Quarterly Economic and Revenue Forecasts
UPDATED: June 28, 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.
June 28, 2019
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 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 have increased to $371 in April 2019.
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, but are still much lower than they were throughout 2018, averaging $553/mbf through April.
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. Unfortunately, with the drop in timber and lumber prices and the weak demand, a number of DNR's recent contracts have been passed over at auction with no bidders. To date, DNR has sold 424 mmbf in stumpage, leaving 76 mmbf to be sold in the final auction to reach the current forecast for FY 19. It is DNR's intention to bring more than this to the June auction, however, given the number of contracts with no bidders, 500 mmbf was determined to be a reasonable total estimate of what will actually sell.
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 was increased to $370/mbf in the September forecast, due to the strong prices in the first half of 2018, which were forecast to wane, but not collapse. This was pulled back to $360 in November, which was still achievable given the sales through October. Price continued to be lower in sales through January, so the stumpage price was reduced to $350/mbf in the February forecast. This was an entirely plausible forecast, until April.
FY 19 sales through March averaged $362/mbf; however, prices plummeted in April. Prices for April and May averaged $257/mbf. Given the sales prices to-date and the very large volume being offered in June, the FY 19 price forecast has been reduced to $325/mbf, despite the expectations for increases in log prices. Sales prices for the outlying years are unchanged because log and lumber prices are expected to recover from the weakness that dominated prices in FY 19. However, prices are also not increased in outlying years because a number of risks to house prices and the broader economy still could adversely affect log and stumpage prices.
Timber Removal Volume and Prices. Harvest volume forecast for FY 19 is meaningfully reduced and the forecasts for outlying years are altered significantly. Timber removals for FY 19 are reduced by 20 mmbf to 500 mmbf because harvests continue to be much lower than expected. It is possible, but very unlikely, that harvests in June outweigh the current deficit.
The volume not harvested in FY 19 is essentially pushed out to outlying years.
Timber removal prices for FY 19 are increased to $380/mbf, due entirely to an increased proportion of the harvest to-date being higher priced timber. This was not the case through the February forecast, where the average price of removals was $375. Between February and May, the average removal price was $442/mbf. Although this has increased the removal price in the current year, it has meaningfully affected prices in outlying year, FY 20 in particular.
Timber Revenue. The changes to the timber harvest volume have reduced projected revenue in FY 19, decreasing it by $4 million to $190 million. Revenue in FY 20 and FY 21 are reduced by $17 million and $8 million respectively.
Revenues for the 2017-2019 biennium are forecast to total $369 million, a decrease of 1.1 percent ($4 million) from February's forecast. Forecast revenues for the 2019-2021 biennium are decreased by 6.3 percent ($25 million) to $372 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 forecast for FY 19 is increased slightly due to higher than expected revenues in dryland agriculture and minerals leases outweighing a reduction in irrigated agriculture. The forecast in outlying years is increased slightly due to new leases in minerals and hydrocarbons.
Aquatic lease revenues in FY 19 are increased by $4 million, due to updated geoduck auction prices and volumes as well as higher than expected revenue in almost all types of aquatic leases. Outlying years are increased due to increased expectations for all types of aquatic leases except aquaculture. Price weakness in geoduck auctions were incorporated into the February forecast, and are expected to continue as long as the 25 percent tariff to China continues.
Total Revenues. Total revenues for the 2017-2019 Biennium (FYs 18-19) are decreased by 0.1 percent (less than $1 million) to $535 million. Revenues for the 2019-2021 Biennium (FYs 20 and 21) are decreased by 4.4 percent ($23 million) to $516 million.
Notes to the Forecast. There are a number of sources of significant uncertainty for DNR revenue and the overall economic activity. These include DNR-specific issues, such as the as-yet undetermined sustainable harvest volume, as well as broader economic issues including the escalating trade dispute with China, a continued decrease in wood-fiber exports to China, a slowdown in housing starts, and a potentially weaker economic climate.
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 has 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.
In September 2018, China and the U.S. implemented another round of reciprocal tariffs. These tariffs include a 25 percent tariff on geoduck and wheat, and a 5 percent tariff on softwood logs. The tariff on geoduck is likely the main driver of the drop in geoduck prices, from an average of $11.31/lb in FY 18 to an average of $9.43/lb in FY 19 (a 17 percent drop). The log tariffs, in addition to the slowdown in housing starts, likely undermined the domestic price of logs.
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 Pacific Northwest market share to international and Southeastern U.S. competitors.
Continued growth in domestic housing demand was expected to offset the continued decline in China-bound exports. If housing construction does not resume its growth, as optimistic analysts have forecast, and Chinese exports continue to decline, then log and lumber prices will likely continue to fall, in which case even our conservative current stumpage forecast may be optimistic.
Another concern for the overall U.S. economy, which would affect DNR revenue, is the continued political uncertainty surrounding the U.S. Federal Government. The government was shut down from December 22, 2018, to January 25, 2019, and was the second federal government shutdown of the current U.S. administration. Although the shutdown itself is likely to only meaningfully negatively affect GDP growth in the first quarter of 2019, it is a presage to more uncertainty. If a budget agreement isn't reached by October, then the government will shut down again. Additionally, the budget caps will also expire, assuming there is no agreement to extend them, which would cause across-the-board cuts to U.S. government spending. Given that government spending has been a major driver of GDP in 2018 and the first quarter of 2019, these automatic cuts may have an surprisingly large impact on GDP.
The Congressional Budget Office estimated that the cost of the 2018-19 shutdown was around $11 billion in lost GDP revenue, all but $3 billion of which will likely be recovered. That is an insignificant amount compared to the overall size of the U.S. economy. However, if the government were to shut down again, combined with automatic spending cuts, the impacts may be more significant than last time.
The direct impact of the shutdown on DNR was mostly 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 potentially 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.
To be clear, in the end, the effects of the Federal Government shutdown in 2018-19 were likely minimal and were likely 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.
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.
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 for 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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