Quarterly Economic and Revenue Forecasts
UPDATED: November 29, 2018
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 2013 and prior years, contact Office of Budget and Economics, PH: 360-902-1730; FAX: 360-902-1775; or email: email@example.com
November 29, 2018
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 have continued to increase through the first half of 2018, averaging $569/mbf through July. However, since the June peak of $635/mbf prices have dropped markedly to $334/mbf in October.
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, before falling slightly in the second quarter to average $706/mbf. Prices have fallen markedly since July, to $591/mbf in October.
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 current levels in early 2019. That is no longer the case. As discussed in the main forecast, housing starts have stalled, house prices have flattened and lumber mills currently have significant inventories of both logs and lumber. An updated forecast for prices, suggests that prices will not recover meaningfully in 2019, instead remaining flat until mid-2020.
Timber Sales Volume. FY 18 sales volume ended at 496 mmbf, slightly above the June forecast. 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.
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 to $370/mbf in the last forecast, however, this is being pulled back on the updated log and lumber forecast. The sales price forecasts for outlying years are unchanged at $340/mbf despite expectations for increases in log prices. This is because there are a number of risks to house prices and the broader economy that could adversely affect log and stumpage prices.
Timber Removal Volume and Prices. Harvest volume forecast for all years are essentially unchanged.
Timber removal prices for FY 19 are increased slightly, to $381/mbf, due to an increase in the value of timber in inventory. Prices in outlying years are reduced due to the decrease in FY 19 sales prices to $362/mbf and $350/mbf for FYs 20 and 21 respectively. These removal prices reflect changes in both the sales prices and removal timing.
Timber Revenue. The changes to the timber sales price in FY 19 has meaningfully reduced projected revenue in FYs 20 and 21. Revenues for the 2017-2019 biennium are forecast to total $396 million, an increase of 0.1 percent (less than $1 million) from September's forecast. Forecast revenues for the 2019-2021 biennium are decreased by 1.2 percent ($5 million) to $396 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 FY 19 is reduced slightly due to decreased expectations for mineral sales. All other non-timber uplands sources in all other years are unchanged.
Aquatic lease revenues in FY 19 are increased slightly, with a better outlook in a range of aquatic leases. Outlying years are unchanged.
FY 19 geoduck revenue is increased slightly due to a small update in volume harvested from the May auction. Outlying years are unchanged.
Total Revenues. Total revenues for the 2017-2019 Biennium (FYs 18-19) are increased by 0.1 percent (less than $1 million) to $556 million. Revenues for the 2019-2021 Biennium (FYs 20 and 21) are decreased by $5 million to $539 million.
Notes to the Forecast. 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 in meaningfully amounts 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. While Chinese demand has been dropping, domestic housing demand has been picking up speed and seems to have more than offset the decrease in China-bound exports. Indeed, it appears that the strong log and lumber price growth from 2017 and the beginning of 2018 was due largely to housing construction, but housing construction growth has stalled.
In August, China proposed another round of tariffs in response to new U.S. tariffs. Currently these proposed tariffs include hardwood logs and products and some softwood products, though not softwood logs. When these tariffs are enacted, they will likely undermine the domestic price of logs and will put pressure on processing industries. These are on top of tariffs announced in June on U.S. goods that included both agricultural products and geoducks, both of which are significant DNR-managed asset classes. It is not yet clear what effects, if any, these tariffs have had on revenues to-date.
China is still a major market for Washington timber and lumber and the demand drop 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 a further 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 resume its growth, as optimistic analysts have forecast, and Chinese exports continuing to decline, then log and lumber prices will continue to fall and our current stumpage forecast may be optimistic.
On the other hand, if the current malaise of the housing market is only temporary, a meaningful recovery in construction would offer some up-side potential. Unfortunately, there are 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. Supply side impediments constraining construction growth include a lack of skilled labor or readily buildable land.
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\%. 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 2017
Fiscal Year 2016
Fiscal Year 2015
Fiscal Year 2014
Office of Budget & Economics
1111 Washington St. SE
Olympia, WA 98504-7001
1111 Washington St. SE
Olympia, WA 98504-7001