Consumer sentiment slides to lowest level of the year, dragged down by trade conflicts and recession worries.

The University of Michigan Consumer Sentiment Survey fell in August, adding to concerns about a weakening economy. Economist Richard Curtin says,

Consumer sentiment declined in early August to its lowest level since the start of the year. The early August losses spanned all Index components. Although the Expectations Index recorded more than twice the decline in August as the Current Conditions Index (-8.2 versus -3.3), the Current Conditions Index fell to its lowest level since late 2016. Monetary and trade policies have heightened consumer uncertainty—but not pessimism—about their future financial prospects. Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports, spontaneously cited by 33% of all consumers in early August, barely below the recent peak of 37%. Although the announced delay until Christmas postpones its negative impact on consumer prices, it still raises concerns about future price increases. The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession. Consumers concluded, following the Fed’s lead, that they may need to reduce spending in anticipation of a potential recession.

We wrote of these concerns here and here. Curtin says consumers will probably cut spending, “while keeping the economy out of recession at least through mid 2020.”

The Wall Street Journal writes,

Despite the drop, the survey remains at a historically high level. Longer-term inflation expectations firmed a bit this month. Consumers now expect inflation of 2.6% in five to 10 years, up from 2.5% in July, while household expectations for near-term inflation strengthened slightly in August to 2.7% from 2.6% in July.

Still, the August survey indicated some concerns about the future pace of income and job gains. U.S. households have been benefiting from a strong labor market and steadily rising wages. Employers added jobs at a steady pace in July and unemployment was a low 3.7%, the Labor Department said earlier this month.

The uncertainty and mixed signals continue to tamp down economic growth.

Latest monthly economic and revenue update shows state economy remains strong, despite heightened uncertainty.

Yesterday’s update from the state Economic and Revenue Forecast Council shows state tax collections continue to beat expectations.

Major General Fund-State (GF-S) revenue collections for the July 11 – August 10, 2019 collection period came in $24.7 million (1.4%) below the June forecast, but the shortfall was due to an $83.8 million transfer of funds out of the GF-S that occurred in July instead of in June as expected. Without the transfer, collections would have been $59.1 million (3.3%) higher than forecasted. The transfer moved the remainder of fiscal year 2019 collections of the supplemental proper- ty tax levy to the Education Legacy Trust Account. Cumulatively, collections are now $107.8 million (3.1%) higher than forecasted.

Here’s the collections graph. It’s been a good run.

Yet, the troubling economic trends we have discussed also cast shadows on the state economy. The update reports, 

In a sharp reversal from a year ago, Seattle home prices have declined over the last year… In spite of the slight uptick in May, monthly Seattle home prices have, on average, been trending down since May 2018. As of May 2019, Seattle home prices were down 1.2% over the year compared to a 13.5% increase during the previous year (see figure)…

Washington exports declined sharply over the year in the second quarter of 2019. Exports decreased 27.6% in the second quarter of 2019 compared to the second quarter of 2018 due largely to a 41.9% drop in transportation equipment exports (mostly Boeing planes). Boeing suspended deliveries of the 737 Max in March which clearly affected second quar- ter exports. However exports of agricultural products also declined 22.4% over the year and exports of all other commodities (mostly manufacturing) declined 5.6%….

Washington car and truck sales declined for a third consecutive month. Seasonally adjusted new vehicle registrations fell 2.7% in May, 3.2% in June, and 3.5% in July. Car and truck sales are down 6.6% over the year and 18.3% since the November 2017 post- recession peak. Monthly sales are erratic but have been trending down since mid-2016.

Of the national outlook, ERFC writes,

National data were once again mixed this month. Consumer confidence improved, layoff announcements dipped and new home sales were up. Job growth was slightly below the average over the last 12 months but still respectable. However, slower GDP growth in the U.S., Germany and China combined with ongoing international trade disputes has led to concerns about future growth.

Calculated Risk reviews several economic forecasts and concludes,

These early estimates suggest real GDP growth will be around 2% annualized in Q3.

Uncertainty continues.

Recession risk? Positive news on retail sales, consumer confidence, and productivity but signs of global slowdown.

During the recent legislative session, we warned often of unsustainable growth in state spending. Our concern then – and now – was that the strong Washington economy would eventually return to slower growth. As a trade-driven state, Washington is unusually susceptible to trade wars. So far, the state continues to outperform the nation.

Yet, as we wrote earlier, there are signs that recession risk is rising. Today’s economic news continues the pattern of mixed signals.

Some upside headlines:

Consumer spending, the primary driver of the U.S. economy, appears healthy even as other sectors of the economy, such as business investment, have weakened amid growing uncertainty over the U.S.-China trade conflict. Job growth is steady, the unemployment rate is near a 50-year low, and wages are rising modestly, which bolsters Americans’ spending power…

Thursday’s retail figures may allay some concerns about the potential for a recession that would end the 10-year U.S. recovery, the longest on record.

Greater productivity is a key ingredient in raising living standards. It enables companies to lift worker pay without raising prices on costumers. The recovery, now in its 11th year, has been held back by historically weak productivity growth. It has grown at roughly two-thirds of its historical average since the recession began.

Yet productivity has picked up in recent quarters and expanded 1.8% in the past year.

Builder confidence in the market for newly-built single-family homes rose one point to 66 in August, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Sentiment levels have held at a solid 64-to-66 level for the past four months.

Yet, even these positive reports contain some hints of growing concern. Builders, for example, worry about regulatory costs and the lack of buildable lots. 

Then, some “on the other hand” stories are more direct.

Over the past 12 months, factory production has fallen 0.5%. Manufacturers’ struggles reflect a global softening in growth that has been magnified by President Donald Trump’s use of tariffs to escalate a trade war with China. The risks have been great enough that the financial markets on Wednesday flashed signs of a possible recession. The interest charged on 10-year U.S. Treasury notes fell below the rate charged on 2-year notes, usually an indicator that investors see near-term problems that could cause a downturn.

Allen Sinai, a forecaster at Decision Economics, said that if corporate earnings slip, that could lead to less investment and then less hiring, creating a self-fulfilling process of contraction. Mr. Sinai has nudged his recession risk estimate up for the first time in years.

Already, both corporate earnings and investment are sliding. U.S. corporate profits before taxes were down 2.2% in the first quarter compared with a year earlier, according to the Commerce Department. And U.S. business investment fell at a 0.6% annual rate in the second quarter, after achieving quarterly growth rates exceeding 8% in late 2017 and early 2018…

“I think that the U.S. economy has enough strength to avoid [a recession],” Janet Yellen, the former Fed chairwoman, said…

As Global Order Crumbles, Risks of Recession Grow

When assumptions about how the world works are shattered, a global downturn is often the result. The world learned in the early 1970s that the era of cheap oil was over, in the early 1980s that countries could default, and a decade ago that American mortgages and global banks aren’t safe.

Today, a similar rethink of globalization is under way. From Washington to Buenos Aires, nations’ mutually reinforcing commitment to open markets is disintegrating. In response, investors are rearranging portfolios, businesses are rethinking investments and policy makers are struggling to respond—all of which are pushing the global economy closer to recession.

The number of Americans filing applications for unemployment benefits increased more than expected last week, but the trend continued to point to a strong labor market…

Therere are still no signs that a bitter trade war between the United States and China, which has contributed to an inversion of the U.S. Treasury yield curve, was spilling over to the labor market. The U.S. 2-year Treasury note yield rose above the 10-year bond yield on Wednesday for the first time since June 2007.

An inverted U.S. yield curve is widely viewed as a classic recession signal. Concerns over the impact of the trade tensions between Washington and Beijing on the U.S. economic expansion, the longest on record, prompted the Federal Reserve to cut interest rates last month for the first time since 2008.

Huseyin Gulen of Purdue University and Mihai Ion of the University of Arizona have attempted to quantify the effect of elevated policy uncertainty on corporate investment. In a 2016 paper, they show that a doubling of the level of political and regulatory uncertainty — after controlling for measures of broader economic uncertainty — is associated with an 8.7% decline in investment.

New research suggests that the trade war follows this pattern. Economists at Goldman Sachs looked at data from 70 industries, and found that the sectors with the highest share of total sales in China had markedly lower capital expenditures in early 2018, when trade tensions began to escalate. Over the previous two decades, those same industries invested relatively heavily.

Of course, if businesses are feeling more pessimistic about the trade war, they may not just delay investments (and hiring) but cut back. Many surveys show that business sentiment has noticeably darkened. Some further suggestan elevated risk of recession.

About that inverted yield curve, Erik Sherman writes in Fortune magazine,

Inversion is important because of its status as an indicator of coming economic recessions. When short-term rates are higher than long term, it indicates the potential for a future recession because the numbers indicate that investors think the short-term economy is a better bet than the long term…

“Typically these inversions occur 12 to 18 months before a recession,” said Andrew Aran, a partner at Regency Wealth Management. But an inversion is just an indicator, as in recent times, only two-thirds of them have actually come before a recession.

Uncertainty is the watchword. And, as pervasive as it is, we remain concerned about the state’s budget path. 

How $100 in Washington shrinks to $93.98. Well, it kind of depends.

Does a dollar not stretch as much as you think it should? If so, it may depend on where you live. Here in Washington, according to the Tax Foundation, that buck is only worth about 94 cents. That puts our state No. 43, with No. 1 being the best value (Mississippi). Clearly, there’s more to consider.

Tax Foundation analysts Robert Bellafiore, Aida Vazquez-Soto, and Scott Eastman explain.

Prices for the same goods are often much cheaper in the more rural areas of states like Missouri or Ohio than they are around large cities in states like New York or California. As a result, the same amount of cash can buy you comparatively more in a low-price state than in a high-price state.

The U.S. Bureau of Economic Analysis has been measuring this phenomenon for four years now; it recently published its data for prices in 2017. 

A number of factors are at play:

Regional price differences are strikingly large; real purchasing power is 35 percent greater in Mississippi than it is in New York…

It’s generally the case that states with higher nominal incomes also have higher price levels. This is because in places with higher incomes, the prices of finite resources like land get bid up. (This is especially true in cities.) What is also true is that places with high costs of living pay higher salaries for the same jobs. This is what labor economists call a compensating differential; the higher pay is offered to make up for the low purchasing power.

While this is interesting and possibly fodder for discussing relocation or retirement options, the state-to-state comparisons miss a major factor, alluded to above in the “especially true in cities” parenthetical. The “best bang for the buck” states are also generally (not always) states without major metros. 

Within Washington, the cost of living differentials can be significant. Seattle, with its fifth highest cost of living among major metros, no doubt drives the state-to-state comparisons, as it is the dominates in both population and economic influence. 

Still, the comparisons are fun to consider.

Less fun, however, is the concluding observation in the Tax Foundation piece.

This has substantial implications for public policy, which is often progressive with respect to income. Many policies–like minimum wage, public benefits, and tax brackets–are denominated in dollars. But with different price levels in each state, the amounts aren’t equivalent in purchasing power.

As we’ve written before, that argument can also apply to state minimum wage policies. Oregon, for example, has adopted a different minimum wage for Portland than for the rest of the state. Good public policy will recognize regional variations.


Everett Herald takes close look at I-976 car tab initiative; would “siphon off millions of dollars” of transportation funding.

In the Everett Herald, Jerry Cornfield reports on the effects of Initiative 976. Supporters of safe and efficient transportation systems have good reasons to be concerned.

Initiative 976, the latest handiwork of Tim Eyman, seeks to cap car tab fees at $30, erase most of the motor vehicle excise tax collected by Sound Transit, and wipe out fees now imposed by cities through transportation benefit districts.

If approved on the Nov. 5 general election ballot, and if it withstands an almost certain legal challenge, it would siphon off millions of dollars flowing into accounts used each year to buy buses, expand transit service, repave streets, maintain ferries, build roads, fix bridges and run the Washington State Patrol.

As we wrote previously, the state budget office estimates the initiative would reduce transportation funding by more than $4 billion over six years.

Cornfield writes,

This measure takes aim at three major targets.

First, it would cap car tab fees on passenger vehicles at $30, reduce fees for electric vehicle and snowmobiles to the same level, and get rid of a special 0.3 percent sales tax imposed on sales of new vehicles. Those are all controlled by the state.

Second, it goes after Sound Transit. It seeks to eliminate much of its current 1.1 percent motor vehicle excise tax rate (MVET). If passed, only 0.2 percent of an 0.8 percent increase approved by voters in 2016 as part of Sound Transit 3 would remain in effect. ST3 is the source of funds for expanding service to Everett…

Third, the measure would ax vehicle fees levied through transportation benefit districts, a move that would affect Edmonds, Everett, Granite Falls, Lynnwood and Mountlake Terrace. The initiative seeks to erase the authority of those districts — which exist in roughly 60 cities — to levy such fees.

Cornfield writes,

Collectively, the financial impact stands to be more far-reaching than Eyman’s previous car-tab targeting measures which voters embraced in 1999 and 2002.

The campaign to oppose the measure can be expected to provide a lot more information in the coming months.

“The impacts of this misguided initiative touch every corner of the state,” said Sandeep Kaushik, consultant to Keep Washington Rolling, an alliance of diverse political forces that is leading the fight against the measure.

“It cuts state-funded projects, as well as regional and city-level projects – impacting transit service, road maintenance and major highway infrastructure projects. It also defunds projects that were already approved by local voters,” he said…

Context is also important. The measure comes at a time when the productivity of the gas tax is falling, leading transportation officials to seek supplements and alternatives. The Seattle Times editorial board writes that California has stepped up fuel efficiency targets.

In the voluntary agreement announced late last month, Ford, Honda, Volkswagen and BMW agreed to increase their fleets’ fuel efficiency to an average 51 miles per gallon by 2026. That would increase the industry average by 50%…

The trend is clear. The traditional revenue streams for transportation are approaching their limits. I-976, again, risks dramatic reductions in transportation projects already underway.

Small business optimism rises; so does recession risk.

The Bank of America, reports CNBC, has elevated its assessment of recession risk in the next twelve months.

“Our official model has the probability of a recession over the next 12 months only pegged at about 20%, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance,” Bank of America’s head of U.S. economics Michelle Meyer said in a note to clients Friday. 

Uncertainty around the U.S.-China trade war and a global economic slowdown have caused interest rates to tumble and weighed on the major stock averages in recent weeks. Last month’s jobs report showed a strong consumer, but business investment is low as investors and business owners juggle new tariffs and fiscal policy uncertainty.

And, while small business owners are aware of their risks, optimism increased in the last month, according to NFIB.

Optimism among small business owners bounced back in July as expectations for business conditions, real sales, and expansion made solid gains. The NFIB Small Business Optimism Index rose 1.4 points to 104.7, with seven of 10 components advancing, two falling, and one remaining unchanged. The Uncertainty Index fell 10 points, reversing a surge in June that reached the highest level since March 2017.

“While many are talking about a slowing economy and possible signs of a recession, the 3rd largest economy in the world continues to defy expectations, generating output, creating value, and expanding the economy,” said NFIB President and CEO Juanita D. Duggan.“Small business owners want to grow their operations, and the only thing stopping them is finding qualified workers.”

The NFIB economic trends report confirms the challenges posed by the tight labor market.

Job creation slowed in July, falling to an average addition of 0.12 workers per firm on average. Finding qualified workers is becoming increasingly difficult with a 46-year record high of 26 percent reporting finding qualified workers as their number one problem. Ten percent (down 2 points) reported increasing employment an average of 3.8 workers per firm and 7 percent (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). The shortage of potential employees relative to the demand for them is slowing economic growth. The demand for workers has not faded and remains at record levels.

Sixty-three percent reported hiring or trying to hire (up 5 points), but 56 percent (89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.

The inability to find qualified workers – workers with the credential required for the job – threatens economic growth.

“Contrary to the narrative about impending economic doom, the small business sector remains exceptional. This month’s index is a confirmation that small business owners remain very optimistic about the economy but are being hamstrung by not finding the workers they need,” said NFIB Chief Economist William Dunkelberg.

Meyers raises other concerns.

Meyer also said that three of five economic indicators that track business cycles — auto sales, industrial production and aggregate hours worked — are at levels reached right before previous recessions.

Uncertainty remains high.

The News Tribune editorial board endorses pay-per-mile tax “as long as money isn’t diverted from highways.”

The News Tribune editorial board weighs on on the search for alternatives and supplements to the state gas tax. The editorial gives a qualified endorsement of a pay-per-mile tax.

Washington transportation policy makers are faced with a “dangerous curve ahead” signpost due to the state’s overreliance on a gas tax. Unless an alternate route is mapped out, we’re headed toward a fiscal cliff in the next few decades.

Shifting to a pay-per-mile formula is the best idea on the table right now. A trial project involving 2,000 volunteers who tracked their mileage for a year was recently completed; the state Transportation Commission will review a report and may vote on a proposal in December; and legislators could be debating bills in Olympia next year.

We’ve written previously of the declining productivity of the gas tax for funding highway infrastructure and of the state’s fourth-highest-in-the-nation gas tax.

The editorial emphasizes the importance of making sure the money is spent on roads.

At the same time, however, they need to study changes to Washington law to ensure the revenue is spent on traditional transportation infrastructure, not diverted to the state general fund or to legislators’ pet projects.

Specifically, that will require a close look at the 18th Amendment to the Washington Constitution.

The amendment specifies that gas tax revenues are spent on highway purposes. And, the editorial says, that’s how it should be for the mileage tax.

The problem with the 18th Amendment is that its language centers on collecting tax “on the sale, distribution or use of motor vehicle fuel.” Ratified in 1944 when the internal-combustion engine was king, it didn’t anticipate a switch to a mile-based tax or other non-petroleum revenue source.

State lawmakers, therefore, shouldn’t mess around with a mileage tax unless they have a parallel discussion about preserving the original intent of the gas tax.

Washington clearly needs a more reliable way to pay for transportation in the 21st century. But as long as there are highways — whether filled with gas or electric cars, driverless vehicles or cars piloted by brainwaves — we’ll also need a reliable stream of money dedicated to highway purposes.

An issue to watch in the 2020 legislative session.

City Journal takes a long look at the effects of high minimum wage; a similar perspective applies to proposed overtime rule.

Last week we wrote about how New York City restaurants were shedding jobs as a result of the city’s steep hike in the minimum wage. An excellent overview article by economist Jonathan Meer, published in City Journal, the quarterly magazine published by the Manhattan Institute, takes a long view of the effects of the minimum wage.

Meer writes of the many debates occurring in cities, states, and Congress as advocates seek to boost the wage. He writes that the discussions generally focus on the obvious tradeoff.

Most of the debates focus on the number of jobs that might be lost from mandated increases and balancing these possible effects against the higher incomes.

This emphasis is misguided. When politicians point to crude job counts to justify policies like protectionist tariffs, economists routinely mock these lines of argument. Yet they seem content to accept them when it comes to the minimum wage. Data limitations are partly to blame—counting the number of people employed is relatively straightforward, while other aspects of a job, even the number of hours worked, rarely get tallied with any consistency. But the notion that the value of a job rests simply on whether one is employed and the level of cash compensation makes for unimaginative economics.

Besides the question of job loss versus pay hike are a host of considerations, harder to measure but of clear relevance to affected employees. Again, Seattle is cited.

Cutting hours is one approach, including opportunities for lucrative overtime work. After Seattle raised its minimum wage from just under $10 per hour in 2014 to $13 per hour in 2016, reductions in hours worked were much more striking than the reduction in the job count, as shown in research by the Seattle Minimum Wage Project. The nature of the job can change, too, with employers expecting more effort from their employees in exchange for those higher wages.

Meer covers a lot of ground, including some history that was new to us. While the minimum wage debates in Washington have subsided – the state and its major cities are near the top of the minimum wage scale nationally – the topic remains of interest. This, for example, is worth pondering.

…the real question is whether the minimum wage is good antipoverty policy. Does it transfer resources from high-income households to low-income households? Does it preserve incentives to work and to hire?

…The effects of the minimum wage on employment are likely to be nonlinear. Employers will adjust through other means, often making workers worse off in ways that aren’t generally visible to researchers. At a certain point, though, firms have no more ways to adjust, and then they will either lay off workers or find themselves unable to stay in business.

Enhancing economic mobility and alleviating poverty are of paramount importance. But the minimum wage is the wrong tool for the job. It lends itself easily to slogans and gestural politics, but it’s not a real solution for real problems.

Which brings us to the “super minimum wage” being proposed for salaried workers under the state’s proposed overtime rule. (We’ll again embed AWB’s excellent video explainer.)

The Tri-City Herald reports,

Local business leaders are taking a dim view of a plan to raise the minimum salary in Washington to 250 percent of minimum wage — or nearly $80,000 a year — for executive, administrative and other salaried workers who don’t receive overtime pay…

Executives suggested the state Department of Labor and Industries trim the plan to less than 200 percent and give businesses until 2021 to begin implementation, a year longer than currently planned.

The proposal represents an overreach that will affect hiring and retention, say employers.

If approved, the rule will take effect next summer, with the minimum salary ramping up to 250 percent of minimum wage by 2025 for employers with more than 50 workers and 2026 for those with less.

Steve Simmons, owner of CG Public House, a Tri-City restaurant and catering business, is opposed to the plan. He said his employees bring a wide variety of skill levels to the job, and he recruits workers with disabilities and barriers to employment…

Nonprofits have gone on the record opposing the revised wages too.

The leaders of Columbia Industries, Grace Clinic and YMCA of Tri-Cities told the Tri-City Herald editorial board their funding hasn’t kept up and they can’t afford the new rates.

Converting salaried employees to hourly workers, as suggested by L&I, presents its own set of challenges, they said.

They would have to pay overtime when work exceeds 40 hours, upending flexible schedules that allow workers to take time off for family affairs.

That could threaten the ability of nonprofits to offer a wide range of services ranging from summer camps to college tours for high school students.

As the paper reports, the department wants to hear from you. There’s still time.

The deadline to comment is Sept. 6.

Written comments can be sent by email to or by mail, Employment Standards Program, P.O. Box 44510, Olympia, WA 98504.