Just weeks after Moody’s Financial Service upgraded Washington’s general bond credit rating to its highest ever, a new report by the state Economic and Revenue Forecast Council (ERFC) shows the state economy remains one of the strongest in the nation – despite a large decrease in exports. At the same time, a new assessment of Washington’s general debt by S&P Global also gives the state high ratings, citing its reliance on more stable revenue sources such as a sales tax rather than an income tax.
The economic growth has occurred even as the state has been affected by ongoing trade disputes between the U.S. and China and Boeing’s suspension of 737 Max deliveries. In the second quarter of the 2019 fiscal year, exports from Washington dropped 27.6 percent compared to the same time in 2018. It’s the largest decline in exports since the first quarter of the 2000 fiscal year.
ERFC says the decrease in exports was “clearly affected” by Boeing’s decision with the 737 Max:during the same period, there was a 41-percent drop in transportation equipment exports.
At the same time, agricultural exports also fell 22.4 percent, while manufacturing exports decreased by 5.6 percent.
“It’s a really terrible quarter,” ERFC Executive Director and Chief Economist Steve Lerch told the council at its Sept. 5 meeting. “I think it’s a safe bet that the trade wars, the tariffs…is driving that big decline in exports.”
As one of the most trade-dependent states in the nation, exports make up 15 percent of gross state product (GSP). One of the challenges for ERFC has been to incorporate into their economic forecasts the latest of what is a continually changing trade policy between the U.S. and China. While it does include a 25 percent tariff on almost half of Chinese imports and a Chinese tariff on $100 billion worth of U.S. exports, the forecast did not account for a new 10 percent tariff that took effect in September or $75 billion worth of tariffs placed by China on U.S. exports.
Yet despite the decreased exports and a continued decline in Seattle metro home prices, state revenue continues to grow. From June 10 to August 11, the state brought in $3.54 billion in revenue — $108 million or 3.1 percent more than anticipated. The state unemployment rate remains at around 4.6 percent; its lowest rate ever was in October 2018 at 4.4 percent. The report also noted that high housing prices “could impede long-term growth prospects, although officials have begun to forecast a cool down in the housing sector throughout the next five years.”
S&P Global’s rating assessment of Washington offered some observations regarding its tax structure, noting the “reliance on retail sales tax, and business and occupation taxes typically affords Washington more revenue stability than other states that rely on personal income tax revenues,” and “that capital gains-related tax revenues are among the most cyclical and difficult to forecast revenues in numerous other states.”
Like Moody’s, S&P positively cited the state’s fiscal practices, including balanced budget requirements stipulating that biennial budget spending cannot exceed the forecasted revenue for that period. The report also noted that the $12 billion in unfunded public pension liabilities are “relatively low” compared to other states.
ERFC’s next monthly revenue collection report will be released Sept. 17. The council’s next revenue forecast will be available on Sept. 25.