By Jim Cline
In our last newsletter, we discussed the February CPI Report. In this article we discuss other economic developments, including state and local revenue forecasts.
Other than a slight rebound in past week, most of the recent economic news has not been good. The University of Michigan consumer sentiment survey also showed a dramatic drop in consumer confidence. The tariff wars concern economists and the broader stock market. The drop in consumer confidence is likely to impact consumer spending.
Last week Federal Reserve Chair Powell expressed a concern that tariffs could impact inflation and he was anticipating at least somewhat higher inflation in 2025. Those Fed projections will result in at least some delay in any interest rate reductions which will inhibit economic growth. Increasingly economists, including the Fed, are expressing some concern of the possibility of “stagflation” — the combination of inflation and a slower economy.
Over the past week the stock market has stabilized indicating that at least investors think that a recession may be avoided. But a number of economists have increased their projections on a possible 2025 recession from remote to much more possible.
A drop in consumer spending will have a potentially significant impact on Washington local government revenues. Statewide sales tax revenues for 2024 were flat relative to 2023, and 2023 revenues were up only modestly compared to 2022. On the other hand, those same revenues rose dramatically since 2018 and until recently cities and counties were in a seemingly strong fiscal position. The Cline and Associates premium website contains details sales tax revenue data, including breakouts by city and county.
Just last week the State released an updated revenue report that shows revenues lower than had previously been projected, largely because of the plateauing of sales tax revenues. The flat revenue picture has already impacted the State budget with State budget cuts anticipated. Damage from state budget cuts is ordinarily not limited only to state agencies. In many direct and indirect ways, local governments benefit from a strong state budget.
There are numerous Washington cities and counties that had already predicted possible budget cuts for 2026 and beyond budgets. Pending and uncertain are the request by cities and counties to raise the property tax levy restrictions and other revenue to allow more local government taxing capacity. The outcome of those efforts may not be clear until later in the spring.
