Quarterly Economic and Revenue Forecasts
UPDATED: December 7, 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 firstname.lastname@example.org.
November 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. Although recent vaccine announcements based on initial results are very promising, showing that at least one is 90 percent effective at seven days after the second dose, and suggest that there will be at least two very effective vaccines, both of those vaccines still need to complete their phase 3 trial and data needs to be submitted to regulators Additionally, there are still questions about distribution, given that at least one of them must be transported at -75 degrees, and questions about how long immunity will last.
While the vaccines are excellent news, the U.S. and much of Europe are experiencing a tremendous increase in the number of COVID cases. As of the forecast writing, U.S. hospitalizations have reached a record high, more than doubling since September, and lockdowns are being announced across Europe and the United Kingdom.
The novel coronavirus pandemic has caused economic mayhem. Initially, it created the steepest and most sudden drop in employment and economic activity in U.S. history as the virus spread through the country and led almost every state to initiate some type of stay-at-home or social-distancing order, closing schools and many businesses. Since then, the U.S. economy has seen a large rebound, though a full recovery is likely to take much longer and will probably not happen without better control of the virus.
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 a 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) and too uncertain to provide a good metric for quarantining decisions. Additionally, 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. Finally, there are reports of people being uncooperative with contact tracing officials, further undermining the efficacy of their work.
The lack of an effective national strategy to contain COVID-19 is important because it presents an risk to the current nascent economic recovery from the pandemic. There is evidence that the local and national lockdowns were only a small contributor to 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 fairly reasonable finding. When 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.
The current surge in both the number of infections and the rate of growth of new infections will likely slow the recovery for at least the next couple of months and potentially push the economy back into a recession. This is a potentially large downside risk for this forecast for FY 21.
Already, the economic damage of the virus has been extraordinary, causing a recession characterized by the sharpest drop in quarterly GDP ever measured (-9.0 percent, or -31.4 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 6.9 percent in October and preliminary Q3 GDP growth of 33.1 percent (SAAR). This leaves Q3 GDP about 3 percent lower than it was at the end of 2019. 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. Additionally, the recovery has been uneven, with wide differences in output growth between industries and between employment and income recovery by industry.
It is important to emphasize that the rebound in economic activity happened on the back of an enormous fiscal stimulus and accommodating monetary policy. Congress passed the $2 trillion CARES Act and the Federal Reserve dropped interest rates to essentially zero and, for the first time, promised to buy corporate debt as well as expanding U.S. Treasuries purchases.
The CARES Act had one-time payments to each person in the U.S., additional payments to weekly unemployment recipients, and extended unemployment benefits. The additional unemployment payments, in particular, were generous enough that many people were able to entirely replace their wages or even increase their income. This meant that although people were losing work, household balance sheets weren't necessarily falling. Indeed, personal saving actually increased in the early months of the pandemic, so people had money to spend when the virus was better under control and the economy opened up in late summer.
While the Federal Reserve activity is ongoing, the additional unemployment benefits of the CARES Act expired at the end of July. U.S. Bureau of Economic Analysis work indicates that the CARES Act unemployment programs were 5.5 percent of personal income in July. As expected, the expiration of the additional unemployment benefits at the end of July caused a fairly sharp decrease, 2.5 percent, in personal income in August. This drop has the potential to undermine spending and the current recovery in the near future, though personal saving in previous months may help to offset this.
Almost every forecast that we have 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 and the result of the federal elections that there is much less motivation to pass another stimulus. Given the contentious political environment, we do not expect another stimulus package.
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 560 mmbf for sale in FY 21. In the last forecast, we refrained from increasing the predicted sales volume because of uncertainty around the pandemic and the potential numbers of no-bid contracts. However, given the consistent strength of lumber prices, and increasing log prices, as well at the demand seen at sales to date, we are increasing our sales volume forecast to 520 mmbf for FY 21. Forecast sales volumes in future years are unchanged.
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, ending FY 20 with an average price of $291/mbf. The first four timber sales of FY 21 had much stronger prices than expected, averaging $405/mbf. We are increasing the sales price forecast for FY 21 to $340/mbf (from $300/mbf in the June forecast and $320 in September one) due to the both the strong log and lumber prices that we've seen and their continued strong outlook. For now, forecast prices in outlying years are unchanged.
Timber Removal Volume and Prices. The removal volume forecast is unchanged in all years.
The average price of timber harvested to date in FY 21 has been higher than expected, largely coming from contracts with higher-value timber. However, there is still a large amount of timber due to expire this fiscal year that also has high prices. This, combined with the expectation that some of the timber sold to date will be harvested in this fiscal year, has motivated us to increase the forecast average removal price for FY 21 by $15/mbf to $325.
Removal prices in outlying years are also increased due to the higher expectations for FY 21 sales prices.
Timber Revenue. Forecast timber revenue in FY 21 are increased by $8 million to $165 million. FYs 22 and 23 are also increased, by $6 million and $3 million respectively.
Timber revenues for the 2019-2021 biennium are forecast be $347 million, an $8 million increase, while revenues for the 2021-2023 biennium are increased by $9 million to $345 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 increased slightly in FY 21 due to lease renewals in communications increasing revenue to date and likely through the remainder of the fiscal year.
The aquatic lease revenue forecast for FY 21 is decreased slightly due to weaker-than-expected revenue from non-water-dependent leases.
The forecast geoduck revenue has been slightly decreased for FY 21 but increased in FY 22 due to updated sales volume expectations. This is a similar reason for the changes in FYs 24 and 25. The geoduck revenue forecast is based on an assumed harvest volume of 85 percent of sales through the first half of CY 2021.
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 at least through the beginning of CY 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 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