Quarterly Economic and Revenue Forecasts
UPDATED: October 1, 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.
September 30, 2020
Coronavirus pandemic. Overshadowing all of the normal constituent parts of the forecast are the uncertainties and risks associated with the COVID-19 pandemic and the economic disruption it continues to cause.
As of the drafting of the February Forecast, the novel coronavirus had infected at least 17,000 people and killed more than 150 across the world and China had just quarantined more than 50 million people. Since then the novel coronavirus has become a pandemic—as of September 10, there were almost 28 million confirmed cases across the world and more than 900,000 deaths, with more than six million cases and almost 200,000 deaths in the U.S. These data are known to be underestimates because of difficulties with testing the virus and with collecting the data. There are outbreaks in every country, and it appears that even countries that had seemed to successfully halt their outbreaks, such as New Zealand have to deal with the new flare-ups. Many countries have at least partially reopened their economies, but many are also dealing with new or resurgent outbreaks. Currently, the European Union is seeing a significant increase in cases.
The novel coronavirus pandemic has caused economic mayhem, creating the steepest and most sudden drop in employment and economic activity in US history. The virus spread through the US starting in February and led to almost every state to initiate some type of stay-at-home or social-distancing order, closing schools and most businesses.
Thus far, the U.S. has had a relatively poor public health record in response to the pandemic compared to other developed countries, with the one of the highest numbers of per capita deaths and infections rates (though the economic comparison is unclear yet). The country has no national test-trace-isolate plan, which experts believe is necessary for effective containment. However, even if it did have an national plan to trace contacts, much of the testing available is too slow to be useful for most testing and tracing (with waiting times of a week or more), outbreaks are often too big for contact tracing to hope to be effective, and many people don’t have the resources to effectively quarantine if they’ve been exposed. Additionally, there are reports of people being uncooperative with contact tracing officials, further undermining its efficacy.
The lack of an effective national strategy to contain COVID-19 is important because it presents an enormous risk to the current nascent economic recovery from the pandemic. There is evidence that the local and national lockdowns were only a small contributor the collapse of economic activity in March and April, with one study finding that legal restrictions on movement accounted for slightly over a tenth of the drop in activity—the vast majority of the change was due to individual choices to change behavior. Intuitively, this is a reasonable finding. If people are scared of getting gravely ill if they go out, people will go out less. A sustained recovery is unlikely without public confidence that the virus is under control, regardless of whether or not stay-at-home orders are in place. Even states that have reopened fully have seen only a partial return of jobs.
Having said that, a large number of people within the U.S. do not believe the virus exists, or believe (against evidence) that it is simply a cold or flu. In areas where more of these people live, it is possible that there will be less change in individual behavior and less decline in economic activity, at least for a while. Thus far, the pattern appears to be that if a population doesn’t take the disease seriously, disregarding precautions like social distancing or wearing face masks, then there are large outbreaks that compel either a change in behavior or some sort of rules enacted.
The economic damage of the virus has been extraordinary, causing a recession characterized by the sharpest drop in quarterly GDP ever measured (-9.6 percent, or -33.3 percent real SAAR and the sharpest ever increase in national unemployment (from 3.5 percent in February to 14.7 percent in April).
However, the rebound has also been extraordinary with the unemployment rate falling to 8.4 percent in August and high-frequency data based estimates of Q3 2020 GDP suggesting between 15 and 25 percent (SAAR) growth. However, as noted by a pair of prominent economists, "This rebound should not be confused with a recovery." Even with a strong rebound in GDP the U.S. and global economies are not expected to recover to January 2020 levels until mid-2021 at the earliest, and many things could make the recovery take much longer.
It is important to emphasize that the rebound in economic activity happened on the back of an enormous fiscal stimulus—the $2 trillion CARES Act—and accommodating monetary policy, with Congress passing the CARES Act and the Fed dropping interest rates to essentially zero and, for the first time, promising to buy corporate debt as well as expanding U.S. Treasuries purchases.
The CARES Act had both one-time payments to each person in the U.S. and additional payments to weekly unemployment recipients. The unemployment payments, in particular were generous enough that there were many people who were able to entirely replace their wages or increase their income. This meant that although people were losing work, household balance sheets weren’t necessarily falling, so that people had money to spend when the appeared to be more under control and the economy opened up.
While the Federal Reserve activity is ongoing, a large portion of the CARES Act expired at the end July. U.S. Bureau of Economic Analysis work indicates that the CARES Act unemployment programs were 5.5 percent of personal income in July. Excluding government transfers, personal incomes are still around 5.0 percent less than there were in February.
This all suggests that the expiration of the additional CARES funding at the end of July will create a fairly sharp decrease in personal income in August, potentially undermining spending and the current recovery in the near future—unless the increase in jobs provides enough income to offset the loss. Indeed, preliminary retail sales growth estimates for August were much slower than expectations, growing at only 0.6 percent rather than the 1.0 percent predicted, leading to speculation that the end of the stimulus funds were beginning to show (though, to be clear, retail spending is still 2.6 percent higher than August 2019).
Almost every forecast that we’ve seen is based upon the assumption that there will be some additional stimulus package—even the most recent forecast from the FOMC on September 16.
Unfortunately, it appears that with the improvements to the unemployment rate that there is less motivation to pass another stimulus—Congress appears to be at an impasse and it looks as if there will not be one for some time. And now, the brewing dispute over a Supreme Court appointment looks likely to derail or distract from stimulus negotiations. Having said that, another sharp contraction in the stock market, sharp increase in unemployment, or other large negative change in a visible representation of the economy may spur action.
For this forecast, we are assuming that:
- Despite the lack of disruptive second waves, the economic disruption has been severe enough that economic growth will not just bounce back.
- Regardless of whether there is a meaningful second wave, people will be wary enough of both the virus and their household budgets that it will take some time before sustained growth in demand re-emerges.
Lumber and Log Prices. Through March 2020, lumber prices had been climbing and peaked at $478/mbf. From there prices tumbled to $363/mbf in May. However, since May, prices have rebounded dramatically, to $788/mbf in August—higher in real terms than any time since 2000.
After peaking in February at $570/mbf, prices for the "typical" DNR log fell to $500/mbf in May. Log prices have rebounded to $595/mbf through August, higher than has been seen since the spike in prices in 2018.
Early in the pandemic we, and others, expected the pandemic to undermine house prices and demand, and demand for lumber. This widely shared expectation resulted in slower production at mills, furloughs, layoffs and some mill closures. However, it appears that the very low interest rates have spurred housing demand and starts, and remodeling and renovation demand has also spiked during stay-at-home orders. The result has been a sharp drop in supply while there is strong demand, making lumber prices rocket up and pushing up log prices. Prices are expected to fall in Q4 as mills are able to bring back production, before increasing again in early 2021.
Timber Sales Volume. DNR plans to offer around 580 mmbf for sale in FY 21. However, given the uncertainty surrounding the economy during the pandemic and to allow for significant numbers of no-bid contracts, we have opted to leave the sales volume forecast unchanged—it remains 500 mmbf for FY 21 and beyond.
Timber Sales Prices. The average prices for sales in the beginning of the FY 20 were extremely low, averaging only $164/mbf in the first two months. Sales prices recovered through early 2020, but then fell as the effects of the pandemic took hold. The first two timber sales of FY 21 had much stronger prices than expected, averaging $355/mbf—much higher than the FY 20 average of $291/mbf. We are increasing the sales price forecast for FY 21 to $320/mbf (from $300/mbf in June) due to the log and lumber price expectations. For now, forecast prices in outlying years are unchanged.
Timber Removal Volume and Prices. The removal volume forecast for FY 21 is increased by 10 mmbf to 510 mmbf. This is a partial reversal of a decrease in June and is due to strong than expected log demand and stumpage purchaser interest. The harvest volume forecast for FY 22 is increased to 520 mmbf, FY 23 is unchanged at 520 mmbf and FY 24 is increased to 510 mmbf. This reflects higher expected demand in FYs 22 and 23, followed by a decrease toward the mean in FY 24 and beyond.
The removal price for FY 20 was much higher than expected in February and ended the fiscal year at $345/mbf. This, combined with the lower than forecast sales prices in FY 20, would have led to a drop in removal prices for FY 21 and outlying years if not for the increased sales prices expected in FY 21. The result is only small changes to the removal prices in all forecast years.
Timber Revenue. Forecast timber revenue in FY 21 are increased by $3 million to $160 million. FYs 22 and 23 are also increased, by $3 million and $1 million respectively.
Timber revenues for the 2019-2021 biennium are forecast be $340 million, an $11 million increase, while revenues for the 2021-2023 biennium are increased by $4 million to $336 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 were all higher than expected in FY 20, resulting in revenues of $44 million for the fiscal year, $1 million higher than forecast. For FY 21 irrigated revenues are increased by $0.4 million due to consistently high revenues in the past several years and new irrigated leases coming online in the fiscal year. Additionally, minerals and hydrocarbon revenue is increased by $0.2 million due to consistently high revenue and negotiations for backfill leases nearing completion.
The aquatic lease revenue forecast in FY 20 was $0.9 million higher than expected in June. The forecast for FY 21 and outlying years is increased due to higher expectations for water-dependent and non-water-dependent leases, bringing them more inline with recent historical revenue. These offset a decrease in forecast revenue for easements and other rents in FY 21.
The forecast geoduck revenue has been decreased for FYs 21 and 22 due to weaker than expected harvest volumes. Our previous forecasts had been based on harvest volumes of around 95 percent of sales because demand had been growing strongly as China came out of coronavirus lockdowns. However, demand growth has apparently slowed markedly and harvest volumes are likely to be closer to 85 percent for sales through the first half of CY 2021.
In FY 23 and beyond, geoduck forecast is unaltered. Aside from the COVID-19 pandemic, there remains a trade-war between the US and China, with high tariffs on geoduck. These are expected to continue at least through the beginning of 2021, limiting Chinese consumption and continuing to push Chinese consumers toward other luxury seafood.
Total Revenues. Forecast revenues for the 2019-2021 Biennium (FYs 20 and 21) are increased by 2.8 percent ($13 million) to $473 million. Revenues for the 2021-2023 Biennium are increased by 1.1 percent ($5 million) to $472 million.
Other notes to the Forecast. In addition to the economy-wide impacts of COVID-19, a number of sources of uncertainty 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 six months out; the ongoing trade war and political tension with China directly affecting timber and agricultural exports and prices; and uncertainty about the stability of the current high housing starts level.
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.
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 5 percent tariff on geoduck, wheat, and softwood logs. Prior to the pandemic, the tariffs on geoduck were 25 percent and were a significant driver of the drop in geoduck prices in late 2019. The log tariffs and the slowdown in housing starts were the major contributors to the lower domestic price of logs through late 2019.
Although exports to China have dropped by more than 70 percent since 2014, it remains a meaningful export market for Washington logs. Demand is expected to continue to decrease in the coming years, even aside from the immediate impact of the coronavirus pandemic.
In addition to the coronavirus and the trade tensions discussed above, other things could undermine Chinese demand, such as continued loss of Pacific Northwest market share to international and Southeastern U.S. competitors.
As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Fiscal Year 2021
September 2020 | November 2020 | February 2021 | June 2021
Fiscal Year 2020
September 2019 | November 2019 | February 2020 | June 2020
Fiscal Year 2019
Fiscal Year 2018
Fiscal year 2017
Fiscal Year 2016
Fiscal Year 2015
Fiscal Year 2014
Office of Budget & Economics
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1111 Washington St. SE
Olympia, WA 98504-7001