June Economic and Revenue Update

Last Friday, the Economic and Revenue Forecast Council (EFRC) posted its monthly progress report, the Economic and Revenue Update, for June. The update sets the stage for Thursday, when EFRC will issue its quarterly update to the state revenue forecast.

The U.S. economy has performed largely as anticipated in the February forecast,

The economic recovery lost some steam in May, but remains on track for the moderate growth we have been predicting… The May jobs report … was disappointing. But the risk of a double-dip, or return to recession, is also receding… We expect the economy to gain traction over the summer, and close out the year on a more positive note.

Ditto for the Washington state economy,

Washington’s economic recovery is unfolding largely as expected in the February forecast. Our major state economic variables – employment, income, and housing – are all coming in very close to what we had expected. As a result, the revisions that will be reflected in the June Washington economic forecast will be minimal.

For now, EFRC economists foresee minimal impact from Greece’s financial crisis on the Washington economy,

A new but potentially significant risk to the recovery is the brewing worry about European sovereign debt… The strengthening [U.S dollar] will hurt U.S. export competitiveness, but Washington will be spared much of the pain. Exports of transportation equipment are minimally affected in the short run by currency fluctuations… Moreover, close to 90% of the state’s commodity exports … are to Asia, and the [U.S. dollar] has remained stable against Asian currencies.

Although it remains well below pre-recession levels, state revenue is now growing,

For the second consecutive month, Revenue Act receipts [largely sales and B&O taxes] showed year-over-year growth after adjustment for legislative changes and non-economic factors. Adjusted receipts from the May 11, 2010 – June 10, 2010 collection period were 2.2% above their year-ago level. Seasonally adjusted Revenue Act revenue has been trending upward since November 2009.

Revenue in May was greater than had been forecast, but this was entirely due to special factors,

Major General Fund-State revenues for the May 11, 2010 – June 10, 2010 collection period were $30.8 million (1.9%) higher than our February forecast. During the period, there was a large one-time assessment payment of $32.4 million that was not included in the forecast. Also, an extra $9 million was collected in cigarette taxes due to the legislatively enacted increase in the tax rate that took effect on May 1. In addition, the continued non-economic shift in watercraft excise taxes [due to the Department of Licensing’s decision not to send out billing reminders in March] has subtracted $1.5 million from May collections. Adjusted for these special factors, the forecast variance for the period is -$9.1 million (-0.6%).

Over four months, revenue is $38.5 less than forecast (and $54.9 million less if special factors are ignored),

Combined with the shortfall from the last collection period, the cumulative variance for the February 11 – June 10, 2010 period is now -$38.5 million (-0.9%). During this period, the forecast variance of expected large one-time payments and refunds combined with unexpected large payments and refunds summed to $13.3 million. The non-economic changes to cigarette and watercraft excise taxes totaled $3.1 million. Adjusted for these factors, the cumulative variance is -$54.9 million (-1.3%).