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City of Seattle
Department of Finance
Economic & Revenue
Forecast
April 6, 2009
2
U.S. Economy: The path to the current recession
• Past 20 years has been era of asset bubbles
– Stock market in the 1990s
– Housing in the current decade, also commodities
• Bubble formation has been facilitated by
– Cheap money
• Federal Reserve policies
• Asian savings glut
– Loose lending standards
– Deregulation & lax regulation of financial sector
April 6, 2009
3
• Bubbles have led to:
– Excessive borrowing and debt buildup
– Excessive risk taking
• Housing bubble popped in 2006. With prices falling:
– Loans have gone bad, reducing value of securities
• Leading to financial crisis
– Household wealth has declined
• Leading to drop in consumer spending
• Housing downturn and financial crisis caused recession
– U.S. recession began in December 2007
April 6, 2009
4
U.S. Personal Income and Household Debt: 1980 Q1 = 100
0
200
400
600
800
1,000
1,2001
98
0 Q
1
19
85
Q1
19
90
Q1
19
95
Q1
20
00
Q1
20
05
Q1
Household
debt
Personal
income
Source: Federal Reserve Board.
• Household debt increased 97% from 2000 to 2008.
April 6, 2009
April 6, 2009 5
-800
-600
-400
-200
0
200
400
Jun
-00
De
c-0
0
Jun
-01
De
c-0
1
Jun
-02
De
c-0
2
Jun
-03
De
c-0
3
Jun
-04
De
c-0
4
Jun
-05
De
c-0
5
Jun
-06
De
c-0
6
Jun
-07
De
c-0
7
Jun
-08
De
c-0
8
Th
ou
sa
nd
s o
f jo
bs
Monthly Change in U.S. Employment
Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted.
• 5.1 million jobs lost since Dec-07; 3.3 million in past 5 months.
• Unemployment rate hit 8.5% in March; highest since 1983.
6
Recent weeks have seen a few positive signs
• Stock market is up over 20% from early March low
• Home sales rose in February: new 4.7%, existing 5.1%
• Single family permits rose 11.0% in February
• U.S. retail sales rose in January and February
measured on month-to-month basis
• Orders for manufactured goods rose 1.8% in February
• Shipping volumes are showing signs of stabilizing
– Rail, truck, container, air freight
April 6, 2009
7
U.S. GDP Forecasts for October 2008 and March 2009
-8%
-6%
-4%
-2%
0%
2%
4%
2008
Q1
2008
Q2
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
2010
Q3
2010
Q4
Oct-08
Forecast
Mar-09
Forecast
Source: Global Insight.
U.S. Economic Forecast
April 6, 2009
8
Puget Sound Economy: Recent trends
• 2001-03 recession was very severe locally
– Recovery started later here
– Housing bubble cycle was delayed
• Current downturn arrived later here
– Construction peaked in Nov-07 locally
• Compared to Jan-07 for U.S.
– Aerospace employment increased through 2008 Q3
– Software employment increased through 2008 Q4
• Falloff beginning in 2008 Q4 has been very steep
– 53,400 jobs lost from Aug-08 to– Feb-09 in King
& Snohomish Co., a 3.6% declineApril 6, 2009
9
S&P/Case-Shiller Home Price Index, 2000 Q1 = 100
80
100
120
140
160
180
200
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
U.S.
Seattle
Metro
Area
April 6, 2009
10April 6, 2009
92
94
96
98
100
102
104
106Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Employment: December 2000 =100
U.S.
Seattle Metro Area*
*King & Snohomish Counties. Data adjusted to remove effects of Boeing strikes.Data are seasonally adjusted non-agricultural wage & salary employment.
11
Puget Sound Region Economic Forecast
• Regional forecast is based on Feb-09 U.S. forecast
April 6, 2009
12April 6, 2009
-5%
-4%
-3%
-2%
-1%
0%
1%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Quarters from pre-recession peak
Job Losses in the Five Most Recent Puget Sound* RecessionsPercent Decline from pre-Recession Peak
1981-83
1980
1990-912008-10 Forecast
2001-03
*King, Kitsap, Pierce, and Snohomish Counties.
13
Why is 2008-10 forecast not as bad as 2001-03?
• 2001-03 was very bad locally. Employment decline:
-2.0% U.S.
-4.8% Puget Sound Region (4 counties)
-6.6% Seattle Metro Area (King & Snohomish Counties)
• Modest cuts announced by Boeing, Microsoft thus far
– In 2001-03, Boeing cut 27,200 jobs in less than 3 yrs
• Areas of U.S. hardest hit in this recession include:
– Areas with big housing bubbles
– Manufacturing centers, especially auto related
– Financial centers
– Areas dependent on travel, tourism, in-migration
April 6, 2009
14
What has changed since the last revenue forecast?
(which was prepared in Oct. 2008)
• U.S. and local economies have declined steeply
– as has City sales and B&O tax revenue
• Economic forecasts have been revised
– Major recession is now forecast
– Deflation or very low inflation is expected in 2009
– Savings rate forecast has been raised
• Falling wealth = higher savings & weaker spending
– Weaker spending = lower tax revenue
April 6, 2009
15
Forecast of Employment Change: Puget Sound Region*
Quarter-to-Quarter Change
-30
-25
-20
-15
-10
-5
0
5
10
15
202007 Q
1
2007 Q
3
2008 Q
1
2008 Q
3
2009 Q
1
2009 Q
3
2010 Q
1
2010 Q
3
2011 Q
1
2011 Q
3
Th
ou
san
ds o
f jo
bs
*King, Kitsap, Pierce, and Snohomish Counties. Source: Puget Sound Economic Forecaster.
April 6, 2009
16
U.S. Household Net Worth
0
10,000
20,000
30,000
40,000
50,000
60,000
70,0001980 Q
1
1982 Q
1
1984 Q
1
1986 Q
1
1988 Q
1
1990 Q
1
1992 Q
1
1994 Q
1
1996 Q
1
1998 Q
1
2000 Q
1
2002 Q
1
2004 Q
1
2006 Q
1
2008 Q
1
Bil
lio
ns o
f d
oll
ars
April 6, 2009
17
Change in 2009 Forecast from Sept. 2008 to Feb. 2009
1.3%
3.1%
0.4%
-0.3%
-2.4%
5.6%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
PS Region Employment US PCE Deflator US Savings Rate
Sep '08
Forecast
Feb '09
Forecast
Source: Puget Sound Economic Forecaster; Global Insight (savings rate).
April 6, 2009
18
Retail Sales Tax
• Revenue was flat in 2008 (up 0.2% from 2007)
– Sharp deceleration over course of year
– Snowstorm hurt December revenue (-11.4% yr-over-yr)
– Non-current revenue declined $1.4 mil. from 2007
• Performance by industry in 2008:
– Construction was up 10.4%; flat in the 4th quarter
– Retail trade was down 3.1%; flat without auto sales
o Motor vehicles & parts fell 20.6%
– Finance, insurance, real estate declined 5.0%
– Service industries had modest growth of 1.5%
April 6, 2009
19
Growth of Seattle Retail Sales Tax Revenue
-10%
-5%
0%
5%
10%
15%2
00
1 Q
1
20
01
Q3
20
02
Q1
20
02
Q3
20
03
Q1
20
03
Q3
20
04
Q1
20
04
Q3
20
05
Q1
20
05
Q3
20
06
Q1
20
06
Q3
20
07
Q1
20
07
Q3
20
08
Q1
20
08
Q3
Ye
ar-
ov
er-
ye
ar
gro
wth
April 6, 2009
20April 6, 2009
21
Sales Tax Forecast
• Reflects forecast of major regional recession
• Over two-thirds of tax base is in cyclical industries
– Construction, trade, manufacturing, etc.
o Construction’s share of base = 24.4% in 2008
• Forecast of peak-to-trough revenue decline is 10.6%
– Compared to 11.4% drop in 2001-03
– Expect 6.7% decline in 2009; 1.9% drop in 2010
• Construction forecast: real decline of 23.1% over 3 years
– Largest real decline since at least 1975
– Assumes continued public construction
• Motor vehicle sales weakness will continue in 2009
April 6, 2009
22
Construction Cycles: Real* Taxable Retail Sales
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1976-7
9
1979-8
3
1983-9
1
1991-9
5
1995-0
0
2000-0
4
2004-0
8
2008-1
1
*Inflation adjusted by Seattle CPI.
April 6, 2009
23
B&O Tax
• B&O revenue started 2008 with healthy growth and
ended the year in decline
• From 2007 to 2008 B&O revenue declined by $3.8 mil. (2.3%)
– Non-current revenue declined by $5.3 mil.
– Excluding non-current yields $1.5 mil. gain
• Forecast reflects:
– Severity of downturn
– 50% of B&O base is relatively stable service industries
– Lower expectations for non-current revenue
• Forecast of peak-to-trough revenue decline is 8.1%
– Compared to 8.6% in 2001-03
April 6, 2009
24April 6, 2009
-8%
-4%
0%
4%
8%
12%
16%2004 Q
1
2004 Q
3
2005 Q
1
2005 Q
3
2006 Q
1
2006 Q
3
2007 Q
1
2007 Q
3
2008 Q
1
2008 Q
3
Obligation Quarter
B&O Payments by Obligation Quarter year-over-year growth rate
Current
Obligations
Total
April 6, 2009 25
280
290
300
310
320
330
340
350
2006 2007 2008 2009 2010
Mil
lio
ns
of
do
lla
rs
Combined Sales and B&O Tax Revenue Forecast
Nov-08
Forecast
Apr-09 Forecast
26
Utility Business Tax – Natural Gas
• Natural Gas tax revenue is dependent on both weather
and prices
• Natural gas prices rose 27% in 2008 over 2007
• Year-over-year Henry Hub prices were up 49% in the
3rd quarter
• Utility Tax revenue on natural gas was also up 44% in the
3rd quarter
• Natural gas spot prices have plummeted since the summer,
along with other energy commodities
• As a result, receipts are expected to be down 15% for
2009 over 2008, a 24% decrease from the Adopted
2009 Budget
April 6, 2009
27
Seasonally Adjusted Utility Gas Tax Revenue
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
1990
Q1
1991
Q1
1992
Q1
1993
Q1
1994
Q1
1995
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Quarterly
Receipts
(Left)
Yr/Yr Growth
Rate (Right)
Utility Business Tax – Natural Gas
April 6, 2009
28
Real Estate and REET
• 2008 saw the national housing and property bust come
to Seattle
• Seattle single-family and condo sales plunged
throughout the year
– Single-family sales were down 33% year-over-year in Q408,
28% down for the year
– Condo sales were down 63% for the same period, 42% down for
the year
• Commercial activity also slowed considerably as
financing for large developments has evaporated
• Home sales are expected to pick up at the end of 2009,
as home prices continue to fall during 2010
April 6, 2009
29
Real Value of Seattle Real Estate Sales
0
1,000
2,000
3,000
4,000
5,000
6,000
1982
1985
1988
1991
1994
1997
2000
2003
2006
Mil
lio
ns
of
20
00
do
lla
rs
Comm.
Condo
Resid.
Real Estate and REET
April 6, 2009
30
• The REET forecast expects a 28% decline in average
home prices from peak (3Q07) to trough (4Q10)
• This forecast expects the Seattle market to mimic the
national one
• Foreclosures are expected to rise in the area as the
Seattle market was one of the last to see subprime and
alternative mortgage originations
• Office vacancy rates remain under 10%, a good sign
compared to the national 14.2% rate
• There is limited scope for large property deals and only
downside risk to vacancy rates
Real Estate and REET
April 6, 2009
31
Seasonally Adjusted Seattle Single-family Forecast
0
100,000
200,000
300,000
400,000
500,000
600,000
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
0
500
1000
1500
2000
2500
3000
3500
Sales Fcst
(right)
Avg Price
Fcst (left)
Real Estate and REET
April 6, 2009
32
REET Revenue and Forecast by Sector
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
f
2010
f
Residential
Condo
Commercial
Real Estate and REET
April 6, 2009
33
General Government Revenue
April 6, 2009
GSF - Item Nov Actuals Act-Nov Nov Mar Mar-Nov Nov Mar Mar-Nov
Property Taxes 238,746,000 238,257,418 (488,582) 246,218,000 245,736,000 (482,000) 251,331,000 249,941,000 (1,390,000)
Business & Sales Taxes 343,592,942 332,699,802 (10,893,140) 340,250,145 313,994,265 (26,255,880) 345,804,743 312,789,344 (33,015,399)
Public Utility Taxes 80,780,000 79,686,308 (1,093,692) 87,349,474 90,984,903 3,635,429 91,808,777 94,375,700 2,566,923
Private Utility Taxes 57,341,000 55,615,966 (1,725,034) 57,981,000 54,852,267 (3,128,733) 58,176,000 55,228,681 (2,947,319)
Other Notable GSF Revenues 55,623,000 56,500,384 877,384 61,420,000 58,095,274 (3,324,726) 67,426,000 61,148,796 (6,277,204)
Subtotal 776,082,942 762,759,879 (13,323,064) 793,218,619 763,662,709 (29,555,910) 814,546,520 773,483,521 (41,062,999)
All Else 76,736,360 86,355,721 9,619,361 79,035,588 78,778,988 (256,600) 80,544,256 80,001,256 (543,000)
GSF - Grand Total 852,819,302 849,115,599 (3,703,703) 872,254,207 842,441,697 (29,812,510) 895,090,776 853,484,777 (41,605,999)
DPR Charter Revenue 38,141,246 37,191,812 (949,434) 39,184,313 37,827,110 (1,357,203) 40,007,170 38,144,348 (1,862,822)
Real Estate Excise Tax 30,889,914 30,313,740 (576,174) 31,814,326 20,762,068 (11,052,258) 35,565,629 22,010,411 (13,555,219)
BTG - Employee Hours Tax 4,781,252 4,448,764 (332,488) 5,261,136 5,261,136 - 5,647,751 5,647,751 -
BTG - Commercial Parking Tax 12,844,000 13,302,260 458,260 17,874,000 17,874,000 - 21,347,000 21,347,000 -
2008 2009 2010
34April 6, 2009
2009
Adopted Budget
(Nov. 2008)
April
Forecast Revision
(Apr. 2009) Difference
2008 21,400,000 15,200,000 (6,200,000)
2009 (6,510,000) (40,530,000) (34,020,000)
2010 (14,875,000) (58,851,000) (43,976,000)
General Subfund Status
Annual Operating Position
(Revenues minus Expenses)
35April 6, 2009
2009 Adopted Budget
(Nov. 2008)
April Forecast Revision
(Apr. 2009)
Resources
2008 Yearend Balance
(includes anticipated abandonments)8,481,000 10,836,000
2009 Estimated Revenue 31,814,000 20,762,000
2010 Estimated Revenue 35,566,000 22,010,000
Total Resources Available in the Biennium 75,861,000 53,608,000
Biennial Planned Expenditures
2009-10 Debt Service Expenditures 28,013,000 28,013,000
2009-10 Discretionary Expenditures 47,021,000 47,021,000
Total Planned Expenditures in the Biennium 75,034,000 75,034,000
Balance 827,000 (21,426,000)
Cumulative Reserve Subfund (REET) Status
36
Risks to the forecast
• Risks are large and mostly on the downside
– This recession is different, thus harder to forecast
– Housing market uncertainty is great
– Forecasts assume success of stimulus, bank bailout
– Savings rate shift makes it hard to forecast consumption
– Construction outlook is very uncertain
– Potential for more cuts at region’s large employers
• Upside potential
– Federal policies may be more effective than expected
– B&O non-current revenue may bounce back
April 6, 2009
37
Pessimistic Revenue Scenario
• Based on pessimistic U.S. forecast. Assumptions:
– Financial conditions worsen, restricting access to credit
• This leads to reduced spending and investment,
and further weakens the housing market
• The weak housing market further reduces wealth
and damages consumer confidence
• Causing a steeper drop in consumer spending
• Employment falls for 11 consecutive quarters
– Employment growth resumes in 2010 Q4
• Recovery is weak as consumers rebuild savings
April 6, 2009
38April 6, 2009
128
130
132
134
136
138
1402007 Q
1
2008 Q
1
2009 Q
1
2010 Q
1
2011 Q
1
2012 Q
1
Millio
ns o
f jo
bs
U.S. Employment Forecast Scenarios
Baseline forecast
Low scenario
Source: Global Insight 's March 2009 U.S. forecast.
April 6, 2009 39
865
870
875
880
885
890
895
2008 2009 2010
Mill
ion
s
General Subfund Revenue Scenarios
Baseline
Low
April 6, 2009 40
-
5
10
15
20
25
30
35
2008 2009 2010
Mill
ion
s
Real Estate Excise Tax Scenarios
Base
Low
