Washington State Economic Outlook€¦ · 21/6/2018 · 2006 2008 2010 2012 2014 2016 2018 n, ent...

WASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCIL

Washington State Economic Outlook

Presented to the Information Processing Management Association

Steve LerchExecutive Director

June 21, 2018Tumwater, Washington

IPMAJune 21, 2018

Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Office of the

Governor

Director, OFM

Director, DOR

Economic and Revenue

Forecast Council

Member, Democratic

Caucus

Member, Republican

Caucus

Member, Democratic

Caucus

Member, Republican

Caucus

House of

RepresentativesSenate

Economic and Revenue Forecast Council Organization Chart

ERFC

Created in 1984 as part of Dept. of Revenue

Became separate agency in 1990

State

Treasurer

IPMAJune 21, 2018


ERFC Forecast Process

National Economic Forecast

Preliminary Washington State Economic Forecast

Review by Work Group

Review by Governor’s Council of Economic Advisors &

Economic and Revenue Forecast Council

Final National and Washington Economic Forecast

Review by Forecast Council

Final Washington General Fund Revenue Forecast

ERFC and Revenue-Generating Agencies Create Revenue Forecasts

The national economic forecast is based on a modified version of the IHS Markitmodel of the U.S. economy

IPMAJune 21, 2018


Summary

• The economic forecast for the U.S. is slightly stronger than in February.

• The economic forecast for WA has slightly higher personal income than in February.

• Risks to the baseline include concerns about international trade, geopolitical risks and a maturing economic expansion.

• The revenue collection variance since the February forecast is $189 million.

• Near General Fund revenue for the 2017-19 biennium has been increased by $298 million, and revenue for the 2019-21 biennium has been increased by $287 million.

IPMAJune 21, 2018


Forecast risks

Upside

• Elevated consumer, business confidence could translate into stronger growth

• Stronger global economic growth

Downside

• International trade and fiscal policy uncertainty

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

• Higher oil and gasoline prices

• Maturing economic expansion

IPMAJune 21, 2018


Consumers remain confident about economic prospects

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 May 2018

IPMAJune 21, 2018


Small business optimism and sales expectations are 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 May 2018

IPMAJune 21, 2018


Freight carried by trucks has steadily increased since the end of the recession

70

75

80

85

90

95

100

105

110

115

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

In

dex,

20

15

= 1

00

Truck tonnage index, SA

Source: American Trucking Association, data through March 2018

IPMAJune 21, 2018


0

1

2

3

4

5

6

7

8

9

0

50

100

150

200

250

300

350

400

450

2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Th

ou

san

ds

Th

ou

san

ds

Average monthly employment change

U.S. (left) WA (right)

U.S., WA labor markets look strong

Source: Bureau of Labor Statistics, ERFC; data through May 2018

IPMAJune 21, 2018


Adjusted for inflation, hourly wage growth remains muted

-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 May 2018

IPMAJune 21, 2018


Through May, layoff announcements are 6% above the same time period last year

0 20,000 40,000 60,000 80,000 100,000

All other

Telecomm

Consumer Goods

Services

Health Care/Products

Retail

Layoff announcements

Jan - May 2017 Jan - May 2018

Source: Challenger, Gray & Christmas; Job Cut Report, May 2018

IPMAJune 21, 2018


Global GDP forecasts have strengthened compared to last year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2016 2017 2018 2019 2020 2021 2022

Real global GDP growth

Apr. 2018 Apr. 2017

Source: International Monetary Fund, World Economic Outlook; April 2017 and April 2018

IPMAJune 21, 2018


Oil and gasoline prices appear to be heading higher

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$0

$10

$20

$30

$40

$50

$60

$70

$80

2015 2016 2017 2018

Oil (WTI, per barrel) Gasoline (U.S. regular, per gallon)

Source: U.S. Dept. of Energy, data through May 2018

IPMAJune 21, 2018


As of 2018, our GDP forecast is essentially equal to “potential GDP”

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

19,000

19,500

20,000

2015 2016 2017 2018 2019 2020 2021 2022 2023

Billio

ns 2

00

9 d

ollars

Actual & forecast GDP Potential GDP

Potential GDP is defined as the economy’s maximum sustainable output

Source: CBO, BEA, ERFC June 2018 preliminary forecast

IPMAJune 21, 2018


Capacity utilization is typically at or above 80% before the start of a recession

65

70

75

80

85

90

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Capacity utilization, 12 mo. moving average

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

IPMAJune 21, 2018


At the start of the last three recessions, Philadelphia Fed leading index was below 1.0% and declining

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1983 1987 1991 1995 1999 2003 2007 2011 2015

Percen

t ch

an

ge

Philadelphia Federal Reserve leading economic index

Source: Federal Reserve Bank of Philadelphia, data through March 2018

IPMAJune 21, 2018


Probability of recession by year, May 2018 WSJ Survey of Economists

0%

10%

20%

30%

40%

50%

60%

70%

2019 2020 2021 2022 after 2022

Macroeconomic Advisors recession probabilities:

1 year = 20%5 years = 80%

Source: Wall Street Journal

IPMAJune 21, 2018


Household financial obligations as share of disposable income below levels in last three recessions

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

1980 1986 1992 1998 2004 2010 2016

Percen

tFinancial obligations as % disposable personal income

Source: Federal Reserve System Board of Governors, data through 2017Q3

Financial obligations include mortgage payments & other required debt payments, rent, auto lease payments, and property taxes.

IPMAJune 21, 2018


Mortgage debt is slightly above its previous 2008 peak

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1

Million

s $

Mortgage debt outstanding

1-4 family residences Multifamily Nonfarm, nonresidential Farm

Source: Federal Reserve System Board of Governors, data through 2017Q4

IPMAJune 21, 2018


U.S. retail sales continue to grow

200

220

240

260

280

300

320

340

360

380

300

320

340

360

380

400

420

440

460

480

500

2004 2005 2006 2008 2009 2010 2012 2013 2014 2016 2017

$Billions, SA U.S. Retail Sales and Food Services

Retail Trade and Food Services (L) Excluding Auto and Gas (R)

Preliminary U.S. retail trade and food services sales (SA) increased 4.8% YOY in March and 4.8% in April.

Excluding autos and gas, sales were up 4.2% YOY in March and 4.1% in April.

Retail sales at gas stations were up 10.9% YOY in March and 11.8% in April.

Source: U.S. Department of Commerce, Census Bureau; Data through April 2018 advance

IPMAJune 21, 2018


WA residential construction activity is at pre-housing boom levels

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 2018

Th

ou

san

ds

Th

ou

san

ds

U.S., WA residential building permits (SAAR)

U.S. WA

Source: U.S. Census Bureau, ERFC; U.S. data through May 2018, WA data through April 2018

IPMAJune 21, 2018


WA employment has grown much faster than for the U.S. as a whole

0.95

1.00

1.05

1.10

1.15

1.20

1.25

2005 2006 2007 2009 2010 2011 2013 2014 2015 2017

In

dex,

Jan

. 2

00

5 =

1.0

U.S. WA

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

IPMAJune 21, 2018


WA personal income growth continues to outpace the U.S.

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

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 2017 Q4

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

IPMAJune 21, 2018


After 10 quarters of decline, exports have grown slightly in the last two quarters

-60%

-40%

-20%

0%

20%

40%

60%

80%

2011 2012 2013 2014 2015 2016 2017 2018

Year over year growth, quarterly WA exports

All Other Transp Equip Ag Products

Source: WISERTrade, data through 2018 Q1

IPMAJune 21, 2018


WA exports have slowed, but exports to China, Canada improved in 2017

-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 March 2018

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

IPMAJune 21, 2018


Real GDP is very similar to the February forecast

14,000

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

19,000

19,500

20,000

2007 2009 2011 2013 2015 2017 2019 2021 2023

Billio

ns o

f 2

00

9 D

ollars

Real GDP

June February

Source: ERFC June 2018 forecast; data through Q4 2017

IPMAJune 21, 2018


Oil prices are slightly higher compared to the February forecast

25

35

45

55

65

75

85

95

105

115

125

2007 2009 2011 2013 2015 2017 2019 2021 2023

Do

llars P

er B

arrel

Average Price of Crude Oil

June February

Source: U.S. DOE, ERFC June 2018 forecast; historical data through Q1 2018

IPMAJune 21, 2018


The U.S. nonfarm payroll employment forecast is very similar to the February forecast

125

130

135

140

145

150

155

2007 2009 2011 2013 2015 2017 2019 2021

Millio

ns

U.S. Nonfarm Payroll Employment

June February

Source: ERFC June 2017 forecast; data through Q1 2018

IPMAJune 21, 2018


Washington personal income is slightly higher than in February

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

June February

Source: ERFC June 2018 forecast; historical data through 2017

IPMAJune 21, 2018


Washington employment forecast is slightly lower compared to February

2,600

2,700

2,800

2,900

3,000

3,100

3,200

3,300

3,400

3,500

3,600

3,700

2007 2009 2011 2013 2015 2017 2019 2021 2023

ThousandsWashington Nonfarm Payroll Employment

June February

Source: ERFC June 2018 forecast; historical data through Q1 2018

A downward revision in the population forecast has resulted in a nonfarm employment forecast 53,000 jobs lower (1.5%) by 2023 Q4 compared to February.

IPMAJune 21, 2018


Washington housing permits forecast is higher in 2018 compared to February

20

25

30

35

40

45

50

2013 2015 2017 2019 2021 2023

Th

ou

san

ds

Washington Housing Permits

June February

Source: ERFC June 2018 forecast; historical data through 2017

IPMAJune 21, 2018


Revenue Act collections growth has been strong for two quarters

Source: DOR and ERFC; monthly data through April 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):

2017Q2: 5.6%2017Q3: 6.4%2017Q4: 8.3%2018Q1: 8.2%

June 10, 2018 collections: 10.8%

IPMAJune 21, 2018


Revenue Act growth relative to personal income has rebounded since 2017Q3

-15%

-10%

-5%

0%

5%

10%

1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Year-Over-Year Revenue Act* Growth Less State Personal Income Growth

YOY Rev Act Less Income Growth Long-Term Average

Source: ERFC; Quarterly revenue data through Q1 2018, February 2018 income estimates

Adjusted Revenue Act growth YOY:

17Q2: 5.6%17Q3: 6.4%17Q4: 8.3%18Q1: 8.2%

February personal income YOY growth estimates:

17Q2: 5.3%17Q3: 5.3%17Q4: 5.7%18Q1: 4.3%

*Adjusted for large one-time payments and refunds and payments under the amnesty program

IPMAJune 21, 2018


Cannabis revenue continues to be volatile

10

15

20

25

30

35

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Millio

ns

Retail Cannabis Collections

Actual Forecast

Source: LCB, ERFC; data through May 2018

Collections were 0.9% above forecast in May

Collections are 5.0% below forecast since February

IPMAJune 21, 2018


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 $321

Non-GF $501 $530 $530

Total $749 $798 $851

Total change since February forecast:

•2017-19-$0.2 M

•2019-21-$10.8 M

•2021-23-$2.6M

* Detail may not add to total due to rounding

IPMAJune 21, 2018


Large commercial property sales decreased but still strong 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 May 2018 preliminary

Large commercial sales (>$10 million) totaled $2.6 billion in the 1st quarter of 2018, down from $3.6 billion in the 4th quarter of 2017.

Residential and smaller commercial sales continue to grow.

IPMAJune 21, 2018


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

February 2018 Forecast*

Non-economic Change**

Forecast Change Forecast

Total Change#

General Fund-State

$44,213 ($1,173) $493 $43,532 ($680)

Education Legacy Trust Account

$520 $935 $43 $1,498 $978

WA Opportunity Pathways Account

$257 $0 $1 $258 $1

Total Near GF-S

$44,990 ($238) $536 $45,288 $298

$Millions

* Forecast for the 2017-19 biennium adopted February 20, 2018** Sum of legislative and budget driven revenue changes from the 2018 legislative session# Detail may not add to total due to rounding

As of June 10, General Fund-State collections were $189 million higher than the February forecast.

IPMAJune 21, 2018


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

February 2018 Forecast*

Non-economic Change**

Forecast Change Forecast

Total Change#

General Fund-State

$48,253 ($181) $448 $48,520 $267

Education Legacy Trust Account

$565 $0 $17 $582 $17

WA Opportunity Pathways Account

$258 $0 $3 $261 $3

Total Near GF-S

$49,076 ($181) $468 $49,363 $287

* Forecast for the 2019-21 biennium adopted February 20, 2018** Sum of legislative and budget driven revenue changes from the 2018 legislative session# Detail may not add to total due to rounding

$Millions

IPMAJune 21, 2018


Conclusion

• WA personal income is slightly higher than in February

• 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 16.0% between the 2015-17 and 2017-19 biennia and 9.0% between the 2017-19 and 2019-21 biennia

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

IPMAJune 21, 2018


Questions

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

www.erfc.wa.gov360-534-1560

Washington State Economic Outlook€¦ · 21/6/2018 · 2006 2008 2010 2012 2014 2016 2018 n, ent...

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