Quarterly Economic and Revenue Forecasts
UPDATED: October 8, 2021
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.
Coronavirus pandemic Although the COVID-19 pandemic not longer completely overshadows all of the normal constituent parts of the forecast, it is still an important consideration for the world economy and still poses significant risks.
Since the previous forecast, vaccination rates have slowed dramatically, falling from an average of more than 3 million doses per day in mid-April to a low of just more than 500,000 per day in mid-July. As more people get vaccinated and the country got closer to a fully vaccinated population, a drop-off in the rate of vaccination was expected. But that is not what has happened in the U.S. Instead, a large portion of the population is hesitant or completely against getting vaccinated, such that only 53 percent of the population has been fully vaccinated.
In the previous forecast we were optimistic that the U.S. would be approaching herd immunity by now and the pandemic would largely be a problem external to the U.S., though it would still have implications and risks for the U.S. economy. Herd immunity now seems very unlikely in the foreseeable future. Additionally, the more contagious Delta variant of COVID-19 has created another spike in cases across the US, but has been particularly large in some regions.
Having said that, it seems unlikely that current or future outbreaks of COVID will entirely shut down the economy like in early 2020. Instead, it seems more likely that the ongoing pandemic will have more insidious impacts that are more difficulty to quantify. These could include things like:
- Reduced demand for services or fluctuations in demand for different types of goods because many people are still wary of public spaces.
- Disruptions to shipping, both international and domestic, because of overrun ports and outbreaks in port cities, as happened at the Ningbo-Zhoushan, the worlds third largest container port, in mid-August 1.
- Reduced economic output across the economy due to outbreaks among labor in other sectors.
- Reduced labor availability due to school closures or availability.
- Impaired productivity growth due to long COVID (ongoing symptoms that can severely affect normal life after the illness) affecting a meaningful portion of the workforce — current estimates are that around 11 million people in the U.S., or around 30 percent of those infected, are affected by long COVID 2.
This means that the path of the economic recovery and how long it will take is inordinately unclear. The massive multiple fiscal stimulus packages and monetary policy response of the U.S. appears to have been enough to mitigate the worst of the damage and even driven a strong rebound, at least as far as GDP is concerned. Importantly, personal income and savings increased in 2020. This means that U.S. consumers, as a whole, were flush with cash to spend at the end of 2020 and early 2021 (though this is a very uneven situation, with a significant portion of the population worse off).
However, the effects of the direct fiscal stimulus programs have likely already moved through the economy and the additional economic programs have ended or are ending soon. For instance, the expanded and extended unemployment benefits ended in early September, the Federal Housing Authority moratorium on single-family evictions for foreclosed borrowers will end on September 30, and the moratorium on rental property evictions has expired.
Additionally, the combination of a re-opening economy and relatively high savings have sharply increased demand while supply chain issues and labor constraints across the world are limiting the supply response, causing large price spikes from everything from cars to lumber to aluminum. Some of these price spikes have resolved, like lumber, while others are appearing, like aluminum. Over time the supply chains and labor constraints will likely resolve and the high prices will suppress demand in the interim, but it seems likely that it will take some time to reach new price equilibria.
Although the recovery may be rocky, most of the major indicators currently suggest that it will be strong. Overall, the outlook of this forecast is less optimistic than the previous.
Lumber and Log Prices. Lumber prices have plummeted to $408/mbf in August, after peaking at around $1,600/mbf in May (West Coast standard or better 2x4, Douglas-fir/Hemlock). This is roughly what the price was in December 2019 as prices were picking up due to housing construction demand, before COVID-19 threw everything into disarray.
The high lumber prices pulled up log prices, with the price of a "typical" DNR log rising from a low of $498/mbf in April 2020 to peak at $718/mbf in April 2021. These are very high historically, but interestingly, still below the highs of early 2018. Since April, log prices have softened, falling to $636/mbf in August. This is, notably, still higher than the prices of early 2020.
Early in the pandemic, we, and others, expected the pandemic to undermine house prices and demand, and, consequently, the demand for lumber. This widely shared expectation, as well as actual COVID-19 outbreaks and restrictions, resulted in slower production at mills, furloughs, layoffs, and some mill closures. However, it appears that extremely low interest rates spurred housing demand and starts, and remodeling and renovation demand spiked during stay-at-home orders. The result was a sharp drop in supply while strong demand remained, making lumber prices rocket up and pushing up log prices. These high prices continued into the summer as wood manufacturers weren’t able to sufficiently expand output due to supply chain and labor supply difficulties.
Lumber prices were expected to remain high through the third quarter of 2021, but have fallen much further and faster than expected. Prices are already recovering from their recent lows are expected to reach and remain on the higher end of their historical range through 2022.
Timber Sales Volume. FY 21 sales volume was 541 mmbf, with few offered contracts unsold.
DNR now plans to offer around 580 mmbf for sale in FY 22. Although stumpage prices thus far still seem relatively high, stumpage demand appears to have softened, with four DNR timber sales having already passed-in with no bids in the first two auctions.
Given the recent plummeting lumber prices, softening timber prices and apparent weakness in stumpage demand, the sales volume forecasts are unchanged.
Timber Sales Prices. Sales prices through FY 21 were been consistently high, with every sale being above the five-year average of $340/mbf, and many of them well above. In June the sales price forecast for FY 21 was increased to $395/mbf — well above our initial FY 21 forecast of $300/mbf in June 2020 — and this was very close to the final FY 20 average price of $396/mbf.
Again, given the recent drop in lumber prices, softening timber prices and weakness in stumpage demand, the sales price forecasts are unchanged. This may be too conservative, lumber prices are already climbing again, but it seems a reasonable balance of the risks to both the upside and downsides at this point.
Timber Removal Volume and Prices. The removal volume in FY 21 was decreased by 10 mmbf to 490 mmbf in the June 2021 forecast. This decrease was based on harvests through April and was after another reduction in the February forecast. The decrease in June was also were based on an understanding that there were still meaningful constraints on harvest labor and hauling services, much of which were taken up in fire salvage operations in Oregon.
The FY 21 harvest volume forecast was remarkably off. The final harvest was 528 mmbf, above even our forecast volume just before the start of the fiscal year in June 2020 of 520 mmbf.
It is unclear why our forecast was so wrong. Part of it is likely that DNR tracking of harvest volume is done through the internal financial system, and harvest volume is generally recognized only when revenue is recognized. For many contracts, this means that there is a, sometimes substantial, amount of harvest volume that isn’t tracked until the contract is fully closed out. This is why June is typically the month with the largest harvest volume — because many of the completed contracts must be closed out before the end of the fiscal year.
The removal volume forecast is unchanged in outlying years.
The forecast average removal price for FY 21 was increased in June by $6/mbf to $337/mbf due to the continued high average price of removals to date and the high value of remaining inventory. The final average removal price for FY 21 was $341/mbf.
Removal prices in outlying years are all slightly decreased. This is due to the much-higher-than-expected harvests essentially shifting the harvest of high-value timber into FY 21.
Timber Revenue. Timber revenue in FY 21 was 528 mmbf, substantially higher than forecast due primarily to the much higher harvest volume. Revenue in FYs 22 and 23 are decreased by $7 million and $9 million to $179 million and $176 million, respectively. These and decreases in outlying years are due to lower expected average harvest prices.
Timber revenues for the 2019-21 biennium are $363 million — around 9 percent higher ($15 million) than previously forecast. Forecast revenues for the 2021-23 biennium are decreased by $9 million to $355 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 $4 million higher than forecast in FY 21 at $50 million. This was due to higher than expected revenue in a number of areas, including orchard/vineyard, dryland, commercial, and communications.
Forecast revenue for both FYs 22 and 23 are increased by $2 million to $47 million. This is due to improved expectations for orchard/vineyard and communications leases in all years, as well as a one-time increase in irrigated agriculture revenue.
The aquatic lease revenue for FY 21 was around 4 percent lower (less than $1 million) than forecast in June due much lower revenue in non-water-dependent rents offsetting higher revenue in other sources. In FY 22 and outlying years, the aquatic lease revenue forecast is decreased by around one percent, driven by lower expectations in other revenue.
Geoduck revenue in FY 21 was around five percent higher than expected, ending the year at $13 million. The forecast revenue for FY 22 is increased slightly to $17 million based on updated sales volume information.
In June, the forecast geoduck revenue was increased meaningfully for all forecast years due to better-than-expected prices in recent auctions. Typically, we are wary of increasing outlying years’ price forecast based on recent prices, but the recent prices suggest that there is something of a mean reversion of geoduck prices. Prices dropped significantly in mid-2019 as tariffs between the U.S. and China began affect demand. Then, in early 2020, they fell sharply as the Chinese economy was essentially shut down. As China has gained a level of control over the pandemic, demand has increased and it looks like there’s a new equilibrium of between $7-9/lb. The new June forecast reflects the lower side of this range.
The most recent geoduck auction results in August, at $11.32/lb, support a higher price forecast and suggest that our current range may be too low. However, significant risks to geoduck prices still exist at this point. Aside from the COVID-19 pandemic, there remains a trade war between the U.S. and China, with high tariffs on geoduck. These are expected to continue indefinitely, limiting Chinese consumption and continuing to push Chinese consumers toward other luxury seafood. And as always in the geoduck fisheries, paralytic shellfish poison closures create uncertainty around harvest volumes as well.
Total Revenues. Revenues for the 2019-21 biennium (FYs 20 and 21) were $503 million — $19 million higher than previously forecast. The forecast revenue for the 2021-23 biennium are decreased by $5 million to $506 million.
Other notes to the Forecast. In addition the ongoing a COVID-19 resurgence, a number of sources of uncertainty may affect DNR revenue specifically, and the overall economic activity more broadly. These include: legal challenges to the 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; uncertainty about the stability of the current high housing starts level; supply chain issues across the world economy threatening to undermine economic growth more broadly as well as affecting timber-specific industries, such as a lack of glue impairing plywood manufacturing; and now, as of this writing, the threat of an imminent default by one of China’s largest real estate developers that is threatening to become a "contagion" and cause a cascading wave of defaults across the country. Additionally, while the timber sales volume estimates are based on the best available internal planning data, they are subject to adjustments due to ongoing operational and policy issues.
From the beginning of 2018 until just before the COVID-19 pandemic, the U.S. and China engaged in an escalating trade dispute. 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 a slowdown in housing starts were the major contributors to the lower domestic price of logs through late 2019. With the pandemic, tariffs were reduced to 5 percent tariff on geoduck, wheat, and softwood logs. There’s no indication that tariffs between the countries will be reduced further or removed soon.
In addition to the coronavirus and the trade tensions discussed above, other things could undermine Chinese demand for wood, such as the continued loss of Pacific Northwest market share to international and Southeastern U.S. competitors.
Another issue on the horizon that should be mentioned in relation to timber markets, is that it appears that Russia is moving forward with legislation banning the export of timber from the beginning of 2022. Given that Russia supplies around 12 percent of world log exports, the ban will have a significant impact on log supply across the world. In the short term, this will likely push up log prices across the world, and will mainly affect China, which gets a significant amount of logs from Russia. This will also likely push up lumber and wood product prices. This has not been built into the forecast prices, but will likely be when the legislation is finalized.
Finally, climate change has emerged as a more meaningful immediate risk as opposed to an amorphous risk in the far future, as previously rare extreme weather events become more common. The drought this year appears to have decreased wheat production on DNR lands by about 40 percent. Droughts and high temperatures are also increasing wildfires. While these do not appear to have seriously affected revenue from DNR timber lands since 2015, they pose a significant risk to both our short-term timber revenue forecast, potentially destroying standing timber under contract, as well as long-term revenue by destroying younger stands that would be harvested in future decades. Recent research suggests that the massive fires in Oregon around Labor Day 2020 caused not only immediate damage, but will reduce future Oregon harvests by 115 to 365 mmbf per year for the next 40 years. That, with the more immediate damage of the fires, suggests an overall economic impact of $5.9 billion3.
Fiscal Year 2022
September 2021 | November 2021 | February 2022 | June 2022
Fiscal Year 2021
Fiscal Year 2020
September 2019 | November 2019 | February 2020 | June 2020*
*Not completed due to COVID-19 pandemic.
Fiscal Year 2019
Fiscal Year 2018
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