Washington State Economic Outlook & Revenue Collection

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Washington State Economic Outlook & Revenue Collection Experience

Presented to

Governor’s Distinguished Mangers Association

Steve Lerch Executive Director

October 25, 2013

Tumwater, Washington

Economic Outlook October 25, 2013

Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Summary

• The U.S. and Washington economies continue to grow, although at a slow pace

• Construction activity has been a big contributor to Washington employment growth; employment is rising in most Washington industries except aerospace and government

• Risks to the forecast are generally from factors outside the state, including a weaker Chinese economy, uncertain federal fiscal policy and possible disruptions to the housing recovery

• State revenue collections have returned to pre-recession levels



Three major risks to the forecast

China • Hard Landing • Reduced

Exports

Fiscal Policy

• Debt Ceiling • Budget

Housing • Affordability • Household

formation

Baseline Forecast



Excluding aerospace, exports outside of China are weak

0

2

4

6

8

10

12

14

16

Total ex Trans Equip Total ex Trans Equip

China All Other

Per

cen

t Washington Exports

(4 Quarter Moving Average Annual % Change)

Source: Wiser Trade Data; data through 2013 Q2



Slowing government expenditures a drag on GDP growth

-2

-1

0

1

2

3

4

5

2011 2012 2013

Per

cen

tag

e P

oin

ts

Contributions to Percent Change in Real GDP

Personal Consumption Private Investment Net Exports Govt Exp & Investment

Source: BEA; data through 2013 Q2



Consumer confidence is beginning to strengthen…

0

25

50

75

100

125

150

1980 1985 1990 1995 2000 2005 2010

Index Mich: 1966Q1 = 100, SA Conf Board: 1985 =100, SA

U Mich Conf Board

Source: University of Michigan; Conference Board, data through October 2013



…but housing affordability is plummeting.

50

75

100

125

150

175

200

225

1994 1997 2000 2003 2006 2009 2012

Ind

ex

Housing Affordability Index, SA

U.S. Washington

Source: Global Insight, WA Center Real Estate Research, ERFC; data through 2013Q3



Many adults continue to live at home with their parents

10

11

12

13

14

1983 1987 1991 1995 1999 2003 2007 2011

Per

cen

t U.S. Residents Ages 25-34 Living with Parents

Source: U.S. Census; data through 2012



Euro area GDP has returned to positive growth but risks remain

-6

-4

-2

0

2

4

6

8

10

2010 2011 2012 2013

Per

cen

t C

han

ge

SA

AR

Quarterly GDP Growth

Italy Germany Euro area

Source: Eurostat; data through 2013Q2

Eurozone Forecast: 2013: -0.6% 2014: 0.8%



U.S. employment returns to pre-recession levels in 2014

125

130

135

140

145

150

2000 2002 2004 2006 2008 2010 2012 2014 2016

Mill

ion

s

U.S. Total Nonfarm Employment

Actuals September forecast

Source: BEA, ERFC; historical data through 2012



Part time jobs have grown faster than full time jobs since 2000

0.8

0.9

1.0

1.1

1.2

1.3

2000 2002 2004 2006 2008 2010 2012

Ind

ex,

20

00

=1

.0

Part time Full time

2000: PT = 23.0 M FT =113.8 M 2012: PT = 27.7 M FT = 114.8 M

Source: U.S. Bureau of Labor Statistics, ERFC; annual data through 2012



Oil prices are expected to decline over the next several years

25

50

75

100

125

2005 2007 2009 2011 2013 2015 2017

Dol

lars

per

bar

rel

Average Price of Crude Oil

Forecast

Source: DOE, ERFC September 2013 forecast; historical data through 2013Q1



Washington personal income is growing

100

150

200

250

300

350

400

450

2000 2002 2004 2006 2008 2010 2012 2014 2016

Bill

ion

s of

Dol

lars

Washington Personal Income


Source: ERFC September 2013 forecast; historical data through 2012



Washington Housing Permits Forecast: still increasing but lower than June

10

15

20

25

30

35

40

45

50

2012 2013 2014 2015 2016 2017

Thou

san

ds

Washington Housing Permits

June September

Source: U.S. Census, ERFC September 2013 forecast; historical data through 2012



Like the U.S., Washington employment will return to pre-recession levels in 2014…

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

2000 2002 2004 2006 2008 2010 2012 2014 2016

Thou

san

ds

Washington Nonfarm Payroll Employment





But Washington employment is growing slightly faster than the U.S.

0.94

0.96

0.98

1.00

1.02

1.04

1.06

1.08

1.10

2005 2007 2009 2011 2013 2015 2017

Ind

ex,

20

13

Q2

= 1

.0

Nonfarm Payroll Employment

Washington U.S.

Forecast

Date of regaining peak:

WA: 2014Q3

U.S.: 2014Q3

Source: ERFC September 2013 forecast; historical data through 2013Q2



WA personal income will recover slightly faster than the U.S.

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

2005 2007 2009 2011 2013 2015 2017

Ind

ex,

20

13

Q2

= 1

.0

Real Personal Income

Washington U.S.

Forecast




Aerospace employment is declining

80

85

90

95

100

2012 2013 2014 2015 2016 2017

Thou

san

ds

Washington Aerospace Employment

June September




Boeing has over 7 years of commercial orders on its books

0

1250

2500

3750

5000

0

400

800

1200

1600

03 04 05 06 07 08 09 10 11 12 13

Bac

klog

Ord

ers

& D

eliv

erie

s

Net Orders Deliveries Backlog

YTD

Source: Boeing, data through October 2013

Excludes the military’s new refueling tanker



Washington construction employment is recovering

100

125

150

175

200

225

1990 1995 2000 2005 2010 2015

Thou

san

ds

Washington Construction Employment

Trend, 1990-2012 Employment

Forecast




Single-family home prices continue to increase

-25

-20

-15

-10

-5

0

5

10

15

20

25

2001 2003 2005 2007 2009 2011 2013

Per

cen

t Case Shiller Home Price Index, SA

Year–over-year percent Change

Seattle Composite 20

Jul 2013

U.S. is up 12.3%

Seattle is up 12.4%

Source: S&P/Case-Shiller; data through July 2013



Washington building permits are improving

0

5

10

15

20

25

30

35

40

45

50

1970 1975 1980 1985 1990 1995 2000 2005 2010

Thou

san

ds

Washington Housing Units Authorized by Building Permits, 3MMA, SAAR

Multiple Single

Source: U.S. Census Bureau; data through August 2013



Contract data indicates a possible increase in activity

0

1

2

3

4

5

6

7

8

0

10

20

30

40

50

60

70

80

2000 2002 2004 2006 2008 2010 2012

Bill

ion

s

Nonresidential Construction Contracts, SAAR, 3MMA

Sq. Feet Value

Mill

ion

s

Source: Dodge, ERFC; data through September 2013

Non-Residential square footage is up 69%, and value is up 36% year over year (3mma).



Revenue collections have recovered slowly after the last recession

-15 -10

-5 0 5

10 15 20 25 30 35

0 2 4 6 8 10 12 14 16 18 20 22

Cu

mu

lati

ve G

row

th (

per

cen

t)

Quarters

Revenue Act Collections after Business Cycle Peak

1990 2001 2007-09

Source: ERFC; data through 2013 Q2

Revenue Act collections have now exceeded their previous peak reached in Q1 2008



Rev Act collections still above pre-recession peak despite surtax sunset

Source: DOR and ERFC; monthly data through estimated August 2013 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

2002 2004 2006 2008 2010 2012

$millions SA

Revenue Act Revenue 3-Month Moving Average

Seasonally adjusted collections decreased slightly in the September 11th - October 10th collection period (August taxable activity) Collections in the previous period managed to increase even though the B&O surtax expired on July 1st The surtax brought in $20-$26 million per month



Revenue from liquor sales has been volatile since privatization

14

16

18

20

22

24

26

2007 2008 2009 2010 2011 2012 2013

Liquor Sales and Liter Taxes, SA

Actual Forecast Pre-Privitization Trend

Mill

ion

s of

dol

lars

Source: DOR, ERFC; data through September 2013



Underlying REET trend still positive after spike in commercial sales

0

1

2

3

4

5

6

7

8

9

10

1996 1998 2000 2002 2004 2006 2008 2010 2012

$Billions

Seasonally Adjusted Taxable Real Estate Excise Activity

Source: ERFC; Monthly data through September 2013 preliminary

Large sales of commercial property were still elevated in September, with $222 million in sales of property worth $10 million or more There has already been a $475 million sale in October, which will generate $5.6 million in GF-S REET



10

11

12

13

14

15

16

17

18

19

20

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

$billions

Forecast

8.0% 1.2%

General Fund-State* forecast by fiscal year

(9.6%) (4.1 %)

7.9%

*General Fund-State & Related Funds for FY 07-09, General Fund-State new definition for FY 10-17 Source: ERFC forecast, September 2013

1.5% 6.2%

General Fund-State Revenue

2.4% 4.1%

3.9% 4.1%



Revenue collections to date

Estimate Actual Difference Pct.

Dept. of Revenue $1,096,129 $1,129,529 $33,400 3.0%

All other agencies $8,486 $7,394 ($1,092) -12.9%

Total GF-S $1,104,615 $1,136,923 $32,308 2.9%

Excl. Special Factors* $1,104,615 $1,114,423 $9,808 0.9%

Cumulative Variance Since September Forecast (September 11 – October 10, 2013)

dollars in thousands

*$22.5 million refund included in forecast but yet to occur



Conclusion

• We expect the slow pace of economic recovery to continue in both the U.S. and Washington economies

• Washington is still likely to outperform the nation, but by a small margin

• Washington construction activity has been strong but rising mortgage rates could slow the housing recovery

• Other threats to economic recovery include slowing Asian economies and uncertainty around federal fiscal issues



Questions

Economic & Revenue Forecast Council 1025 E. Union Avenue, Suite 544 Olympia WA 98504-0912 www.erfc.wa.gov 360-534-1560

Documents

Washington State Economic Outlook & Revenue Collection