WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
Washington State Economic Outlook
Presented to the Information Processing Management Association
Steve LerchExecutive Director
June 21, 2018Tumwater, Washington
IPMAJune 21, 2018
Slide 1 WASHINGTON 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
IPMAJune 21, 2018
Slide 2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
ERFC Forecast Process
National Economic Forecast
Preliminary Washington State Economic Forecast
Review by Work Group
Review by Governor’s Council of Economic Advisors &
Economic and Revenue Forecast Council
Final National and Washington Economic Forecast
Review by Forecast Council
Final Washington General Fund Revenue Forecast
ERFC and Revenue-Generating Agencies Create Revenue Forecasts
The national economic forecast is based on a modified version of the IHS Markitmodel of the U.S. economy
IPMAJune 21, 2018
Slide 3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• The economic forecast for the U.S. is slightly stronger than in February.
• The economic forecast for WA has slightly higher personal income than in February.
• Risks to the baseline include concerns about international trade, geopolitical risks and a maturing economic expansion.
• The revenue collection variance since the February forecast is $189 million.
• Near General Fund revenue for the 2017-19 biennium has been increased by $298 million, and revenue for the 2019-21 biennium has been increased by $287 million.
IPMAJune 21, 2018
Slide 4 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast risks
Upside
• Elevated consumer, business confidence could translate into stronger growth
• Stronger global economic growth
Downside
• International trade and fiscal policy uncertainty
• Geopolitical risks: North Korea, Russia, Iran, Venezuela, Europe
• Higher oil and gasoline prices
• Maturing economic expansion
IPMAJune 21, 2018
Slide 5 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Consumers remain confident about economic prospects
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 May 2018
IPMAJune 21, 2018
Slide 6 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Small business optimism and sales expectations are above pre-recession levels
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 May 2018
IPMAJune 21, 2018
Slide 7 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Freight carried by trucks has steadily increased since the end of the recession
70
75
80
85
90
95
100
105
110
115
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
In
dex,
20
15
= 1
00
Truck tonnage index, SA
Source: American Trucking Association, data through March 2018
IPMAJune 21, 2018
Slide 8 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0
1
2
3
4
5
6
7
8
9
0
50
100
150
200
250
300
350
400
450
2010 2011 2012 2013 2014 2015 2016 2017 2018YTD
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
U.S., WA labor markets look strong
Source: Bureau of Labor Statistics, ERFC; data through May 2018
IPMAJune 21, 2018
Slide 9 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Adjusted for inflation, hourly wage growth remains muted
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2007 2008 2009 2010 2011 2013 2014 2015 2016 2017
Year-over-year growth in U.S. real average hourly wages
Source: U.S. Bureau of Labor Statistics, monthly data through May 2018
IPMAJune 21, 2018
Slide 10 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Through May, layoff announcements are 6% above the same time period last year
0 20,000 40,000 60,000 80,000 100,000
All other
Telecomm
Consumer Goods
Services
Health Care/Products
Retail
Layoff announcements
Jan - May 2017 Jan - May 2018
Source: Challenger, Gray & Christmas; Job Cut Report, May 2018
IPMAJune 21, 2018
Slide 11 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Global GDP forecasts have strengthened compared to last year
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2016 2017 2018 2019 2020 2021 2022
Real global GDP growth
Apr. 2018 Apr. 2017
Source: International Monetary Fund, World Economic Outlook; April 2017 and April 2018
IPMAJune 21, 2018
Slide 12 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil and gasoline prices appear to be heading higher
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$0
$10
$20
$30
$40
$50
$60
$70
$80
2015 2016 2017 2018
Oil (WTI, per barrel) Gasoline (U.S. regular, per gallon)
Source: U.S. Dept. of Energy, data through May 2018
IPMAJune 21, 2018
Slide 13 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
As of 2018, our GDP forecast is essentially equal to “potential GDP”
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
19,000
19,500
20,000
2015 2016 2017 2018 2019 2020 2021 2022 2023
Billio
ns 2
00
9 d
ollars
Actual & forecast GDP Potential GDP
Potential GDP is defined as the economy’s maximum sustainable output
Source: CBO, BEA, ERFC June 2018 preliminary forecast
IPMAJune 21, 2018
Slide 14 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
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 April 2018
IPMAJune 21, 2018
Slide 15 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
At the start of the last three recessions, Philadelphia Fed leading index was below 1.0% and declining
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
1983 1987 1991 1995 1999 2003 2007 2011 2015
Percen
t ch
an
ge
Philadelphia Federal Reserve leading economic index
Source: Federal Reserve Bank of Philadelphia, data through March 2018
IPMAJune 21, 2018
Slide 16 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Probability of recession by year, May 2018 WSJ Survey of Economists
0%
10%
20%
30%
40%
50%
60%
70%
2019 2020 2021 2022 after 2022
Macroeconomic Advisors recession probabilities:
1 year = 20%5 years = 80%
Source: Wall Street Journal
IPMAJune 21, 2018
Slide 17 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Household financial obligations as share of disposable income below levels in last three recessions
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
1980 1986 1992 1998 2004 2010 2016
Percen
tFinancial obligations as % disposable personal income
Source: Federal Reserve System Board of Governors, data through 2017Q3
Financial obligations include mortgage payments & other required debt payments, rent, auto lease payments, and property taxes.
IPMAJune 21, 2018
Slide 18 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
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
2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1
Million
s $
Mortgage debt outstanding
1-4 family residences Multifamily Nonfarm, nonresidential Farm
Source: Federal Reserve System Board of Governors, data through 2017Q4
IPMAJune 21, 2018
Slide 19 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. retail sales continue to grow
200
220
240
260
280
300
320
340
360
380
300
320
340
360
380
400
420
440
460
480
500
2004 2005 2006 2008 2009 2010 2012 2013 2014 2016 2017
$Billions, SA U.S. Retail Sales and Food Services
Retail Trade and Food Services (L) Excluding Auto and Gas (R)
Preliminary U.S. retail trade and food services sales (SA) increased 4.8% YOY in March and 4.8% in April.
Excluding autos and gas, sales were up 4.2% YOY in March and 4.1% in April.
Retail sales at gas stations were up 10.9% YOY in March and 11.8% in April.
Source: U.S. Department of Commerce, Census Bureau; Data through April 2018 advance
IPMAJune 21, 2018
Slide 20 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA residential construction activity is at pre-housing boom 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 2002 2004 2006 2008 2010 2012 2014 2016 2018
Th
ou
san
ds
Th
ou
san
ds
U.S., WA residential building permits (SAAR)
U.S. WA
Source: U.S. Census Bureau, ERFC; U.S. data through May 2018, WA data through April 2018
IPMAJune 21, 2018
Slide 21 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA employment has grown much faster than for the U.S. as a whole
0.95
1.00
1.05
1.10
1.15
1.20
1.25
2005 2006 2007 2009 2010 2011 2013 2014 2015 2017
In
dex,
Jan
. 2
00
5 =
1.0
U.S. WA
Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through Apr. 2018
IPMAJune 21, 2018
Slide 22 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA personal income growth continues to outpace the U.S.
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2005 2006 2008 2009 2011 2012 2014 2015 2017
In
dex,
20
05
Q1
= 1
.0
U.S. WA
Source: U.S. Bureau of Economic Analysis; data through 2017 Q4
WA personal income grew by 4.8% in 2017 compared to a 3.1% growth rate for the U.S.
IPMAJune 21, 2018
Slide 23 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
After 10 quarters of decline, exports have grown slightly in the last two 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 Q1
IPMAJune 21, 2018
Slide 24 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA exports have slowed, but exports to China, Canada improved in 2017
-25
-20
-15
-10
-5
0
5
10
15
20
25
China Canada Japan All other
YO
Y p
ercen
t ch
an
ge
Year-over-year growth in export value, major trading partners
2013 2014 2015 2016 2017 2018 YTD
Source: WISERTrade; data through March 2018
Total exports declined 3.9% in 2017 but increased 0.6% in fourth quarter 2017 and 3.9% in first quarter 2018
IPMAJune 21, 2018
Slide 25 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Real GDP is very similar to the February forecast
14,000
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
19,000
19,500
20,000
2007 2009 2011 2013 2015 2017 2019 2021 2023
Billio
ns o
f 2
00
9 D
ollars
Real GDP
June February
Source: ERFC June 2018 forecast; data through Q4 2017
IPMAJune 21, 2018
Slide 26 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil prices are slightly higher compared to the February forecast
25
35
45
55
65
75
85
95
105
115
125
2007 2009 2011 2013 2015 2017 2019 2021 2023
Do
llars P
er B
arrel
Average Price of Crude Oil
June February
Source: U.S. DOE, ERFC June 2018 forecast; historical data through Q1 2018
IPMAJune 21, 2018
Slide 27 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The U.S. nonfarm payroll employment forecast is very similar to the February forecast
125
130
135
140
145
150
155
2007 2009 2011 2013 2015 2017 2019 2021
Millio
ns
U.S. Nonfarm Payroll Employment
June February
Source: ERFC June 2017 forecast; data through Q1 2018
IPMAJune 21, 2018
Slide 28 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is slightly higher than in February
0
100
200
300
400
500
600
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Billio
ns o
f U
SDWashington personal income
June February
Source: ERFC June 2018 forecast; historical data through 2017
IPMAJune 21, 2018
Slide 29 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment forecast is slightly lower compared to February
2,600
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
2007 2009 2011 2013 2015 2017 2019 2021 2023
ThousandsWashington Nonfarm Payroll Employment
June February
Source: ERFC June 2018 forecast; historical data through Q1 2018
A downward revision in the population forecast has resulted in a nonfarm employment forecast 53,000 jobs lower (1.5%) by 2023 Q4 compared to February.
IPMAJune 21, 2018
Slide 30 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington housing permits forecast is higher in 2018 compared to February
20
25
30
35
40
45
50
2013 2015 2017 2019 2021 2023
Th
ou
san
ds
Washington Housing Permits
June February
Source: ERFC June 2018 forecast; historical data through 2017
IPMAJune 21, 2018
Slide 31 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Revenue Act collections growth has been strong for two quarters
Source: DOR and ERFC; monthly data through April 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
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):
2017Q2: 5.6%2017Q3: 6.4%2017Q4: 8.3%2018Q1: 8.2%
June 10, 2018 collections: 10.8%
IPMAJune 21, 2018
Slide 32 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Revenue Act growth relative to personal income has rebounded since 2017Q3
-15%
-10%
-5%
0%
5%
10%
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Year-Over-Year Revenue Act* Growth Less State Personal Income Growth
YOY Rev Act Less Income Growth Long-Term Average
Source: ERFC; Quarterly revenue data through Q1 2018, February 2018 income estimates
Adjusted Revenue Act growth YOY:
17Q2: 5.6%17Q3: 6.4%17Q4: 8.3%18Q1: 8.2%
February personal income YOY growth estimates:
17Q2: 5.3%17Q3: 5.3%17Q4: 5.7%18Q1: 4.3%
*Adjusted for large one-time payments and refunds and payments under the amnesty program
IPMAJune 21, 2018
Slide 33 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Cannabis revenue continues to be volatile
10
15
20
25
30
35
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Millio
ns
Retail Cannabis Collections
Actual Forecast
Source: LCB, ERFC; data through May 2018
Collections were 0.9% above forecast in May
Collections are 5.0% below forecast since February
IPMAJune 21, 2018
Slide 34 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Cannabis excise tax and license fee estimates
$Millions Cannabis Forecast
2017-19 2019-21 2021-23
GF-S share of excisetax and license fees $247 $268 $321
Non-GF $501 $530 $530
Total $749 $798 $851
Total change since February forecast:
•2017-19-$0.2 M
•2019-21-$10.8 M
•2021-23-$2.6M
* Detail may not add to total due to rounding
IPMAJune 21, 2018
Slide 35 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Large commercial property sales decreased but still strong in Q1 2018
0
1
2
3
4
5
6
7
8
9
10
1996 2000 2004 2008 2012 2016
$Billions
Seasonally Adjusted Taxable Real Estate Excise Activity
Total Total excl. sales >$10M
Source: ERFC; Monthly data through May 2018 preliminary
Large commercial sales (>$10 million) totaled $2.6 billion in the 1st quarter of 2018, down from $3.6 billion in the 4th quarter of 2017.
Residential and smaller commercial sales continue to grow.
IPMAJune 21, 2018
Slide 36 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast changes: Near General Fund-State, 2017-2019 biennium
February 2018 Forecast*
Non-economic Change**
Forecast Change Forecast
Total Change#
General Fund-State
$44,213 ($1,173) $493 $43,532 ($680)
Education Legacy Trust Account
$520 $935 $43 $1,498 $978
WA Opportunity Pathways Account
$257 $0 $1 $258 $1
Total Near GF-S
$44,990 ($238) $536 $45,288 $298
$Millions
* Forecast for the 2017-19 biennium adopted February 20, 2018** Sum of legislative and budget driven revenue changes from the 2018 legislative session# Detail may not add to total due to rounding
As of June 10, General Fund-State collections were $189 million higher than the February forecast.
IPMAJune 21, 2018
Slide 37 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecast changes: Near General Fund-State, 2019-2021 biennium
February 2018 Forecast*
Non-economic Change**
Forecast Change Forecast
Total Change#
General Fund-State
$48,253 ($181) $448 $48,520 $267
Education Legacy Trust Account
$565 $0 $17 $582 $17
WA Opportunity Pathways Account
$258 $0 $3 $261 $3
Total Near GF-S
$49,076 ($181) $468 $49,363 $287
* Forecast for the 2019-21 biennium adopted February 20, 2018** Sum of legislative and budget driven revenue changes from the 2018 legislative session# Detail may not add to total due to rounding
$Millions
IPMAJune 21, 2018
Slide 38 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• WA personal income is slightly higher than in February
• 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 16.0% between the 2015-17 and 2017-19 biennia and 9.0% between the 2017-19 and 2019-21 biennia
• The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks
IPMAJune 21, 2018
Slide 39 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast CouncilPO BOX 40912Olympia WA 98504-0912
www.erfc.wa.gov360-534-1560