Quarterly Economic and Revenue Forecasts
UPDATED: October 2, 2019
This quarterly forecast includes our analysis of current economic conditions and our objective projections of future revenue for state trust funds and their beneficiaries.
For Economic and Revenue Forecasts from 2013 and prior years, contact the Office of Budget and Economics by phone at 360-902-1730, by fax at 360-902-1775, or by email at firstname.lastname@example.org.
October 2, 2019
Lumber and Log Prices. Lumber prices in 2017 increased through the year from $350/mbf to $490/mbf, averaging $425/mbf for the year---significantly higher than previous years and the highest prices in real terms since the height of the previous housing boom in 2005. Prices continued to increase through the first half of 2018, averaging $569/mbf through July, peaking at $635 before dropping markedly to an apparent nadir of $324/mbf in November. Since then prices increased to $395/mbf in February 2019, before falling back to $360/mbf in August.
Prices for the `typical' DNR log were also markedly higher in 2017 than previous years, climbing from $578/mbf in January to $719/mbf in December, averaging $611/mbf for the year. Prices for DNR logs increased in the first quarter of 2018, averaging $722/mbf, but declined through the rest of the year to a low of $519/mbf in December. Prices have recovered from that low to $560/mbf in February 2019, but fell back again to $537/mbf in August. Prices have averaged $550/mbf year-to-date through August.
Log and lumber prices were expected to weaken in the final two quarters of 2018, but they were still expected to stay above recent years' averages, before climbing back to near early-2018 levels in early 2019. That, obviously, did not happen. The steepness of the price decline was surprising and appears to be due to a confluence of a number of factors. As discussed in the main forecast, throughout the latter half of 2018 housing starts stalled, house price growth flattened (and declined in some areas, like Seattle) and lumber mills built significant inventories of both logs and lumber. Log prices are expected to continue recovering through the rest of 2019, and will average something close to 2016 prices for the calendar year. Prices are expected to continue increasing through early 2020, though they are not expected to approach the highs seen in 2018
Timber Sales Volume. Sales plans in the current and outlying years have not changed, so absent a new sustainable harvest calculation, sales volume forecasts remain at 500 mmbf. The volume sold in FY 19 was 488 mmbf, 12 mmbf lower than the June forecast. Unfortunately, with the continued low price and weak demand, we continue to see a number of contracts being passed in at auction with no bidders. To date, DNR has sold 65 mmbf in stumpage, with 18 mmbf of contracts left with no bids. That leaves 435 mmbf to auction in the remainder of the year to reach our forecast sales volume. It is DNR's intention to bring more than this auction, however, given the number of contracts with no bidders and the potential issues with the planned volume, 500 mmbf was determined to be a reasonable total estimate of what will actually sell.
Timber Sales Prices. Auction prices for FY 18 totaled $458/mbf, well above the FY 17 average of $346/mbf. The sales price forecast for FY 19 was increased from $350/mbf to $370/mbf in the September 2018 forecast, due to the strong prices in the first half of 2018, which were forecast to wane but not collapse. This was pulled back to $360 in November 2018, which was still achievable given the sales through October. Price continued to be lower in sales through January 2019, so the stumpage price was reduced to $350/mbf in the February forecast. This was an entirely plausible forecast, until April.
FY 19 sales through March 2019 averaged $362/mbf, however, prices plummeted in April. Prices for April and May averaged $257/mbf and the average price for the fiscal year was $325/mbf.
As of the June 2019 Forecast, sales prices for the outlying years were left unchanged because log and lumber prices are expected to recover from the weakness that dominated prices in FY 19. However, the average prices for sales to date have been extremely low at $164/mbf. While the composition of the timber in the first two auctions was not necessarily representative of what will be brought forward in the remainder of the year and we expect prices to recover, we are reducing the forecast average sales price for FY 20 to $330. Prices in outlying years are remain unchanged
Timber Removal Volume and Prices. The harvest volume forecast for FY 19 was reduced by 20 mmbf in June to 500 mmbf, and ended the year slightly above the forecast at 502 mmbf.
In this forecast (and likely the next) we are revising the methods used to forecast harvest volume. Essentially, the previous method used likely harvest volumes estimated from a purchaser survey, as well as historical averages of volume harvested from sales remaining in the year. Downward revisions in volume harvested in a given year are pushed into future years, because that volume is still in inventory and has a contractual time limit to when it must be harvested by. While this is conceptually sound, it has, in practice, led to apparently systematic overestimation of harvest volumes in future years. This problem propagates at the start of new fiscal years when we begin revising the volumes down based on recent harvest history, and pushing that volume out to future years. This issue is illustrated in the appendix review of historical forecasts.
The effect of this method revision is a decrease in the forecast harvest volume for the current and all outlying fiscal years.
The timber removal price forecast for FY 19 was increased in June, but ended the year even higher than expected at $385/mbf. This revision and the end result were due entirely to an increased proportion of the harvest being higher priced timber. This was not the case through the February forecast, where the average price of removals was $375. Between February and May, the average removal price was $442/mbf. Although this increased the removal price in FY 19, it pushed down the forecast prices in outlying year, FY 20 in particular.
However, it appears that the June downward revision to the forecast removal price for FY 20 was too much and it has been increased in this forecast. This is due to the high average price of timber removed to-date this fiscal year---which has had an average price of $384/mbf---and the value of remaining inventory and expiring contracts. There are 152 mmbf worth of contracts expiring in FY 20, with an average value of $372/mbf, and 304 mmbf worth of contracts expiring in FY 21, with an average value of $388/mbf.
Timber Revenue. The downward revisions to harvest volume outweigh the upward revisions to price so that the forecast timber revenue are decreased in FY 20 and all outlying years. Revenue in FY 20 and FY 21 are reduced by $1 million and $2 million respectively.
Revenues for the 2019-2021 biennium are forecast to total $368 million, a decrease of 0.9 percent ($3 million) from the June Forecast, while revenues for the 2021-2023 biennium are decreased by 2.2 percent ($8 million) to $357 million.
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.
The non-timber uplands revenue forecast for FYs 20 and 21 are decreased slightly due to poor prices for irrigated agricultural products, which have been affected by both broader economic issues and the trade war. Although, orchard/vineyard products are similarly affected, the revenue forecast for this source was already more conservative, so it was left unchanged this forecast.
The aquatic lease revenue forecast is unchanged for all forecast years. However, the forecast geoduck revenue has been revised downward for all forecast years due to very low prices in the first geoduck auction in August and updated auction volume expectations. Price weakness in geoduck auctions are expected to continue as long as the 25 percent tariff to China continues, though prices are expected to be higher than the average of the August auction.
Total Revenues. Total revenues for the 2017-2019 Biennium (FYs 18-19) were $3 million higher than expected in the June Forecast. Forecast revenues for the 2019-2021 Biennium (FYs 20 and 21) are decreased by 1.4 percent ($7 million) to $509 million.
Notes to the Forecast. While we strive to produce an accurate forecast, there are a number of sources of uncertainty that may affect DNR revenue specifically, and the overall economic activity more broadly. These include: the as-yet undetermined sustainable harvest volume; the trade-war and slow-down in the Chinese economy directly affecting timber and agricultural exports and prices, as well as affecting overall economic growth; uncertainty about future housing starts; and a potentially weaker economic climate, if not an out-right recession.
While the sales volume estimates are based on the best available internal planning data, they are subject to adjustments due to ongoing operational and policy issues. In particular, these issues are likely to affect sales volumes in outlying years, where the assumed sustainable harvest volume of 500 mmbf might be too high.
The most concerning factor in this forecast, and likely for forecasts in the near future, is the combined problem of the slowdown in housing construction and the decreasing exports to China.
Chinese imports of U.S. logs and lumber started meaningfully in 2010 and provided support to prices in the worst years following the Recession in 2008-09, when housing construction was very low. However, Chinese imports have dropped dramatically since 2014, year-to-date exports of untreated Douglas-fir and Hemlock logs from Washington and Oregon to China decreased by 46 percent between 2014 and 2018. While Chinese demand has been dropping, domestic housing demand has been picking up and more than offset the decrease in China-bound exports---it appears that the strong log and lumber price growth from 2017 and the beginning of 2018 was due largely to housing construction. But that housing construction growth has stalled.
Since the beginning of 2018 the U.S. and China have been engaged in an escalating trade dispute. Directly relevant to DNR revenues are a 25 percent tariff on geoduck and wheat, and a five percent tariff on softwood logs. The tariff on geoduck is likely the main driver of the drop in geoduck prices, from an average of $11.31/lb in FY 18 to an average of $9.43/lb in FY 19 (a 17 percent drop). The log tariffs, in addition to the slowdown in housing starts, likely contributed to the lower domestic price of logs.
Although decreasing exports are built into the forecast, China is still a major market for Washington timber and lumber. A faster than expected drop in demand represents a continuing downside risk for the forecast. Aside from the trade tensions discussed above, there are other things that could undermine Chinese demand, such as the current apparent slowdown in Chinese economic growth or continued loss of PNW market share to international and Southeastern US competitors.
Continued growth in domestic housing demand was expected to offset the continued decline in China-bound exports. If housing construction does not recover from its recent weakness, as optimistic analysts have forecast, and Chinese exports continue to decline, then log and lumber prices will continue to fall, in which case even our conservative current stumpage forecast may be optimistic.
The strong housing starts for August 2019 offer a potential upside to the forecast, if it turns into a meaningful recovery in construction. Unfortunately, there are still a number of significant impediments, on both the supply and demand sides, to a strong recovery in prices and starts. Constraints on demand include persistently stringent lending standards, a continued tough labor market for younger workers, enormous student loan debt, poor wage growth, and now increasing interest rates. It has been surprising how high prices have risen given these constraints. Additional, supply side impediments constraining construction growth include a lack of skilled labor or readily buildable land.
Another concern for the overall U.S. economy, which would affect DNR revenue, is the continued political uncertainty surrounding the U.S. Federal Government. The government was shutdown from December 22, 2018 to January 25, 2019 and was the second federal government shutdown of the current U.S. administration. If a budget agreement isn't reached by the end of November, then the government will shut down again. In the end, the effects of the Federal Government shutdown in 2018-19 were likely minimal and insignificant compared to the size of the economy. However, shutdowns cause instability in an economy and could have significant unforeseen impacts if they happen too often.
Any direct impact of the shutdown on DNR was from the effect on the housing market, potentially delaying what was expected to be a recovery in the first quarter of 2019. Single-family home loans through the FHA and all types of VA loans were still funded through the shutdown, though with delays, while some other types of FHA loans were not processed. Most conventional mortgages are not backed by the federal government and were processed as usual, though tax transcript processing at the IRS was disturbed and caused delays in application processing.
Since the expiration of the Softwood Lumber Agreement (SLA) in late 2015, the U.S. and Canada have been without a trade agreement that covers lumber. As of late 2017 a U.S. ITC finding cleared the Department of Commerce to impose duties, which have been set at 20.23 percent. Although Canada has appealed the finding to a NAFTA panel and has filed a complaint with the WTO, much of the short-term uncertainty about trade costs is gone. Without a breakthrough on the new SLA negotiations or a finding from the WTO or NAFTA panel, the markets are unlikely to see the price volatility that the previous duty uncertainty caused. Additionally, at current lumber prices, the duties shouldn't be significant enough to reduce Canadian production.
Aside from the tariffs pushing down geoduck prices, which they appear to have done, China has twice instituted bans on Pacific Northwest shellfish on food safety grounds---paralytic shellfish poison (PSP) and arsenic contamination. It's not clear that either of these bans significantly affected prices or harvest activity. However, it is entirely possible that China could re-enact a more forceful ban on geoduck that would have a dramatic effect on geoduck prices, and therefore revenue.
As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Fiscal Year 2020
September 2019 | November 2019 | February 2020 | June 2020
Fiscal year 2017
Fiscal Year 2016
Fiscal Year 2015
Fiscal Year 2014
Office of Budget & Economics
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