WASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCILWASHINGTON STATE
ECONOMIC AND REVENUE FORECAST COUNCIL
Washington State Forecast
Presented toESD Economic Symposium
Bret Bertolin
Senior Economist
April 1, 2019
Seattle, Washington
Washington State Forecast
April 1, 2019
Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Summary
• U.S., WA forecasts similar to the November forecast
• Baseline forecast has slowing growth but no recession
• Wage growth and inflation remain moderate
• Downside risks to the baseline include uncertainty regarding trade and fiscal policy, geopolitical concerns and a maturing economic expansion
• Potential impact of 737 MAX grounding adds a new downside risk
• The Near General Fund-State forecast is increased by $307 million for the 2017-19 biennium and by $554 million for 2019-21 biennium
Washington State Forecast
April 1, 2019
Slide 2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Selected forecast risks
Labor markets
• Unemployment rate, initial UI claims low
• Job growth has been strong until February
737 MAX
• Currently, impact on WA employment and personal income unclear
International trade policy
• China – U.S. trade deal no longer seems imminent
Washington State Forecast
April 1, 2019
Slide 3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Consumer confidence dipped in late 2018 but has partially recovered, remains strong
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 February 2019
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April 1, 2019
Slide 4 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Small business optimism has weakened recently but remains strong
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
tio
n,
percen
t
NFIB Small Business Optimism Index
Sales Expectations Optimism Index
Source: National Federation of Independent Business; data through Jan. 2019
Washington State Forecast
April 1, 2019
Slide 5 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Job openings continue to grow at a strong pace
-50
-40
-30
-20
-10
0
10
20
30
40
2002 2004 2006 2008 2010 2012 2014 2016 2018
Percen
t C
han
ge
U.S. Job Openings, Year over Year Growth (SA)
Source: U.S. Bureau of Labor Statistics, data through Dec. 2018
An average of 5.7 million jobs were open in 2018
Washington State Forecast
April 1, 2019
Slide 6 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
WA, U.S. unemployment rates are below pre-recession levels
3
4
5
6
7
8
9
10
11
2007 2008 2009 2011 2012 2013 2015 2016 2017 2019
Percen
t
WA, U.S. unemployment rates SA
WA U.S.
Source: Bureau of Labor Statistics, ERFC; Data through Feb. 2019
Washington State Forecast
April 1, 2019
Slide 7 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income growth has outpaced the U.S. for the last seven years
-600%
-400%
-200%
0%
200%
400%
600%
800%
1000%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
U.S. and WA personal income growth
U.S. WA
Source: U.S. Bureau of Economic Analysis, data through 2018
WA personal income growth is expected to average 4.8% per year for 2019 - 2023
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Slide 8 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
450
500
2011 2012 2013 2014 2015 2016 2017 2018
Th
ou
san
ds
Th
ou
san
ds
Average monthly employment change
U.S. (left) WA (right)
WA, U.S. job growth remain strong
Source: Bureau of Labor Statistics, ERFC; data through 2018
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Slide 9 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington vs U.S. employment growth: Feb. 2018 to Feb. 2019
Total
Information
Constr.
Educ/Health
Services
Manufacturing
Leisure/
Hospitality
Prof/Business
Services
Retail Trade0%
1%
2%
3%
4%
5%
6%
7%
U.S. WA
Source: U.S. Bureau of Labor Statistics, Employment Security Dept., ERFC; data through Feb. 2019
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Slide 10 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Nominal wage growth has averaged 3.3% in last 12 months regardless of educational level
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Percen
t
Year over year growth, 12 mon. moving avg.
High school or less AA degree Bachelors degree or higher
Source: Federal Reserve Bank of Atlanta, data through Jan. 2019
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Slide 11 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Exports to China are declining
-35
-25
-15
-5
5
15
25
35
45
55
65
75
85
China Canada Japan South Korea All Other
YO
Y p
ercen
t ch
an
ge
Year-over-year growth in export value, major trading
partners
2018Q2 2018Q3 2018Q4
Source: WISERTrade; data through 2018 Q4
After four quarters of year over year growth, WA exports declined in 2018 Q4
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Slide 12 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
After four consecutive quarters of growth, WA exports declined in the fourth quarter of 2018
-80%
-40%
0%
40%
80%
120%
160%
200%
2005 2007 2009 2011 2013 2015 2017
WA exports, year over year growth
Transp Equip Agriculture All other
Total Export Growth
2017Q4: 0.6%2018Q1: 3.9%2018Q2: 3.7%2018Q3: 2.6%
2018Q4: -2.7%
Source: WISERTrade; data through 2018 Q4
Washington State Forecast
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Slide 13 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Home price growth is slowing
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Percen
t
Case-Shiller home price index, year over year % change,
SA
Seattle U.S.
Starting in July 2018, the Case-Shiller index for Seattle has decreased for six consecutive months.
Source: Case-Shiller, data through December 2018
Washington State Forecast
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Relative to population, WA residential construction activity is stronger than the U.S.
0
1
2
3
4
5
6
7
8
9
10
2000 2003 2006 2009 2012 2015 2018
Residential building permits per 1,000 population
US WA
Source: U.S. Census Bureau, ERFC; data through 2018 Q4
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U.S. retail sales growth has slowed recently
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Year over year growth, %
Retail & food services sales
Source: U.S. Census Bureau data through January 2019
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Business investment trended down in last five months of 2018
45,000
50,000
55,000
60,000
65,000
70,000
75,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
$ m
illion
s
New orders: nondefense capital goods excluding aircraft
(SA)
Source: U.S. Census Bureau; data through Dec. 2018
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Leading economic indexes for WA, U.S. dipped recently but do not suggest a recession in near term
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
2000 2003 2006 2009 2012 2015 2018
WA U.S.
Source: Federal Reserve Bank of Philadelphia, data through Nov. 2018
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-1
0
1
2
3
4
5
1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Percen
t
10 yr. Treasury rate – 3 mo. Treasury rate
An inverted yield curve (short-term interest rates > long-term rates) is a consistent recession predictor
Source: Federal Reserve Bank of St. Louis, data through March 2019
As of March 28, 2019 10 year Treasury bond yields were 0.04% below three month Treasury bill yields
3/28/2019
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Slide 19 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Timing of next recession: National Assoc. of Business Economists survey
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2019 2020 2021 After 2021 No opinion
Percen
t o
f resp
on
den
ts
Source: National Association of Business Economists, Economic Policy Survey, Feb. 2019
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Wall Street Journal economists’ survey shows recession probability rising but below 25%
10
12
14
16
18
20
22
24
26
Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19
Probability of recession in next 12 months
Source: Wall Street Journal economists’ survey, data through Mar. 2019
GCEA members:
Average probability of recession in next 12 months = 36%
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Recessions are always (almost) preceded by UR<NAIRU
0
2
4
6
8
10
12
Jan-49 Jan-57 Jan-65 Jan-73 Jan-81 Jan-89 Jan-97 Jan-05 Jan-13
Percen
t
Natural Rate of Unemployment (SA) Civilian Unemployment rate
Source: Federal Reserve Economic Data
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Unconditional probability of recession in X years
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Probability density function (PDF) for a recession in Xth year
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Cumulative density function (CDF) for a recession in Xth year
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The increase in Washington Unemployment is Usually Similar to the U.S.
0
2
4
6
8
10
12
14
Jan-76 Jan-84 Jan-92 Jan-00 Jan-08 Jan-16
Percen
t
U.S. Washington
Source: BLS; Data through Q4 2018
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Slide 26 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
2019-21 Biennium alternative General Fund-State forecasts
2019-21
Biennium
Difference From the baseline#
March 2019 Baseline (50%) $49,609
March 2019 Alternative Forecasts
Optimistic (15%) $51,784 $2,176
Pessimistic (35%) $47,052 ($2,557)
Probability Weighted Average $49,040 ($569)
GCEA* $49,855 $246
$Millions (cash basis)
*Based on the Governor’s Council of Economic Advisors’ economic assumptions#May not add to total due to rounding
Washington State Forecast
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U.S. real GDP growth has slowed
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2015 2016 2017 2018
Percen
t
Source: U.S. Bureau of Economic Analysis. Data through Q4 2018
Due to the partial Federal government shutdown, 2018 Q4 data, which was released Feb. 28th, was not available for this forecast.
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Slide 28 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Many forecasters expect U.S. economic growth is to slow further
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2018 2019 2020 2021
Actual ERFC IHS-Markit Federal Reserve Economy.com
Sources: U.S. Bureau of Economic Analysis, ERFC Mar. 2019 preliminary forecast, IHS-Markit, Federal Reserve Board, Economy.com
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GDP is slightly lower than in November
15,000
16,000
17,000
18,000
19,000
20,000
21,000
2007 2009 2011 2013 2015 2017 2019 2021 2023
Billio
ns o
f 2
01
2 D
ollars
March November
Source: IHS Markit, ERFC; data through Q4 2018Note: Vertical black line indicates last actual
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Oil prices are slightly lower than in the November forecast
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
March November
Source: Energy Information Administration, IHS Markit, ERFC; data through Q4 2018Note: Vertical black line indicates last actual
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The Federal Reserve is not expected to raise interest rates as high as anticipated in November
0
1
2
3
4
5
6
2007 2009 2011 2013 2015 2017 2019 2021 2023
Percen
t
Federal Funds Interest Rate
March November
Source: ERFC March 2019 Preliminary forecast; historical data through Q4 2018
Washington State Forecast
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U.S. nonfarm payroll employment is slightly higher than in November
125
130
135
140
145
150
155
160
2007 2009 2011 2013 2015 2017 2019 2021 2023
Millio
ns
U.S. Nonfarm Payroll Employment
March November
Source: IHS Markit, ERFC; data through Q4 2018Note: Vertical black line indicates last actual
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Slide 33 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington personal income is slightly higher than in November
200
300
400
500
600
2007 2009 2011 2013 2015 2017 2019 2021 2023
Billions o
f D
ollarsWashington personal income
March November
Source: ERFC March 2019 forecast; historical data through Q4 2018
Forecast
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Slide 34 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Washington employment forecast is slightly lower than in November
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
ThousandsWashington Nonfarm Payroll Employment
March November
Source: ERFC March 2019 forecast; historical data through Q4 2018
Forecast
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April 1, 2019
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Online retail employment forecast consistent with press comments about future hiring plans
0
10
20
30
40
50
60
70
80
2007 2009 2011 2013 2015 2017 2019 2021 2023
Th
ou
san
ds
WA electronic shopping employment
Source: ERFC March 2019 Preliminary forecast; historical data through Q4 2018
Washington State Forecast
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Permits forecast for 2019 – 2023: average unchanged, timing slightly different compared to November
0
10
20
30
40
50
60
70
2007 2009 2011 2013 2015 2017 2019 2021 2023
Thousands
Washington Housing Units Authorized by Building Permits
March November
Source: ERFC March 2019 forecast; historical data through Q4 2018
Forecast
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Slide 37 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Conclusion
• Economic forecasts are only slightly changed from November
• Washington’s economy is continuing to outperform the nation but not as dramatically as in past
• Threats to economic expansion include concerns about international trade and fiscal policy, geopolitical risks and a maturing expansion
• GF-S revenues are expected to grow 15.3% between the 2015-17 and 2017-19 biennia and 12.3% between the 2017-19 and 2019-21 biennia
• The level of uncertainty in the baseline remains elevated, with downside risks outweighing upside risks
Washington State Forecast
April 1, 2019
Slide 38 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL
Questions
Economic & Revenue Forecast CouncilPO BOX 40912Olympia WA 98504-0912
www.erfc.wa.gov360-534-1560