WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
Economic and Revenue Outlook
Presented toSouth Sound Construction and Financial
Managers Association
Steve Lerch
Chief Economist & Executive Director
December 12, 2019
Tacoma, Washington
Economic and Revenue Outlook
December 12, 2019
Slide 1WASHINGTON 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
Economic and Revenue Outlook
December 12, 2019
Slide 2WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• Both the U.S. and WA economies are performing well but are expected to slow
• Inflation remains tame
• U.S. manufacturing activity has slowed, although the resolution of the GM strike should be helpful
• The 737 MAX is assumed to return to service in early 2020 with an increase in both deliveries and production
• State revenue collections have been strong but are expected to slow to more sustainable levels
Economic and Revenue Outlook
December 12, 2019
Slide 3WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast risks
Upside
• Consumer and business confidence have dipped but remain at high levels
• U.S., WA labor markets have slowed compared to 2018 but remain strong
Downside
• International trade policy uncertainty
• Geopolitical risks: North Korea, China, Russia, Iran, Venezuela, Brexit
• Maturing economic expansion
Economic and Revenue Outlook
December 12, 2019
Slide 4WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Despite some volatility this year, consumer confidence remains at high levels
0
25
50
75
100
125
150
2005 2007 2009 2011 2013 2015 2017 2019
Index
Mich: 1966Q1 = 100, SAConf Board: 1985 =100, SA
U. Michigan Conf Board
Sources: University of Michigan, Conference Board; data through November 2019
Economic and Revenue Outlook
December 12, 2019
Slide 5WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Small business optimism has declined but remains historically high
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 October 2019
Economic and Revenue Outlook
December 12, 2019
Slide 6WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
A survey covering a broader mix of firms finds business expectations have been declining since late 2018
70
80
90
100
110
120
130
2015 2015 2016 2016 2017 2017 2018 2018 2019 2019
Atlanta Federal Reserve Business Expectations Index
The index measures one year ahead expectations that firms have about their own employment, investment and sales.
Source: Atlanta Federal Reserve Bank, data through November 2019
Economic and Revenue Outlook
December 12, 2019
Slide 7WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S., WA job growth below 2018 averages but remain healthy
0
1
2
3
4
5
6
7
8
9
10
0
50
100
150
200
250
300
350
400
450
500
2011 2012 2013 2014 2015 2016 2017 2018 2019
YTD
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
Source: Bureau of Labor Statistics, Employment Security Dept.; WA data through Oct. 2019; U.S. data trough Nov. 2019
Economic and Revenue Outlook
December 12, 2019
Slide 8WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Unemployment rates remain low
3
5
7
9
11
13
15
17
19
2005 2007 2009 2011 2013 2015 2017 2019
Percen
t
Unemployment rate Alternative measure
Sources: U.S. Bureau of Labor Statistics; data through November 2019
The alternative unemployment measure includes discouraged workers and those working part time for economic reasons.
Economic and Revenue Outlook
December 12, 2019
Slide 9WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Hourly earnings are increasing but growth has slowed
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Percen
tYear over year growth, U.S. avg. hourly earnings
Source: Bureau of Labor Statistics, data through November 2019
Economic and Revenue Outlook
December 12, 2019
Slide 10WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Employment-population ratio is rising but remains below late 90s peak
50
52
54
56
58
60
62
64
66
68
1976 1982 1988 1994 2000 2006 2012 2018
Percen
t
Employed persons as % of age 16+ population: U.S. & WA
U.S. WA
Source: U.S. Bureau of Labor Statistics, annual data through 2018
Economic and Revenue Outlook
December 12, 2019
Slide 11WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The number of workers in WA receiving layoff notices this year is the highest since 2009
0
2000
4000
6000
8000
10000
12000
14000
16000
2004 2006 2008 2010 2012 2014 2016 2018
WA workers receiving mass layoff notices
Firms with 100+ employees planning layoffs of 50 or more workers are required to notify workers 60 days before closure.
Source: Employment Security Dept., data through 2019
Economic and Revenue Outlook
December 12, 2019
Slide 12WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Philadelphia Fed leading economic indexes for WA, U.S. trending down but not in recession territory
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
1982 1985 1989 1992 1996 1999 2003 2006 2010 2013 2017
U.S. WA
Source: Federal Reserve Bank of Philadelphia, data through October 2019
Economic and Revenue Outlook
December 12, 2019
Slide 13WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Timing of next recession: National Association of Business Economists survey
0%
10%
20%
30%
40%
50%
2019 2020 H1 2020 H2 2021 H1 2021 H2 orlater
Percen
t of
resp
on
den
ts
Source: National Association of Business Economists, Oct. 2019 Outlook Survey
Economic and Revenue Outlook
December 12, 2019
Slide 14WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
NY Federal Reserve model indicates recession probabilities have dropped in last two months
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1960 1966 1972 1978 1985 1991 1997 2003 2010 2016
12 month ahead recession probability
Nov. 2020 probability = 25%
Source: Federal Reserve Bank of New York; monthly data through November 2019
The model predicts recession probabilities 12 months in the future based on the difference in yields between 10 year and 3 month Treasury bonds.
Economic and Revenue Outlook
December 12, 2019
Slide 15WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
There is a heightened risk of a downturn in construction in WA
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Percen
tConstruction Share of Employment
Washington United States
Source: ERFC November forecast; data through Q3 2019Note: Vertical black line indicates last actual in September
Since 1975, WA construction employment has exceeded 6% of total employment only three times.
Forecast
Economic and Revenue Outlook
December 12, 2019
Slide 16WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
During the last construction downturn, construction revenue dropped from 12% to 8% of GF-S
0%
2%
4%
6%
8%
10%
12%
14%
0
500
1,000
1,500
2,000
2,500
3,000
2006 2008 2010 2012 2014 2016 2018
$ m
illio
ns
Construction revenue by FY
Construction revenue % GF-S
Source: Dept. of Revenue, ERFC; data through FY 2019
Economic and Revenue Outlook
December 12, 2019
Slide 17WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Manufacturing has slowed nationally but continues to expand in WA
30
35
40
45
50
55
60
65
70
75
80
2000 2001 2003 2005 2007 2009 2011 2012 2014 2016 2018
Institute for Supply Mgmt. Manufacturing Index: U.S., WA
U.S. WA
Source: ISM, WA data through Oct. 2019; U.S. data through Nov. 2019
Values above 50 indicate expansion, below 50 indicate contraction.
Economic and Revenue Outlook
December 12, 2019
Slide 18WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Relative to GDP, Federal debt is expected to reach levels last seen just after WW II
0
10
20
30
40
50
60
70
80
90
100
1980 1986 1992 1998 2004 2010 2016 2022 2028
Percen
t
Federal debt as % GDP
Source: Congressional Budget Office, Update to Budget and Economic Outlook Aug. 2019, historic data through 2018
Forecast
Economic and Revenue Outlook
December 12, 2019
Slide 19WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
So far this year, WA exports are down by 23% compared to last year
-40%
-30%
-20%
-10%
0%
10%
20%
2014 2015 2016 2017 2018 2019 YTD
WA exports by industry, year over year growth
Transportation Equip Ag Products All other
Source: WISERTrade, data through September 2019
Economic and Revenue Outlook
December 12, 2019
Slide 20WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
GDP growth is expected to slow
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Annual GDP growth
Source: IHS Markit, ERFC November 2019 forecast; data through 2018
Economic and Revenue Outlook
December 12, 2019
Slide 21WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil prices are expected to gradually decline to $52 per barrel
20
30
40
50
60
70
80
90
100
110
120
2007 2009 2011 2013 2015 2017 2019 2021 2023
Do
llars P
er B
arrel
Source: Energy Information Administration, IHS Markit, ERFC November 2019 forecast; data through Q3 2019Note: Vertical black line indicates last actual
Forecast
Economic and Revenue Outlook
December 12, 2019
Slide 22WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. employment is expected to grow 1.6% this year, 1.1% next year and average 0.5% growth in 2021 - 2023
125
130
135
140
145
150
155
160
2007 2009 2011 2013 2015 2017 2019 2021 2023
Millio
ns
U.S. Nonfarm Payroll Employment
Source: IHS Markit, ERFC; data through Q3 2019Note: Vertical black line indicates last actual
Forecast
Economic and Revenue Outlook
December 12, 2019
Slide 23WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is expected to average 4.5% growth for 2019 - 2023
0
100
200
300
400
500
600
700
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Billio
ns o
f U
SD
Washington personal income
Source: ERFC November 2019 forecast; historical data through 2018
Personal income is the sum of wages and salaries; income from interest, dividends and rent; transfer payments such as Social Security and unemployment insurance.
Economic and Revenue Outlook
December 12, 2019
Slide 24WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA employment is expected to grow 1.9% this year, 1.5% in 2020 then slow to under 1% for 2021 - 2023
2,600
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
2007 2009 2011 2013 2015 2017 2019 2021 2023
Th
ou
san
dsWashington Nonfarm Payroll Employment
Source: ERFC November 2019 forecast; historical data through Q3 2019
Forecast
Economic and Revenue Outlook
December 12, 2019
Slide 25WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington housing permits will average 42,500 units per year for 2020 - 2023
20
25
30
35
40
45
50
2013 2015 2017 2019 2021 2023
Th
ou
san
ds
Washington Housing Permits
Source: ERFC November 2019 forecast; historical data through 2018
Economic and Revenue Outlook
December 12, 2019
Slide 26WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
General Fund-State plus cannabis revenues for 2017-19 biennium
Sales Tax,
21,339
B&O, 8,587
Prop. Tax,
5,143
REET, 2,183
Cannabis, 752
Cigarettes,
703
Spirits, total,
562
Other, 5,377
$ millions
Source: ERFC November 2019 forecast
Economic and Revenue Outlook
December 12, 2019
Slide 27WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Revenue Act collections remain strong after second quarter jump
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
Source: DOR and ERFC; monthly data through September 2019 activity
* Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act
Adjusted collections for second quarter activity grew at 8.1% year over year (6.3% excluding extra-strong growth in remittances).
Adjusted collections for third quarter activity grew at 6.6% year over year.
Economic and Revenue Outlook
December 12, 2019
Slide 28WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Cannabis revenue growth is expected to moderate
0
5
10
15
20
25
30
35
40
2015 2016 2017 2018 2019 2020
Millio
ns
Retail Cannabis Collections
Forecast History
Source: ERFC November 2019 forecast; historical data through October 2019
Economic and Revenue Outlook
December 12, 2019
Slide 29WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• The U.S. and Washington economies are expected to continue growing but at a slower pace over the next several years
• As has been the case for some time, Washington’s economy is continuing to outperform the nation
• State revenue collections have been strong but are expected to slow as economic growth moderates
• Threats to economic expansion include concerns about international trade and fiscal policy, geopolitical risks and a maturing expansion
Economic and Revenue Outlook
December 12, 2019
Slide 30WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast CouncilPO BOX 40912Olympia WA 98504-0912
www.erfc.wa.gov360-534-1560
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