Quarterly Economic and Revenue Forecasts
UPDATED: February 26, 2020
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 email@example.com.
February 26, 2020
Lumber and Log Prices. Lumber prices in increased substantially from the beginning of 2017 through mid-2018, from $351/mbf in January 2017 to $635/mbf in June 2018. Since then, prices have dropped markedly and averaged $376/mbf in 2019.
Prices for the "typical" DNR log also grew rapidly between the beginning of 2017 and early 2018, climbing from $578/mbf in January 2017 to peak at $735/mbf in March 2018. Prices fell through the remainder of 2018 to a low of $519/mbf in December 2018. Since then, they have recovered slightly to average $549/mbf for 2019.
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 grow meaningfully in the first two quarters of 2020, before falling back in the latter half of the year.
Timber Sales Volume. Sales plans in the current and outlying years have not changed, so sales volume forecasts remain at 500 mmbf. Through December 2019, DNR sold 210 mmbf in stumpage, with 45 mmbf of contracts offered passed-in with no bids. That leaves 290 mmbf to auction in the remainder of the year to reach our forecast sales volume. It is DNR's intention to bring much more than this to auction, however, given the number of contracts with no bidders and the potential issues with the planned volume, 500 mmbf remains a reasonable estimate of what will actually sell.
Timber Sales Prices. The average prices for sales in July and August 2019 were extremely low at $164/mbf. While the composition of the timber in the first two auctions is not representative of what will be brought forward in the remainder of the year and prices were expected to recover, the forecast average sales price for FY 20 was reduced to $330 in September. Although sales prices since then have recovered, the average price for sales through January is only $302/mbf. The average sales price forecast is unchanged.
Timber Removal Volume and Prices. The removal volume forecast for FY 20 is increased by 8 mmbf to 520 mmbf. This was reduced in the November auction because harvests through September had been quite low, averaging only 31 mmbf/month. However, a very large harvest volume in October was followed by strong harvests in November and December, making the previous forecast likely too low. However, the forecast average removal price is reduced due to the removal of more low value timber from inventory. Consequently, the removal values in outlying years are increased slightly.
Timber Revenue. Forecast timber revenue are decreased in FY 20 by $0.3 million and increased slightly in outlying years.
Timber revenues for the 2019-2021 biennium are forecast to remain at $345 million, while revenues for the 2021-2023 biennium are increased by $0.2 million to $353 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 forecasts are changed slightly in FY 20, due to weaker than anticipated dryland agricultural prices. The likely impacts of the trade war has already been built in to the forecast.
The aquatic lease revenue forecast is unchanged for all forecast years.
The forecast geoduck revenue has been revised downward for FY 20 due primarily to the outbreak of the novel coronavirus that has essentially shut down China. Geoduck prices had already fallen substantially because of the slowdown in Chinese economic growth and the impact of the trade war. Since the outbreak, harvest of geoduck destined for China has basically stopped, leaving only about 10 % of the normal daily harvest, which is bound for other international locations or for domestic consumption. The current geoduck forecast is based on the assumption that the coronavirus will not turn into a pandemic, but will remain a source of uncertainty and fear and a powerful downward driver to Chinese demand for at least two months. Consequently, the geoduck forecast for FY 20 is reduced by $1.0 million to $9.9 million.
In outlying years the geoduck forecast is also reduced by over $2 million per year due to updated price forecast based on assumptions about tariffs, which are expected to continue through the beginning of 2021; Chinese consumption; and competition from farm and other luxury seafoods.
Total Revenues. Forecast revenues for the 2019-2021 Biennium (FYs 20 and 21) are decreased by 0.9 percent ($4 million) to $474 million. Revenues for the 2021-2023 Biennium are decreased by 1.0 percent ($5 million) to $489 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: legal challenges to the newly determined sustainable harvest volume and marbled murrelet conservation strategy; uncertainty about the type and quality of stumpage DNR is able to bring to market more than three months out; 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; a potentially weaker economic climate, though probably not an out-right recession; and the coronavirus outbreak, among other things.
The most concerning factor in this forecast is the uncertainty created by the novel coronavirus outbreak in China on top of the combined problem of a slowdown in housing construction (which may have turned around with strong starts in December 2019) and decreasing exports to China.
The coronavirus is an ongoing epidemic in China that began in early January, that, as of this writing, has infected more than 17,000 people and killed more than 150. There are currently more than 50 million people quarantined in a number of Chinese cities with many across the country self-quarantining or avoiding public places. The outbreak has had a massive impact on life and business in China.
For this forecast, we are assuming that the novel coronavirus outbreak is contained reasonably quickly, such that China begins returning to normal in March. Even with this timeline, geoduck revenue will be seriously affected, though we do not forecast timber or agricultural revenue to be affected. However, this is a fast-moving and uncertain situation. If the disease starts spreading in other countries (there have only been a few cases of human-to-human transmission outside of China thus far) and it becomes a pandemic, then there could be broader economic consequences.
Countries that have had previous epidemics similar to the novel coronavirus have generally bounced back with stronger GDP in the year after the epidemic. We are not making that assumption in this forecast, leaving it as a potential upside in outlying fiscal years.
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 5 percent tariff on softwood logs. The tariff on geoduck is a significant driver of the drop in geoduck prices. The log tariffs and the slowdown in housing starts are the major contributors to the lower domestic price of logs.
Although exports to China have dropped by almost 70 percent since 2014, it remains a meaningful export market for Washington logs. Demand is expected to continue to decrease in the coming years, but a faster than expected decline remains a downside risk for the forecast. The coronavirus outbreak could cause that drop in demand. However, we haven't included it in our forecast because there are already fewer exports to China and it seems, as of this writing, as though the coronavirus will only affect first quarter economic growth in China.
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 U.S. competitors.
Domestic housing demand had 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. However, housing construction growth stalled in mid-2018, while the U.S. dollar became more expensive. Additionally, year-to-date through November 2019 exports to China were 35 percent lower than 2018, and that was before the coronavirus became an issue. The combination of these things undermined prices through 2019.
Growth in domestic housing demand was expected to offset the decline in China-bound exports. If the recent recovery in housing construction does not continue, as optimistic analysts have forecast, then log and lumber prices will remain weak and continue to fall, in which case even our conservative current stumpage forecast may be optimistic.
As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Fiscal year 2017
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Fiscal Year 2015
Fiscal Year 2014
Office of Budget & Economics
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