook24 Sep 2009

Slide 2 Washington State Economic and Revenue Forecast Council

Summary

• It is almost certain that the recession in both the national and state economies is now over

• The recovery is still fragile, and risks remain– Real estate, especially commercial– Banking, particularly local and regional banks– Consumer spending

• On the upside, a synchronized global recovery now unfolding, means exports will kick in earlier in the cycle

• In terms of the economy, we are where we thought we’d be in June, but consumer spending and revenue collections are lagging the recovery



This recession has seen the sharpest drop in both consumption and investment

-40% -30% -20% -10% 0% 10%

Consumption

Investment

Equipment andSoftware

ResidentialConstruction

GovernmentSpending

Perc

ent

chan

ge, $

2005

SA

Prior post WWII recessions This recession

Peak to trough decline in GDP components

Source: BEA, NBER, ERFC; data through 2009Q2



Inter-bank lending has returned to normal

USD 3m LIBOR - 3m US T-bill SpreadBasis Points

0

50

100

150

200

250

300

350

400

450

500

Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09

Source: British Bankers Association, US Federal Reserve Bank, ERFC; data through August 21, 2009

The spread indicates the premium banks have to pay to borrow from each other

First indication of trouble in subprime mortgage related bond portfolios

Bear Stearns

Fannie, Freddie, AIG, Lehman

TARP



Bank lending to businesses and consumers is easingNet Tightening minus EasingPercent

-40

-20

0

20

40

60

80

100

2000 2002 2004 2006 2008For large and medium firms For small businessesCredit cards Other consumer loans

Source: Federal Reserve Board, Senior Loan Officers Quarterly Survey, data through July 2009 survey



Corporate bond issuance volume has recovered sharplyUSD, billions

0

20

40

60

80

100

120

140

160

180

200

J an-08 Apr-08 J ul-08 Oct-08 J an-09 Apr-09 J ul-09

Source: SIFMA, revised data through July 2009

Q/Q growth2008Q4: -46%

2009Q1: 140%Q2: 50%



Home prices nationally have reached a point of inflection

Case Shiller 20-City Composite House Price Index, SA

0

60

120

180

240

01 02 03 04 05 06 07 08 09

Jan

2000

= 1

00

-20

-10

0

10

20

Perc

ent

(Y/Y

)

Index Y/ Y

Home prices are now showing a slower rate of Y/Y decline

Home prices increased from May to June

Source: S&P/Case-Shiller; data through June 2009



Home prices in Seattle appear to be leveling off, but lag the nation in the turnaround

Case Shiller Seattle House Price Index, SA

0

60

120

180

240

01 02 03 04 05 06 07 08 09

Jan

2000

= 1

00

-20

-10

0

10

20

Perc

ent

(Y/Y

)

Index Y/ Y

Seattle Home Prices

Source: S&P/Case-Shiller; data through June 2009



The rate of decline in national GDP is moderating

Percent growth, SAAR

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009

Real

GD

P, 2

005$

Recession

Source: BEA, data through 2009 Q2, preliminary



The manufacturing sector is seeing a rebound

Institute of Supply Management Manufacturing Index

20

30

40

50

60

70

80

2000 2002 2004 2006 2008

Diff

usio

n In

dex

New Orders ISM Manufacturing

Index > 50 means growth

Source: ISM; data through August 2009



The services sector shows a weak employment picture, but activity has started to grow

Institute of Supply Management Non-Manufacturing Index

20

30

40

50

60

70

80

2000 2002 2004 2006 2008

Diff

usio

n In

dex

Employment Business Activity

Index > 50 means growth

Source: ISM; data through August 2009



U.S. housing starts appear to have turned the cornerThousands, SA, 3MMA

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008

Single Family TotalSource: U.S. Census Bureau; data through July 2009



Source: Bureau of the Census, ERFC; data through June, 2009

There is further downside to the non-residential downturn

Construction Put In Place, Private Non-Residential $ millions SAAR

-20%

-10%

0%

10%

20%

30%

40%

1990 1993 1996 1999 2002 2005 2008

Y/ Y, 3MMA



Contract data indicate WA non-res construction will remain weak

Source: McGraw-Hill Construction, data through August, 2009

-60

-40

-20

0

Total Non-Residential

Office andBank

Buildings

ManufacturingPlants

Schools andColleges

PublicBuildings

ApartmentBuildings

Washington StateContracts for New, Addition and Major Alteration Projects

(Cummulative YTD)

Percent, Y/ Y



State chartered banks in Washington have experienced faster deterioration in asset quality than national banks

Ratio of Non-Performing to Total Assets

0

2

4

6

8

2007 2008 2009

Perc

ent

United States, national charter WA, state charterSource: FDIC, data through 2009 Q2.

This is generally true for state chartered banks in other states as well



We are witnessing an unprecedented global recovery

Q/Q, SAAR %GDP share 2009 Q1 2009 Q2

Japan 8.0% -14.2 3.7China 6.2% 5.6 16.0Germany 6.0% -13.4 1.3France 4.7% -5.7 1.2India 2.0% 7.0 6.5Korea 1.9% 0.5 9.7Indonesia 0.8% 3.7 5.3Taiwan 0.7% -3.2 9.1Thailand 0.4% -7.2 9.6Hong Kong SAR 0.4% -14.7 13.8Malaysia 0.3% -17.7 13.2Singapore 0.3% -12.2 20.7Philippines 0.3% -7.1 11.0

These economies represent 32% of global GDP.

The US is 25% of global GDP

Source: IMF, ERFC



Exports may help the state recover earlier in the cycle than we expected

-40

-20

0

20

40

60

80

1998 1999 2001 2002 2004 2005 2007 2008

Percent Change, year ago

Total Total excluding Transportation Equipment

Source: Wiser Trade Data; through 2009 Q2

2009 Q2 shows improvement over 2009 Q1 due to transportation equipment



Automotive sales have ticked up nationally, and in the state

0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Milli

on U

nits

, SAA

R

0

6

12

18

24

30

WA

New

Vehi

cle R

egist

ratio

ns,

Thou

sand

s, 3

MM

A, S

A

US Light Trucks US Cars WA New Vehicle Registrations

Source: Autodata Corporation, WA DOL, ERFC estimate; data through August 2009

June boost from closing dealerships; July and August boost from “cash for clunkers”



WA single family building permits are showing signs of stabilization

Thousands, SA, 3MMA

0

10

20

30

40

50

1990 1994 1998 2002 2006

Single Multiple

Source: U.S. Census Bureau; data through July 2009



WA employment lagged the nation in the downturn, and will recover a little faster than the nationPercent change, year ago

-6

-4

-2

0

2

4

6

8

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Washington U.S.

Source: ERFC September 2009 forecast; actual through August 2009 (unpublished)



The recovery in WA personal income growth is expected to be better than the nation’sPercent change, year ago

-3

0

3

6

9

12

15

80 83 86 89 92 95 98 01 04 07 10

Washington U.S.Source: ERFC September 2009 forecast; actual data through 2009Q1



Recovery in revenue depends on consumer spending – still a wildcard

3 MMA, Y/ Y percent

-4%

-2%

0%

2%

4%

6%

8%

90 92 94 96 98 00 02 04 06 08

Real Consumption Real Disposable IncomeSource: BEA, data through June 2009.



Consumer confidence is still in recessionary territory, but improvingIndex Mich: 1966Q1 = 100, SAConf Board: 1985 =100, SA

25

50

75

100

125

150

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

U Mich Conf BoardSource: University of Michigan; Conference Board, data through August 2009.



Growth in Net Revenue Act Collections* Minus Growth in State Personal Income

-15%

-10%

-5%

0%

5%

10%

87 91 95 99 03 07 11Y-O

-Y G

row

th in

Rev

Act m

inus

Per

sona

l Inc

ome

Gro

wth

Revenue growth relative to income growth is turning around

* Adjusted for new legislation and special factors

Source: ERFC forecast; actual data through 2009Q2



Forecast changes: General Fund State, 2009-2011 biennium

September ‘09 Forecast

Collection Experience

Non-economic Change

Forecast Change Forecast

Total Change*

Dept. of Revenue

($76) ($46) ($101) $28,138 ($223)

All other agencies

$1 $0 ($9) $1,465 ($8)

Total GF-S ($75) ($46) ($110) $29,603 ($231)

USD Millions

* Detail may not add to total due to rounding

June Forecast:

$29,834 million

USD millions



General Fund* forecast by fiscal year

USD billions

13.0

13.5

14.0

14.5

15.0

15.5

16.0

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

(9.6%) 0.6%

7.8%

Source: ERFC forecast, September 2009

* General Fund & Related Funds for FY 07, 08, 09

General Fund – new definition, for FY 10, 11



Innovation follows recessions

Gray bars correspond to national recessions



Conclusion

• State revenues will lag the economic recovery

• The recovery in revenues will be slow and is subject to risk

• Collections in FY 11 are expected to be USD 300 million less than in FY 08.

• Revenues in the 2009-11 biennium are expected to be 1% below their 2007-09 level



Questions

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

www.erfc.wa.gov360-570-6100

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