WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. and Washington State Economic Outlook
Presented toThe Institute for Real Estate Management
Steve LerchExecutive Director
September 14, 2017Seattle, Washington
Economic OutlookSeptember 14, 2017
Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast summary
• The preliminary economic forecast for the U.S. is very similar to the June forecast; the impacts of Hurricane Harvey will be incorporated in the final September forecast
• The preliminary economic forecast for WA has slightly higher employment, personal income, and housing permits than in June
• Downside risks to the baseline include weak labor productivity growth, uncertainty regarding international trade policy and geopolitical concerns
Economic OutlookSeptember 14, 2017
Slide 2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast risks
Upside
• Elevated consumer, business confidence could translate into stronger growth
• Stock market gains could translate into faster household consumption growth
• Stronger global economic growth
Downside
• Stagnant labor productivity inhibits wage growth
• Geopolitical risks: North Korea, Russia
• International trade policy uncertainty
Economic OutlookSeptember 14, 2017
Slide 3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Consumer confidence is at or above pre-recession levels
0
25
50
75
100
125
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 August 2017
Economic OutlookSeptember 14, 2017
Slide 4 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The stock market continues to grow
0
500
1000
1500
2000
2500
3000
1990 1994 1998 2002 2006 2010 2014
S&P 500
Source: Yahoo! Finance, data through August 2017
Economic OutlookSeptember 14, 2017
Slide 5 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Global GDP growth is expected to improve gradually
-1
0
1
2
3
4
5
6
2005 2008 2011 2014 2017 2020
Percen
tReal global GDP growth
Source: International Monetary Fund, World Economic Outlook, July 2017; historic data through 2016
Economic OutlookSeptember 14, 2017
Slide 6 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Labor productivity has remained low since 2011
-3
-2
-1
0
1
2
3
4
5
6
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Labor productivity, year over year % change
Source: U.S. Bureau of Labor Statistics, nonfarm businesses, data through 2017 Q2
Economic OutlookSeptember 14, 2017
Slide 7 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA portion of U.S. personal income and population
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Personal income Population
Source: U.S. Bureau of Economic Analysis, 2017 Q2
Economic OutlookSeptember 14, 2017
Slide 8 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Year over year population growth: U.S., CA, WA, OR, ID
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2016 Q2 2016 Q3 2016 Q4 2017 Q1
U.S. CA WA OR ID
Source: U.S. Bureau of Economic Analysis
Economic OutlookSeptember 14, 2017
Slide 9 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Year over year personal income growth: U.S., CA, WA, OR, ID
0
0.01
0.02
0.03
0.04
0.05
0.06
2016 Q2 2016 Q3 2016 Q4 2017 Q1
U.S. CA WA OR ID
Source: U.S. Bureau of Economic Analysis
Economic OutlookSeptember 14, 2017
Slide 10 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0
1
2
3
4
5
6
7
8
9
10
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016 2017YTD
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
So far in 2017, WA employment change slightly stronger than 2016
Source: Bureau of Labor Statistics, ERFC; U.S. data through August 2017, WA data through July 2017
Economic OutlookSeptember 14, 2017
Slide 11 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington vs U.S. employment growth: July 2016 to July 2017
Total
Construction
Information
Retail Trade
Educ/Health
Services
Leisure/Hospitality
Prof/Business
Services
Manufacturing
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
U.S. WA
Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through July 2017
Economic OutlookSeptember 14, 2017
Slide 12 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington electronic shopping employment is exploding
0
5
10
15
20
25
30
35
40
2001 2003 2005 2007 2009 2011 2013 2015 2017
Th
ou
san
ds
Washington Electronic Shopping and Mail Order
Employment
Source: Employment Security Department; Monthly data through August 2017
Economic OutlookSeptember 14, 2017
Slide 13 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Wage growth in WA has been at or above national rates since 2011
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2002 2004 2006 2008 2010 2012 2014 2016
Year-over-year average weekly wage growth, 3
month average
U.S. WA
Source: U.S. Bureau of Labor Statistics, data through 2017 Q1
Economic OutlookSeptember 14, 2017
Slide 14 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Average weekly wages, 2017 Q1: US, WA, selected WA counties
U.S.
WA
King
Snohomish
Benton
Skamania
San Juan
Okanogan
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Source: U.S. Bureau of Labor Statistics
Economic OutlookSeptember 14, 2017
Slide 15 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Agricultural exports are showing some improvement, transportation equipment is declining
-60%
-40%
-20%
0%
20%
40%
60%
80%
2011 2012 2013 2014 2015 2016 2017
Year over year growth, quarterly WA exports
All Other Transp Equip Ag Products
Source: WISERTrade, data through 2017 Q2
Economic OutlookSeptember 14, 2017
Slide 16 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S., WA housing permits trending up; U.S. remains below historical averages
0
10
20
30
40
50
60
70
80
0
500
1,000
1,500
2,000
2,500
2000 2002 2004 2006 2008 2010 2012 2014 2016
Th
ou
san
ds,
WA
Th
ou
san
ds,
U.S
.
U.S. WA
Source: U.S. Census Bureau, seasonally adjusted annual rates, data through July 2017
Economic OutlookSeptember 14, 2017
Slide 17 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA residential contract data shows continuing shift towards single family
5
10
15
20
25
30
20
30
40
50
60
70
2012 2013 2014 2015 2016 2017
Mu
lti-
Fam
ily
Sin
gle
Fam
ily
Square Footage of Residential Construction Contracts,
SAAR, 6MMA, Millions
Single Family Multi-Family
Source: Dodge, ERFC; data through June 2017
Single Family square footage is up 5% and Multi-Family is down 43% year over year (6mma).
Economic OutlookSeptember 14, 2017
Slide 18 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
AK
Washington ranks 3rd in year-over-year home price growth
-1.1 to 1.9%
2.0 to 4.7%
5.0 to 7.0%
7.1 to 12.8%
Source: Zillow, Data: ZHVI Summary, July 2016
Economic OutlookSeptember 14, 2017
Slide 19 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Median home sale price growth for selected counties (2016 Q2 – 2017 Q2)
San JuanSkamania
ClarkKing
Whatcom
Statewide
Whitman
Grant
Ferry
Klickitat
Columbia
-25
-20
-15
-10
-5
0
5
10
15
20
25
Percen
t
Source: Runstad Center for Real Estate Research, University of Washington
Economic OutlookSeptember 14, 2017
Slide 20 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Affordability has been decreasing in recent years, especially in King County
0
20
40
60
80
100
120
140
160
180
200
1994 1997 2000 2003 2006 2009 2012 2015
Affordability Index for Washington and King County
Washington King County
An index score of 100 means a median-income family can afford a median-priced home.
Source: Runstad Center for Real Estate Studies, University of Washington, data through 2017 Q2
Economic OutlookSeptember 14, 2017
Slide 21 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Rental increases by metro area, March 2016 to March 2017
-20% -10% 0% 10% 20% 30% 40% 50%
Walla Walla
Ellensburg
Wenatchee
Bellingham
Everett
Mt. Vernon
Yakima
Tacoma
Olympia
Longview
Seattle
STATEWIDE
Pullman
Vancouver
Tri-cities
Bremerton
Spokane
Source: Runstad Center for Real Estate Research, University of Washington
Economic OutlookSeptember 14, 2017
Slide 22 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Seattle area Class A office lease and vacancy rates, 2017 Q2
0%
5%
10%
15%
20%
25%
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Bellevue CBD Seattle
Downtown
Tacoma/Fife South King
Co.
Everett
Lease rate Vacancy rate
Source: CBRE, Puget Sound Office Marketview, 2017 Q2
Lease rate:
Annual, full service per square foot
Economic OutlookSeptember 14, 2017
Slide 23 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Seattle area industrial lease and vacancy rates, 2017 Q2
0%
1%
2%
3%
4%
5%
6%
7%
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
East King Co. Seattle South King Co. Tacoma/Fife
Lease rate Vacancy rate
Source: CBRE, Puget Sound Industrial Marketview, 2017 Q2
Lease rate:
Monthly, per square foot, NNN
Economic OutlookSeptember 14, 2017
Slide 24 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA commercial contract data has been trending down since mid-2016
0
5
10
15
20
25
30
2012 2013 2014 2015 2016 2017
Square Footage of Commercial Construction Contracts, SAAR, 6MMA, Millions
Source: Dodge, ERFC; data through June 2017
Commercial includes office, retail, food service, and motels/hotel.
Commercial square footage is down 19% year over year (6mma).
Economic OutlookSeptember 14, 2017
Slide 25 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Real GDP is slightly higher than in the June forecast
14,000
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
19,000
2007 2009 2011 2013 2015 2017 2019 2021
Billio
ns o
f 2
00
9 D
ollars
Real GDP
September preliminary June
Real GDP at the end of 2021 is 0.2% higher than in the June forecast.
Source: ERFC September 2017 Preliminary forecast; data through Q2 2017
Economic OutlookSeptember 14, 2017
Slide 26 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil prices are slightly higher compared to the June forecast
25
35
45
55
65
75
85
95
105
115
125
2007 2009 2011 2013 2015 2017 2019 2021
Do
llars P
er B
arrel
Average Price of Crude Oil
September Preliminary June
Source: DOE, ERFC September 2017 Preliminary forecast; historical data through Q2 2017
Economic OutlookSeptember 14, 2017
Slide 27 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The U.S. nonfarm payroll employment forecast is slightly higher than in June
125
130
135
140
145
150
155
2007 2009 2011 2013 2015 2017 2019 2021
Millio
ns
U.S. Nonfarm Payroll Employment
September Preliminary June
By the end of 2021, U.S. employment is 0.4% higher than in the June forecast.
Source: ERFC September 2017 Preliminary forecast; data through Q2 2017
Economic OutlookSeptember 14, 2017
Slide 28 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The Fed is expected to raise rates in December
0
1
2
3
4
5
6
2007 2009 2011 2013 2015 2017 2019 2021
Percen
tFederal Funds Rate
Source: Global Insight, ERFC September 2017 Preliminary forecast; data through Q2 2017Note: Vertical black line indicates last actual
The forecast assumesthe rate will rise gradually, eventually reaching 3.00%.
Economic OutlookSeptember 14, 2017
Slide 29 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is slightly higher than in June
0
100
200
300
400
500
600
2013 2014 2015 2016 2017 2018 2019 2020 2021
Billio
ns o
f U
SDWashington personal income
September preliminary June
Source: ERFC September 2017 Preliminary forecast; historical data through 2016
2017 YTD data were revised slightly higher. WA personal income is 1.2% higher in 2021 compared to the June forecast.
Economic OutlookSeptember 14, 2017
Slide 30 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment forecast is slightly higher than in June
2,600
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
2007 2009 2011 2013 2015 2017 2019 2021
ThousandsWashington Nonfarm Payroll Employment
September preliminary June
Source: ERFC September 2017 Preliminary forecast; historical data through Q1 2017
The WA nonfarm employment forecast is 43,000 jobs higher (1.2%) by 2021 compared to June.
Economic OutlookSeptember 14, 2017
Slide 31 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington housing permits forecast is slightly higher compared to June
20
25
30
35
40
45
50
2013 2014 2015 2016 2017 2018 2019 2020 2021
Th
ou
san
ds
Washington Housing Permits
September preliminary June
Source: ERFC September 2017 Preliminary forecast; historical data through 2016
Economic OutlookSeptember 14, 2017
Slide 32 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Large commercial property sales made a comeback in the 2nd quarter
0
1
2
3
4
5
6
7
8
9
10
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
$Billions
Seasonally Adjusted Taxable Real Estate Excise Activity
Total Total excl. sales >$10M
Source: ERFC; Monthly data through July 2017 preliminary
Large commercial sales (>$10 million) totaled $5.2 billion in the 4th quarter of 2016, $1.8 billion in the 1st
quarter of 2017 and $2.9 billion in the 2nd
quarter.
Large commercial sales totaled $478 million (preliminary) in July while sales less than $10 million spiked.
Economic OutlookSeptember 14, 2017
Slide 33 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The price of cannabis may be nearing a floor
5
10
15
20
25
30
Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul
Do
llars p
er g
ram
Price of Recreational Cannabis Sold at Retail Stores
Source: LCB, ERFC; data through July 2017
Economic OutlookSeptember 14, 2017
Slide 34 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Cannabis revenue continues to be volatile
30
40
50
60
70
80
90
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17
Millio
ns
Retail Cannabis Sales
Recreational Medical Forecast
Source: LCB, ERFC; data through July 2017
2017-19 revenue forecasts:
Cannabis revenue =$685 million
Total state general fund = $40.9 billion
Economic OutlookSeptember 14, 2017
Slide 35 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• As has been the case for some time, Washington’s economy is continuing to outperform the nation
• Threats to economic expansion include slow labor productivity, geopolitical risks and uncertainty regarding international trade policy
• Home prices and residential rents continue to increase in many but not all parts of Washington
• Vacancy rates for central Puget Sound Class A office space have dropped from nearly 16% in 2012 to 11.3% in 2017 Q2
• Vacancy rates remain low for central Puget Sound area industrial property
Economic OutlookSeptember 14, 2017
Slide 36 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast CouncilPO Box 40912Olympia WA 98504-0912
www.erfc.wa.gov360-534-1560