October 26, 2011 STATE OF WASHINGTON ECONOMIC AND REVENUE FORECAST COUNCIL - 34-1560 TO: FROM: Governor s Council of Economic Advisors Arun Raha, Executive Director Economic and Revenue Forecast Council SUBJECT: PRELIMINARY NOVEMBER 2011 ECONOMIC FORECAST This preliminary forecast is based on a modified version of Global Insight's October 2011 Control forecast for the U.S. economy. You should have received a summary of that Global Insight forecast by email. If not, please contact our office. As usual, we adjusted real gross domestic product (GDP) to match the Blue Chip Consensus GDP forecast for 2011, 2012 and 2013. The new Blue Chip GDP forecast for 2011 is 1.7% up slightly from the 1.6% increase expected in September due to the fact that second quarter GDP was revised upward. The new forecast for the second half of the year is weaker than expected in September. The forecast for 2012 is also weaker at 2.0% compared to the 2.2% expected in the September forecast. The Blue Chip forecast for 2013 has been updated for the first time since March. The October forecast for 2013 growth came in at 2.8%, down from 3.2%. We also adjusted our oil price forecast to match the NYMEX futures prices as has been our standard practice. The new oil price forecast is lower than the assumption made in the September forecast. This forecast was produced with the NYMEX futures prices as of the close of business on Tuesday, October 18, 2011. The price for delivery in November 2011 was $88.34 with prices rising to $90.47 per barrel by December 2013. We modified the Global Insight forecast in one additional way. We removed their assumption that the 2% payroll tax cut and emergency unemployment insurance benefits will be extended another year. As per current law, we have assumed these will expire at the end of this year. The U.S. economy did not worsen in the last month, but the outlook remains extremely uncertain. Europe is tottering on the brink of recession and it remains to be seen if the firewall being contemplated around their banks will be able to head off a global credit crunch. China and India are slowing, on 1
purpose, as their governments move to cool overheating economies. Here at home, political dysfunction at the federal level has dashed any hope that fiscal policy will be able to lend monetary policy a hand in stabilizing the economy. Fear and uncertainty have paralyzed consumers and businesses who continue to sit on their cash. Our forecast last month of a muddlethrough economy, with flat growth, high unemployment and weak confidence, appears to be coming true. Data releases in the last month were mildly encouraging, but only because expectations were so low. The September employment report s establishment survey showed that the economy gained 103,000 (SA) net new jobs that month. Private sector gains of 137,000 which included the return of 45,000 striking telecommunication workers were partially offset by public sector job losses of 34,000. Real GDP growth in the second quarter was revised back to 1.3% from 1.0%. Early indicators of third quarter economic activity point to continuing but modest growth. The Institute for Supply Management s purchasing managers indices for both manufacturing and services remained above 50 in September, indicating continued slow growth in those sectors. September light motor vehicle (LMV) sales improved to 13.1 million (SAAR) units, 11% above a year ago, and 8% above the prior month. Nominal personal income fell 0.1% (SA) in August, but consumer spending rose 0.2% (SA) as the savings rate fell to 4.5%. Housing remains weak. Though new home sales rose 5.7% in September, they remain deeply depressed at 313,000 (SAAR). Existing home sales fell 3.0% in September to a seasonally adjusted annual rate of 4.91 million units. While housing starts improved to 658,000 in September (SAAR), permits declined, indicating September s gain will likely be reversed in October or November. The seasonally adjusted Case-Shiller 20-city index declined in August and was 3.9% below a year ago. Prices are expected to stay weak as more foreclosed properties hit the market. The Bureau of Economic Analysis (BEA) has now extended its annual revision to the national income and product accounts to the state level personal income estimates. Although the new state level personal income data were not available to us at the time of our September forecast, we anticipated most of the significant downward revisions based on the revisions to the national data. As a result, the estimates assumed for the September forecast are much closer to the revised data than were the previous BEA estimates. The peak-to-trough decline in Washington real personal income during the recession was actually 5.1%, which was much worse than the previous BEA estimate of a 1.6% drop. The BEA revisions for total personal income in 2008, 2009, and 2010 are +0.8%, -2.5%, and -2.4%. Because we anticipated most of the revision in our September forecast, our revisions in November are only +0.1%, -0.3%, and -0.5%. Economic and Revenue Forecast Council 2
We have only one more month of Washington employment data since the September forecast and it was extremely disappointing. According to our employment estimates, the Washington economy lost a total of 4,400 jobs in September. We had expected a modest gain of 1,600 jobs. The loss of 4,200 government jobs accounted for virtually all the overall decline in the month. The loss of 5,600 state and local education jobs more than accounted for the public sector decline. The private sector lost 200 jobs in September. We had expected a gain of 2,400 private sector jobs. Manufacturing employment grew by 1,700, boosted by 1,000 net new aerospace jobs, but construction employment declined by 300. Private service-providing industries lost 1,600 jobs in September. We had expected an increase of 1,800 jobs. We also have only one more month of housing permit data since the September forecast. Both single-family and multi-family housing did a little better than expected but our expectations were low. There were 13,300 single-family units (SAAR) and 8,800 but multi-family units for a total of 22,100 units authorized in the month of August. We had expected 19,500 units. We continue to believe the trend is positive in multi-family housing due to rising rents and declining apartment vacancies. The outlook for single-family construction is flat to negative. We continue to believe the Washington economy will outperform the U.S. economy. Washington is benefitting from strong export growth and hiring at both Boeing and Microsoft. However, the national outlook has weakened, as noted above, and this is reflected in a weaker state forecast as well. Our job growth forecast for 2011 is unchanged at 1.1% but we now expect 1.1% growth in 2012 and 2.0% in 2013 compared to the 1.4% and 2.1% expected in the September forecast. Our personal income growth forecast for 2011 is also unchanged at 4.9% but our forecast for 2012 and 2013 have been lowered to 2.7% and 4.4% from 3.0% and 4.5%. A comparison of the preliminary Washington forecast with the forecast adopted in September is shown in Table 3. Review of the forecast by the Governor s Council of Economic Advisors is scheduled for Friday, November 4, 2011 at 10:00 a.m., in the Governor s Conference Room. If you have any questions, please contact Bret Bertolin, Senior Economist, at (360) 534-1566. Economic and Revenue Forecast Council 3
PLEASE NOTE: Enclosed is a worksheet summarizing the current preliminary forecast, which requests a response from you. Council members are strongly encouraged to complete and return this worksheet via e-mail to BretB@dor.wa.gov by Wednesday November 2, 2011. This worksheet is relied on by the Forecast Council members and staff to gauge the reasonableness of the preliminary economic forecast and also serves as the basis of an alternative revenue forecast. Even if you do not have a model that forecasts the variables in the worksheet, please give us your best estimates, using our forecast as a benchmark. AR: bb Enclosures Economic and Revenue Forecast Council 4
Table 1 U.S. Economic Forecast Comparison October 2011 2011Q3 2011Q4 2012Q1 2012Q2 2010 2011 2012 2013 Real GDP, Percent Change, Annual Rate ERFC 1.9 1.9 1.9 2.2 3.0 1.7 2.0 2.8 Global Insight 2.4 1.0 1.1 1.3 3.0 1.7 1.4 2.4 Economy.com 2.4 2.2 2.3 3.2 3.0 1.8 2.6 Blue Chip Average 1.9 1.9 1.9 2.2 1.7 2.0 2.8 Blue Chip Top 10 2.6 2.7 2.7 3.0 1.8 2.6 3.5 Blue Chip Bottom 10 1.2 0.8 0.7 1.3 1.5 1.3 2.1 Real Consumption, Percent Change, Annual Rate ERFC 0.9 2.6 1.8 2.4 2.0 2.1 2.0 2.3 Global Insight 1.3 1.8 1.9 2.5 2.0 2.1 1.9 1.8 Economy.com 1.6 1.9 1.9 3.0 2.0 2.1 2.3 Blue Chip Average 1.7 1.8 1.8 2.1 2.1 1.9 2.6 Blue Chip Top 10 2.4 2.8 2.8 2.8 2.2 2.4 3.5 Blue Chip Bottom 10 1.2 0.8 0.6 1.3 1.8 1.3 1.7 Federal Funds Rate ERFC 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 Global Insight 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 Economy.com 0.1 0.1 0.1 0.1 0.2 0.1 0.1 Three Month T-Bill Rate ERFC 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 Global Insight 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 Blue Chip Average 0.0 0.1 0.1 0.1 0.1 0.1 0.7 Blue Chip Top 10 0.0 0.2 0.2 0.2 0.1 0.3 1.4 Blue Chip Bottom 10 0.0 0.0 0.0 0.0 0.1 0.0 0.2 Consumer Price Index, Percent Change, Annual Rate ERFC 3.1 0.9 1.1-0.2 1.6 3.2 1.3 1.5 Global Insight 3.1-0.8 1.1 0.6 1.6 3.0 1.3 1.9 Economy.com 2.3 0.9 1.8 1.6 1.6 3.0 1.8 Blue Chip Average 2.5 1.8 2.0 1.9 3.1 2.2 2.3 Blue Chip Top 10 3.3 2.9 2.8 2.8 3.3 2.8 2.9 Blue Chip Bottom 10 1.3 0.6 1.1 0.9 2.8 1.6 1.8 Payroll Employment, Millions ERFC 131.1 131.2 131.4 131.9 129.8 131.0 132.1 134.4 Percent Change, Annual Rate 0.2 0.4 0.6 1.4-0.7 0.9 0.9 1.7 Global Insight 131.1 131.2 131.3 131.6 129.8 131.0 131.8 133.5 Percent Change, Annual Rate 0.4 0.1 0.3 1.0-0.7 0.9 0.6 1.3 Economy.com 131.3 131.4 131.5 131.8 129.8 131.1 132.0 Percent Change, Annual Rate 0.9 0.3 0.4 0.7-0.7 1.0 0.7 Unemployment Rate, Percent ERFC 9.2 9.3 9.2 9.2 9.6 9.1 9.1 8.7 Global Insight 9.1 9.3 9.3 9.3 9.6 9.1 9.3 9.1 Economy.com 9.1 9.0 9.0 9.0 9.6 9.0 8.9 Blue Chip Average 9.1 9.1 9.1 9.1 9.1 9.0 8.3 Blue Chip Top 10 9.1 9.4 9.5 9.6 9.1 9.5 8.9 Blue Chip Bottom 10 9.1 9.0 8.8 8.6 9.0 8.6 7.7 Real Disposable Personal Income, Percent Change, Annual Rate ERFC -1.1 3.2-2.1 3.2 1.8 1.4 0.9 1.4 Global Insight -1.0 4.4 2.2 2.2 1.8 1.5 1.8 0.7 Blue Chip Average 0.8 1.7 1.2 2.1 1.5 1.6 2.5 Blue Chip Top 10 3.0 2.8 3.0 3.4 1.8 2.6 3.4 Blue Chip Bottom 10-1.0 0.6-1.1 1.0 1.2 0.7 1.6 Economic and Revenue Forecast Council 5
Table 2 U.S. Forecast Comparison Real GDP (2005 USD billions) 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2009 2010 2011 2012 2013 November Forecast, Preliminary 13,334 13,397 13,460 13,534 13,618 13,709 12,703 13,088 13,308 13,580 13,960 Percent Change 1.9% 1.9% 1.9% 2.2% 2.5% 2.7% -3.5% 3.0% 1.7% 2.0% 2.8% September Forecast 13,323 13,392 13,462 13,542 13,629 13,724 12,703 13,088 13,301 13,589 14,024 Percent Change 1.9% 2.1% 2.1% 2.4% 2.6% 2.8% -3.5% 3.0% 1.6% 2.2% 3.2% Real Consumption (2005 USD billions) November Forecast, Preliminary 9,414 9,475 9,516 9,572 9,633 9,695 9,037 9,221 9,415 9,604 9,829 Percent Change 0.9% 2.6% 1.8% 2.4% 2.5% 2.6% -1.9% 2.0% 2.1% 2.0% 2.3% September Forecast 9,433 9,478 9,522 9,586 9,651 9,723 9,037 9,221 9,419 9,621 9,860 Percent Change 2.0% 1.9% 1.9% 2.7% 2.8% 3.0% -1.9% 2.0% 2.1% 2.1% 2.5% Implicit Price Deflator, PCE (2005=1.00) November Forecast, Preliminary 1.144 1.146 1.149 1.150 1.153 1.157 1.092 1.111 1.138 1.152 1.169 Percent Change 2.4% 0.8% 1.1% 0.3% 1.1% 1.4% 0.2% 1.8% 2.5% 1.2% 1.5% September Forecast 1.142 1.143 1.146 1.147 1.152 1.155 1.092 1.111 1.137 1.150 1.166 Percent Change 1.9% 0.4% 0.9% 0.6% 1.5% 1.3% 0.2% 1.8% 2.3% 1.1% 1.4% Real Personal Income (2005 USD billions) November Forecast, Preliminary 11,402 11,477 11,446 11,543 11,617 11,687 10,929 11,136 11,426 11,573 11,861 Percent Change -1.0% 2.7% -1.1% 3.4% 2.6% 2.4% -4.4% 1.9% 2.6% 1.3% 2.5% September Forecast 11,454 11,547 11,530 11,621 11,692 11,771 10,929 11,136 11,457 11,654 11,963 Percent Change 0.7% 3.3% -0.6% 3.2% 2.5% 2.7% -4.4% 1.9% 2.9% 1.7% 2.7% Nonfarm Payroll Employment (Millions) November Forecast, Preliminary 131.1 131.2 131.4 131.9 132.4 132.9 130.8 129.8 131.0 132.1 134.4 Percent Change 0.2% 0.4% 0.6% 1.4% 1.5% 1.6% -4.4% -0.7% 0.9% 0.9% 1.7% September Forecast 131.2 131.5 131.9 132.4 132.9 133.4 130.8 129.8 131.1 132.6 135.0 Percent Change 0.7% 0.9% 1.1% 1.6% 1.6% 1.5% -4.4% -0.7% 1.0% 1.2% 1.8% Unemployment Rate (Percent of Labor Force) November Forecast, Preliminary 9.2 9.3 9.2 9.2 9.1 9.0 9.3 9.6 9.1 9.1 8.7 September Forecast 9.1 9.2 9.1 9.1 9.0 8.9 9.3 9.6 9.1 9.0 8.3 30 Year Fixed Mortgage Rate (Percent, average) November Forecast, Preliminary 4.3 4.0 4.1 4.5 4.8 4.9 5.0 4.7 4.5 4.6 5.0 September Forecast 4.3 4.0 4.2 4.6 4.9 5.0 5.0 4.7 4.5 4.7 5.0 3 Month T-Bill Rate (Percent, average) November Forecast, Preliminary 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1 September Forecast 0.0 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1 Economic and Revenue Forecast Council 6
Table 3 Washington Forecast Comparison 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2009 2010 2011 2012 2013 Real Personal Income (2005 USD billions) November Forecast, Preliminary 264.7 265.4 265.2 267.7 270.3 270.8 255.3 258.4 264.7 268.5 276.1 Percent Change 1.7% 1.0% -0.3% 3.8% 4.0% 0.7% -3.9% 1.2% 2.4% 1.4% 2.8% September Forecast 266.3 268.2 267.9 270.2 272.5 274.1 257.6 259.7 266.1 271.2 279.4 Percent Change 1.8% 3.0% -0.6% 3.5% 3.4% 2.5% -2.9% 0.8% 2.5% 1.9% 3.1% Personal Income (USD billions) November Forecast, Preliminary 302.7 304.1 304.7 307.7 311.7 313.4 278.7 287.1 301.3 309.4 322.9 Percent Change 4.2% 1.8% 0.8% 4.0% 5.2% 2.2% -3.7% 3.0% 4.9% 2.7% 4.4% September Forecast 304.0 306.6 306.9 310.0 313.8 316.7 281.2 288.6 302.6 311.8 326.0 Percent Change 3.8% 3.4% 0.4% 4.1% 5.0% 3.9% -2.7% 2.6% 4.9% 3.0% 4.5% Nonfarm Payroll Employment (Thousands) November Forecast, Preliminary 2821 2823 2829 2840 2852 2865 2822 2784 2815 2847 2902 Percent Change 0.9% 0.3% 0.9% 1.6% 1.7% 1.8% -4.6% -1.4% 1.1% 1.1% 2.0% September Forecast 2819 2825 2835 2848 2861 2874 2822 2783 2815 2855 2915 Percent Change 1.2% 0.8% 1.4% 1.9% 1.9% 1.8% -4.6% -1.4% 1.1% 1.4% 2.1% Unemployment Rate (Percent of Labor Force) November Forecast, Preliminary 9.3 9.2 9.2 9.1 9.0 8.9 9.3 9.6 9.2 9.1 8.6 September Forecast 9.3 9.4 9.3 9.3 9.2 9.0 9.3 9.6 9.3 9.2 8.5 Manufacturing Employment (Thousands) November Forecast, Preliminary 269.9 273.8 274.7 276.5 277.8 279.2 265.5 257.9 268.1 277.1 282.8 Percent Change 5.5% 5.9% 1.4% 2.5% 1.9% 2.1% -8.8% -2.8% 3.9% 3.3% 2.1% September Forecast 270.4 271.6 273.1 276.2 278.3 279.9 265.5 257.9 267.8 276.9 284.4 Percent Change 5.9% 1.9% 2.2% 4.5% 3.1% 2.4% -8.8% -2.8% 3.8% 3.4% 2.7% Construction Employment (Thousands) November Forecast, Preliminary 138.5 138.2 138.1 138.7 139.2 139.4 159.7 141.1 137.8 138.9 143.5 Percent Change 2.1% -0.7% -0.2% 1.6% 1.3% 0.8% -20.4% -11.6% -2.3% 0.8% 3.4% September Forecast 138.3 137.7 138.0 138.4 139.1 139.4 159.7 141.1 137.8 138.7 143.9 Percent Change 1.8% -1.5% 0.7% 1.3% 1.8% 0.9% -20.4% -11.6% -2.3% 0.7% 3.7% Housing Permits (Thousands) November Forecast, Preliminary 21.0 19.4 20.0 20.7 21.3 22.4 17.0 20.7 20.8 21.1 27.4 Percent Change -57.4% -26.3% 13.6% 12.8% 13.9% 22.2% -41.2% 21.6% 0.5% 1.6% 29.8% September Forecast 20.1 19.4 20.0 20.9 21.7 22.5 17.0 20.7 20.6 21.3 27.6 Percent Change -63.8% -13.2% 13.3% 18.1% 15.9% 16.0% -41.2% 21.6% -0.5% 3.3% 29.6% Economic and Revenue Forecast Council 7