Economic Outlook. Presented to IPMA Executive Seminar. Steve Lerch Chief Economist & Executive Director. September 25, 2012 Chelan, Washington

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1 Presented to IPMA Executive Seminar Steve Lerch Chief Economist & Executive Director Chelan, Washington WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

2 Summary The updated economic forecast is very similar to the June forecast; as a result the revenue forecast is largely unchanged Uncertainty in the baseline remains very high, mostly due to on-going concerns about Europe, China, and the fiscal cliff Within WA, revenue growth has been positive for motor vehicles and most retail sectors but has been declining in the manufacturing sector Revenues since the June forecast are $20.8 million (0.6%) above expectations This forecast increases expected GF S revenues by $29 million in the current biennium and $23 million in the biennium Slide 1

3 Washington s Economy The state s risk matrix shows most risks from outside state EUROPE Sovereign Debt European Recession EUROPE Banks Asia Slowdown U.S. Banks U.S. Trade Fiscal Cliff Election cycle Iran s effect on oil Housing and construction, Exports State of Washington Pluses Aerospace Software Minuses State & Local Government Source: ERFC Slide 2

4 Percent European unemployment is heading in the wrong direction Unemployment Rate: 12 Eurozone and U.S. Unemployment Spain: 25.1 Greece: 23.1 Germany: Euro area (17 countries) Source: Eurostat; data through July 2012 United States Slide 3

5 Billions of USD U.S. banks have reduced their direct exposure to European banks Contingent liabilities continue to increase 2,500 2,000 U.S. Bank Exposure 554 Total value at risk is now over $2 trillion 1, , ,232 1,328 1,400 1,449 1,520 1, Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 Contigent Source: Bank of International Settlements, 2012Q1 Direct Slide 4

6 Percent Asian economic growth is slowing 12 Real GDP Growth Slide 5 0 China India South Korea Source: Blue Chip Economic Indicators August 2012, data through 2011

7 The U.S. will enter another recession if Congress does not address fiscal cliff FY 2013 Fiscal Cliff 1 Alt Scenario 2 GDP -0.5% +1.7% Unemployment Rate 9.1% 8.0% Budget Deficit $641 Billion $1,037 Billion 1 Current laws remain generally unchanged. Slide 6 2 Maintains majority of current policies (extend most tax cuts and prevent automatic spending cuts) Source: The Congressional Budget Office

8 Percent Single-family home prices are beginning to stabilize Slide 7 Jun 2012 U.S. is up 0.5% Seattle is up 1.7% Case Shiller Home Price Index, SA Year over-year percent Change Seattle Composite 20 Source: S&P/Case-Shiller; data through June 2012

9 Thousands WA multi-family building permits are increasing Washington Housing Units Authorized by Building Permits, 3MMA, SAAR Multiple Source: U.S. Census Bureau; data through July 2012 Single Slide 8

10 Percent Washington s foreclosure problem is not improving WA Rank: (1 st = highest) 2011Q1: 23 rd 2012Q1: 16 th Seriously Delinquent Seriously Delinquent = 90+ Days Past Due or in foreclosure Slide Washington U.S. Source: Mortgage Bankers Association National Delinquency Survey, data through 2012 Q1

11 Millions Contract data signal more weakness in non-residential construction Residential square footage is up 36%, and value up 28% year over year (3mma). Non-Residential square footage is down 5%, and value is down 43% year over year (3mma) Square Footage of Construction Contracts, SAAR, 3MMA non-residential Source: Dodge, ERFC; data through April 2012 residential Slide 10

12 WA export growth is slowing Trans. Equip. exports were up 21% year over year in Q Exports Percent Change, year ago Slide Total Total excluding Transportation Equipment Source: Wiser Trade Data; through 2012 Q2

13 Orders & Deliveries Backlog Boeing has over 7 years of commercial orders on its books Excludes the military s new refueling tanker YTD Slide 12 Source: Boeing, data through August 2012 Net Orders Deliveries Backlog

14 Percent, Y/Y Software publishing employment is expected to slightly outperform overall employment Washington Software Publishing Employment, SA Forecast Slide Source: ERFC September 2012 Preliminary forecast; historical data through 2012Q2

15 Millions of Jobs Billions of Dollars The economy is now producing more than its pre-recession output with fewer jobs Data normalized to recession start, 2007Q4 = U.S. GDP and Employment after Recession Start Million Slide Quarters Employment GDP Source: BEA, BLS, ERFC; data through 2012 Q2

16 Thousands Job growth remains weak 12.5 million people remained unemployed in August Net New Jobs The economy needs to add roughly 125K jobs each month just to keep up with growth in the labor force Slide 15 0 Jan Feb Mar Apr May Jun Jul Aug Source: Bureau of Labor Statistics, data through July 2012

17 Thousands The decline in employment has been severe Washington Employment after Business Cycle Peak K Source: WA ESD, ERFC; data through August Months Slide 16

18 Consumer confidence remains weak Index Mich: 1966Q1 = 100, SA Conf Board: 1985 =100, SA Slide U Mich Conf Board Source: University of Michigan; Conference Board, data through August 2012

19 Percent Consumers continue to deleverage 20 Total U.S. Household Debt Service and Financial Obligations as % of Disposable Personal Income Slide Source: Board of Governors of the Federal Reserve System, data through 2012Q1

20 Percent The recovery in consumer debt is stalling 20 Consumer Credit Outstanding Revolving Debt Source: Federal Reserve; data through June Month Moving Avg Slide 19

21 Manufacturing has been contracting nationally An index greater than 50, implies growth Institute of Supply Management Index Slide U.S. Washington Source: Institute of Supply Management; data through August 2012

22 Index, 1986=100 Small business optimism is slowly improving 105 Small Business Optimism Index Slide Source: National Federation of Independent Business; data through August 2012

23 Millions, SAAR WA New Vehicle Registrations, Thousands, SAAR Vehicle sales continue their upward trend U.S. LMV sales in August were up 17% yearover-year Slide 22 U.S. Light Trucks U.S. Cars WA New Vehicle Registrations Source: Autodata Corporation, WA DOL; data through August 2012

24 Billions of 2005 Dollars U.S. GDP Forecast Slightly Lower 15,000 Blue Chip Consensus Real GDP forecast 14,500 14,000 13,500 13,000 12, Slide 23 June September Source: BEA, Blue Chip Economic Indicators September 2012; historical data through 2011

25 Billions of 2005 Dollars WA Personal Income Forecast Slightly Higher Washington Real Personal Income Slide 24 June September Source: BEA, ERFC September 2012 Forecast; historical data through 2011

26 Thousands WA Employment Forecast Slightly Higher Washington Nonfarm Payroll Employment 3,100 3,050 3,000 2,950 2,900 2,850 2,800 2,750 2, Slide 25 June September Source: WA State ESD, ERFC September 2012 Forecast; historical data through 2011

27 Dollars per barrel Oil prices are expected to decline Average Price of Crude Oil 125 Forecast Slide September June Source: DOE, ERFC September 2012 forecast; historical data through 2012Q2

28 Thousands Washington construction employment will remain below trend throughout the forecast Washington Construction Employment 225 Forecast Slide 27 Trend, :2 Employment Source: ERFC September 2012 forecast; historical data through 2012Q2

29 Thousands State and local government employment will remain weak Washington State and Local Government Employment Forecast Slide 28 Trend, :2 Employment Source: ERFC September 2012 forecast; historical data through 2012Q2

30 Housing permits relative to population will still be below historic levels in 2015 Washington Housing Permits per 1,000 People Forecast Slide Source: U.S. Census Bureau, ERFC September 2012 Forecast; historical data through 2012 Q2

31 Cumulative Growth (percent) Revenue collections have been weak compared to past recoveries Revenue Act Collections after Business Cycle Peak Source: ERFC; data through 2012 Q Quarters Slide 30

32 Revenue Act collections are still on an upward trend Collections were up 3.4% yearover-year in the August 11 - September 10, 2012 collection period. Collections through September 10 were $15 million (0.5%) lower than forecasted. $millions SA Slide 31 Revenue Act Revenue 3-Month Moving Average * Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act Source: DOR and ERFC; monthly data through estimated July 2012 activity

33 WA sales tax growth still moderate Preliminary seasonally adjusted sales tax receipts were up 4% yearover-year for July activity. $Millions, SA Washington Retail Sales Tax Receipts Slide 32 Retail Sales Tax 3-Month Moving Average Adjusted for large payments/refunds, amnesty payments and taxpayer reporting frequency change Source: ERFC; Monthly data through July 2012 preliminary activity

34 B&O tax growth has slowed from its prior pace Preliminary seasonally adjusted business and occupation tax receipts were up 6% year-overyear for July activity. $Millions, SA Washington B&O Tax Receipts Slide 33 B&O Tax 3-Month Moving Average Source: ERFC; Monthly data through July 2012 preliminary activity Adjusted for taxpayer frequency shift, amnesty payments, and recent large refunds

35 REET activity since April has been boosted by large commercial sales $Billions 10 Seasonally Adjusted Taxable Real Estate Excise Activity Slide Source: ERFC; Monthly data through August 2012 preliminary

36 Millions of dollars Revenue for liquor sales has been volatile Revenue was $4.0 million (6.4%) above the June forecast We have raised our forecast by $10.9 million this biennium Liquor Sales and Liter Taxes, SA Actual Source: DOR, ERFC; data through August 2012 June Forecast Slide 35

37 Forecast changes: General Fund State, Biennium June Forecast: $30,440 million USD millions Dept. of Revenue All other agencies Collection Experience September Forecast Forecast Change Forecast $20 $24 $28,824 $44 Total Change* $1 ($16) $1,646 ($15) Total GF-S $21 $8 $30,469 $29 * Detail may not add to total due to rounding Slide 36

Forecast revisions to the 2011-13 biennium GF-S New Definition USD, millions 35,000 1,858 33,000 32,224 669 809 698 183 31,000

38 Forecast revisions to the biennium GF-S New Definition USD, millions 35,000 1,858 33,000 32, ,000 1, ,469 29,000 Slide 37 27,000 Feb-10 Sep-10 Mar-11 Sep-11 Feb-12 Sep-12 Source: ERFC September 2012 forecast

39 Forecast changes: General Fund State, Biennium June Forecast: $32,626 million USD millions Dept. of Revenue All other agencies Noneconomic Change September Forecast Forecast Change Forecast $0 $39 $31,114 $39 Total Change* $0 ($15) $1,535 ($15) Total GF-S $0 $23 $32,649 $23 * Detail may not add to total due to rounding Slide 38

Forecast revisions to the 2013-15 biennium GF-S New Definition USD, millions 35,000 33,000 32,428 197

40 Forecast revisions to the biennium GF-S New Definition USD, millions 35,000 33,000 32, ,649 31,000 29,000 Slide 39 27,000 Feb-12 Jun-12 Sep-12 Forecast Source: ERFC September 2012 forecast

41 Initial Forecast: General Fund State, Biennium The USD biennial Millions forecast is 8.8% higher than the forecast Dept. of Revenue $34,102 Forecast ($millions) All other agencies $1,416 Total GF-S $35,518 * Detail may not add to total due to rounding Slide 40

General Fund* forecast by fiscal year FY 2011 revenues were boosted by the tax amnesty program and one-time transfers of non-gf-s funds into the GF-S $billions 20 19 18 17 16 15 14 8.0% 1.

42 General Fund* forecast by fiscal year FY 2011 revenues were boosted by the tax amnesty program and one-time transfers of non-gf-s funds into the GF-S $billions % 1.2% General Fund-State Revenue (9.6%) (4.1 %) 7.9% Forecast 1.6% 4.7% 2.3% 4.8% 3.9% 4.5% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Slide 41 *General Fund & Related Funds for FY 07-09, General Fund new definition for FY Source: ERFC forecast, September 2012

Real Per Capita General Fund*-State Revenue * General Fund & Related Funds for FY 2007-2009

8% Per Capita GF-S*, $2005 Forecast (3.2%) (11.7%) 4.7% (2.0%) 1.5% 1.5 % 0.6 % 1.3 % (0.

43 Real Per Capita General Fund*-State Revenue * General Fund & Related Funds for FY General Fund new definition, for FY $2,500 $2, % Per Capita GF-S*, $2005 Forecast (3.2%) (11.7%) 4.7% (2.0%) 1.5% 1.5 % 0.6 % 1.3 % (0.7%) (6.1%) $1,500 Slide 42 $1,000 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Source: ERFC forecast, September 2012

44 Biennium alternative forecasts cash basis $Millions Biennium Difference From the baseline September 2012 Baseline (50%) $30,469 September 2012 Alternative Forecasts Optimistic (15%) $31,246 $776 Pessimistic (35%) $29,752 ($717) Probability Weighted Average $30,335 ($135) Slide 43 GCEA* $30,472 $3 *Based on the Governor s Council of Economic Advisors assumptions

45 Biennium alternative forecasts cash basis $Millions Biennium Difference From the baseline September 2012 Baseline (50%) $32,649 September 2012 Alternative Forecasts Optimistic (15%) $35,830 $3,181 Pessimistic (35%) $29,364 ($3,285) Probability Weighted Average $31,976 ($673) Slide 44 GCEA* $32,491 ($158) *Based on the Governor s Council of Economic Advisors assumptions

46 Conclusion The forecast for the Biennium is $29 million higher than in June The forecast for the Biennium is $23 million higher than in June Revenues are expected to grow 8.0% between the and biennium and 7.2% between the and biennium As in June, an extended period of slow economic and job growth is expected for both the national and state economies The level of uncertainty in the baseline remains extremely high, and downside risks outweigh upside risks Slide 45

47 Questions Slide 46 Economic & Revenue Forecast Council 1025 E. Union Avenue, Suite 544 Olympia WA

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