A roundup of today’s economic news: some disappointment, some gains, and more evidence that public policies matter.

Another Friday begins with mixed economic news. First, the August employment report – 130,000 new jobs, including 25,000 Census workers – brought some disappointment. The Wall Street Journal reports,

U.S. employment grew modestly in August and unemployment showed signs of stabilizing at historically low levels, signs that a global economic slowdown isn’t driving the U.S. into outright recession but has dented the growth outlook.

The U.S. economy added 130,000 payrolls in August, the Labor Department reported Friday, and has averaged 156,000 new jobs a month over the past three. That was down from average growth of 190,000 a month in the eight years since employment started picking up after the last recession. The August number was propped up in part by the addition of 25,000 temporary Census workers by the U.S. government, while estimates of payrolls in July and June were revised down.

Calculated Risk comments,

The headline jobs number at 105 thousand for August ex-Census (130K total including temp Census hires) was well below consensus expectations of 158 thousand, and the previous two months were revised down 20 thousand, combined. The unemployment rate was unchanged at 3.7%. There was good news with the increase in the participation rate and employment-population ratio. But overall this was a disappointing employment report.

The numbers were also well below the ADP estimate of 195,000 jobs excluding government employment.

CR also reports GDP forecasts for Q3 are coming in below 2 percent

Productivity for the second quarter increased 2.3 percent, up but slowing. More worrisome is the decline in manufacturing productivity

U.S. worker productivity slowed in the second quarter, the government confirmed on Thursday, as productivity in the manufacturing sector declined by the most in nearly two years.

The Labor Department said nonfarm productivity, which measures hourly output per worker, increased at an unrevised 2.3% annualized rate in the last quarter.

Bringing some of this down to our state’s economy, the Economic and Revenue Forecast Council met yesterday. The Washington Research Council reports,

The economic review (beginning on page 19 of the pdf) notes that the preliminary economic forecast for Washington is “very similar” to the June forecast and that downside risks continue to include “uncertainty regarding trade policy.”

Indeed, slide 9 of the presentation … shows the year-over-year change in Washington exports over time. From the second quarter of 2018 to the second quarter of 2019, Washington exports dropped by 27.6 percent. That’s the biggest decline since the first quarter of 2000. Additionally, exports of transportation equipment, agricultural products, and the all-other category all declined. As Lerch said, it was a “really terrible quarter.”

Policy matters. And so far trade conflicts have taken a major toll on the state economy. A good overview of the economic situation (pdf here), global and national, from Bruce Yandle at the Mercatus Center, then offers some reason for optimism going into 2020. 

First, he puts the current economy in context.

…the US economy, much like that of the rest of the developed world, began to slow significantly in late 2018 and at the start of 2019. While consumer spending continued to show remarkable strength, employment growth, US industrial production, and exports weakened. The Trump administration’s escalating trade war with China, threats of tariffs on Mexican imports, and additional tariff threats on European autos and even French wine raised uncertainty across the manufacturing sector. The negative effects generated by trade war uncertainties were reinforced by debates regarding reversals of Federal Reserve (Fed) interest rate policies along with the possibility of another government shutdown in association with congressional debate regarding raising the nation’s debt limit. By late July, the Fed and debt limit uncertainties were resolved when the Fed reduced interest rates by a mild 25 basis points at its July meeting and Congress passed a two-year budget bill that eliminated the risk of government shutdown. Meanwhile, trade war uncertainties and a slowing industrial economy remained in place.

The effects of these uncertainties are seen in the slowing growth in industrial production, where the year-over-year growth rate peaked in September 2018 and has diminished almost every month since then.

So, is a recession in the offing?

Will we see a recession—two consecutive months of negative real GDP growth—in the next 12 months? Based on what we know now, I think not. The normal election year incentives create a push to more deficit spending, less confrontational trade talk, and continued regulation relaxation, which should be enough to generate greater than two percent real GDP growth in the year ahead.

Granted, an odd kind of optimism. A recession, in this scenario, amounts to an unforced error, an economic own goal. We should be able to avoid it.

More time to affect proposed regulation: Labor and Industries extends public comment on overtime rule to September 20.

There’s still time to comment on controversial overtime rule – or “super minimum wage” – proposed by the Department of Labor and Industries. L&I says in its news release that it is extending the comment period through Friday, September, 20. Apparently, quite a few people are weighing in.

Driven by a high level of interest, the Washington State Department of Labor & Industries (L&I) is extending the public comment period on its proposed changes to the state’s overtime rules.

Comments will now be accepted through Friday, Sept. 20. That’s two weeks later than the original Sept. 6 deadline.

This, then, is a good time to review the proposal. We’d again point you to this excellent video overview produced by the Association of Washington Business.

In one of our previous posts on the issue, we linked to this Washington Research Council analysis. The WRC writes,

Currently, workers must be paid overtime if they work more than 40 hours a week, but there are some exemptions—including for EAP workers. To be exempt, these workers must perform certain duties and earn more than $455 per week ($23,660 per year). (This is the current federal salary threshold; the current state threshold is $250 per week.)

Under the proposal, the salary threshold would be increased by steps (depending on employer size) until it is 2.5 times the state minimum wage for all employers beginning Jan. 1, 2026.

AWB has also prepared a two-page issue brief and a one-page overview. We recommend reading the short discussion. Here’s part of AWB’s material produced ahead of last month’s public hearings..

L&I advises on how to submit a comment.

The final decision is expected in early December.

Comments can be sent by email to EAPrules@Lni.wa.gov or by fax at 360-902-5300. Find details on the proposed rules on L&I’s overtime rules webpage (Lni.wa.gov/OvertimeRulemaking).

 

More signs of an economic slowdown: a dip in manufacturing, construction spending flattens, and cautions in the Fed’s Beige Book

The economic news continues to roll in, and it points to slower growth. 

The Institute for Supply Management reports a dip in manufacturing activity. 

The Institute for Supply Management, an association of purchasing managers, said Tuesday that its manufacturing index slid to 49.1 last month, from 51.2 in July. Any reading below 50 signals a contraction. That’s the lowest for the index since January 2016.

A global softening in demand, worsened by an increasingly high-risk trade war between the U.S. and China, appears to be hurting American manufacturers. More than half of the public comments from companies surveyed by ISM pointed to economic uncertainty as a drag on their businesses.

Not much of a lift coming from construction spending, either.

U.S. construction spending ticked up just 0.1% in July, aided by government spending on schools, sewers and the water supply.

The Commerce Department said Tuesday that spending on construction projects in July occurred at a seasonally adjusted annual pace of $1.29 trillion. So far this year, construction spending has tumbled 2.1%, dragged down by a sharp pullback in expenditures for homebuilding.

Pulling it all together is the latest from the Fed’s Beige Book. The take on “overall economic activity.” (H/T Calculated Risk)

On balance, reports from Federal Reserve Districts suggested that the economy expanded at a modest pace through the end of August. Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook. Reports on consumer spending were mixed, although auto sales for most Districts grew at a modest pace. Tourism activity since the previous report remained solid in most reporting Districts. On balance, transportation activity softened, which some reporting Districts attributed to slowing global demand and heightened trade tensions. Home sales remained constrained in the majority of Districts due primarily to low inventory levels, and new home construction activity remained flat. Commercial real estate construction and sales activity were steady, while the pace of leasing increased slightly over the prior period. Overall manufacturing activity was down slightly from the previous report. Among reporting Districts, agricultural conditions remained weak as a result of unfavorable weather conditions, low commodity prices, and trade-related uncertainties. Lending volumes grew modestly across several Districts. Reports on activity in the nonfinancial services sector were positive, with reporting Districts noting similar or improved activity from the last report.

Slow growth. Better than no growth. And much better than a recession. The uncertainty continues.

A “respectful difference of opinion” generates a legislative lawsuit over a gubernatorial veto.

Last week the Legislature filed a lawsuit challenging Gov. Inslee’s veto of language in a transportation bill. In the Spokesman-Review, Jim Camden reported,

The state Constitution allows a governor to veto sections of a bill while signing the rest of it into law. But Inslee vetoed sentences, within certain sections of that budget, which said the type of fuel being used can’t be a factor in receiving certain state grants.

The transportation budget passed unanimously in both houses, but the bill wasn’t signed until after the Legislature adjourned for the year. In an even rarer show of bipartisanship, Democrats and Republicans from both chambers announced Thursday they will file suit in Thurston County Superior Court over the vetoes.

The Association of Washington Business writes,

Lawmakers on both sides of the aisle said this is an important separation of powers issue. House Minority Leader J.T. Wilcox, R-Yelm, said “it’s important for the court to rule so both the Legislature and governor have a clear understanding of their authority in the future.”

The last time this issue came up in the courts was in 2003, when lawmakers sued then-Gov. Gary Locke for a similar veto. Locke didn’t fight the lawsuit; instead, in a one-day special session, he withdrew the vetoes. The high court had invalidated a Locke veto in 1999 on these grounds, while in 1997 upholding vetoes from then-Gov. Mike Lowry in 1994.

The governor says,

“We don’t believe this issue has been addressed by the courts and we understand the Legislature’s desire to settle the question about important institutional powers. 

“The language was vetoed because it indirectly amends an existing statute through the transportation budget. Our Constitution does not allow laws to be changed indirectly. The language would have prevented the Washington State Department of Transportation from considering clean fuels as a factor in the grant selection process of nearly $190 million in multimodal grant funding, contradicting that statute’s mandate to consider ‘energy efficiency issues’ in the grant selection process.

“This is a respectful difference of opinion, and we look forward to forthcoming guidance from our courts.”

Camden’s reporting points out what’s at stake. To us, it seems nontrivial.

The dispute involves more than $190 million in state grants set aside for public transportation projects around the state. Different subsections say certain amounts of state money can be awarded to transit agencies for special needs riders, vanpool programs, regional mobility projects, commute-trip reduction and transit coordination. Each subsection describing the various amounts contains a sentence that “fuel type may not be a factor in the grant selection process.”

Inslee left the dollar amounts and the other details of the various grant programs intact, but vetoed the sentence that allows any fuel type to be used by the organization requesting the grant.

Those sentences, known as budget provisos, indirectly amend an existing law that requires energy efficiency to be part of the grant selection process, Inslee said in his veto message. It also conflicts with a state mandate to transition to zero-emission vehicles, he said.

Those sentences are making a policy change to existing law, which violates a constitutional prohibition against indirectly amending a statute, Inslee said at the time.

But a 1974 amendment to the constitution also says a governor “may not object to less than an entire section, except that if the section contain one or more appropriation items he may object to any such appropriation item or items.”

Courthouse News cites statements by leading Democrats.

Majority Leader Rep. Pat Sullivan, D-Covington, said in a statement that the lawsuit was about preserving the balance of power.

“This is an institutional lawsuit with one branch of government taking issue with the actions of another. We believe the executive branch overstepped its constitutional authority with these vetoes. Therefore, we are moving forward with a lawsuit to ask the judiciary to rule on this dispute and provide additional clarity on executive veto authority.”

Senate Majority Leader Andy Billig, D-Spokane, underscored that point in a statement of his own.

“The checks and balances woven throughout our constitution are essential to a healthy democracy,” Billig said. “This lawsuit is one of those checks.”

More at the Associated Press

 

 

New “Quality Counts” Education Report Card finds Washington among “most improved,” but still only earning a C+

A new education report card gives Washington middling marks overall, but still finds the state among the top 5 “most improved.” Quality Counts 2019 assesses state education systems. Here’s how they describe it:

The report, the third of three installments, synthesizes 39 indicators that capture a range of school finance, academic achievement, and socioeconomic factors that affect the quality of state school systems.

Overall, the nation gets a C. Washington gets a C+. The “most improved” post relatively unimpressive marks, as the chart below shows.

Washington’s score of 77.2 compares with a national score of 75.6; so, C+ rather than C. Nationally,

The national score of 75.6 represents an increase of 0.5 points over last year, when the nation also earned a C on the summative report card. The slight uptick in the numerical score reflects modest gains in each of the three report card categories. But the result also continues a trend of mediocre performance, with large disparities between high- and low-scoring states.

The top and bottom performers:

New Jersey bested Massachusetts overall, and just barely.

New Jersey’s first-place position with a B-plus and a score of 87.8 ends Massachusetts’ four-year reign atop the Quality Counts rankings, in which Massachusetts also earned a B-plus. Massachusetts fell short of the top spot by just a few hundredths of a point on the combined scores.

Massachusetts has topped our Opportunity Washington Achieve priority in recent years. Most recently, we wrote,

Massachusetts holds on to its 1st place position. The Bay State outperforms Washington on the K-12 measures as well production of bachelor’s and advanced degrees per capita. Washington beats Massachusetts in associate’s degrees awarded per capita.

For more on the Quality Counts 2019 report card see the full report.

Preliminary state economic forecast: slowing employment growth, small uptick in personal income.

The Economic and Revenue Forecast Council has released its September 2019 preliminary economic forecast. It’s the first step in a process ERFC leading to the official revenue forecast:

During a typical forecast cycle, the Chief Economist and staff of the Forecast Council (ERFC) meet with the Forecast Work Group to discuss the preliminary U.S. and state economic forecasts.

ERFC produces preliminary economic forecasts for the U.S. and Washington. In September, he preliminary forecasts are then reviewed and discussed by the Governor’s Council of Economic Advisors (GCEA) in the presence of the Governor and members of the Economic and Revenue Forecast Council.

Once the final economic forecasts for the U.S. and the state are completed, work begins on the General Fund-State revenue forecast. The economic forecasts are completed first because data from the economic forecasts are used to produce the revenue forecasts.

These preliminary assessments provide a good overview of the current state of the national and Washington economies. Key conclusions:

We expect 1.9% Washington employment growth this year, down from 2.2% in the June forecast. As in June, we expect growth to decelerate. We expect employment growth to average 1.3% per year in 2020 through 2023, up slightly from 1.2% in the June forecast. Our forecast for nominal personal income growth this year is 5.7%, up from 4.9% in the June forecast. Our new forecast for nominal personal income growth in 2020 through 2023 averages 4.9% per year, the same rate as in the June forecast.

In other economic news, The Wall Street Journal reports personal consumption remains strong.

U.S. households ramped up their spending in July, continuing to underpin the economy’s expansion as manufacturing cools and global growth slows.

Personal-consumption expenditures, a measure of household spending, increased a seasonally adjusted 0.6% in July from June, the Commerce Department said Friday.

Consumer spending is the driving force behind the U.S. economy, accounting for more than two-thirds of total demand. Solid spending bodes well for third-quarter growth.

From the BEA report:

Personal income increased $23.9 billion (0.1 percent) in July according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $44.4 billion (0.3 percent) and personal consumption expenditures (PCE) increased $93.1 billion (0.6 percent).

Real DPI increased 0.1 percent in July and Real PCE increased 0.4 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.2 percent.

As the Associated Press notes, that increase in DPI is not great.

The Commerce Department also said Friday that personal incomes rose just 0.1%, the smallest gain in 10 months. 

Things seem to happen swiftly these days. The official revenue forecast for the state will be released September 25.

Do-over? Appeals court asked to re-think ruling finding cities can tax income.

Last month – it seems so long ago – the state Appeals Court rejected a 1984 statute prohibiting municipalities from levying an income tax. The decision came as the court considered Seattle’s graduated income tax.

We wrote at the time the court’s decision to reject the graduated income tax was expected; the state Supreme Court has long held that graduated income taxes are unconstitutional. The scrapping of the statutory prohibition on the basis that the legislation violated the single-subject rule, however, surprised even proponents of the Seattle tax. Some Republican lawmakers signaled their intent to refile a standalone statutory prohibition in the 2020 session.

Jason Mercier, of the Washington Policy Center, reports that the Appeals Court has been asked to reconsider.

Led by former State Supreme Court Justice Chief Gerry Alexander, former Associate Justice Phil Talmadge and former Attorney General Rob McKenna, plaintiffs filed an extensive brief painstakingly pointing out the errors of the Courts original ruling. Included in the brief are the transcripts from the 1984 public hearings and floor debates on the law explicitly banning a local income tax. The brief also points out that the state Supreme Court has already repeatedly ruled that income is “intangible personal property.” This is important because the Appeals Court “refused” to read income into the exemption against taxing intangible personal property.

The motion for reconsideration is worth reading, as it clearly counters the court’s analysis. 

And the saga continues.

 

Moody’s upgrades ratings on Washington’s $19.4 billion general obligation bonds. Washington among 10 most leveraged states.

Washington state’s debt received an upgrade from Moody’s.

Moody’s Investors Service has upgraded the ratings on the State of Washington’s approximately $19.4 billion outstanding general obligation bonds, including bonds additionally secured by motor vehicle fuel taxes and toll revenues, to Aaa from Aa1…

The upgrade of the general obligation bonds and school bond guarantee program to Aaa reflects a significant increase in financial reserves even as the state increased funding for K-12 education in response to a state supreme court mandate, the exceptional growth of the state’s economy driven largely by the technology sector in the Seattle metro area, and the consequent diversification of the state’s economy… Additional strengths include above-average wealth and income levels, and the state’s strong fiscal governance practices. While the state’s debt levels are above average, they have been declining relative to the 50-state medians and the state’s debt and pension liabilities combined and fixed costs are comparable to medians.

The upgrade is a good thing for our state and its taxpayers, as state Treasurer Duane A. Davidson points out

“Not only does the Aaa rating reflect highly upon Washington’s credit, it will help ensure that when we finance schools, roads and other important projects, we do so at the lowest possible interest rates,” Treasurer Davidson said.

…Although Washington ranks among the top ten most leveraged states across the country, Moody’s expects it will continue to address any budget gaps that may emerge as it has in the past.

The Washington Research Council cites some ongoing concerns, however.

Though Moody’s considers Washington’s outlook to be stable, it writes that a “protracted structural budget imbalance and/or a shift to reliance on one-time budget solutions” could lead to a ratings downgrade.

We wrote about Washington’s budget sustainability policies earlier this year, noting that they work when they are followed. Moody’s is certainly correct that Washington’s reserves have increased, but they could be even higher. Instead, the Legislature opted to spend all the extraordinary revenue growth the state has experienced over the past few biennia, and it has diverted revenues away from the rainy day fund.

In The Lens, TJ Martinell writes,

… a 2019 debt affordability study by the State Treasurer’s Office notes that at 14.1 percent, the state’s total fund balance as a percentage of revenue is not only above average, but it is the eight-highest of any state.

…Although Moody’s report anticipates that “the state will continue to address any budget gaps that emerge, as it has in the past,” it warns that one of the following could cause Moody’s to downgrade Washington’s rating:

  • An unexpected downturn in the state economy;
  • Prolonged budget challenges, including use of one-time revenue solutions to plug spending gaps; and
  • Depletion of unrestricted reserves in the state general fund.

Davidson and other Treasurer’s Office officials have warned against spending increases that leave little in the general fund.

Good advice heading into the 2020 legislative session. The upgrade is something to both celebrate and protect.