Quarterly Economic and Revenue Forecasts
UPDATED: February 27, 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: firstname.lastname@example.org
February 27, 2018
Lumber and Log Prices. Lumber prices for 2017 were significantly higher than previous years, averaging $425/mbf for the year - the highest prices in real terms since 2005, the height of the previous housing boom. After reaching an average of $376/mbf in 2014, west coast lumber prices fell to $317/mbf for 2015. They recovered slightly in 2016, averaging $341/mbf.
Prices for the `typical' DNR log were also markedly higher in 2017 than previous years, averaging $611/mbf for the year. The `typical' DNR log averaged $521/mbf in 2015, having fallen from an average of $591/mbf in 2014. The average price for 2016 was slightly higher at $536/mbf. The decline in 2015 was primarily due to the dramatic slowdown in demand from China and to an ample regional supply of both logs and lumber. The increase in prices through 2017 was primarily due to increased lumber demand. Prices are expected to remain high through early 2018, though are unlikely to increase significantly.
Timber Sales Volume. Given current timber sales plans, the sales volume forecast for FY 18 is unchanged at 500 mmbf. Sales plans in outlying years have not changed, so absent a new sustainable harvest calculation, sales volume forecasts in those years also remain at 500 mmbf.
Timber Sales Prices. FY 17 auction prices averaged $345/mbf. To-date, auction prices for FY 18 have averaged $444/mbf with slightly over 50 percent of the forecast volume sold. The sales price forecast for FY 18 is increased to $403/mbf due to the strong auction prices to-date and high expected prices for logs and lumber for the remainder of the fiscal year. The sales price forecasts for outlying years are unchanged.
Timber Removal Volume and Prices. Accounting for changes to purchaser plans, the timing of contract expirations and the likely average monthly harvest possible, FY 18 harvest volume expectations are lowered by 51 mmbf to 539 mmbf. The FY 19 havest volume forcast is decreased by 12 mmbf to 585 mmbf. Harvest volume forecasts for FYs 20, and 21 are increased by 9 mmbf and 36 mmf, respectively.
The average timber removal price for FY 18 is increased to $334/mbf, due to increased auction prices and an increase in the value of remaining inventory. Timber removal prices for FYs 19-21 are projected to be about $353 (+$12), $348 (-$2), and $344 (+$1) 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 in all forecast years. Revenues for the 2017-2019 biennium are forecast to total $387 million, down around one percent ($2 million) from Septembers's forecast. Forecast revenues for the 2019-2021 biennium are increased by five percent ($17 million) to $378 million.
Uplands and Aquatic Lands Lease (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 forecast for FY 18 is increased by $1 million due to increases in revenue expectations for irrigated, commercial property, and other leases. Revenue forecasts for outlying years are increased marginally due to revised expectations for commercial property.
Aquatic lease revenue expectations are increased slightly FY 18 due to better than expected revenue from non water-dependent leases.
The FY 18 geoduck revenue is increased by $1 million to $24 million due to higher than expected auction prices to-date and an increase in likely sales volume. The revenue forecasts for the outlying years are adjusted downward slightly based on our price model updated with the November auction results.
Total Revenues. Total revenues for the 2017-2019 Biennium (FYs 18-19) are unchanged at $533 million. Revenues for the 2019-2021 Biennium (FYs 20 and 21) are raised by $16 million to $517 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.
A continuing downside risk for the forecast is timber and lumber demand from China, which has already experienced a steep decline. A further decrease---due, for instance, to a slowdown in Chinese economic growth or a trade-war---would undermine overall demand and would most-likely weaken prices.
Since the expiration of the Softwood Lumber Agreement in late 2015, the U.S. and Canada have been without a trade agreement that covers lumber. The U.S. has imposed duties on Canadian lumber and there has been a finding by the U.S. International Trade Commission that the U.S. was harmed by subsidised Canadian lumber. However, Canada has appealed the finding to a NAFTA panel and has filed a complaint with the WTO. The uncertaintly caused by the lack of an agreement is likely to cause volatility in lumber markets until a final deal replacing the SLA is reached. This volatility may impact timber markets, though lumber price volatility does not always predictably influence log prices.
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, however, even with the growth forecast in the next two calendar years, starts will still remain below underlying demand. Robust growth has't yet occurred because of significant demand and supply side constraints. 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 general economic and social malaise. Most of which are easing, but none of which show signs of completely abating just yet. Additionally, there are a number of supply side impediments constraining construction growth, primarily a lack of skilled labor and a lack of 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 give that the tax cuts are unlikely to alleviate any of the demand or supply side issues.
In late 2015, China again instituted a ban on geoduck imports from the Pacific Northwest due to paralytic shellfish poison (PSP) and arsenic concerns. However, once again, this didn't appear to impact prices or harvest activity. In late February 2016, the Washington Department of Health posted an article saying that China had lifted the ban and it listed the areas cleared for geoduck export to China. 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.
Additionally, friction between geoduck purchasers and divers could disrupt the market, though these seem to have settled. As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Finally, it is unclear how long U.S. economic growth can continue in the absence of coherent, growth-driven federal economic policies.
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