Quarterly Economic and Revenue Forecasts
UPDATED: June 21, 2017
This quarterly forecast includes our analysis of current economic conditions and our objective projections of future revenue for state trust funds and their beneficiaries.
For Economic and Revenue Forecasts 2013 and prior years, contact Office of Budget and Economics, PH: 360-902-1730; FAX: 360-902-1775; or email: firstname.lastname@example.org
June 21, 2017
Lumber and Log Prices. After peaking at $373/mbf in 2014, coast lumber prices fell to $311/mbf for 2015. They recovered slightly in 2016, averaging $327/mbf, mostly due to higher first quarter housing starts than in 2015. The increase in starts spiked lumber demand, catching lumber dealers off-guard, and pushed prices up from the end of the first quarter. Prices retreated toward the end of the year but did not fall to earlier lows. Lumber prices have averaged $378/mbf through May.
Through 2015 a 'typical' DNR log averaged $521/mbf, falling from the $591/mbf average in 2014. The average price for 2016 was slightly higher at $536/mbf. The decline in 2015 was primarily due to the dramatic slowdown in demand from China and to an ample regional supply of both logs and lumber. Log prices are expected to increase in 2017 due to increased lumber demand; they've averaged $578/mbf through May.
Timber Sales Volume. Given current timber sales plans, the sales volume forecast for FY 17 is increased by 5 mmbf to 520 mmbf. Sales plans in outlying years have not changed, so absent a new sustainable harvest calculation, sales volume forecasts in those years remain at 500 mmbf.
Timber Sales Prices. Industry analysts expect higher prices in CY 2017. FY 17 auction prices have averaged $342/mbf through May; while stronger than the bid prices through the same period last year, these results are a bit weaker than assumed in the February Forecast. Although we lowered our forecast to $344/mbf in February, the June Forecast includes a small reduction (-$2/mbf) to this fiscal year's estimate. The sales price forecasts for outlying years are barely changed.
Timber Removal Volume and Prices. Accounting for changes to purchaser plans and the timing of contract expirations, we're lowering FY 17 harvest volume expectations by 47 mmbf to 502 mmbf. In FYs 18-19, compensating increases of 17 and 28 mmbf yield annual estimates of 648 and 571 mmbf.
The average timber removal price for FY 17 is raised to $308/mbf. Timber removal prices for FYs 18-21 are projected to be about $317 (-$5), $342 (-$7) and $354 (-$1) per mbf. These removal prices reflect changes in the removal timing and follow from, and lag behind, the changes projected in timber sales prices and from an internal adjustment in the model.
Timber Revenue. The above changes to timber sales prices, sales volumes, and harvest timing have shifted projected revenue in all forecast years. Revenues for the 2015-2017 biennium are forecast to total $321 million, down two percent ($7 million) from February's forecast. Forecast revenues for the 2017-2019 biennium are raised by two percent ($8 million) to $401 million.
Uplands and Aquatic Lands Lease (Non-Timber) Revenues. In addition to revenue from timber removals on state-managed lands, DNR also generates sizable revenues from managing leases on uplands and aquatic lands.
Upland lease revenue estimates are raised by $2.1 million in FY 17 due to relatively large increases in revenue from irrigated, orchard/vineyard, and dryland leases. Revenue forecasts for outlying years are lowered modestly due to changing expectations for communication sites, grazing, and mineral leases.
The average geoduck auction price for the February and May auctions were each higher than expected, and have pushed up the geoduck revenue forecast for FY 17 by $2.6 million and for FY 18 by $1.2 million. These increases outweigh small decreases in expected earnings from aquatic leases. In outlying years the forecasts for aquatics revenues are reduced due to lower expectations for aquatic leases.
Total Revenues. Forecast revenues for the 2015-2017 Biennium (FYs 16-17) are lowered by $2.6 million to $468 million. Most of the revenue change is driven by expected timber harvest timing, geoduck prices, and agricultural leases. Revenues for the 2017-2019 Biennium (FYs 18 and 19) are raised by $8.5 million to $540 million.
Notes to the Forecast. While the sales volume estimates are based on the best available internal planning data, they are subject to adjustments due to ongoing operational and policy issues. These issues may also affect sales volumes in outlying years, where the assumed sustainable harvest volume of 500 mmbf might be too high.
A continuing downside risk for the forecast is timber and lumber demand from China, with ongoing concern that the country's current slowdown could become dramatically worse.
In previous forecasts, we noted that the expiration of the Softwood Lumber Agreement posed a major downside risk to the forecast: the expiration of tariffs might allow a flood of cheaper Canadian lumber into the U.S., suppressing domestic prices. This doesn't seem to have happened. Current expectations are that the countervailing duties recently imposed on Canadian lumber by the U.S. Department of Commerce will continue through most of 2017.
Robust growth in U.S. residential improvements and housing construction would provide much needed, if unlikely, high-side potential. This has not yet occurred, despite strong employment growth for the last two years. The lack of housing demand is likely due to a number of impediments---persistently stringent lending standards, a continued tough labor market for younger workers, student loan debt, and general economic and social malaise---most of which are easing, but none of which show signs of completely abating just yet.
In late 2015, China again instituted a ban on geoduck imports from the Pacific Northwest due to paralytic shellfish poison (PSP) and arsenic concerns. However, once again, this didn't appear to impact prices or harvest activity. In late February 2016, the Washington Department of Health posted an article saying that China had lifted the ban and it listed the areas cleared for geoduck export to China. It is entirely possible that China could re-enact a more forceful ban on geoduck that would have a dramatic effect on geoduck prices, and therefore revenue.
Additionally, friction between geoduck purchasers and divers could disrupt the market, though these seem to have settled. As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
It's unclear how long U.S. economic growth can continue in the absence of coherent, growth-driven federal economic policies.
Archived Economic & Revenue Forecasts
Fiscal year 2017
Fiscal Year 2016
Fiscal Year 2015
Fiscal Year 2014
Office of Budget & Economics
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