State revenue forecast sees possible turning point

August 12, 2009

By Communications staff, Washington State University

U.S. GDP over the past three years, slowing decline in GDP’s Seasonal Adjusted Anual Rate

The Washington State Department of Revenue has issued an August 2009 update to its Economic and Revenue Forecast, noting that the state’s index of leading economic indicators has increased in each of the last three months, and that the economy may be “approaching a turning point.”

How the state economy is performing is important to WSU, in that the majority of WSU’s funding come from state revenues.

The state’s June 2009 economic revenue report gave the following summary:

U.S. Economy

Policy stimuli have finally succeeded in cushioning the economy’s downward slide. If the recession does not trough this month, it is almost certain to do so next month. The key question now is when can we expect growth to become self-sustaining? The data do not provide an obvious answer. Private spending, both business and consumer, remains weak and confidence measures do not suggest an imminent improvement. We therefore expect the recovery will be slow and U-shaped and that policy accommodation will remain in place for a while longer.
The rate of change in real GDP improved sharply to -1% (Seasonally Adjusted Annual Rates) in the second quarter, from a downwardly revised –
6.4% in the first quarter (See graph).
Personal consumption expenditures worsened from 0.6% growth in
Q1 to a 1.2% decline in Q2. On the other hand, government spending at the local,
state and national levels went from a 2.6% decline in Q1 to 5.6% growth in
Q2.
Businesses have been very prompt in reducing inventories. This may lend to a faster recovery than we have predicted. However, households are still paying
down debt and saving more, and there is considerable slack in both labor and
goods markets. So we do not expect the pace of the recovery to quicken to self
sustaining levels prior to mid-2010.
Even before the popularity of the CARS program, automotive companies had
announced a ramp up in production plans over the summer to restore depleted
inventory. Now, as dealer inventory has been further reduced, we are likely to see a further uptick in auto output. We expect that will provide a temporary boost to third quarter GDP, but at the cost of fourth quarter GDP. The longer term effects of
increased showroom traffic on car sales are likely to wait until the labor market
improves.
The latest employment report continued to show a decline in the rate of job
losses, with net job losses totaling 247,000 in July, lower than June’s loss of
443,000.

Washington State

Evidence continues to mount that Washington’s economy is approaching a
turning point. While labor market conditions continue to deteriorate, it does
so at a markedly slower rate. Building permits probably hit bottom in the second
quarter and the state’s index of leading economic indicators has increased in each
of the last three months.
Job losses in the state continue, but the monthly employment data suggest a
leveling-off is under way. The recession in Washington is now in its third distinct
phase.

… The sectors that had been declining the most rapidly – construction, manufacturing, trade, financial services, and business services, have all seen a significant slowing in the rate of job loss in the last few months. The leisure and hospitality sector actually gained jobs. On the other hand, the sectors that had been holding up well (information, education and health services, and government) have all seen modest erosion.
Washington initial claims for unemployment insurance are also slowing
another sign that the recession’s grip is weakening. Initial claims declined to
68,600 (seasonally adjusted annual rate) in June from 75,900 in May. June’s initial
claims were the lowest since January 2009 and are now about 10% below the
peak.
The number of housing units authorized by building permits declined slightly in
the second quarter to 13,900 (seasonally adjusted annual rate) from 15,100 in the
first quarter.
The Washington Index of Leading Economic Indicators has risen in each of the last three months. Contributing positively to the increase over the three month period are a reduction in initial claims for unemployment insurance, rising average weekly hours in manufacturing, a falling dollar, and an increase in the U.S. index of leading of leading economic indicators. Negative contributions over the three month period came from reductions in the WA State Help Wanted Index, aerospace employment, and housing permits.
Major general fund-state revenues for the July 11 Aug. 10, 2009 collection
period were $23.0 million (2.1%) lower than our June forecast. Cumulatively,
revenues from the June 11- Aug. 10, 2009 period are $24.1 million (1.1%)
below the June forecast.