Quarterly Economic and Revenue Forecasts
   

UPDATED:  September 24, 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: obe@dnr.wa.gov

September 24, 2018

FORECAST SUMMARY

 
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 in 2018, averaging $569/mbf through July.
 
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. Again, prices for DNR logs have continued to increase in 2018 and have averaged $712/mbf through July. Prices are expected to weaken in the final two quarters of 2018, though they will remain above recent years' averages, before climbing back to near current levels in early 2019.
 
Timber Sales Volume. FY 18 sales volume ended at 496 mmbf, slightly above the June forecast. Sales plans in outlying years have not changed, so absent a new sustainable harvest calculation, sales volume forecasts in those years 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 is increased to $370/mbf. 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. The final volume harvested in FY 18 was 14 mmbf higher than expected in the June forecast, ending at 528 mmbf. The FY 19 forecast is decreased by 17 mmbf to 570 mmbf.  Harvest volume forecasts for FYs 20 and 21 are increased by 3 mmbf and decreased by 6 mmbf, respectively.
 
The average timber removal price for FY 18 was $338/mbf, slightly lower than forecast in June. Timber removal prices for FYs 19-21 are projected to be about $380 (+$6), $366 (+$8), and $354 (+$7) per mbf.  These removal prices reflect changes in both the sales prices and removal timing.
 
Timber Revenue. The above changes to timber sales prices, sales volumes, and harvest timing have shifted projected revenue. Revenues for the 2017-2019 biennium are forecast to total $395 million, an increase of 0.3 percent ($1 million) from June's forecast.  Forecast revenues for the 2019-2021 biennium are increased by 1.9 percent ($8 million) to $401 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 upland lease revenue for FY 18 was around $2 million higher than forecast, ending the year at $47 million. This was due to higher revenue in almost every type of upland lease. Revenue forecasts for FY 19 and outlying years are increased due to higher expectations for irrigated, orchard/vineyard, and commercial leases outweighing decreased expectations for dryland agriculture and grazing revenues.
 
Aquatic lease revenues were also higher in FY 18, by around $2 million, due to better than expected revenue for every type of aquatic lease. Revenues in FY 19 and 20 are increased slightly, with a better outlook in a range of aquatic leases. Outlying years are unchanged.
 
The FY 18 geoduck revenue,  at $26 million, was $1 million higher than forecast in June. FY 19 revenue is decreased by $0.4 million due to diminished volume expectations and slight price forecast adjustments. The outlying years are changed slightly due to the updated price forecast. For FY 18, other aquatic leases exceeded the June forecast by $0.6 million; the FY 19 estimated is increased by $0.8 million.
 
Total Revenues. Total revenues for the 2017-2019 Biennium (FYs 18-19) are increased by 1.2 percent ($7 million) to $556 million, with FY 18 increases outweighing an expected decrease in FY 19 revenues. Revenues for the 2019-2021 Biennium (FYs 20 and 21) are raised by $11 million to $544 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.
 
Singularly concerning this forecast, and likely for forecasts in the near future, are the increasing trade tensions between the U.S. and some of its largest trading partners, most notably China. 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.
 
Although domestic housing demand has been growing and offsetting a decline in China-bound exports, 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. The more optimistic analysts argue that domestic housing will continue to offset declining Chinese demand, but a more sudden drop would still cause a major disruption.
 
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.
 
More robust growth in U.S. residential improvements and housing construction would provide a high-side potential. Both measures have improved since the end of the recession in 2009, but starts are expected to remain below underlying demand for the foreseeable future and there is no reason to expect a sudden or dramatic increase any time soon. Robust growth hasn't yet occurred because of significant constraints on both the demand and supply sides. Although housing demand is strong overall, there are still a number of impediments---persistently stringent lending standards, a continued tough labor market for younger workers, student loan debt, and poor wage growth. Most of these are easing, but none shows signs of completely abating just yet. Supply side impediments constraining construction growth include a lack of skilled labor or readily buildable land. It is possible that the tax cuts passed in late 2017 will spur investment in real estate, but it is far from clear that this will really help the market given that they are unlikely to alleviate any of the demand or supply side issues.
 
Aside from the tariffs, 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 2019

September 2018  |  November 2018  |  February 2019  |  June 2019

 

 

Fiscal Year 2018

September 2017  |  November 2017  |  February 2018  |  June 2018

 

 

Fiscal year 2017

September 2016  |  November 2016  |  February 2017  |  June 2017

 

 

Fiscal Year 2016

September 2015  |  November 2015  |  February 2016  |  June 2016

 

 

Fiscal Year 2015

September 2014  |  November 2014  |  March 2015  |  June 2015

 

 

Fiscal Year 2014

September 2013  |  November 2013  |  February 2014  |  June 2014

 

 
 
Office of Budget & Economics
1111 Washington St. SE 
MS 47001
Olympia, WA 98504-7001
360-902-1730
Fax 360-902-1775
obe@dnr.wa.gov