1. WASHINGTON STATEECONOMIC AND REVENUE FORECAST COUNCIL Model Overview and September Forecast Update Presented to Seattle Economics Council Steve Lerch Chief Economist & Executive Director October 10, 2012 Seattle, Washington

2. October 10, 2012 Washington State Economic and Revenue Forecast Council MODEL OVERVIEW

3. October 10, 2012 Washington State Economic and Revenue Forecast Council ERFC’s US economic model ERFC U.S. Forecast Blue chip consensus GDP Global Insight model Brent & WTI futures prices

4. October 10, 2012 Washington State Economic and Revenue Forecast Council ERFC’s Washington economic model U.S. Economic Forecast Other Exogenous Employment Wage Rates Nonwage Income Wage & Salary Disbursements Population & Housing Personal Income This model was reviewed by Global Insight in 2007-08

5. October 10, 2012 Washington State Economic and Revenue Forecast Council Revenue Act model overview QBR data on taxable activity (5 month lag) DOR data on credits, refunds, remittances (1 month lag) State and National Economic Models Quarterly forecast of activity Bimonthly forecast of credits, refunds remittances Bimonthly forecast of receipts (1 st through 10 th, 11 th through EOM) B&O, RST, Use and Public Utility are broken into 40 components (some small sources like semiconduct- ors and nuclear waste disposal are forecasted exogenously) Liquor tax forecast is a work in progress due to recent privatization

6. October 10, 2012 Washington State Economic and Revenue Forecast Council Any recent changes to modeling? Kalman filter applied to state employment data (as of March 2011) Include both West Texas Intermediate and Brent futures prices to forecast “refiner’s acquisition” price Revising liquor tax model Re-examining potential for greater aggregation in revenue model

7. October 10, 2012 Washington State Economic and Revenue Forecast Council Source: WA State ESD, ERFC; data through August 2012 Filtering has improved estimates Kalman filtered data has been closer in 16 out of 18 months Average absolute error is 700 jobs lower in filtered data

8. October 10, 2012 Washington State Economic and Revenue Forecast Council Filtered estimates show less employment Source: WA State ESD, ERFC; data through August 2012 Filtered estimates are 6,000 lower in August 4,200 of the difference is from the June estimate

9. October 10, 2012 Washington State Economic and Revenue Forecast Council Global Insight expects oil prices to normalize soon but the futures markets do not The mechanisms for prices to return to normal include the reversal of the Seaway oil pipeline beginning today and expanding through mid-2014 plus construction of the southern leg of the Keystone pipeline by late 2013. Global Insight’s forecast shows that they expect prices to be normal by mid- 2013 but the futures market show inverted prices through 2015 at least. Source: CME Group, IntercontinentalExchange, Inc., Global Insight, ERFC; data through first quarter, 2012

10. October 10, 2012 Washington State Economic and Revenue Forecast Council Global Insight expects a sharp drop in oil prices this year Source: DOE, ERFC September 2012 forecast; historical data through 2012Q2 The average refiner’s acquisition price is the oil price variable that affects the overall forecast. It is driven mainly by global prices but is also affected by the WTI price. The latest futures prices indicate that oil will decline sooner and more rapidly than expected in February. Of course, the outlook for oil remains fluid.

11. October 10, 2012 Washington State Economic and Revenue Forecast Council Revenue for liquor sales has been volatile Source: DOR, ERFC; data through August 2012 We have raised our forecast by $10.9 million this biennium Revenue was $4.0 million (6.4%) above the June forecast

12. October 10, 2012 Washington State Economic and Revenue Forecast Council When it came to the Great Recession, forecasters were all in the same boat Two German economists put together a database of 50 economic models, including models that are used at institutions like the IMF, ECB and the Fed, and in academia These are forecasts of real GDP growth produced by the models based on the data available at the given dates compared to the actual growth through 2010

13. October 10, 2012 Washington State Economic and Revenue Forecast Council Data revisions create forecasting difficulties Source: BEA; data through 2012 Q2

14. October 10, 2012 Washington State Economic and Revenue Forecast Council Forecast errors: economic vs. revenue model? Forecast Analysis: Major Tax Sources, 2009-11 Biennium, $ Millions (Retail sales, business & occupation, use, public utility, real estate excise) Forecast Error Forecast Date Actual Forecast* Forecast w/ June 2011 Economic Data* Actual Collections less Amnesty TotalEconomicOther Nov-0825,42221,60820,8014,6213,814807 Nov-0922,99921,31120,8012,1981,688510 Nov-1021,13421,31420,801333-180513 *Corrected for subsequent non-economic changes excluding amnesty program

15. October 10, 2012 Washington State Economic and Revenue Forecast Council FORECAST UPDATE

16. October 10, 2012 Washington State Economic and Revenue Forecast Council The state’s risk matrix shows most risks from outside state Washington’s Economy EUROPE Sovereign Debt EUROPE Banks U.S. Banks Fiscal Cliff Election cycle Iran’s effect on oil Housing and construction, Exports State of Washington Pluses Aerospace Software Minuses State & Local Government Source: ERFC European Recession Asia Slowdown U.S. Trade

17. October 10, 2012 Washington State Economic and Revenue Forecast Council U.S. GDP Forecast Slightly Lower Source: BEA, Blue Chip Economic Indicators September 2012; historical data through 2011

18. October 10, 2012 Washington State Economic and Revenue Forecast Council WA Personal Income Forecast Slightly Higher Source: BEA, ERFC September 2012 Forecast; historical data through 2011

19. October 10, 2012 Washington State Economic and Revenue Forecast Council WA Employment Forecast Slightly Higher Source: WA State ESD, ERFC September 2012 Forecast; historical data through 2011

20. October 10, 2012 Washington State Economic and Revenue Forecast Council The decline in employment has been severe Source: WA ESD, ERFC; data through August 2012 83K

21. October 10, 2012 Washington State Economic and Revenue Forecast Council Oil prices are expected to decline Source: DOE, ERFC September 2012 forecast; historical data through 2012Q2

22. October 10, 2012 Washington State Economic and Revenue Forecast Council Small business optimism is slowly improving Source: National Federation of Independent Business; data through August 2012

23. October 10, 2012 Washington State Economic and Revenue Forecast Council Consumers continue to deleverage Source: Board of Governors of the Federal Reserve System, data through 2012Q2

24. October 10, 2012 Washington State Economic and Revenue Forecast Council Washington construction employment will remain below trend throughout the forecast Source: ERFC September 2012 forecast; historical data through 2012Q2

25. October 10, 2012 Washington State Economic and Revenue Forecast Council State and local government employment will remain weak Source: ERFC September 2012 forecast; historical data through 2012Q2

26. October 10, 2012 Washington State Economic and Revenue Forecast Council Housing permits relative to population will still be below historic levels in 2015 Source: U.S. Census Bureau, ERFC September 2012 Forecast; historical data through 2012 Q2 Forecast

27. October 10, 2012 Washington State Economic and Revenue Forecast Council Revenue collections have been weak compared to past recoveries Source: ERFC; data through 2012 Q2

28. October 10, 2012 Washington State Economic and Revenue Forecast Council Revenue Act collections are still on an upward trend Source: DOR and ERFC; monthly data through estimated July 2012 activity * Adjusted for large one-time transactions, amnesty payments and reporting frequency change, current definition of Revenue Act Collections were up 3.4% year- over-year in the August 11 - September 10, 2012 collection period. Collections through September 10 were $15 million (0.5%) lower than forecasted.

29. October 10, 2012 Washington State Economic and Revenue Forecast Council WA sales tax growth still moderate Source: ERFC; Monthly data through July 2012 preliminary activity Adjusted for large payments/refunds, amnesty payments and taxpayer reporting frequency change Preliminary seasonally adjusted sales tax receipts were up 4% year- over-year for July activity.

30. October 10, 2012 Washington State Economic and Revenue Forecast Council B&O tax growth has slowed from its prior pace Adjusted for taxpayer frequency shift, amnesty payments, and recent large refunds Source: ERFC; Monthly data through July 2012 preliminary activity Preliminary seasonally adjusted business and occupation tax receipts were up 6% year-over- year for July activity.

31. October 10, 2012 Washington State Economic and Revenue Forecast Council REET activity since April has been boosted by large commercial sales Source: ERFC; Monthly data through August 2012 preliminary

32. October 10, 2012 Washington State Economic and Revenue Forecast Council Forecast changes: General Fund State, 2011-2013 Biennium September Forecast Collection Experience Forecast ChangeForecast Total Change* Dept. of Revenue $20$24$28,824$44 All other agencies $1($16)$1,646($15) Total GF-S$21$8$30,469$29 * Detail may not add to total due to rounding June Forecast: $30,440 million USD millions

33. October 10, 2012 Washington State Economic and Revenue Forecast Council Forecast revisions to the 2011-13 biennium USD, millions Source: ERFC September 2012 forecast GF-S New Definition

34. October 10, 2012 Washington State Economic and Revenue Forecast Council Forecast changes: General Fund State, 2013-2015 Biennium September Forecast Non- economic Change Forecast ChangeForecast Total Change* Dept. of Revenue $0$39$31,114$39 All other agencies $0($15)$1,535($15) Total GF-S$0$23$32,649$23 * Detail may not add to total due to rounding June Forecast: $32,626 million USD millions

35. October 10, 2012 Washington State Economic and Revenue Forecast Council Initial Forecast: General Fund State, 2015-2017 Biennium USD Millions * Detail may not add to total due to rounding Forecast ($millions) Dept. of Revenue $34,102 All other agencies$1,416 Total GF-S$35,518 The 2015-17 biennial forecast is 8.8% higher than the 2013-15 forecast

36. October 10, 2012 Washington State Economic and Revenue Forecast Council General Fund* forecast by fiscal year (9.6%) (4.1 %) 7.9% *General Fund & Related Funds for FY 07-09, General Fund – new definition for FY 10-13 Source: ERFC forecast, September 2012 1.6% 4.7% General Fund-State Revenue FY 2011 revenues were boosted by the tax amnesty program and one-time transfers of non-GF-S funds into the GF-S 2.3% 4.8% 3.9% 4.5%

37. October 10, 2012 Washington State Economic and Revenue Forecast Council Real Per Capita General Fund*-State Revenue (11.7%) (6.1%) 4.7% Source: ERFC forecast, September 2012 (2.0%) 1.5% (3.2%) * General Fund & Related Funds for FY 2007-2009 General Fund – new definition, for FY 2010- 2015 1.5 % (0.7%) 0.6 % 1.3 %

38. October 10, 2012 Washington State Economic and Revenue Forecast Council Conclusion The forecast for the 2011-13 Biennium is $29 million higher than in June The forecast for the 2013-15 Biennium is $23 million higher than in June Revenues are expected to grow 8.0% between the 2009-11 and 2011-13 biennium and 7.2% between the 2011-13 and 2013-15 biennium As in June, an extended period of slow economic and job growth is expected for both the national and state economies The level of uncertainty in the baseline remains extremely high, and downside risks outweigh upside risks

39. October 10, 2012 Washington State Economic and Revenue Forecast Council Questions Economic & Revenue Forecast Council 1025 E. Union Avenue, Suite 544 Olympia WA 98504-0912 www.erfc.wa.gov 360-534-1560