1. WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL Economic & Revenue Outlook Presented to Washington State National Institute of Government Procurement Steve Lerch Executive Director January 21, 2014 Seattle, Washington

2. Economic Outlook January 21, 2014 Slide 1 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Summary The U.S. and Washington economies continue to grow, although at a slow pace Construction activity has been a big contributor to Washington employment growth; employment is rising in most Washington industries except aerospace and the federal government Risks to the forecast are generally from factors outside the state, including a weaker Chinese economy, uncertain federal fiscal policy and possible disruptions to the housing recovery State revenue collections have returned to pre- recession levels

3. Economic Outlook January 21, 2014 Slide 2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL ERFC Forecast Process National Economic Forecast Preliminary Washington State Economic Forecast Review by Work Group Review by Governor’s Council of Economic Advisors & Economic and Revenue Forecast Council Final National and Washington Economic Forecast Review by Forecast Council Final Washington General Fund Revenue Forecast ERFC and Revenue-Generating Agencies Create Revenue Forecasts The national economic forecast is based on the Global Insight model

4. Economic Outlook January 21, 2014 Slide 3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Three major risks to the forecast Europe & China Hard Landing for China Slow growth in Europe Reduced Exports Fiscal Policy Debt Ceiling Budget Housing Affordability Household formation Baseline Forecast

5. Economic Outlook January 21, 2014 Slide 4 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL China’s Economic Growth has Slowed Source: Blue Chip, IMF, ISI; data through 2013

6. Economic Outlook January 21, 2014 Slide 5 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Exports have weakened outside of China Source: WISERTrade; 2013 data through November

7. Economic Outlook January 21, 2014 Slide 6 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Government expenditures remain weak Source: BEA; data through 2013 Q3

8. Economic Outlook January 21, 2014 Slide 7 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Debt ceiling debate created uncertainty Source: U.S. Treasury; data through January 16, 2014

9. Economic Outlook January 21, 2014 Slide 8 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Consumer confidence slowly improves Source: University of Michigan; Conference Board, data through December 2013

10. Economic Outlook January 21, 2014 Slide 9 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Housing affordability is high but falling Source: Global Insight, WA Center Real Estate Research, ERFC; data through 2013Q3 Affordability is 100 when the median income can just afford the median priced home. Above 100 means the median income can afford more than the median priced home

11. Economic Outlook January 21, 2014 Slide 10 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Mortgage rates are increasing Source: Freddie Mac; data through December 2013

12. Economic Outlook January 21, 2014 Slide 11 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Many adults continue to live at home with their parents Source: U.S. Census, ERFC, data through 2012

13. Economic Outlook January 21, 2014 Slide 12 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Euro area GDP has returned to positive growth but risks remain Source: Eurostat; data through 2013Q3 Eurozone Forecast: 2013: -0.4% 2014: 0.9% 2015: 1.3%

14. Economic Outlook January 21, 2014 Slide 13 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL U.S. GDP is growing Source: ERFC November 2013 forecast; historical data through 2012

15. Economic Outlook January 21, 2014 Slide 14 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Oil prices are expected to be slightly lower in the near term Source: DOE, ERFC November 2013 forecast; historical data through 2013Q3

16. Economic Outlook January 21, 2014 Slide 15 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Washington personal income is expected to increase by 5.2% in 2014 Source: ERFC November 2013 forecast; historical data through 2012

17. Economic Outlook January 21, 2014 Slide 16 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Washington housing permits forecast is lower in the near term Source: U.S. Census, ERFC November 2013 forecast; historical data through 2012

18. Economic Outlook January 21, 2014 Slide 17 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Like the U.S., Washington employment will return to pre-recession levels in 2014 Source: ERFC November 2013 forecast; historical data through 2012

19. Economic Outlook January 21, 2014 Slide 18 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Washington nonfarm employment is up 45,100 so far this year Source: Employment Security Dept., ERFC; data through November 2013

20. Economic Outlook January 21, 2014 Slide 19 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Initial unemployment claims are declining Source: U.S. Dept of Labor/BLS; data through January 4 2014

21. Economic Outlook January 21, 2014 Slide 20 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Washington manufacturing activity has turned up Source: Institute of Supply Management; data through December 2013 An index greater than 50, implies growth

22. Economic Outlook January 21, 2014 Slide 21 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL After nearly 6 years, Washington employment has still not recovered Source: WA ESD, ERFC; data through November 2013 Washington remains 20,000 jobs below the start of the recession

23. Economic Outlook January 21, 2014 Slide 22 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Washington employment will recover slightly faster than the U.S. Date of regaining peak: WA: 2014Q2 U.S.: 2014Q3 Source: ERFC November 2013 forecast; historical data through 2013Q3

24. Economic Outlook January 21, 2014 Slide 23 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL …and state personal income will recover slightly faster than the U.S. Source: ERFC November 2013 forecast; historical data through 2013Q2

25. Economic Outlook January 21, 2014 Slide 24 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Aerospace employment is declining Source: ERFC November 2013 forecast; historical data through 2012

26. Economic Outlook January 21, 2014 Slide 25 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Boeing has over 7 years of commercial orders on its books Source: Boeing, data through December 2013 Excludes the military’s new refueling tanker

27. Economic Outlook January 21, 2014 Slide 26 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Washington construction employment is recovering Source: ERFC November 2013 forecast; historical data through 2013Q3

28. Economic Outlook January 21, 2014 Slide 27 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Single-family home prices continue to increase Oct 2013 U.S. is up 13.6% Seattle is up 13.1% Source: S&P/Case-Shiller; data through October 2013

29. Economic Outlook January 21, 2014 Slide 28 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Multifamily building permits improving but single family permits have stalled Source: U.S. Census Bureau; data through November 2013

30. Economic Outlook January 21, 2014 Slide 29 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Nonresidential activity is trending up but remains volatile Source: Dodge, ERFC; data through November 2013

31. Economic Outlook January 21, 2014 Slide 30 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Revenue collections have recovered slowly after the last recession Source: ERFC; data through 2013 Q3 Revenue Act collections have now exceeded their previous peak reached in Q1 2008

32. Economic Outlook January 21, 2014 Slide 31 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Revenue from liquor sales has been volatile since privatization Source: DOR, ERFC; data through December 2013

33. Economic Outlook January 21, 2014 Slide 32 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL REET base strengthening along with spikes of large commercial sales Source: ERFC; Monthly data through December 2013 preliminary Even after last year’s rush in sales of commercial property due to federal tax changes, large commercial sales are still occurring at an above-average rate Residential prices and sales volume grew in 2013 but have flattened in recent months

34. Economic Outlook January 21, 2014 Slide 33 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL General Fund-State* forecast by fiscal year (9.6%) (4.1 %) 7.9% *General Fund-State & Related Funds for FY 07-09, General Fund-State new definition for FY 10-17 Source: ERFC forecast, November 2013 1.5% 6.1% General Fund-State Revenue 2.8% 3.2% 4.1% 4.2%

35. Economic Outlook January 21, 2014 Slide 34 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL Conclusion We expect the slow pace of economic recovery to continue in both the U.S. and Washington economies Washington is still likely to outperform the nation, but by a small margin Washington construction activity has been strong but rising mortgage rates could slow the housing recovery Other threats to economic recovery include slowing Asian economies and uncertainty around federal fiscal issues

36. Economic Outlook January 21, 2014 Slide 35 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