By Jim Cline and Kate Kremer
This is the third article in our 11 part series reporting on contract settlement trends. This article highlights some of the recent economic developments most likely to impact your negotiations outlook.
In our recent Blog, we noted the recent improvement in the Seattle economy as reported in the February “Economic and Revenue Update” from the Washington State Economic and Revenue Forecast Council (WSERFC). Washington employment was slightly higher than forecast; housing construction improved; Seattle area home prices continue to rise; and Washington exports reached an all-time high in the fourth quarter of 2014.
The May 2015 good economic forecast was similar to February’s:
…2015 GDP is weaker, oil prices are slightly higher and Washington construction activity a bit stronger. We expect the moderate pace of the economic recovery to continue in both the U.S. and Washington economies. Downside risks to the forecast include declines in labor productivity, a reduction in exports due to a stronger dollar and a slowing Chinese economy, and weak consumer spending due to lackluster wage growth.
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. WSERFC created a slide presentation with accessible presentations of recent and future Washington Statewide economic conditions:
WSERFC predicts the following:
- Moderate pace of the economic recovery to continue in both the U.S. and Washington economies;
- Washington State General Fund revenues are expected to grow 4.8%, 3.7%, 4.9% in 2015, 2016 and 2017; and
- The level of uncertainty in the baseline remains elevated, with risks on both the upside and the downside.
It is in its prediction of volatility that WSERFC may have accurately nailed the economic activity for 2015. The more optimistic predictions of slow, but steady, US growth were given a setback as the Real Gross Domestic Product, which initially was reported to have increased by a mere 0.2% in the first quarter of 2015, was revised downward in May to have decreased at a rate of 0.7% in the first quarter. This was caused in part by:
- The dollar strengthened against other major currencies;
- Imports and exports were delayed by the West Coast ports labor dispute;
- Energy prices fell; and
- Severe winter weather affected much of the nation.
Those concerns were mostly particular to first quarter conditions and the balance of the year is expected but to be better. But throughout May 2015, reports from other sources indicate signs the U.S. economy is not showing signs of strong growth:
- Manufacturing: Both April and May showed a decrease in Manufacturing numbers
- The US and Washington State Unemployment rate came in the same in April at 5.5%.
- Consumer Spending was flat, showing no increase from April to May 2015.
- Consumer confidence has increased slightly in May over April 2015 as the job market improved.
- Personal Income increased 0.4% in April 2015 and spending decreased less than 0.1%.
While it is possible to attribute sluggish numbers to a unique first quarter conditions, the April and May indicators do not show much of a resurgence of growth. Fed Bank Governor Lael Brainard gave a speech on the US Economic Outlook and Implications for Monetary Poicy on June 2, 2015, and stated:
My own reading is that earlier, more optimistic growth projections may have placed too much weight on the boost to spending from lower energy prices and too little weight on the negative implications for aggregate demand of the significant increase in the foreign exchange value of the dollar and large decline in the price of crude oil.
…at a time when a lot of the growth burden is riding on U.S. consumers, consumers appear to be disinclined to spend much of the gains from cheaper prices at the pump, preferring, it seems, to strengthen household balance sheets instead.
Just as the positive effects appear to have been more muted than expected, so, too, the negative effects from the substantial decline in the price of oil and appreciation of the exchange rate on business investment, manufacturing, and exports seem to have been greater than expected.
Brainard discusses the negative effect of the strong dollar on exports in the past two quarters and the estimates from some experts that this drag on the economy can continue for years. This coupled with uncertain economic activity in Europe and a slowdown in China’s economic growth makes for a concerning international context. However, he concludes with a positive note about inflation:
Despite the deflationary pressures from abroad, the recent data have provided some reassurance that inflation in the United States is starting to firm. Oil prices have now retraced part of their decline from the middle of last year through January, and monthly changes in core personal consumption expenditures (PCE) prices have increased from the very low levels reached around the turn of the year.
In the face of the long period of weak overall inflation, it is reassuring that survey-based measures of longer-run inflation expectations appear to have remained stable. In addition, market-based measures of inflation expectations have moved up somewhat in the past few months after several months of decreases that appeared to have been associated with oil price declines and heightened anxiety about global deflationary pressures.
Does this mean that we are going to see more inflationary growth in 2015? We could fall back to the disclaimer of sorts by the Washington State Economic and Revenue Forecast Council:
The level of uncertainty in the baseline remains elevated, with risks on both the upside and the downside.
In other words, predictions by professional economists in the current climate both on inflation and economic growth are no proving reliable. We recognize this uncertainty complicates your negotiations decision-making. Regardless, you are probably best served by viewing negotiations as a risk management process of your own, in which you decide whether to gamble that by waiting your position will be stronger or to grab the sure but less attractive offer available now.
