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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


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


-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


April 1, 2019


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


April 1, 2019


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%


April 1, 2019


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


April 1, 2019


Unconditional probability of recession in X years


April 1, 2019


Probability density function (PDF) for a recession in Xth year


April 1, 2019


Cumulative density function (CDF) for a recession in Xth year


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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.


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


April 1, 2019


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


Forecast


April 1, 2019


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


April 1, 2019


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


Forecast


April 1, 2019


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


April 1, 2019


Questions

Economic & Revenue Forecast CouncilPO BOX 40912Olympia WA 98504-0912

www.erfc.wa.gov360-534-1560

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