Economic Outlook

Presented to Horizons Economic Forecast

Arun Raha Chief Economist & Executive Director

January 13, 2012 Tacoma, Washington

WASHINGTON STATE

ECONOMIC AND REVENUE FORECAST COUNCIL

Summary
Events are unfolding as expected in the November forecast
However, the uncertainty in the baseline remains very high, mostly due to out-of-state factors

Within WA, there is fiscal drag from declining state and local government budgets
Revenue growth has been restrained due to a stagnant construction sector Revenues since the November forecast are $20 million (1.2%) above expectations
Events to date since the November forecast do not indicate the need for a significant forecast revision
WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Arun Raha Economic Outlook January 13, 2012

Slide 1

The states risk matrix shows most risks from outside state
EUROPE Sovereign Debt EUROPE Banks
GRE ITA IRL ESP POR

DEU

FRA

U.S. Banks

Washingtons Economy

Political Gridlock In Washington DC

Debt limit debate Super Committee

Weak consumer and business confidence

Pluses State of Washington Minuses

Arun Raha Economic Outlook January 13, 2012

Slide 2

Aerospace Software Exports Agriculture

Construction State & Local Government

Source: ERFC WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

U.S. banks exposure to Europe is worrying

GREECE

U.S. Banks Exposure

GERMANY

United States Banks

$ bill. GRE ITA

IRE

Sov. 2.3 12.9

1.9 1.1 7.6 59.6 24.9

Pvt. 6.0 34.0

51.7 4.1 59.1 175.1 246.8

ITALY

IRELAND

POR ESP DEU

FRANCE

PORTUGAL

Arun Raha Economic Outlook January 13, 2012

Slide 3

FRA Cont.

Direct $ 687 billion

SPAIN

$ 1.4 trillion

Source: Bank of International Settlements, 2011 Q2 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

The consensus economic outlook has been fairly steady recently

Blue Chip Consensus GDP forecast
3.5 3.2

3.0
Percent

2.8

2.5

2.2 2.0
1.6 1.5

2.1

2.2

1.8

1.7

Arun Raha Economic Outlook January 13, 2012

Slide 4

2011 September

2012 November

2013 December

Source: Blue Chip Economic Indicators, data through December 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

The U.S. economy is now producing its pre-recession output with fewer jobs
Data normalized to recession start, 2007Q4 = 0

U.S. GDP and Employment after Recession Start

2
0 Millions of Jobs -2 -4
6.6 Million

200
0 -200 -400 -600 -800 -1000
Billions of Dollars

-6 -8 -10

Arun Raha Economic Outlook January 13, 2012

Slide 5

10

12
GDP

14

Quarters

Employment
Source: BEA, BLS, ERFC; data through 2011 Q3

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Labor productivity growth has slowed job growth

Any increase in final demand will translate to job growth after labor productivity declines U.S. Employment & Labor Productivity Growth
8 6 Percent change (Y/Y) 4 2 0 -2 -4
Arun Raha Economic Outlook January 13, 2012
Slide 6

-6 1991 1995 1999 2003 2007 2011 Employment

Source: BLS; data through 2011 Q3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Productivity

Consumer confidence is showing some signs of firming, but still weak

Index Mich: 1966Q1 = 100, SA Conf Board: 1985 =100, SA
150 125 100 75 50
Arun Raha Economic Outlook January 13, 2012
Slide 7

25 1980 1985 1990 U Mich 1995 2000 Conf Board 2005 2010

Source: University of Michigan; Conference Board, data through December 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Small business optimism and sales expectations are weak but improving
National Federation of Independent Business
3 month sales growth expectation, percent 40 30 20 10 0 95 90 105 100 Optimism Index, 1986=100

-10
-20 -30 -40

85
80 75

Arun Raha Economic Outlook January 13, 2012

Slide 8

2006

2007

2008

2009

2010

2011

Sales Expectations

Optimism Index

Source: National Federation of Independent Business; data through November 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Stock market volatility down but EU slow burn continues

Volatility of S&P 500 (VIX)
90
Financial Meltdown

80
70

60
Percent

50 40 30 20 10

Greek Crisis

PIIGS Debt

Arun Raha Economic Outlook January 13, 2012

2006

2007

2008

2009

2010

2011

2011

Source: Yahoo! Finance; data through December 30, 2011

Slide 9

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

U.S. LMV sales have recovered from recent supply chain disruptions
WA New Vehicle Registrations, Thousands, 3 MMA, SA

Million Units, SAAR

U.S. LMV sales in December were up 8.4% Y/Y

25

30

20

24

15

18

10

12

Arun Raha Economic Outlook January 13, 2012

Slide 10

0 1990 1994 1998 2002 2006 2010 U.S. Light Trucks U.S. Cars

0 WA New Vehicle Registrations

Source: Autodata Corporation, WA DOL; data through December 31, 2011, WA estimated WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Relative age of the car fleet indicates continued turnaround in car sales
The percent of old cars on the road was at a historic high in June and has now been falling over the last 6 months

U.S. LMV Sales: Ratio of 36/120 Months

40%

35%

30%

25%

Arun Raha Economic Outlook January 13, 2012

Slide 11

20% 1976 1982 1988 1994 2000 2006

Source: Autodata Corporation, ERFC; data through December 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

WA non-residential contracts have turned up for the first time in four years
Non-Residential Contract Value Annual Percent Change
50 40 30 20 Percent
Arun Raha Economic Outlook January 13, 2012
Slide 12

10 0 -10 -20

-30
-40 1981 1985 1989 1993 1997 2001 2005 2009

Source: McGraw-Hill Construction, data through November 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

WA multi-family building permits are improving

Washington Housing Units Authorized by Building Permits, 3MMA, SAAR
50

45
40 35 Thousands
Arun Raha Economic Outlook January 13, 2012
Slide 13

30 25 20 15 10

5
0 1970 1975 1980 1985 Multiple
Source: U.S. Census Bureau; data through November 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

1990

1995

2000

2005

2010

Single

Single-family home prices continue to decline

Oct 2011 U.S. is down 3.4% SEA is down 6.2%
25 20 Case Shiller Home Price Index, SA
Year-over-Year % Change

15
10
Percent

5 0 -5 -10 -15

-20
Arun Raha Economic Outlook January 13, 2012
Slide 14

-25

2001

2003 Seattle

2005

2007 2009 Composite 20

2011

Source: S&P/Case-Shiller; data through October 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

More foreclosures can be expected...

WA Rank: 2011Q2 : 23 2011Q3 : 23

Seriously Delinquent

12.0
10.0

Percent

Seriously Delinquent = 90+ Days Past Due or in foreclosure

8.0 6.0 4.0 2.0

Arun Raha Economic Outlook January 13, 2012

Slide 15

0.0

2008

2009

2010
U.S.

2011

Washington

Source: Mortgage Bankers Association National Delinquency Survey, data through 2011 Q3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

...but will eventually slow down

WA Rank: 2011Q2: 47 2011Q3: 45 30 Days Past Due, SA

4.0

3.0
Percent
Arun Raha Economic Outlook January 13, 2012
Slide 16

2.0

1.0

0.0

2008

2009

2010
U.S.

2011

Washington

Source: Mortgage Bankers Association National Delinquency Survey, data through 2011 Q3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Boeing has over 7 years of commercial orders on its books

Excludes the militarys new refueling tanker
1600 Orders & Deliveries 4000

1200

3000 Backlog

800

2000

400

YTD

1000

0
Arun Raha Economic Outlook January 13, 2012
Slide 17

0 03 04 05 06 07 08 09 10 11 Backlog

Net Orders
Source: Boeing, data through November 2011

Deliveries

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Software publishing employment is growing

Percent change, year ago 25 20 15 10 5 0
Forecast

-5
Arun Raha Economic Outlook January 13, 2012 Source: ERFC November 2011 forecast; actual through November 2011
Slide 18

-10 2000 2002 2004 2006 2008 2010 2012

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

WA export growth is strong, and will help state outperform in the recovery
Total exports were up 29% y/y in Q3
Exports Percent Change, year ago
80 60 40 20 0 -20

Arun Raha Economic Outlook January 13, 2012

Slide 19

-40
1998 2000 Total 2002 2004 2006 2008 2010

Total excluding Transportation Equipment

Source: Wiser Trade Data; through 2011 Q3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Recent free trade agreements will benefit the state

Rank USD % Key Industries Detail
92% of trans equip barriers eliminated immediately, 2/3 of ag barriers
Over 90% of aerospace exports become duty free immediately Majority of exports become duty free immediately

South Korea

4th

$2.7 Billion

5.1%

Agriculture, Transportation Equipment

Panama

27th

$315 million

0.6%

Transportation Equipment

Colombia
Arun Raha Economic Outlook January 13, 2012

50th

$56 million

0.1%

Petroleum, Chemicals, Machinery

Source: U.S. Department of Commerce, Wiser Trade; data through 2010

Slide 20

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

WA employment will recover slightly faster than the U.S.

WA employment peaked 1 month after U.S. (Feb. 2008 vs. Jan. 2008) Both WA and the U.S. reached a trough in Feb. 2010 Both WA and the U.S. wont reach their previous peak until after 2013
Arun Raha Economic Outlook January 13, 2012
Slide 21

November 2011 = 1.0

1.06 1.05 Forecast

1.04
1.03 1.02 1.01 1.00 0.99 0.98

0.97
2007 2009 Washington 2011 U.S. 2013

Source: ERFC November 2011 forecast; actual through November 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

WA personal income will recover faster than that of the U.S.

Date of regaining peak: WA: Nominal 2011Q1 2011Q3 = 1.0 1.06 Forecast

1.04
1.02 1.00 0.98 0.96 0.94 2007 2009 Washington 2011 U.S. 2013

Real 2012Q2
U.S.: Nominal 2010Q4

Real 2012Q3

Arun Raha Economic Outlook January 13, 2012

Slide 22

Source: ERFC November 2011 forecast; actual data through 2011Q3 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

General Fund* forecast by fiscal year

FY 2011 revenues were boosted by tax amnesty program and one-time transfers of non-GF-S funds into the GF-S
USD billions

General Fund-State Revenue

Forecast

18 17 16 15 (9.6%) 14 13 12 11 (4.1 %) 8.0% 1.2% 7.9%

5.4% 0.3%

Arun Raha Economic Outlook January 13, 2012

Slide 23

10 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

*General Fund & Related Funds for FY 07-09, General Fund new definition for FY 10-13 Source: ERFC forecast, November 2011 WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

GF-S revenues as a share of personal income will be below trend until FY13
Total General Fund-State Revenue as Percentage of State Personal Income 7.0%
Forecast

6.5%

6.0%

5.5%

5.0%

Arun Raha Economic Outlook January 13, 2012

Slide 24

4.5% 1995 1997 1999 2001 2003 2005 Fiscal Years 2007 2009 2011 2013

*Current definition of Revenue Act Source: ERFC; data through FY 2011, November 2011 forecast WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Conclusion

The national and state economies appear headed for an extended period of muddle-through slow economic and job growth, high unemployment and weak confidence

The level of uncertainty in the baseline remains extremely high, and downside risks outweigh upside risks
Revenue growth is likely to remain flat in the near term
Arun Raha Economic Outlook January 13, 2012
Slide 25

WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL

Questions

Arun Raha Economic Outlook January 13, 2012

Slide 26

Economic & Revenue Forecast Council 1025 E. Union Avenue, Suite 544 Olympia WA 98504-0912

www.erfc.wa.gov WASHINGTON STATE ECONOMIC AND REVENUE FORECAST COUNCIL 360-534-1560