Washington and U.S. Economic Outlook · 16-01-2019 · Economic & Revenue Outlook January 16, 2019 Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Summary • U.S

WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL

Washington and U.S. Economic Outlook

Presented toLeading Age Washington

Steve LerchChief Economist & Executive Director

January 16, 2019Tukwila, Washington

Economic & Revenue Outlook

January 16, 2019

Slide 1WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Summary

• U.S. economic growth will slow but the baseline forecast does not contain a recession

• The forecast expects oil prices to stabilize at $60/barrel but prices have continued to decline

• The economic forecast for WA has higher personal income than in September but slower growth

• 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 $163 million


January 16, 2019


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

• Slowing global economic growth

• Impact of rising interest rates

• Maturing economic expansion


January 16, 2019


Consumer confidence has moderated recently but remains strong

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 December 2018


January 16, 2019


Small business optimism and sales expectations remain very strong

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

, 1

98

6=

10

0

3 m

onth

sal

es g

row

th e

xpec

tati

on,

per

cen

t

NFIB Small Business Optimism Index

Sales Expectations Optimism Index

Source: National Federation of Independent Business; data through Nov. 2018


January 16, 2019


WA, U.S. unemployment rates are below pre-recession levels

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

WA, U.S. unemployment rates SA

WA U.S.

Source: Bureau of Labor Statistics, ERFC; U.S. data through Dec. 2018, WA data through Nov. 2018


January 16, 2019


0

1

2

3

4

5

6

7

8

9

10

0

50

100

150

200

250

300

350

400

450

500

2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Thou

san

ds

Thou

san

ds

Average monthly employment change

U.S. (left) WA (right)

WA, U.S. job growth remain strong

Source: Bureau of Labor Statistics, ERFC; U.S. data through Dec. 2018, WA data through Nov. 2018


January 16, 2019


Nominal wage growth has plateaued regardless of occupational skill level

0

1

2

3

4

5

6

7

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Year over year growth, 12 mon. moving avg.

High skill Low skill Mid skill

Source: Federal Reserve Bank of Atlanta, data through Nov. 2018

High: managers, professionals, technicians

Mid:office/admin, production, sales

Low: food prep & serving, cleaning, personal care, protective services


January 16, 2019


Fraction of statewide employment change, Seattle vs. rest of state

0%

10%

20%

30%

40%

50%

60%

70%

80%

2012 2013 2014 2015 2016 2017 2018Years ending in October

Seattle metro Rest of state

Source: Bureau of Labor Statistics, WA Employment Security Dept.


January 16, 2019


Washington Employment Trends

0 20 40 60 80 100

All OtherAerospace Manufacturing

Financial ActivitiesWholesale Trade

Manuf ex AerospaceState, Local Govt Educ

InformationAdmin & Support Services

Health CareProf, Scientific, Tech Services

ConstructionLeisure & Hospitality

Retail Trade

Employment Change since Trough (thousands)Washington has gained 626,000 nonfarm jobs since February 2010

Source: U.S. Dept. of Labor, BLS; ESD; ERFC; data through Nov. 2018


January 16, 2019


Weekly wage growth in WA is outpacing the nation recently

-3

-1

1

3

5

7

9

2010 2011 2012 2013 2014 2015 2016 2017 2018

Per

cen

tYear-over-year growth in average weekly wages

WA U.S.

Source: U.S. Bureau of Labor Statistics, quarterly data through 2018 Q1


January 16, 2019


Average weekly wages, home health care services

$300

$350

$400

$450

$500

$550

$600

$650

$700

$750

$800

2001 2003 2005 2007 2009 2011 2013 2015 2017

WA U.S.

Source: U.S. Bureau of Labor Statistics, annual data through 2017


January 16, 2019


Average weekly wages, nursing and residential care facilities

$350

$400

$450

$500

$550

$600

$650

$700

2001 2003 2005 2007 2009 2011 2013 2015 2017

WA U.S.



January 16, 2019


Average weekly wages, continuing care and assisted living facilities

$350

$400

$450

$500

$550

$600

2001 2003 2005 2007 2009 2011 2013 2015 2017

WA U.S.



January 16, 2019


WA exposure to retaliatory tariffs

Based on 2017 export values:

• $3.7 billion of exports subject to retaliatory tariffs (6.1% of total exports)

• 8,300 direct export-supported jobs subject to retaliation

• 20,600 total export-related jobs subject to retaliation

Source: J. Parilla and M. Bouchet, “Which US communities are most affected by Chinese, EU and NAFTA retaliatory tariffs?”, Brookings Institution , Oct. 2018


January 16, 2019


After 10 quarters of decline, exports have grown in the last four 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 Q3


January 16, 2019


The IMF has revised its global GDP forecast down for 2019 and beyond

2.5

3

3.5

4

4.5

5

5.5

2010 2013 2016 2019 2022

IMF real annual global GDP growth forecast (%)

Actual Oct-17 Oct-18

Source: International Monetary Fund, World Economic Outlook; historic data through 2017


January 16, 2019


U.S. residential construction remains below historic 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 2003 2006 2009 2012 2015 2018

Thou

san

ds

Thou

san

ds

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

U.S. WA

Source: U.S. Census Bureau, ERFC; U.S. data through Nov. 2018, WA data through Sep. 2018


January 16, 2019


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

18,000,000

2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1

Mill

ion

s $

Mortgage debt outstanding

1-4 family residences Multifamily Nonfarm, nonresidential Farm

Source: Federal Reserve System Board of Governors, data through 2018Q3


January 16, 2019


Outstanding debt securities, U.S. non-financial corporations

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Bill

ion

s, $

Debt securities include commercial paper, bonds and other securities traded in financial markets

Source: Federal Reserve Bank of St. Louis, data through 2018 Q1


January 16, 2019


Home price growth appears to be slowing

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Case-Shiller home price index, year over year % change, SA

Seattle U.S.

The Case-Shiller index for Seattle has decreased for four consecutive months

Source: Case-Shiller, data through Oct. 2018


January 16, 2019


WA in-migration may be slowing

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1983 1987 1990 1994 1998 2001 2005 2009 2012 2016

Surrendered out of state driver licenses, 12 mma

Source: WA Dept. of Licensing, ERFC; data through Aug. 2018


January 16, 2019


Over 20% of the WA population will be age 65+ by 2030

0%

5%

10%

15%

20%

25%

2010 2015 2020 2025 2030 2035 2040

1.53 M

1.99 M

0.83 M

Source: WA State Office of Financial Management


January 16, 2019


GDP growth is expected to average 1.9% in 2020 - 2023

-3

-2

-1

0

1

2

3

4

5

1990 1994 1998 2002 2006 2010 2014 2018 2022

History ForecastSource: U.S. Dept. of Commerce, BEA, history through 2017; ERFC Nov. 2018 forecast


January 16, 2019


The real GDP forecast is very similar to the September forecast

15,000

16,000

17,000

18,000

19,000

20,000

21,000

2007 2009 2011 2013 2015 2017 2019 2021 2023

Bill

ion

s of

20

12

Dol

lars

Real GDP

November September

GDP growth is slightly lower in 2020 -2022.

GDP is 0.3% lower by the end of 2023 compared to September.

Source: IHS Markit, ERFC; data through Q3 2018Note: Vertical black line indicates last actual


January 16, 2019


Oil prices have declined recently

20

30

40

50

60

70

80

90

100

110

120

2007 2009 2011 2013 2015 2017 2019 2021 2023

Dol

lars

Per

Bar

rel

Refiners’ Acquisition Price of Crude Oil

November September

Source: Energy Information Administration, IHS Markit, ERFC November 2018 forecast; data through Q3 2018Note: Vertical black line indicates last actual

Since the preliminary forecast, oil prices have dropped $8 per gallon for the 4th

quarter of this year.

Forecast


January 16, 2019


Washington personal income is slightly higher than in September but grows more slowly

0

100

200

300

400

500

600

700

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Bill

ion

s of

US

DWashington personal income

November September

Source: ERFC November 2018 forecast; historical data through 2017

Personal income data were revised back to 1998 after the September forecast


January 16, 2019


State personal income will continue to grow faster than the U.S.

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

2007 2009 2011 2013 2015 2017 2019 2021

Ind

ex 2

00

7 Q

1 =

1.0

Real Personal Income, U.S. and WA

U.S. Washington

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

Forecast

Presenter

Presentation Notes

Large increase in 2nd Q 2015 stock options, thought to be a one-time event, causes lower 2016Q2 WA growth rate.


January 16, 2019


Washington employment forecast is very similar to September

2,6002,7002,8002,9003,0003,1003,2003,3003,4003,5003,6003,7003,800

2007 2009 2011 2013 2015 2017 2019 2021 2023

Thou

sand

sWashington Nonfarm Payroll Employment

November SeptemberSource: ERFC November 2018 forecast; historical data through Q3 2018

Forecast


January 16, 2019


Washington employment will continue to grow faster than the U.S.

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

2007 2009 2011 2013 2015 2017 2019 2021

Ind

ex 2

00

7 Q

1 =

1.0

0Nonfarm Employment, U.S. and WA

U.S. Washington

Forecast

Source: ERFC November 2018 forecast; historical data through 2018 Q3


January 16, 2019


WA housing permits forecast averages about 500 units lower per year for 2019 – 2023 compared to September

20

25

30

35

40

45

50

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Thou

san

ds

Washington Housing Permits

November September

Source: ERFC November 2018 forecast; historical data through 2017


January 16, 2019


U.S. Economic Expansions since 1945

120

12

58

174

0 25 50 75 100 125 150 175

Economic Expansions, months

This Forecast Average 1980 1990

Sources: NBER, ERFC November 2018 forecast

Presenter

Presentation Notes

Next U.S. Recession Probably 5 Years Out (ISI Mar 16, 2015) Recessions typically start roughly 5 years after the Fed starts to tighten. Recessions typically start roughly 5 years after wages start to accelerate. Recessions typically start roughly 7 years after housing starts move well over 1m


January 16, 2019


Recession forecasts

Duke/U.S. CFO Magazine survey (Dec. 2018)• 49% of CFOs expect recession by end of 2019• 82% of CFOs expect recession by end of 2020

WSJ Economists Survey (Dec. 2018)• 22% expect recession in next 12 months

IHS Markit (Dec. 2018)• Recession risks low in 2019 but rise in 2020 and

beyond


January 16, 2019


Recession probabilities in next 12 months based on economic, financial and yield curve data

0%

5%

10%

15%

20%

25%

30%

35%

Economic data Financial data Yield curve

Source: Moody’s Analytics, October 2018

The probabilities are derived from three different models developed by Moody’s Analytics


January 16, 2019


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 November 2018


January 16, 2019


Leading economic indexes for WA, U.S. do not suggest a recession in near term

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

2000 2003 2006 2009 2012 2015 2018

WA U.S.

Source: Federal Reserve Bank of Philadelphia, data through Oct. 2018


January 16, 2019


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

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

1982 1987 1992 1997 2002 2007 2012 2017

10 year – 3 month Treasury bond yields

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

As of Dec. 2018, 10 year Treasury bond yields were 0.42% above three month Treasury bill yields


January 16, 2019


Revenue Act collections growth has been strong

Source: DOR and ERFC; monthly data through October 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

1,500

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%2018Q3: 7.6%


January 16, 2019


Taxable REET activity may have peaked in Q1 2018

0

1

2

3

4

5

6

7

8

9

10

1996 1999 2002 2005 2008 2011 2014 2017

$Billions

Seasonally Adjusted Taxable Real Estate Excise Activity

Total Total excl. sales >$10M

Source: ERFC; Monthly data through November 2018 preliminary

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

Large commercial sales (>$10 million) have not slowed as much as residential sales.


January 16, 2019


The rapid growth in cannabis revenue is likely over

0

5

10

15

20

25

30

35

40

2015 2016 2017 2018 2019

Mill

ion

sRetail Cannabis Collections

Forecast Actual

Source: ERFC November 2018 forecast; historical data through December 2018


January 16, 2019


Assessed value on existing properties increased between September, November forecasts

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2000 2003 2006 2009 2012 2015 2018 2021

$ B

illio

ns

November September

Forecast

Source: ERFC November 2018 forecast

September forecast for growth in Market Value: 7.3%

Actual growth:10.9%

Every 1.0 percentage point increase in Market Value growth adds between $30-$40 million in revenue per year


January 16, 2019


GF-S forecast changes by source

-$100

-$50

$0

$50

$100

$150

$200

$250

$300

2017 - 19 2019 - 21 2021 - 23

Mill

ion

s

Property Tax Rev Act REET All Other

+$118 M

+$189 MThe largest piece of the “All Other” category in 2017-19 is unclaimed property

+$201 M


January 16, 2019


Conclusion

• WA personal income is higher than in September as a result of revisions to historic data

• 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 17.3% between the 2015-17 and 2017-19 biennia and 9.2% between the 2017-19 and 2019-21 biennia

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


January 16, 2019


Questions

Economic & Revenue Forecast Councilwww.erfc.wa.gov360-534-1560

Documents

Washington and U.S. Economic Outlook · 16-01-2019 · Economic & Revenue Outlook January 16, 2019 Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Summary • U.S