This forecast is based on a modified version of IHS Markit’s May 2018 Control forecast for the U.S. economy. As usual, we have adjusted real gross domestic product (GDP) to match the Blue Chip “Consensus” GDP forecast.
The May Blue Chip forecast for real GDP growth in 2018 and 2019 was increased to 2.8% and 2.6% from 2.7% and 2.4% in February. The Blue Chip long-range forecast has also been updated. The new forecast calls for growth rates of 1.9%, 1.9%, 2.1% and 2.1% in 2020 through 2023 compared to 2.1%, 2.0%, 2.0%, and 2.1% in February.
Our oil price forecast reflects the futures markets, primarily the Brent (North Sea) oil price but also the West Texas Intermediate (WTI) benchmark. This forecast was based on the Monday, May 21, 2018 closing prices for Brent and WTI futures. The latest futures prices are higher than the prices used in the February forecast. The refiner acquisition price of crude oil in the third quarter of 2018 is now expected to average $73 per barrel compared to $62 in the February forecast. By the end of 2023, the refiner acquisition price is now expected to average $57 per barrel compared to $52 in the February forecast.
The U.S. economy added 164,000 net new jobs in April. Employment data for February and March were revised up by 30,000 jobs. Average hourly earnings increased by four cents in April and are 2.6% above their year-ago level. The average workweek in April was unchanged at 34.5 hours. The April unemployment rate dropped to 3.9% after six months at 4.1%.
Two key measures of consumer confidence gave conflicting signals this month. The University of Michigan index of consumer sentiment decreased by 2.6 points in April to 98.8, with the long duration of the economic expansion making consumers somewhat apprehensive about future economic trends.
The Conference Board index of consumer confidence increased by 1.7 points in April to 128.7. Compared to March, survey respondents were more optimistic about both current and future economic conditions.
Initial claims for unemployment insurance increased by 11,000 to 234,000 (SA) in the week ending May 19th. The four-week moving average of initial claims increased by 6,250 to 219,750.
Industrial production increased by 0.7% (SA) in April following a revised 0.7% increase in March. New orders for core capital goods (i.e., durables excluding aircraft and military), which is a proxy for business investment, increased 1.0% (SA) in advance April data according to U.S. Census Bureau data.
U.S. residential construction and sales activity slowed this month. Housing units authorized by building permits in April were 1.8% (SA) below their March level but 7.7% above their year-ago level. April housing starts decreased by 3.7% (SA) compared to March but were 10.5% above their April 2017 level. After two months of gains, existing home sales decreased by 2.5% in April (SA) compared to March and are 1.4% below their April 2017 level. New single-family home sales in April decreased by 1.5% (SA)compared to March. However, new home sales were up by 11.6% compared to April 2017. The seasonally adjusted Case-Shiller national home price index for February was 0.5% above its January level and 6.3% above its year-ago level.
Major threats to the U.S. and Washington economies remain, including higher oil prices, geopolitical risks and concerns about international trade and fiscal policy.
Focus on Washington State
We have three months of new Washington employment data since the February forecast was released. Total nonfarm payroll employment rose 17,500 (seasonally adjusted) in February, March, and April, which was 400 less than expected in the forecast. As is usually the case, the majority of the employment increase was due to private, services-providing industries, which added 12,500 net new jobs in the three-month period. Construction employment grew 2,100 and manufacturing employment increased 600.
Government payrolls expanded by 2,100 in February, March, and April.
We have also incorporated another quarter of benchmark employment data from the Quarterly Census of Employment and Wages (QCEW). The new QCEW data and other revisions reduced the estimated level of total employment in January 2018 by 4,100 jobs (0.1%). As a result of the downward revision to history and slightly weaker-than-expected growth, the combined effect is 4,500 (0.1%) fewer jobs in April 2018 than expected in the February forecast.
In March, the Bureau of Economic Analysis released estimates for state personal income through the fourth quarter of 2017. We have incorporated the new BEA estimates as well as additional Washington QCEW and other wage data. Our current estimate of Washington personal income in the fourth quarter of 2017 is $428.7 billion, which is $1.2 billion (0.3%) higher than assumed in the February forecast. The new estimate of wage and salary income is $0.2 billion higher than expected and nonwage income is $1.0 billion higher.
Washington housing construction exceeded the forecast in the first quarter of 2018. The number of housing units authorized by building permits totaled 49,200 (SAAR) in January, February, and March which was 6,000 more than the 43,200 expected in the February forecast. The variance was mostly due to the multi-family sector. In the first quarter, 24,200 multi-family units were permitted which was 4,500 more than expected. The number of single-family units permitted was 25,000, which exceeded the forecast by 1,400 units.
Washington housing construction remained very strong at the start of the second quarter due to continued strength in the multi-family sector. The number of housing units authorized by building permits totaled 50,800 in April (SAAR), consisting of 23,800 single-family units and 27,000 multi-family units. The February forecast assumed an average rate of 43,700 units for the second quarter as a whole consisting of 24,500 single-family units and 19,100 multi-family units.
Seattle home prices continue to rise rapidly. According to the S&P/CaseShiller Home Price Indices, seasonally adjusted Seattle area home prices rose 1.4% in February compared to 0.8% in the Composite-20 index.
The over the-year growth was 12.7% in Seattle, which was nearly double the 6.7% increase in the Composite-20 index. Seattle home prices are now up 84% since the December 2011 trough and now exceed the May 2007 peak by 28%.
Seattle area consumer price inflation remains above the national average.
Over the last year, from April 2017 to April 2018, consumer prices in the Seattle area rose 3.3% compared to 2.4% for the U.S. city average. Core prices, which exclude food and energy, were up 3.1% in Seattle compared to 2.1% for the nation. The higher Seattle inflation is due to more rapid growth in shelter costs. During the year, shelter costs in Seattle rose 5.9% compared to 3.4% for the nation. Excluding shelter, Seattle inflation matched the national average at 1.9% over the year.
Washington exports were up over the year for the second consecutive quarter. Exports increased 3.9% in the first quarter of 2018 compared to the first quarter of 2017. Transportation equipment exports (mostly Boeing planes) and exports of agricultural products both rose 2.8% over the year while exports of all other commodities (mostly manufacturing) increased 6.2% over the year.
The BEA recently released preliminary 2017 estimates for personal income and real GDP by state. In both cases, Washington ranked first in the nation in growth in 2017. Washington personal income grew 4.8% compared to 3.1% for the nation and Washington real GDP grew 4.4% compared to 2.1%. The difference between Washington U.S. personal income and GDP growth was mostly due to two sectors: retail trade (which includes electronic shopping) and information (which includes software publishing and other IT services such as internet publishing and web search portals).
The Institute of Supply Management – Western Washington Index (ISM-WW) declined in April but remained in positive territory. The index, which measures conditions in the manufacturing sector, decreased from 68.0 in March to 55.8 in April (index values above 50 indicate growth while values below 50 indicate contraction). The index has exceeded 50 in each of the last nine months. The production, orders, inventory, and deliveries components all indicated expansion in April while only the employment component indicated contraction.
Seasonally adjusted new vehicle registrations fell 3.4% in April, which was the fourth decline in the last five months. Car and truck sales are up 1.7% over the year but are down 11.5% since the post-recession peak in November 2017.
In February, we had assumed that aerospace employment would continue to decline through the end of 2019, though at a slower rate than in 2016 and 2017. However, aerospace employment has been flat for the last six months and we are now assuming no further reductions. The result is 3,700 more aerospace jobs by the end of 2019.
Washington employment is expected to grow 2.5% this year compared to 2.2% in the February forecast. As in February, we expect growth to decelerate gradually as the recovery matures. We expect employment growth to average 1.2% per year in 2019 through 2023, which is slightly weaker than the 1.4% per year expected in the February forecast. Our forecast for nominal personal income growth this year is 5.9%, up from 5.0% in the February forecast, due mainly to stronger growth in the first quarter. Our new forecast for nominal personal income growth in 2019 through 2023 averages 5.1% per year compared to 5.2% per year in the February forecast.
– Economic & Revenue Forecast Council State of Washington