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WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. and Washington Economic Forecast Update
Presented to
NAPMW Seattle Puget Sound Annual LPO Seminar
Steve Lerch Executive Director
March 4, 2016
Bellevue, Washington
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 1
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• Our economic forecast expects continued growth in the U.S. and Washington economies but at a slightly slower pace than in November and with lower inflation
• Oil prices have declined dramatically; moderate growth is expected over the forecast period
• The forecast assumes the Federal Reserve will increase interest rates twice this year
• Risks to the baseline include slowing global and U.S. economic growth, impact of a stronger dollar on exports, and weaker manufacturing activity
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 2
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Economic news continues to suggest risks to forecast
Upside:
– Declining unemployment rates
– Rising wage growth
– Stronger housing starts and home sales (new and existing)
– Lower oil prices
Downside:
– Slower U.S. GDP growth
– Slowing global economy
– Negative impact of stronger dollar on exports
– Stock market volatility
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 3
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S., WA unemployment rates trending down
2
3
4
5
6
7
8
9
10
11
2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015
Percen
t
U.S. WA
Source: Bureau of Labor Statistics; U.S. data through Jan. 2016; WA data through Dec. 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 4
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Number of long-term unemployed workers remains above pre-recession levels
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1990 1994 1998 2002 2006 2010 2014
Th
ou
san
ds
Workers Unemployed 27+ Weeks
Long-term unemployed as share of all unemployed: Apr. 2010: 45% Jan. 2016: 27%
Source: Bureau of Labor Statistics; data through January 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 5
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
0
2
4
6
8
10
12
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 Jan-16
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
Job creation slightly weaker in 2015 than 2014; U.S. weak, WA strong in January 2016
Source: Bureau of Labor Statistics, ERFC; data through Jan. 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 6
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Average U.S. wage growth has turned positive but slowed in January
-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 2012 2013 2014 2015
Year-over-year Growth in U.S. Real Hourly Wages
Source: U.S. Bureau of Labor Statistics, data through Jan. 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 7
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Both U.S. and WA housing permits trending up since 2011
0
10
20
30
40
50
60
70
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1990 1993 1996 1999 2002 2005 2008 2011 2014
Th
ou
san
ds
Housing permits, (SAAR)
U.S. (left scale) WA (right scale)
Source: U.S. Census Bureau, data through 2015 Q4
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 8
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Seattle home prices have been rising faster than prices nationally
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010 2012 2013 2014 2015
Year-over-year house price change, SA
Seattle U.S.
Source: S&P/Case-Shiller; data through Dec. 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 9
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Nonresidential construction activity appears to be slowing
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2000 2001 2003 2005 2006 2008 2010 2011 2013 2015
Th
ou
san
ds
Square feet under contract, WA nonresidential projects (SAAR)
Source: Dodge Data & Analytics; data through Jan. 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 10
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. economic growth weakened in the third and fourth quarters
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3
Percen
t U.S. Real GDP Growth
History Average, 1990-2015Q4
Source: U.S. Dept. of Commerce, BEA, data through 2015Q4
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 11
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Global GDP forecasts have been consistently revised down
2.5
3
3.5
4
4.5
5
5.5
2010 2013 2016 2019
IMF real annual global GDP growth forecast (%)
Source: International Monetary Fund, World Economic Outlook; historic data through 2015
Oct. 2011 forecast
Jan. 2016 forecast
Actual growth
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 12
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The dollar has increased in value relative to currencies of U.S. trading partners
80
85
90
95
100
105
2010 2011 2012 2013 2014 2015 2016
Trade-weighted Dollar
Source: Federal Reserve; data through January 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 13
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA exports in 2015 declined for the first time since 2009
-25
-20
-15
-10
-5
0
5
10
15
20
25
China Canada Japan All other
Y-O
-Y p
ercen
t ch
an
ge
Year-over-year growth in export value
2013 2014 2015
Source: WISERTrade; data through December 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 14
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Manufacturing: slowing nationally, improving in Washington
25
30
35
40
45
50
55
60
65
70
75
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
In
dex,
50
+ =
gro
wth
Institute of Supply Management Index
Washington United States
Source: ISM; WA data through Jan. 2016; U.S. data through Feb. 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 15
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
New vehicle sales continue to trend up; WA had record new car registrations in January
8
10
12
14
16
18
20
100
150
200
250
300
350
2009 2010 2011 2012 2013 2014 2015 2016
Mil
lio
ns
Th
ou
san
ds
New Vehicle Sales (US) & Registrations (WA), SAAR
WA (left) U.S. (right)
Source: Dept. of Licensing, ERFC, MotorIntelligence.com; data through January 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 16
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
The stock market is generally more volatile than the U.S. economy
-40%
-30%
-20%
-10%
0%
10%
20%
30%
1969 1973 1978 1982 1987 1991 1996 2000 2005 2009 2014
Change in U.S. stock market value, quarterly
Source: OECD Main Economic Indicators, through 2015Q1; DJ Total US Market 2015Q2 – Q4
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 17
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conference Board, U. of Michigan indexes both down in February
0
25
50
75
100
125
2005 2007 2009 2011 2013 2015
Index
Mich: 1966Q1 = 100, SA Conf Board: 1985 =100, SA
U. of Michigan Conf Board
Sources: University of Michigan, Conference Board; data through February 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 18
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Small business optimism and sales expectations weakened in 2015
70
75
80
85
90
95
100
105
110
-40
-30
-20
-10
0
10
20
30
40
2006 2008 2010 2012 2014 2016
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 January 2016
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 19
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Forecasted real GDP growth is lower in 2015, 2016 & 2017 compared to the November forecast
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2013 2014 2015 2016 2017 2018 2019 2020 2021
Percen
t Real U.S. GDP Growth Rates
November February
Source: ERFC February 2016 forecast; historical data through 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 20
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oil prices have fallen since the November forecast
20
30
40
50
60
70
80
90
100
110
120
2007 2009 2011 2013 2015 2017 2019
Do
llars P
er B
arrel
Average Price of Crude Oil
February November
Source: DOE, ERFC February 2016 forecast; historical data through 2015Q4
Forecast
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 21
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is lower in 2016 – 2019 compared to the November forecast
200
250
300
350
400
450
500
550
2013 2014 2015 2016 2017 2018 2019 2020 2021
Billio
ns o
f D
ollars Washington Personal Income
November February
Source: ERFC February 2016 forecast; historical data through 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 22
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
State personal income will continue to grow slightly faster than the U.S.
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
2007 2009 2011 2013 2015 2017 2019 2021
In
dex 2
00
7 Q
1 =
1.0
Real Personal Income, U.S. and WA
U.S. Washington
Source: ERFC February 2016 forecast; historical data through 2015Q3
Forecast
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 23
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment forecast revised down slightly in 2017 - 2019
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
2013 2014 2015 2016 2017 2018 2019 2020 2021
Th
ou
san
ds
Washington Nonfarm Payroll Employment
February November
Source: ERFC February 2016 forecast; historical data through 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 24
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Seattle area employment continues to outpace the rest of the state
94
96
98
100
102
104
106
108
110
112
114
2007 2008 2009 2010 2011 2012 2013 2014 2015
In
dex,
Jan
20
07
= 1
00
Total Nonfarm Employment
Seattle Metro Rest of State
Source: Employment Security Department, ERFC; data through December 2015
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 25
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Employment growth varied widely across state metro areas
0%
1%
2%
3%
4%
5%
6%
2015 employment growth by metro area
Source: WA State Employment Security Department
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 26
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment will continue to grow slightly faster than the U.S.
0.90
0.95
1.00
1.05
1.10
1.15
1.20
2007 2009 2011 2013 2015 2017 2019 2021
In
dex 2
00
7 Q
1 =
1.0
0
Nonfarm Employment, U.S. and WA
U.S. Washington
Forecast
Source: ERFC February 2016 forecast; historical data through 2015Q4
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 27
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington housing permits forecast is slightly lower than in November
20
25
30
35
40
45
50
2013 2014 2015 2016 2017 2018 2019 2020 2021
Th
ou
san
ds
Washington Housing Permits
February November
Source: ERFC February 2016 forecast; historical data through 2014
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 28
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
U.S. Economic Expansions since 1945
120
12
58
150
0 25 50 75 100 125 150 175
Economic Expansions, months
This Forecast Average 1980 1990
Sources: NBER, ERFC February 2016 Preliminary forecast
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 29
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Wall Street Journal survey shows low but rising probability of recession
0%
20%
40%
60%
80%
100%
Probability of recession in next 12 months
Source: Wall Street Journal Economic Forecasting Survey
Feb. 2012 WSJ survey places probability at 21%
27%
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 30
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Initial slow recovery points to extended expansion
0
20
40
60
80
100
120
Months of Recovery After Reaching Previous Peak in
Employment
Actual Forecast
Sources: NBER, ERFC February 2016 forecast
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 31
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Retail sales taxes account for over 47% of collections
47%
20%
12%
4%
17%
FY 2015 collections
Retail sales
B&O
State property tax
Real estate excise tax
All other
Source: Dept. of Revenue, ERFC
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 32
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Revenue Act collections close to previous trend after spike in August collections
Source: DOR and ERFC; monthly data through estimated December 2015 activity
* Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act
650
750
850
950
1,050
1,150
2002 2004 2006 2008 2010 2012 2014
$millions SA
Revenue Act Collections 3-Month Moving Average
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 33
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Large commercial property sales have had major impact on REET collections
-
5
10
15
20
25
1990 1993 1996 1999 2002 2005 2008 2011 2014
$ B
illio
ns
Taxable real estate sales, SA
WA total Excl. Comm'l. Sales >$10M
Source: ERFC, data through 2015 Q4
Residential taxable activity and smaller commercial sales grew rapidly for the first 3 quarters of 2015 but declined in the 4th quarter. Large commercial property sales are expected to decrease from the elevated levels of the past few years.
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 34
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Oregon legalization may have affected Clark County but statewide sales continued to grow
0
50
100
150
200
250
300
350
400
450
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
Th
ou
san
ds
Mil
lio
ns
Grams of Usable Cannabis
Washington (left) Clark County (right)
Source: WA LCB; data through January 2016
Prior to legal retail sales in Oregon, Clark County accounted for 12% of total sales by quantity. In January, Clark County accounted for 7% of total sales by quantity.
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 35
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Medical & recreational cannabis sales merge as of July 2016
0
10
20
30
40
50
60
70
80
90
100
2014 2015 2016 2016 2017 2018 2019 2019
$ M
illio
ns
Cannabis excise tax collections
Source: ERFC February 2016 forecast; actual data through 2015 Q4
Currently, only recreational sales subject to 37% tax; starting in July, medical sales will also be taxed at 37%
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 36
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• The economic forecast is weaker than in November but we continue to expect moderate growth
• Oil prices and inflation are lower than expected in November
• Washington is still likely to outperform the nation, but by a small margin
• Threats to economic expansion include slower global and U.S. growth, the impact of a stronger dollar on exports, and a slowdown in manufacturing
U.S. and Washington
Economic Forecast
Update
March 4, 2016
Slide 37
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast Council 1025 E. Union Avenue, Suite 544 Olympia WA 98504-0912 www.erfc.wa.gov 360-534-1560