The latest update from the state Economic and Revenue Forecast Council (ERFC) reports yet another surge of unanticipated revenue, much of that thanks to a combination of Seattle metro’s real estate market and increasing gas prices. Also worthy of note is the council’s current attitude of cautious optimism for Washington’s’ economy despite trade war uncertainty and a cooling regional housing market – though that could change by the council’s next meeting in September.
As the most-trade dependent state in the nation, Washington remains especially vulnerable to the impact of new tariffs on Chinese goods. They were announced just as ERFC released its June economic forecast and as a result were not accounted for. However, ERFC Executive Director Steve Lerch told the council at the June meeting that by the fall they would have a better idea of the impact.
In an email, Lerch wrote that they plan to incorporate into the upcoming forecast the 25 percent tariff placed on U.S goods by China, as well as U.S. tariffs on $16 billion worth of Chinese imports set to take effect Aug. 23. Lerch added that although there is talk of even more U.S. tariffs, “we will not incorporate these in our baseline forecast if they remain at the discussion stage, although they may be part of a pessimistic forecast scenario (we always have a baseline, optimistic and pessimistic forecast).”
“Given stronger U.S. economic growth and higher interest rates relative to most of our trading partners, this forecast will assume a stronger U.S. dollar than in June, which will tend to be a negative for U.S. exports,” he wrote. “It is possible we could gain some additional information beyond what I mentioned above but this is where we are for now.
“We’re just assuming there’s not going to be a major trade disruption,” ERFC Senior Economist Eric Swenson said, who has worked on the council since 2001. “If the consensus was ‘there is going to be a big trade war,’ then we’d see a reflective move of the stock market. Obviously, in terms of (state) growth the rate can’t keep going on forever, but (we) view the Washington economy as doing much better than the national economy.”
Like the June forecast, the Aug. 16 update shows Washington continues to outperform the national average, with higher-than-expected employment and export growth. The Washington Employment Security Department reports an overall state jobless rate of 4.6 percent; though higher than the 4.1 percent national average, it’s the lowest for the state since 2007. In June and July, 18,100 nonfarm jobs were added — 6,300 more than expected in the June forecast. That surprise bump in employment was due primarily to new hires in the service sector. ERFC’s June forecast expects employment to grow 2.5 percent this year.
During the July 11-August 10 collection period, the state also received $75 million more in revenue than anticipated. It’s a trend Washington has experienced periodically over several years. During this legislative session, the legislature was able to take $700 million in unexpected monies that it used to pay for a new K-12 teacher salary schedule. A similar situation is likely for the 2017-19 biennium; ERFC increased its June revenue forecast for that biennium by $298 million. Expected revenue for the 2019-21 biennium was also increased by $287 million.
Under state law, surplus funds are deposited into the state’s budget stabilization account, a.k.a. the rainy day fund. Technically, the legislature requires a two-thirds majority to dip into the funds, unless it’s used for a declared emergency. However, a technical maneuver employed by the legislature this session redirected surplus monies into another account before they were placed in the rainy day fund. The move was upheld by a Thurston County Superior Court judge, though critics warn it now makes the constitutional protection of those funds meaningless.
In an email, State Treasurer Duane Davidson wrote that “it is the function of the legislature to determine what to do with surplus funds. In the past I recommended keeping a healthy balance in Washington’s Budget Stabilization Account, and today I continue to support maintaining a generous, well-funded rainy day fund. It’s simply a good business practice to prepare for economic downturn, regardless of political affiliation
Last year the legislature also authorized collection of sales tax from out-of-state business which the Department of Revenue began in January; a recent U.S. Supreme Court ruling concluded states could tax such transactions.
However, the pattern of higher-than-expected revenue also has been due to the council’s restrained approach when adopting a quarterly revenue forecast and economic outlook. The seven-member council includes four legislators and the agency heads for the Department of Revenue, Office of Financial Management, and the state Treasurer’s Office.
Swenson said much of that unanticipated revenue has come from the real estate excise tax (REET). From July to August alone, REET generated $6.8 million more than forecasted. In the 2017 fiscal year, the tax brought in $1 billion to the state, a 13.5-percent increase over 2016 – in 2013 it generated $574 million. According to the ERFC update, Seattle home prices are up 91 percent since December 2011 and 33 percent higher than the May 2007 peak.
“It’s been really high for so long that we weren’t going to predict they would keep growing by 10 percent year over year,” Swenson said. “But it happened, anyway. It kept on rolling and rolling.” However, he added “you don’t want to overshoot. It is worth undershooting. There’s no advantage to overestimating, because at the end of the fiscal year, you haven’t created any money.”
Now that Seattle’s red-hot real estate market seems to be cooling, Swenson said they expect a drop in the number of sales and consequently less revenue. “The boom is maybe getting closer to our forecast.”
ERFC’s next meeting is scheduled for Sept. 6 in Olympia, when the September preliminary forecast will be released. The forecast will be finalized on Sept. 26.