By Jim Cline and Kate Kremer
This is the third article in our eleven-part series reporting on contract settlement trends. This article highlights some of the recent economic developments most likely to impact your negotiations outlook.
In a couple of our recent Blogs, Chris Casillas noted the recent improvement in the Seattle economy here and here. There are some signs that the King County economy in particular, is starting to accelerate, but with the rest of the State lagging behind. Overall, National and State economic reports are positive, but we are not yet seeing the level of growth that would repair the still fractured balance sheets of those local governments that dipped into their reserves during the recession years.
As always, the most important variable for your contract is your local economy and your employer’s fiscal condition, but the larger State and National trends have an immediate bearing on those and are worth an examination.
A recent report of the Washington State Economic and Revenue Forecast Councilsummarized recent National and State economic developments. They noted several of the mixed economic signals from the past several months. A series of economic reports over the past month, including a rising stock market, though, seem to point to some strengthening in the economy with the possibility of accelerated growth. These were among the highlights from the Forecast Council’s overview of the National economy:
- U.S. economic activity in the fourth quarter of 2012 was weaker than anticipated in November, with GDP estimated to be decreasing by 0.1% (seasonally adjusted annual rate) at the time of the preliminary forecast. Although fourth quarter GDP growth has since been revised up to a +0.1% rate, we continue to see slow growth and a weak labor market.
- Since the November forecast was adopted, the “fiscal cliff” was largely avoided or postponed by legislation passed in January. However, there was significant fiscal tightening as the payroll tax cut expired and some personal income taxes were raised. The payroll tax cut is expected to reduce GDP growth this year by 0.4 percentage points while total fiscal tightening initiated in 2013 is expected to subtract 0.7 percentage points from GDP growth.
- Data from the housing market continue to be positive. Existing homes sales in January were up 0.4% (SAAR) from the December level and were 9.1% (SAAR) above the year-ago sales rate. January new home sales increased by 15.6% above December sales (SAAR) and 28.9% above the year-ago level. The seasonally adjusted Case-Shiller 20-city home price index has now increased for eleven consecutive months through December 2012. The index is now 6.9% above the year-ago level (SA), marking seven straight months of year-over-year growth in house prices. Seasonally adjusted housing starts in January were 8.5% below their December level but 23.6% above the January 2012 level. January housing permits were 1.8% (SAAR) above December and 35.2% above their year-ago level.
- Consumers appear to have recovered from the uncertainty regarding the fiscal cliff and higher payroll taxes. The Conference Board index of consumer confidence increased by 11.2 points to 69.6 in February after having dropped in January. The University of Michigan consumer sentiment survey for February increased by 3.8 points to 77.6, explained primarily by a more positive view of the employment situation.
- Real GDP growth in 2012 is estimated to be 2.2%, essentially unchanged from the November forecast. The February Blue Chip Consensus real GDP growth forecasts, our objective starting point each forecast cycle, is now at 1.9% for 2013 compared to 2.0% in our November forecast. The final economic forecast will incorporate the March Blue Chip forecast for GDP growth. They also noted the uncertainty caused to the economy through weakness in the European economy and “the sovereign debt crisis in Europe, slowing Asian economies (especially China), and the uncertainty surrounding U.S. tax and budget policy” including the impacts of the sequester.
They also noted slow job growth as a continued problem, although the report was released before the February report showed a spike in new jobs. The Council also observed as to the State Economy:
- In the three months since the November forecast was adopted, the Washington economy added 16,900 jobs, 3,800 better than the 13,000 expected in the November forecast. Historical revisions, however, lowered the level of total employment by 8,400. As a result of the downward revisions to history and slightly stronger than expected growth, the net effect is 4,600 (0.2%) fewer jobs in January 2013 than expected in the November forecast. Manufacturing employment growth remains strong, adding 2,900 jobs in the last three months (the forecast expected only 1,000 jobs). Construction employment growth has now turned positive. The construction sector added 3,000 jobs in November, December, and January (the forecast was for an increase of 1,100). Government employment, however, remained weak with a loss of 400 jobs during the last three months.
- Our forecast for Washington employment is very similar to the forecast adopted in November. As in November, we expect flat aerospace employment in the first half of this year with a gradual decline beginning in mid-2013. On the other hand, construction employment growth is expected to accelerate over the next three years, tapering off in 2016 and 2017. While we believe we are at or near the trough in State and local government employment, we expect federal government employment to continue to shrink throughout the forecast.
- Overall, our preliminary March forecast of Washington employment growth is slightly weaker in 2013 and 2014 and slightly stronger in 2016 and 2017 than the forecast adopted in November due to similar changes in the National forecast. Over the entire period from 2013 through 2017, the new Washington employment growth forecast averages 1.9% per year, the same rate as in the November forecast.
- The Washington housing recovery continues to exceed our expectations. Total housing units authorized by building permits averaged 31,000 (SAAR) in the fourth quarter, up from 28,000 in the third quarter. The forecast had expected 28,300 units. The forecast variance was mostly in the single-family segment where permits averaged 19,500 units in the fourth quarter compared to our November forecast of 17,200 units. This was the strongest quarter for single-family housing since the first quarter of 2008. Multi-family permits came in at 11,500 units, slightly better than our forecast of 11,100 units. As a result of the recent strength in housing, we have raised our housing forecast for 2013 through 2017. Subsequent to the preliminary forecast, January’s permits came in at a strong 36,700 annual rate comprised of 19,000 single-family units and 17,600 multi-family units.
- The recovery in home prices gained momentum in the last few months of 2012 according to the S&P/Case-Shiller Home Price Indices. Seasonally adjusted Seattle area home prices increased a strong 1.0% (not annualized) in December 2012, following a 1.4% increase in November and a 0.5% increase in October. Seattle home prices have risen in 9 of the last 10 months and are up 8.2% over the previous December. Nationally, the composite-20 December home price index was up 6.9% over the year.
- Washington new car sales soared in early 2013. New vehicle registrations in Washington jumped from 248,000 (SAAR) in December to 274,200 in January before easing to 267,600 in February. Washington car sales have now recovered nearly all the ground lost during the recession. The average rate so far in 2013 is 63% over the average in 2009 and only 6.6% lower than sales in 2006 which was the pre-recession peak. Consumers put off replacing vehicles during the recession and pent-up demand is likely driving the rebound in vehicle sales.
- Export growth weakened but remained positive in 2012. Total Washington exports rose 16.6% from the fourth quarter of 2011, to the fourth quarter of 2013, down slightly from the 21.4% growth during previous 4 quarters. The continued strong growth in exports was mostly due to acceleration in exports of transportation equipment (mostly aircraft) from a 17.4% growth rate in 2011 to 36.0% in 2012. Outside of transportation equipment, exports struggled to maintain positive growth, slowing from 24.6% in 2011 to just 1.7% in 2012.
The Forecast Council’s March 20 report indicated a slight increase in anticipated State revenues. Throughout March, reports from other sources indicate signs the economy may be strengthening:
- Manufacturing is rising
- A marked drop in new unemployment claims
- Consumer confidence has increased
- Consumer spending is up a bit
On the other hand, there are still some signs of weakness reported and some decline in personal income. On balance, these data points caused the Federal Reserve to issue a somewhat positive statement on the direction of the economy. The Federal Reserve noted the improved labor and housing market.
The direction of the economy generally looks positive and the improved housing and labor market, if continued, should strengthen the budget outlook for strapped government budgets. Later in this series, we’ll discuss what these economic developments and other pending developments mean for your negotiations outlook.
