State revenues continue to outperform expectations: up $153.6 million (2.9%) above November forecast

Despite shutdowns and showdowns in D.C., Brexit and Eurozone worries, and a trade war with China, Washington tax collections keep rolling into state coffers.

The latest monthly update from the state Economic and Revenue Forecast continues the string of positive reports. 

Major General Fund-State (GF-S) revenue collections for the January 11 – February 10, 2019 collection period came in $27.5 million (1.5%) above the November forecast. Cumulatively, collections are now $153.6 million (2.9%) above the November forecast.

Since the November forecast there have been $36.1 million in one-time large payments (net of large re- funds) that were not anticipated in the forecast. Without these payments, collections would have been $117.5 million (2.2%) higher than forecasted.

As the graph below (taken from the report) shows, it’s been quite a run.

The report is generally upbeat about the national and state economies.

National:

National data continue to paint a generally positive picture of the economy. The labor market was again very strong this month with a larger than expected increase in jobs and continued moderate wage increases. Manufacturing indicators were generally positive and although non-manufacturing activity slowed it continued to expand. Consumer confidence weakened this month, possibly in reaction to the federal government shutdown…

Two key measures of consumer confidence declined this month but still remain at high lev- els. The University of Michigan index of consumer sentiment decreased by 7.1 points in January to 91.2. The Conference Board index of consumer confidence decreased by 6.4 points in January to 120.2. Consumers responding to the Conference Board survey were less confident about future business conditions and job prospects compared to December while respondents to the University of Michigan survey indicated concerns about both cur- rent and future economic conditions.

State:

Total nonfarm payroll employment rose 21,800 (seasonally adjusted) in No- vember, December, and January, which was 4,400 more than the 17,400 expected in the November forecast. Manufacturing added 4,100 jobs, including 1,000 aerospace jobs, and construction added 4,200 jobs. Private services-providing sectors added 13,800 jobs but government payrolls lost 400 jobs…

In a sign that the local housing market has cooled, seasonally adjusted Seattle area home prices fell 0.3% in November according to the S&P/Case-Shiller Home Price Indices. This was the fifth consecutive monthly decline. In November, the over-the-year growth was 6.3% in Seattle compared to 12.7% a year ago. Seattle home prices are still up 87% since the December 2011 trough and exceed the May 2007 peak by 30%.

The Institute of Supply Management – Western Washington Index (ISM-WW) increased in January and remained in positive territory.

Considerable uncertainty remains, as indicated by news that industrial output declined in January, but so far collections have not suffered.

After Amazon pulls plug on NYC HQ, some call for end to interstate tax competition; that would be a mistake.

After Amazon chose to abandon its proposed headquarters expansion in New York City, there has been a predictable rush to learn lessons and identify opportunities from the experience. The Seattle Times editorial board writes,

Washington should benefit because the Puget Sound region, Amazon’s primary headquarters, is well positioned to absorb a share of growth that won’t happen in New York.

Many thousands of new jobs and potentially billions of tax dollars to fund more schools, parks and transportation are at stake.

Once again, this opportunity is Washington’s to lose.

…Basically the competition for Amazon’s future job growth is back to where it was in 2016, before the HQ2 search kicked off a bidding war between locales desperate for the type of economic growth Seattle saw over the last five years.

In this competition, the Puget Sound region should fare well, as long as politicians don’t further poison the well.

The editorial points out the importance of “Improving the business climate, and reducing hostility to job creators.” In other words, recognizing the reality of competition and making the adjustments required to compete successfully.

That’s the right lesson. Taxation is part of the business climate reality. Governing magazine reports that some political figures are drawing a different lesson.

…the End Corporate Welfare Act is circulating in several states, including New York. The bill would essentially call a cease-fire on awarding tax incentives to certain companies by creating an interstate compact of states that agree to end the practice…

Connecticut state Rep. Josh Elliott, who is behind an effort to put forward a committee bill in Hartford, acknowledges that gaining national traction among states for banning company-specific tax credits is something that will take a decade or more. Of particular concern for a small state like Connecticut is whether such a pact would really work for the state unless all states in the Northeast are members.

“I think something like this has a 10- to 15-year window to become reality, and that might have to happen federally,” Elliott says.

This isn’t new, though the Amazon HQ search has provided new impetus to the efforts. CityLab last year reviewed the “legal case against bidding wars.” In late 2017, as the HQ hunt was beginning, Geek Wire reported on the “race to the bottom” concerns associated with such competition. A very wonky article by Federal Reserve Bank of San Francisco economists effectively challenges the concern.

U.S. states provide an ideal laboratory for investigating the determination of capital tax rates and the role of tax competition because, while states have much latitude for setting their own capital tax policies and do, in fact, set widely varying tax policies, they share many important institutional and environmental factors in common…

Viewed from a variety of perspectives, state capital taxation has changed greatly in recent years and has become more “business friendly.” These aggregate movements, buttressed with anecdotal observations and past empirical studies, suggest to many observers that states are engaged in a “race to the bottom.”

The empirical results in this paper challenge that conclusion.

It’s a complicated analysis; we won’t try to distill it. But we will share a conclusion from the report.

An important implication of this result is that calls for legislative, judicial, or regulatory actions aimed at restricting tax competition as a means of stemming the fall in state capital tax revenue or the mobility of capital are likely misguided.

Tax policy plays a role in legitimate interstate competition for economic growth and development, in attracting jobs and investment, and in demonstrating what works. As the Washington Research Council as written, our state’s tax policies have been important to stimulating economic vitality here. The Association of Washington Business recently wrote,

Despite claims to the contrary from some legislators and interest groups, the truth is that Washington state’s tax system has contributed to the state’s run of economic growth.

In our original foundation report, we said,

In a connected world, capital flows to where it can most economically be deployed. Other states and nations are aggressively recruiting Washington employers, seeking to entice them with incentive packages, lower operating costs, a lighter regulatory burden, and the promise of a more business-friendly culture.

To expand opportunities for those living and working in Washington, state policymakers must create an investment climate that encourages and rewards innovation and risk-taking.

Examples of successful tax policies to promote industry growth include incentives for data centers, R&D, and aerospace. Washington, with a relatively high overall business tax burden, has good procedures in place for assuring accountability and transparency in tax policy. 

As the ST editorial pointed out, the lesson to be learned is to “improve the business climate.” There’s no race to the bottom in tax policy. Rather, we’re seeing fifty states and countless cities race to secure investment and employment, a competition that keeps all players at their best.

Disappointing holiday sales and small uptick in unemployment claims add to economic concerns

Yesterday we wrote about “mixed signals” in recent economic news. Today’s reports add to our concerns, further suggesting a need for caution as lawmakers develop the coming state budget.

The headlines dealt with the U.S. Commerce Department’s retail sales report, which came in well below expectations. The National Retail Federation responded to the news.

Holiday retail sales during 2018 grew a lower-than-expected 2.9 percent over the same period in 2017 to $707.5 billion, the National Retail Federation said today after the Commerce Department released data that had been delayed by nearly a month because of the recent government shutdown.

“All signs during the holidays seemed to show that consumers remained confident about the economy,” NRF President and CEO Matthew Shay said. “However, it appears that worries over the trade war and turmoil in the stock markets impacted consumer behavior more than we expected. There’s also a question of whether the government shutdown and resulting delay in collecting data might have made the results less reliable. It’s very disappointing that clearly avoidable actions by the government influenced consumer confidence and unnecessarily depressed December retail sales.”

Economic uncertainty again comes in for the blame, as the NRF economist emphasizes.

“Today’s numbers are truly a surprise and in contradiction to the consumer spending trends we were seeing, especially after such strong October and November spending,” NRF Chief Economist Jack Kleinhenz said. “The combination of financial market volatility, the government shutdown and trade tensions created a trifecta of anxiety and uncertainty impacting spending and might also have misaligned the seasonal adjustment factors used in reporting data. This is an incomplete story and we will be in a better position to judge the reliability of the results when the government revises its 2018 data in the coming months.”

AdAge reports some question the data

Some analysts reacted not just with surprise but with an unusually large dose of skepticism. Jim O’Sullivan of High Frequency Economics said the figures were so much weaker than expected “that the data lose credibility,” while Stephen Stanley of Amherst Pierpont Securities said the report “seems seriously out of whack” given mostly upbeat comments from retailers about the Christmas season.

The report was delayed about a month by the federal closure. “I’m actually wondering whether the government shutdown created issues for them in terms of data collection and quality,” said Neil Dutta, head of economics at Renaissance Macro Research.

Still, as Calculated Risk reports, the disappointing results have led to some recalculation of economic growth.

Following the weak retail sales report, Q4 GDP estimates have been revised down.

From Goldman Sachs:

The retail sales report indicated a considerably weaker pace of fourth quarter consumption growth than we had previously assumed. Reflecting this and lower-than-expected November business inventories, we lowered our Q4 GDP tracking estimate by five tenths to +2.0% (qoq ar).

From Merrill Lynch:

Weak retail sales data and inventory build caused a 0.8pp decline in our 4Q GDP tracking estimate to 1.5% from 2.3%

Less significant, perhaps, but also of concern: unemployment claims rose last week.

The number of Americans applying for unemployment benefits rose last week but remains at levels low enough to show that most workers enjoy job security.

The Labor Department says claims for unemployment checks increased by 4,000 to 239,000. The four-week average, which does not bounce around as much, rose 6,750 to 231,750. That’s highest level since late January 2018.

We’ve written that hiring remains strong and employers remain confident. But the news reminds us that this is a time of uncommon uncertainty (we’ll continue to believe it’s uncommon). At such a time, budget writers will want to preserve rainy day funds, be conservative in the projections of future revenue growth. and be cautious about taking actions that can dampen job creation and investment.

Washington’s petroleum refiners in 2017 accounted for 25,366 jobs, $1.9 B in personal income and paid $231.6 million in taxes

Manufacturing is one of the key pillars of our state economy, one which national research has shown to be of extraordinary value to rural communities. A new report from the Washington Research Council digs deep into the economic impact of Washington’s five petroleum refiners. It’s significant.

In 2017, the refiners directly provided 2,171 full-time jobs, paying an annual average wage of $129,132. In addition, the refiners employed, at high wages, 2,658 contract workers on an average day, doing maintenance, capital repair and capital replacement. The refiners indirectly created additional Washington state jobs in industries from which they purchased goods and services, including transportation, construction, utilities and business services. Spending of the income earned in these direct and indirect jobs created even more jobs.

The sum of all these effects was 25,366 jobs and $1.90 billion in per- sonal income for Washington state in 2017. State and local governments received $231.6 million in taxes directly from the refiners and $74.4 million from the follow-on activities of other taxpayers.

Also, industries that distributed refined petroleum products, paid $503 million in wages to 16,078 workers in 2017. Excise taxes collected by the state from these industries totaled $97.3 million in 2017.

The report also finds that taxes paid by refiners in Washington are considerably higher than those paid by California refiners.

Because of Washington’s unique tax structure, a Washington refinery’s state and local tax burden in 2017 was almost three times higher than the state and local tax burden of a comparable refinery located in California.

The report also outlines the history of the industry in the state, breaks down the disposition of product, and provides details of the economic impact analysis. A couple of findings:

Today, Washington’s five refineries make up 3.3 percent of the nation’s total refining capacity (EIA 2018a). With this state accounting for about 2.1 percent of national petroleum consumption, in-state refineries pro- duce quantities more than sufficient for Washington’s needs (EIA 2018b). In 2017, 54 percent of Washington production went to in-state custom- ers, 38 percent was exported to other states, and 8 percent was exported to other countries…

Petroleum product consumption in Washington increased by only 4 percent from 1997 to 2016. Over theperiod the state’s population grewby 29 percent and the output of the state economy (as measured by real gross state product) grew by 69 per- cent. As a result, per-capita consumption declined by 19 percent, while gross state product per barrel of petroleum increased by 62 percent. Residual fuel accounted for 52 percent of the gain from 2014 to 2016, while jet fuel accounted for 19 percent.

There’s much more in the 24-page report, providing insight into the importance of one of Washington’s key manufacturing sectors. 

Yes, career and technical education has been much in the news. All signs suggest the coverage will continue.

Employers cite a shortage of skilled workers as one of the biggest challenges they face.  The skills gap has been a key factor driving programs and initiatives to increase the number of workers with postsecondary credentials. Correspondingly, there’s been a focus on career and technical education

A new report from the American Enterprise Institute sheds light on both the substance and the branding of the new programs. Frederick M. Hess and RJ Martin ask and answer the question, Is Career and Technical Education Just Enjoying Its 15 Minutes of Fame? A summary of their key takeaways:

First, and most obviously, career and technical education’s prominence has increased steadily and significantly over two decades…

Second, this increased interest in career and tech- nical education is part of a broader growth in the prominence of training and workforce development. Regardless of the reason for this growth—whether economic anxiety or disenchantment with college for all or a simple evolution in public taste—career and technical education advocates are making their case at a propitious time for career-centric education.

Third, career and technical education’s rise has been unusually consistent and long-running when compared to other 21st-century education reforms and is especially notable for an idea that generates little controversy.

The analysis is fascinating (read the article for more detail).

In a stab at addressing this question, we examined the media attention devoted to career and technical educa- tion over the past two decades—and how that compares to the attention devoted to other popular 21st-century education reforms.

We used the search engine LexisNexis (a database of news articles from national and international media outlets) to identify the number of articles each year that mentioned career and technical education and, for comparative purposes, other related terms. We searched for “career and technical education” rather than “CTE” to not inadvertently include articles about chronic traumatic encephalopathy, a degenerative brain disease that has received extensive coverage for its impact on former football players’ health.

We’ll show two graphs from the presentation. The first looks at mentions of career and technical education; note the persistent rise.

And compare with other education reforms.

Unlike the big spikes for No Child Left Behind, career and technical education has experienced a steady growth.

…while it has not come anywhere close to those peaks, career and technical education has shown a markedly different public profile than these other reforms—all of which exploded to public consciousness over a span of three or four years and then declined. Career and technical education, on the other hand, has seen a long, dramatic, and uninterrupted build over an extended period of time. Given this long pattern and an attendant lack of controversy, career and technical education seems unlikely to experience the rapid declines in public interest endured by these more polarizing reforms.

They conclude,

It seems a good bet that career and technical education’s gradual build will give it more staying power than other contested, high-profile 21st-century reforms.

It may be as simple as this: Career and technical education has been recognized as an effective strategy fro meeting a challenge that has grown steadily as employers address a still-vibrant economy, an aging workforce, and emerging technologies.

Mixed signals in economic reports: strong job openings, shortage of skilled labor, and “red flag” in late payments on auto loans

Midway through first quarter, the 2019 economy remains problematic. Risks are well known: trade wars, government shutdowns, global uncertainty (Brexit and the Eurozone), labor shortages, and infrastructure deficits. Yet, hiring continues to be strong, even as consumer and small business optimism are receding from 2018 highs.

Continuing the mixed messages comes a new Bureau of Labor Statistics report that job openings at the end of the year reached a record high. 

The number of job openings reached a series high of 7.3 million on the last business day of December, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.9 million and 5.5 million, respectively. Within separations, the quits rate was unchanged at 2.3 percent and the layoffs and discharges rate was little changed at 1.1 percent. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

The Associated Press report on the numbers points out,

The Labor Department said Tuesday that job openings jumped 2.4 percent in December to 7.3 million. That is the most since records began in December 2000. It is also far greater than the number of unemployed, which stood at 6.3 million that month.

Businesses have shrugged off a variety of potential troubles for the economy in the past two months and kept on hiring. The 35-day partial government shutdown began Dec. 22, and growth in China, Europe and Japan has weakened, threatening U.S. exports.

The AP suggests the mismatch between openings and job seekers will lead to increased pressure on wages.

With job postings so high at a time that the unemployment rate is at a very low 4 percent, businesses may be forced to pay more to attract the workers they need.

Paychecks are already increasing, though at a modest pace. Average hourly pay rose 3.2 percent in January from a year earlier, the government said earlier this month. That’s near December’s figure of 3.3 percent, which matched the best pay gain in almost a decade. Still, wage increases typically top 4 percent when the unemployment rate is this low.

We’d add that the persistent skills gap will also challenge employers seeking to hire.

Which brings us to a potential proble we’d not identified before. The Washington Post reports,

A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than during the wake of the financial crisis era.

Economists warn this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills.

The FRBNY economists write on their blog,

The surging auto loan industry has been on our radar for more than five years now. But, the level of loan originations has been commensurate with auto sales, with a steady 50 to 60 percent financing share of combined new and used vehicle purchases—a percentage surprisingly stable in our sample period, which suggests that car loans have been tracking the growth seen in motor vehicle sales. Although rising overall delinquency rates remain below 2010 peak levels, there were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent. The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector.

We suspect the skills gap has something to do with why not everyone has been able to take advantage of the strong labor marker. The AP story puts the delinquency rates in perspective. 

While defaults on auto loans are a red flag, they are unlikely to take down the entire financial system like mortgages did in the lead-up to the 2008-09 financial crisis. The total auto loan market is just over $1 trillion, far smaller than the $9 trillion home mortgage market.

The amount of money people borrow to buy a car is also much smaller – typically under $35,000 – vs. a home loan where people often borrow several hundred thousand dollars.

Still, the problem is real and may be a sign of some pull back in consumer spending, a key driver of economic growth. Another reason state budget writers may want to protect and build reserves.

National study gives Seattle high marks for early childhood education; a solid foundation on which to expand

A new study of Pre-K programs in American cities ranks Seattle among the best. The Seattle Times editorial board writes,

The Seattle program has the highest quality among Pre-K programs in 40 large U.S. cities, according to a new report from the National Institute for Early Education Research at Rutgers University in partnership with nonprofit policy advocacy group CityHealth.

Seattle’s preschool program merits high marks for teacher quality and training, student-teacher ratios and class sizes, and ongoing efforts toward quality improvement. The program gets justified low marks, however, for participation.

The study, in a spotlight on Seattle’s program, points out a significant strength the city had in building out its Pre-K program.

Cities have the opportunity to integrate Pre-K with other city services more readily than states or private Pre-K providers. Establishing an interagency coordinating council can facilitate integration across a number of important ser- vices for children and families. Seattle built on
an already strong system coordinating health and mental health services between the city offices and the county’s Public Health Seattle & King County Child Care Health Program to provide mental health and health services on site at Pre-K provider locations and specialized consultation to teachers.

In our 2017 foundation report, we highlighted as a priority

  • Focus early learning assistance on children most at risk of entering kindergarten unprepared.

And noted,

According to the Washington State Board of Education, less than half (or 44.2 percent) of entering kindergarteners in 2015–16 were able to demonstrate the six characteristics of school readiness (as measured by the Washington Kindergarten Inventory of Developing Skills, or WaKIDS assessment). The numbers are lower for some populations (fewer than one in three Hispanic students is kindergarten ready, for example) and low-income students.15

The state’s goal is to increase the percentage of school-ready kindergarteners to 69 percent by 2020. To get there, the State Board of Education advocates for expanding access to high-quality early childhood education. We agree. Today, only 40 percent of the state’s three- and four-year-olds enroll in early learning programs, a rate that puts Washington in the bottom quartile of states.16

Focusing on kindergarten readiness is a cost-effective way to help ensure students begin their academic careers on a level playing field, thus increasing their potential for consistent individual growth, a successful K-12 experience, and completion of postsecondary programs. The state should continue to make targeted investments to expand early learning options for children most at risk of entering kindergarten unprepared.

The ST editorial says,

A new study last year from the Harvard Graduate School of Education found children who attend high-quality early learning programs are less likely to be placed in special education, less likely to be retained in a grade and more likely to graduate from high school than peers who did not attend. The research supporting preschool as the best way to close the achievement gap is deep and wide.

Seattle’s preschool program deserves such commendation but should  keep working to improve participation and reach as many eligible children as possible.

Yes.

NFIB: Small business optimism slipping as a result of economic uncertainty; hiring and investment remain strong.

Economic uncertainty has begun to erode small business owners’ expectations for the future, although their business operations remain strong, according to the latest NFIB Small Business Optimism Index.

The NFIB Small Business Optimism Index slipped 3.2 points in January, as owners continued hiring and investing, but expressed rising concern about future economic growth. The 101.2 reading, the lowest since the weeks leading up to the 2016 elections, remains well above the historical average of 98, but indicates uncertainty among small business owners due to the 35-day government shutdown and financial market instability.

Political uncertainty translates to economic uncertainty, says NFIB leadership.

Business operations are still very strong, but small business owners’ expectations about the future are shaky,” said NFIB President and CEO Juanita D. Duggan. “One thing small businesses make clear to us is their dislike for uncertainty, and while they are continuing to create jobs and increase compensation at a frenetic pace, the political climate is affecting how they view the future.”

The full report makes clear that despite emerging concerns small business owners continued to hire and invest in January.

Job creation was solid in January with a net addition of 0.33 workers per firm (including those making no change in employment), up from 0.25 in December, affirming the outsized job number reported by the Department of Labor and the best reading since July 2018….

Sixty percent reported capital outlays, down 1 point. Of those making expenditures, 43 percent reported spending on new equipment (up 1 point), 26 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 15 percent spent money for new fixtures and furniture (unchanged). From the start of the recovery in mid-2009 to the end of 2016, an average of 54 percent of small businesses made any capital expenditure, the driving force behind productivity improvements. But since 2016, reports of expenditures have averaged 60 percent.

And, again, finding skilled workers remains a major challenge.

Fifty-six percent reported hiring or trying to hire (down 4 points), but 49 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill (down 2 points). Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, unchanged from last month and 2 points below the record high. Thirty-five percent of all owners reported job openings they could not fill in the current period, down 4 points from December’s record high.

Although the numbers are not alarming – still above average – the report indicates reason for concern. As we noted in our newsletter yesterday, Congressional action on trade and infrastructure would help reduce the current uncertainty, building a foundation for more consistent economic growth in 2019.