Quarterly Economic and Revenue Forecasts
UPDATED: November 25, 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.
November 25, 2019
Lumber and Log Prices. Lumber prices in 2017 increased through the year from $351/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 and vacillating between $360/mbf and $380/mbf since April.
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 $535/mbf in October. Prices have averaged $551/mbf year-to-date through 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 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 115 mmbf in stumpage, with 31 mmbf of contracts left with no bids. That leaves 407 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 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. 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 through August were extremely low at $164/mbf. While the composition of the timber in the first two auctions will not necessarily be representative of what will be brought forward in the remainder of the year and prices are expected to recover, the forecast average sales price for FY 20 was reduced to $330 in September. Although sales prices in the last two months have recovered, averaging $340/mbf, the average sales price forecast is 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.
The harvest volume forecast model revision, that was started in the previous forecast, is ongoing. As a result, the forecast timber removal volumes are again decreased for all forecast years.
In September the forecast average removal price was increased based on the high average price of timber removed through August---which had an average price of $384/mbf---and the value of remaining inventory and expiring contracts. In September there were 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. However, the value of harvested timber has dropped precipitously from an average price of $385/mbf for harvests in July through September to an average value of $269/mbf in October. Additionally, the value of volume expiring in FY 20 has also dropped meaningfully, from an average of $372/mbf to an average of $332/mbf.
These developments have driven a reduction in the timber removal prices for all fiscal years.
Timber Revenue. Forecast timber revenue are decreased in FY 20 and all outlying years. Revenue in FY 20 and FY 21 are reduced by $13 million and $10 million respectively.
Revenues for the 2019-2021 biennium are forecast to total $345 million, a decrease of 6.2 percent ($23 million) from the September Forecast, while revenues for the 2021-2023 biennium are decreased by 1.2 percent ($4 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 forecasts are unchanged for all years. The decrease in agricultural prices and the likely impacts of the trade war has already been built in.
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 continued very low prices in the first and second geoduck auctions of the fiscal year, down from an average of $9.43/lb in FY 19 to $5.98/lb, a 37\% drop from, in the first two auctions of FY 20. Price weakness in geoduck auctions are expected to continue as long as the 25 percent tariff to China continues, which are assumed to remain until at least the beginning of FY 21. After that, prices are expected to increase, but they are not expected to reach their current levels ever again due to an increase in competition from other geoduck production and other luxury seafood products.
Total Revenues. Forecast revenues for the 2019-2021 Biennium (FYs 20 and 21) are decreased by 6.1 percent ($31 million) to $478 million. Revenues for the 2021-2023 Biennium are decreased by 2.0 percent ($10 million) to $494 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; 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; and a potentially weaker economic climate, if not an out-right recession, among other things.
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 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. 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. The log tariffs and the slowdown in housing starts are major contributors to the lower domestic price of logs.
Although decreasing exports are built into the forecast, China is still a meaningful 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.
Growth in domestic housing demand was expected to offset the 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 remain weak and continue to fall, in which case even our conservative current stumpage forecast may be optimistic.
The strong housing starts for August 2019 appears to have been a blip, with the starts estimate falling back to its moving average in September. 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, and poor wage growth. It has been surprising how high prices have risen given these constraints. Additional, supply side impediments constraining construction growth include a concentration of market power, and a lack of skilled labor or readily buildable land.
Another concern for the overall U.S. economy, which would affect DNR revenue, is the recurrent 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 2019, then the government will shut down again. The risk of another shutdown appears to have grown with the beginning of an impeachment inquiry and continued disagreement about funding of a border wall with Mexico. 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. Another shutdown, particularly around the holiday spending period, could have an outsized impact on economic growth.
Any direct impact of the 2018-2019 shutdown on DNR was likely 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.
More important than the lumber duties is likely the drop in available timber due to exhaustion of the beetle killed timber that had been boosting the log supply in BC, Canada. This drop in timber supply has reportedly caused a number of lumber mills to close.
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.
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Office of Budget & Economics
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