UPDATED: November 24, 2014
Economic & Revenue Forecasts
DNR manages a $400 million biennial budget produced by revenues from state trust and public lands. Our economic forecasts help protect Washington’s natural resources and manage millions of acres of trust lands on behalf of public schools, universities, counties, and other trust beneficiaries. The information and authoritative data we collect about Washington forestry products help policymakers, industry, planners — and you — to stay on top of market trends. Published quarterly, we develop each Forecast by gathering and analyzing accurate data about current economic conditions. Then, we make objective projections of future revenue for trust funds and their beneficiaries.
NOVEMBER 2014 DNR Economic and Revenue Forecast Highlights
U.S. Economy and Housing Market. After a harsh winter and business inventory adjustments caused the U.S. economy to shrink by 2.1 percent (annualized) in the first quarter of 2014, economic growth rebounded with strong second quarter growth of 4.2 percent. The economy continued to grow in the third quarter with advanced estimates of 3.5 percent. Despite this recent strength, year-over-year GDP growth remains modest at about 2.4 percent. In October 2009 the unemployment rate peaked at 10.0 percent, but has slowly fallen to 5.8 percent as of October 2014. While these are positive signals, the U.S. economy still faces significant challenges. While it is dropping, unemployment remains historically high and there are significant difficulties for younger workers and the long-term unemployed. Additionally, there are serious questions about the usefulness of the unemployment rate as a measure of slack in the employment market because the labor participation rate has fallen by over three percent since the beginning of the recession. Improvements to the housing market have been disappointingly slow: new housing starts in 2013 averaged 928,000, 52 percent over 2011, but have stagnated to less than a million so far in 2014. U.S. housing prices have been trending upward since January 2012, but price growth has stalled and actually fallen back slightly in the second quarter of 2014. Finally, the U.S. government still has not implemented a coherent, growth-driven economic policy—which is unlikely to happen in the current highly politicized environment.
International Economy. Internationally, the economy of the European Union is showing significant problems, with several countries still in recession and some of the member states suffering from deflation. Additionally, the crisis in Ukraine and the uncertainty created by Russia’s behavior in Eastern Europe have introduced significant political and economic uncertainty. All of the BRIC (Brazil, Russia, India and China) economies are slowing – in particular, the Russian economy is suffering from internal problems and the effects of sanctions, and the Chinese economy continues to show signs of underlying structural and demographic issues.
Lumber and Log Prices. Lumber and log prices were up in 2013 and continue to improve. While it varied widely, Random Lengths’ Coast Dry Random and Stud composite lumber price averaged $370/mbf in 2013 and has averaged $377/mbf thus far in 2014, up over 20 percent from the 2012 average of $309/mbf. Pacific Northwest log prices have also moved up sharply after being fairly flat for 2011 and most of 2012. The price for a ‘typical’ DNR log delivered to the mill continued to climb from 2013’s $564/mbf average, already up 18 percent from 2012, to a nominal high of $624/mbf in January, the highest price since 2000. However, the average price has since pulled back to $587/mbf as of October.
Timber Sales Volume. DNR has sold 79 mmbf thus far this year, 16 percent of the planned 500 mmbf planned sales. Given current timber sales plans—and absent a new sustainable harvest calculation—sales volumes for FY 15 and future years are still estimated to total about 500 mmbf.
Timber Sales Prices. The FY 14 average sales price came in at $356/mbf, very close to the June forecast. Weighted by volume, sales prices have averaged $302/mbf through October. The new predicted sales price for FY 15 is $365/mbf, down four percent from September’s $381/mbf forecast. This is primarily due to the continued slowdown in export markets, particularly China, that affect domestic prices, and to an ample international supply of logs. Due to a broad downward forecast revision in timber prices, future stumpage price estimates are lowered to about $379/mbf in both FYs 16 and 17, down three and four percent, respectively, from the September forecast.
Timber Removal Volume and Prices. Changes in the harvest plans of DNR timber purchasers have led to shifts in anticipated timber removal volumes throughout most of the forecast period. Removal volumes for FYs 15-17 are forecast to be 527 (-25), 573 (-27) and 517 (+49) mmbf. Timber removal prices are projected to be about $344 (-$8), $375 (+$5), $374 (-$9) per mbf for FYs 15-17, respectively. These removal prices reflect changes in the removal timing and follow from, and lag behind, the changes projected in timber sales prices.
Bottom Line for Timber Revenues. The above changes to timber sales prices, sales volumes, and harvest timing have reduced projected revenues in the current fiscal year. The timber revenue projection for the 2013-2015 Biennium is lowered 3.8 percent to $333.1 million. Revenues in the 2015-2017 Biennium are predicted to be $407.7 million, up 1.8 percent from September’s forecast.
Uplands and Aquatic Lands Lease (Non-Timber) Revenues. In addition to revenue from timber removals on state-managed lands, DNR also generates sizable revenues from managing leases on uplands and aquatic lands.
Projected revenues from agricultural and other upland leases are revised down slightly in FYs 15 and 16, to $35.5 and $35.4 million, respectively. However, they are revised upward to over $36 million in the outlying years.
Revenues from aquatic lands are projected to total about $29.2 million in FY 15, down $1.2 million from the September estimate. Revenue expectations for FYs 16 and 17 have been reduced to $29.1 and $31.8 million, respectively, but are unchanged for the outlying years.
Total Revenues. Total 2013-2015 Biennium revenues are projected to be $472.4 million, down $14.7 million (3.0 percent) from the previous forecast. Revenues for the 2016-2017 Biennium are expected to total $540.5 million, up $5.5 million (1.0 percent) from the September Forecast.
Risks to the Forecast. Although significant curtailments in timber sales volumes were assumed in the June 2013 Forecast, final timber sales in each year may be further reduced due to environmental, operational, and policy issues. These risks remain for the November forecast. Additionally, the assumed sustainable harvest limit of 500 mmbf could prove too high.
Upside potential and downside risks for timber prices, and therefore to subsequent removal prices, seem to be balanced. Downside risks include a further decline in the housing prices and demand, and decreased demand from China. While both of these have largely been accounted for in the price forecasts and by markets, there are indications that Chinese construction growth may slow down more quickly than previously expected. The upside potential of an unexpected strengthening of the nascent recovery in the U.S. housing market is fairly low given the rates of employment and wage growth, and continued tight lending conditions. Supply-side influences of stumpage price—such as timber mix and quality—are poorer this year and difficult to estimate in future years, but are assumed to be about average. Mill profit margins in the Pacific Northwest appear to be much lower than the Southern U.S., suggesting that PNW prices growth will be constrained by expansion of the Southern market share at lower prices. Also on the downside are the many challenges to U.S. economic recovery cited above.
Although the end of the Chinese ban on geoduck imports from the Pacific Northwest has eased much of the uncertainty surrounding geoduck demand, geoduck prices are historically volatile and there are still questions about the testing conditions that China will accept. There is no guarantee that a blanket ban will not be reinstated. Additionally, there are indications that geoduck divers are pushing for higher wages. Taken together, this means that both the geoduck sales price and harvest volumes may become even more difficult to predict in the coming years.
2013 Economic & Revenue Forecasts
2012 Economic & Revenue Forecasts
2011 Economic & Revenue Forecasts
2010 Economic & Revenue Forecasts
2009 Economic & Revenue Forecasts
For Economic & Revenue Forecasts older than 2009
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