Regional Outlook Retail Sales 4 Two Realities, One Recession Construction 5 There Is an Old Joke That Has Two Economists Walking Down the Street

VOLUME 28 • ISSUE 3 • SEPTEMBER 2020 CENTER OF ECONOMIC AND BUSINESS RESEARCH • 1

WHAT’S INSIDE Regional Outlook Retail Sales 4 Two Realities, One Recession Construction 5 There is an old joke that has two economists walking down the street. One points Special Topic 6 to a $100 bill on the ground. The other says there is no reason to pick it up – after all, Forecast Detail 7 if it were a real $100 bill, someone else would have already taken it. So off they go. COVID-19 Border Restrictions 8 Our version of that joke today is that one economist points to some data points – including the stock market – and concludes the economy is recovering. The other Washington State Economy 9 economist says it can’t be a real recovery, because real recoveries don’t include 10 Leading Index 12 percent unemployment, a growing number of bankruptcies, and other problems. But here we are. The joke pokes fun at economists for imagining On our minds this quarter: a national election, a pandemic, remote that people are rational working, remote learning, how families and respond to incentives and businesses are impacted by all of in predictable ways. For it and an economy that is operating at example, people would not about 80% of pre-COVID with strong leave $100 just lying on the variances by region. ground. But we do silly things There is a lot to consider. Are we at times. We are not always in recovery? What are the impacts rational. And the economy of less sports? Will wage disparities as a whole can feel a bit create long-lasting issues? What will irrational at times as well the impacts be on residential and (especially the stock market). commercial real estate as people We know all that. Still, change how/where they work and live? conditions today feel truly Economics appear to be getting strange. better for some people and worse for Yet despite that others. Our new normal will not be the strangeness, a lot of what we Summary Forecast same one we had a year ago. Regional see around us makes sense. Annual Percent Change employment, both location and mix, That’s not to say it is good. It 2018 2019 2020 2021 will be different. Commercial space just makes sense. demand and use will shift. Education Many wealthy households Puget Sound Region delivery will change. We will all adapt. are doing just fine – In the meantime, mask up, be kind Employment 2.3 2.3 -6.1 3.0 government statistics are to your neighbors and lend a hand Personal income (cur. $) 6.1 4.5 6.0 -2.8 defining wealthy at incomes where you can. Together is how we get Consumer price index 3.2 2.6 1.6 1.9 exceeding $67,500 per year. to normal. Housing permits -5.7 4.3 -12.1 -3.1 They have been working from home, keeping their Population 1.4 1.3 1.3 1.3 job and income. They are United States* not traveling or eating out GDP ($12) 3.0 2.2 -5.2 3.8 as much, so they aren’t Employment 1.6 1.4 -5.8 4.9 spending as much as they Personal income (cur. $) 5.3 3.9 3.8 -3.0 did pre-COVID. But they are Consumer price index 2.4 1.8 1.0 1.7 fine and the related talk that the recession is over makes Housing starts 3.4 4.0 -6.2 5.8 sense – for them. Meanwhile, *Source: Blue Chip Economic Indicators 2 • THE PUGET SOUND ECONOMIC FORECASTER

The data present challenges for us when we run the forecasting model. We have to consider how the large increase in personal income in the second quarter of 2020 affected spending, ask whether a similar stimulus package might be forthcoming, and imagine what spending might be with different scenarios. For this outlook we assume there will be another stimulus package, but not quite as generous as the first. As such, we have spending declining slightly in many sectors compared to the second quarter. We also have income coming back down to more normal levels. We have also assumed that population growth continues to be relatively strong in the Puget Sound region. The model sees slowing population growth due to slowing economic activity and we have to manually alter that expectation in the model. Regional Outlook continued... It is also critical to note that the national economic the recession is far from over for many other households. But outlook (the key input into our model) includes assumptions there’s been lots of stimulus money to be spent. The bump in about when a vaccine might be widely available and widely income and related spending makes it look like the economy used. After all, there will not be a solid economic recovery is doing fine, when people are out of work and businesses are until people are comfortable getting on planes, going to struggling. events, etc. The forecast shown here assumes a vaccine will

PUGET SOUND TEN-YEAR FORECAST

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Employment (thous.) 2052.3 2114.4 2216.8 2241.8 2250.1 2264.0 2275.6 2284.7 2294.2 2302.1 Aerospace Employment (thous) 77.6 73.2 78.2 77.2 76.4 75.6 74.8 73.9 73.2 70.6 Unemployment rate (%) 8.8 7.2 4.5 4.1 4.1 3.9 4.0 4.2 4.3 4.4 Personal income (bils. cur. $) 321.1 312.1 330.2 344.5 358.4 372.9 388.7 404.6 421.2 440.0 Consumer price index (82-84=1) 2.825 2.880 2.947 3.013 3.078 3.141 3.202 3.270 3.340 3.412 Housing permits (thous.) 23.9 23.2 24.2 23.3 22.2 22.5 23.4 23.6 23.8 24.2 Population (thous.) 4244.8 4299.1 4349.5 4391.1 4423.9 4459.2 4500.0 4541.4 4584.0 4631.3 Retail sales (bils. $) 93.2 96.2 101.6 106.7 111.0 115.7 120.5 125.1 130.0 135.4

Annual growth (% change) Employment (thous.) -6.1 3.0 4.8 1.1 0.4 0.6 0.5 0.4 0.4 0.3 Personal income (cur. $) 6.0 -2.8 5.8 4.3 4.1 4.0 4.2 4.1 4.1 4.5 Consumer price index 1.6 1.9 2.3 2.3 2.1 2.0 2.0 2.1 2.1 2.2 Housing permits -12.1 -3.1 4.7 -3.8 -4.6 1.1 4.1 1.0 0.6 1.6 Population 1.3 1.3 1.2 1.0 0.7 0.8 0.9 0.9 0.9 1.0 Retail sales -1.6 3.2 5.5 5.0 4.0 4.2 4.1 3.8 3.9 4.2

U.S. Growth (% change) GDP ($12) -5.2 3.8 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 Employment -5.8 4.9 2.5 1.2 0.8 0.9 0.8 0.8 0.8 0.8 Personal income (cur. $) 3.8 -3.0 4.1 4.2 4.3 4.2 4.3 4.2 4.2 4.6 Consumer price index 1.0 1.7 2.2 2.2 2.2 2.2 2.1 2.2 2.2 2.2 Housing starts -6.2 5.8 7.8 1.4 0.7 0.7 0.0 0.0 0.0 0.0 [email protected] • 360-650-3909 CENTER OF ECONOMIC AND BUSINESS RESEARCH • 3 be approved this winter and will be widely available in the second half of 2021. Unemployment will remain elevated into 2022. Of course, unemployment will not feel the same for everyone. The impacts of any given recession fall unevenly on different groups in society. We’ve already mentioned that higher-income households have fared quite well in this recession. They have been inconvenienced, but they have not dealt with job loss or income loss. The impacts have been greater for lower-income households. Moreover, the impacts have been greater for women and minority communities. The job loss has been most severe in industries such as food service, person-to-person retail, and many healthcare sectors. A recent article in the Seattle Times noted that 74% of healthcare workers in the Seattle area were women – just one reason this recession is hitting women harder than men. Historically, most recessions have hit male-dominated industries harder, making this COVID recession unique. Minorities are also prominent in the service sectors hit hardest in this recession, making the impacts also very pronounced for various minority groups. And there’s another layer about to emerge, which further complicates our forecast. Most school districts have kids in primary through high print subscribers (online subscribers can access the 10-year school starting school at home. That means someone has forecast year-round). Stay safe, and we will be back with to be home with the kids to help them during school. Times another forecast in December. have changed, but this burden will fall on women more than men. Accordingly, women have seen significant job loss and things are about to get harder. How can you work and help your fifth grader all day with school at the same time? Many school districts even have time in the daily schedule devoted to ‘family learning’. What is clearer every day is that the impacts of COVID-19 and the associated recession are deeper and more varied than ever could have been imagined in mid-March. Throughout this report, we’ll be giving you our thoughts on these impacts, from sports to the border to Boeing. This coverage will continue as long as we keep seeing impacts from COVID – the current vaccine timeline indicates that we probably won’t be getting a shot in the arm until the weather starts warming up again. You’ll notice that impact in our 10-year forecast, included here for our

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Taxable Retail Sales Forecast Scenarios Retail Sales March 2020 June 2020 September 2020 Swallowing our pride $200 $180 Transparency is best when forecasting during a recession – $160 the models tend to not play well with rapidly changing data. With that in mind, let’s look at the forecast. $140 You can see three forecasts for our region’s taxable retail $120 sales (TRS) on the graph. The blue line is our pre-COVID $100 March 2020 forecast. The orange line is our June 2020 Taxable Retail Sales (billions) $80 forecast. This forecast (and the grey line for September’s 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 forecast) both contain a notable decline in TRS in 2020. Approaching 2029, the June 2020 forecast calls for an additional $20 bln in TRS compared to March. earlier), TRS data comes from the quarter before that (i.e., The main difference between those scenarios is a global Q1 2020). Due to the pandemic, TRS data reporting has been pandemic – not really conducive to better long-run results. delayed, requiring us to use Q3 2019 data in the June model. Models cannot know about random events down the line This data is naturally more positive than recent data, so the that impact forecasts. Hence why many long-term forecast model needed adjusting. models, including ours, regress to historical trend growth Thankfully, due to connections from other work, we had rates past the first few years. However, these growth rates access to 2020 TRS data. This allowed us to craft a more (June forecast) are much higher than historical trends. reasonable September forecast, one that is roughly $9 billion There are logical explanations for this. During a normal below the March forecast. There are still many unknowns. quarter, TRS data comes from the DOR a quarter delayed. Yet we believe the September forecast represents a more While most of the data used for the model comes from the reasonable path for TRS growth in the Puget Sound, based on prior quarter (so, in September we are using Q2 2020 data and all available data.

PUGET SOUND RETAIL SALES

2020 2021 Years 2020.1 2020.2 2020.3 2020.4 2021.1 2021.2 2018 2019 2020 2021 Retail sales (bils. $) 92.5 86.0 98.6 95.8 95.8 95.5 90.1 94.8 93.2 96.2 Building materials 7.6 8.1 7.7 7.2 7.4 7.5 7.1 7.4 7.7 7.5 Motor vehicles and parts 20.6 19.9 22.9 20.5 20.5 20.0 21.1 22.5 21.0 20.3 Furniture and electronics 3.3 2.4 3.6 3.4 3.4 3.4 3.3 3.5 3.2 3.4 General merchandise 9.8 9.9 10.0 10.1 10.1 10.2 9.3 9.6 9.9 10.3 Food and beverage 12.8 13.0 13.2 13.3 13.2 13.0 12.0 12.5 13.1 13.0 Gasoline stations 4.7 4.7 4.7 4.7 4.7 4.7 4.8 4.7 4.7 4.7 Clothing and accessories 3.8 1.9 4.6 4.5 4.4 4.4 4.3 4.5 3.7 4.5 Food services and drinking 10.9 6.8 12.2 12.4 12.0 12.0 11.2 11.8 10.6 12.1 Other retails sales 19.1 19.3 19.5 19.7 20.0 20.3 17.0 18.2 19.4 20.4

Taxable retail sales (bils. $) 93.8 106.4 113.3 111.6 112.2 112.4 107.3 113.6 106.3 112.6 Retail trade 37.4 45.0 47.0 46.5 46.7 46.6 43.1 45.5 44.0 46.6 Other taxable sales 56.4 61.4 66.3 65.1 65.6 65.8 64.3 68.1 62.3 66.0

Annual growth (% change) Retail sales -15.6 -27.9 58.2 -11.1 -0.2 -1.0 6.0 5.2 -1.6 3.2 Taxable retail sales -79.7 53.8 25.8 -5.8 2.2 0.5 9.7 5.8 -6.4 5.9

Source: 1 https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2018Q1.pdf 2 https://www.bloomberg.com/graphics/2017-retail-debt/ [email protected] • 360-650-3909 CENTER OF ECONOMIC AND BUSINESS RESEARCH • 5

behind King County’s price decline may be the flight of Construction and households out of metropolitan areas and into the suburbs that has been noted in other American metro areas. Since the Real Estate decline in July’s price is slight at 1.2 percent, and prices are Next stop, suburbia still up year-over-year by 7 percent for King County, this slide in price could also be due to the upward movement of King In June, we posited that the housing market’s pre-COVID County inventory that has been occurring since February. It’s strength may be enough to let it coast through the recession. difficult to diagnose in the moment. Since then, it has become clear that the housing market will In a typical recession, the damage done to the economy do more than just coast – instead, it has shown strong and is wide-reaching. This recession is unique in more ways stable growth in the Puget Sound. Both closings and average than one, but the localized employment impacts – namely, price are reporting year-over-year growth for the region. This a large decrease in low-paying jobs – have harmed specific is driven by growth in all counties but Pierce, which saw a demographics, meaning people who were not typically yearly decline in closings of 4 percent. homeowners or likely prospective homebuyers. This, Closings have been decreasing throughout the pandemic combined with a historically low mortgage rate that period, but this decline is far outpaced by a long-term drop incentivizes wealthier households to continue homebuying, in inventory. Although inventory has grown over the course are the two main reasons why the housing market has shown of the year, it is still averaging about 2,000 listings below such strength amid economic turmoil. the average inventory for the last 5 years. In a normal year, The positive tone of this article is not to suggest that the inventory reaches its highest point in late summer to early housing market is a safe harbor in the recession. There are fall, and the Puget Sound is still 46% below rates seen in an still factors that could dampen the real estate market as we average July. navigate the recovery. Consumer confidence has the potential It is this low level of inventory that has been pushing to shift with vaccine release timelines or future virus waves, up prices across the Puget Sound. King County is the lone two things we are watching warily. But for now, the real exception, noting a $10,000 drop in price in July. One factor estate market continues to be a positive note in an otherwise tumultuous economic time.

PUGET SOUND CONSTRUCTION AND REAL ESTATE

2020.1 2020.2 2020.3 2020.4 2021.1 2018 2019 2020 2021 Housing permits (thous.) 25.8 25.1 22.5 22.2 22.7 26.1 27.2 23.9 23.2 Single-family 9.9 7.6 7.9 7.9 8.3 10.1 9.7 8.3 8.7 Multi-family 15.9 17.4 14.6 14.3 14.4 16.0 17.5 15.6 14.5 Housing permits (mils. $) 5431.6 5260.6 4722.3 4750.7 4941.1 5524.9 5704.5 5041.3 5175.6 Single-family 3329.5 2474.3 2623.4 2673.8 2815.3 3427.0 3235.5 2775.3 2999.8 Multi-family 2102.1 2786.3 2098.9 2076.9 2125.8 2097.9 2469.0 2266.0 2175.8

Average home price (thous. $) 629.6 596.7 634.7 638.5 642.5 568.1 591.8 624.9 657.5 Active home listings (thous.) 6.6 6.1 6.4 6.6 6.7 8.0 8.6 6.4 6.9 Home sales (thous.) 65.7 51.2 60.2 60.1 60.1 66.5 65.5 59.3 60.4

Apartment vacancy rate (%)* 5.0 5.3 5.9 6.5 7.0 5.1 5.0 5.6 6.8 Average apartment rent ($)* 1767 1763 1779 1791 1799 1630 1725 1775 1812

Annual growth (% change) Housing permits (mils. $) -28.7 -12.6 -40.9 2.4 16.0 -9.0 3.3 -11.6 2.7 Average home price 14.6 -20.9 25.5 2.4 2.5 8.9 4.2 5.6 5.2 Average apartment rent 7.4 -0.9 3.7 2.6 1.9 4.4 5.9 2.9 2.1

Source: 1 https://www.wsj.com/articles/with-lumber-in-short-supply-record-wood-costs-are-set-to-juice-home-prices-1519916401 2 http://nahbnow.com/2018/05/builders-say-lumber-tops-labor-as-biggest-challenge/?utm_source=newsletter&utm_ medium=5-0528&utm_campaign=MMB2018

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has been done to sports in the Puget Sound – that will have Puget Sound Sports to wait until there is more data. However, with the scenarios Swing and a Miss we ran, we can illustrate how important the “sports” economy is to the Puget Sound – and give you the tools to help you Sports are one sector where the COVID-19 pandemic has understand it as well. created wide-reaching impacts. Yet trying to drill into the Looking at the Puget Sound as a whole, roughly 32,000 true scope of these impacts is difficult. As players’ unions people appear to work in the wider “sports” economy, and owners haggle out new contracts in the public eye, most as defined above (Bureau of Labor Statistics). Their jobs available information ranges from unhelpful to actively contribute roughly $2.7 billion to Washington’s gross state misleading. Employment numbers often do not disaggregate product (GDP). Additionally, those jobs support another to a level where sports can be analyzed without also including 21,700 jobs in other sectors, contributing another $2 billion other large entertainment-based employment, like performing to Washington’s GDP. Overall, the sports economy employs arts. This restricts the analysis one can do for now. and supports 53,500 jobs and contributes $4.8 billion to Here is what we do know – sports have never looked quite Washington’s GDP. These numbers do include some of the like this. Many Seattle teams have shortened or canceled the performing arts sector and other types of recreation due to remainder of their season due to the COVID-19 pandemic. data limitations, but this is a reasonable approximation. For the Seattle Seahawks and the NFL in general, there are no Using these numbers, we can calculate a Puget Sound preseason games. Season ticket holders have been offered a employment multiplier of 1.68. What this means is that on refund or credit towards their 2021 season ticket renewal. As average, for every 1 job lost in the “sports” industry within for the Seattle Mariners, there are 60 games in total and all the Puget Sound, an additional 0.68 jobs (or 27 hours a are on the West Coast, although many have been cancelled week of paid work) will also be lost. Along the same line of due to COVID-positive players. To makeup for the loss of thinking, the GDP contribution multiplier (1.76) indicates ticket sales and minimal games, the Seattle Mariners are that on average, for every 1 dollar lost to Washington’s GDP offering their fans to buy a cardboard cutout of an image of from declining revenue in the “sports” industry, another themselves or a family member, or a beloved pet. The Seattle 76 cents would also be lost to Washington’s GDP through Storm’s season only has 22 games this season and their lowered business activity and household spending. You can games are played within a “bubble” to restrict the spread of use these multipliers to create a rough estimate of the impact COVID-19. of COVID-19, via the sports economy, on the Puget Sound. As for soccer, the women’s team, Reign FC, will resume their For example, a loss of 5,000 jobs in the sector would equate to season September 5th. For the Seattle Sounders, the men’s a total loss of roughly 8,400 jobs across our region, using this team, their season has been ongoing with other teams being multiplier. pulled from the league if they have positive COVID tests. The These multipliers vary marginally across the Puget Sound Seattle Seawolves had their season canceled due to COVID-19. by county. Snohomish County is impacted the most by sports The new hockey team, the Seattle Krakens will join the NHL employment in this model, with an employment multiplier in the 2021 season. College sports are also affected, with UW of 1.69 and a GDP contribution multiplier of 1.93. Pierce is playing a conference-only football season this year. UW is the least impacted, at a marginally lower 1.65 employment looking at necessary cuts of $28 million or more in fiscal year multiplier and 1.88 GDP contribution multiplier. Full 2021, depending on how the winter football season plays out. multiplier results can be found in the table below. Here at the Forecaster we like to leave you with a bit of our Once data is available for 2020 – through the Employment own insight though, and so we used the economic impact Security Department’s Quarterly Census of Wages and modelling software IMPLAN to try and understand the Employment (QCEW) – the number of “sports” jobs lost will contribution of sports employment to the local economy. be available. Multiplying the lost jobs by the employment This ranges from coaches and scouts, sport agents, fitness multipliers provided here will give an estimate of the full instructors, people involved with gambling, to professional impact of that job loss across the Puget Sound economy. Look athletes. This analysis will not tell us what economic damage for that data and try on your economist hats!

Snohomish King County Pierce County Kitsap County County “Sports” Employment 25,600 2,913 2,500 800 “Sports” GDP Contribution $2.31 billion $0.20 billion $0.17 billion $0.05 billion Employment Multiplier 1.67 1.65 1.69 1.65 GDP Contribution Multiplier 1.73 1.88 1.93 1.9

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FORECAST DETAIL 60 Percent Probability

2020.1 2020.2 2020.3 2020.4 2021.1 2018 2019 2020 2021 Employment (thous.) 2208.9 1939.3 2016.6 2044.5 2061.5 2137.9 2186.6 2052.3 2114.4 Goods producing 325.1 283.0 302.1 302.6 304.9 314.6 323.0 303.2 311.7 Natural resources and mining 1.2 1.1 1.2 1.2 1.1 1.2 1.2 1.1 1.1 Construction 137.5 110.4 133.5 134.7 135.2 131.4 134.2 129.0 135.3 Manufacturing 186.4 171.6 167.5 166.8 168.6 182.0 187.6 173.1 175.2 Aerospace 84.2 79.6 73.3 73.3 73.3 79.7 84.5 77.6 73.2 Other durable goods 69.0 61.7 63.6 63.3 65.1 69.2 69.6 64.4 69.5 Nondurable goods 33.3 30.3 30.6 30.2 30.2 33.2 33.5 31.1 32.5 Services producing 1883.8 1656.3 1714.5 1741.9 1756.5 1823.3 1863.7 1749.1 1802.7 Wholesale and retail trade 336.7 310.8 321.3 325.0 327.5 326.7 332.8 323.4 331.6 Transportation and 80.3 73.5 74.4 72.4 74.2 78.4 79.0 75.1 77.6 public utilities Information 136.7 132.3 130.7 130.2 130.0 120.6 130.2 132.5 130.2 Financial activities 106.8 104.5 104.0 103.6 103.4 104.9 106.6 104.7 103.8 Professional and business services 316.7 296.6 306.3 306.8 308.3 302.7 310.4 306.6 317.5 Other services 592.9 441.6 483.4 512.2 523.4 579.4 595.4 507.5 549.1 Government 313.7 297.1 294.4 291.6 289.9 310.6 309.3 299.2 293.0 State and local 260.2 242.5 239.2 236.1 234.3 257.6 256.1 244.5 237.3 Federal 53.5 54.7 55.2 55.5 55.6 53.0 53.2 54.7 55.7

Unemployment rate (%) 3.8 13.8 9.2 8.6 8.2 3.7 3.4 8.8 7.2

Personal income (bils. $12) 280.0 307.9 294.1 276.9 275.9 267.8 275.8 289.7 277.5 Personal income (bils. $) 310.5 339.8 326.1 308.1 308.2 289.9 302.9 321.1 312.1 Wage and salary disbursements 176.5 176.2 180.8 184.8 186.6 163.6 172.0 179.6 189.7 Other income 134.0 163.6 145.3 123.3 121.6 126.3 131.0 141.5 122.4 Per capita personal income ($) 73495 80177 76699 72247 72022 70045 72285 75654 72599

Consumer price index (82-84=1.000) 2.821 2.808 2.829 2.843 2.854 2.710 2.781 2.825 2.880

Housing permits (thous.) 25.8 25.1 22.5 22.2 22.7 26.1 27.2 23.9 23.2

Population (thous.) 4224.6 4238.3 4251.3 4264.9 4278.7 4137.9 4190.8 4244.8 4299.1 Net migration (thous.) 35.0 31.1 28.6 30.6 31.5 30.6 27.6 31.3 30.2

Three-month treasury bill rate (%) 1.1 0.1 0.1 0.1 0.2 2.0 2.1 0.4 0.2 Conventional mortgage rate (%) 3.5 3.2 3.3 3.4 3.5 4.5 3.9 3.3 3.5

Annual growth (% change)

Employment 1.9 -48.8 15.9 5.5 3.3 2.3 2.3 -6.1 3.0 Personal income (cur. $) 6.1 37.8 -16.2 -22.0 0.0 6.1 4.5 6.0 -2.8 Consumer price index 4.4 -1.9 3.0 2.0 1.6 3.2 2.6 1.6 1.9 Housing permits -23.3 -11.4 -40.1 -6.0 8.8 -5.7 4.3 -12.1 -3.1 Population 1.4 1.3 1.2 1.3 1.3 1.4 1.3 1.3 1.3 8 • THE PUGET SOUND ECONOMIC FORECASTER

the border restrictions, daily cross-border passenger volumes The COVID-19 Border at the Cascade Gateway have remained at around 98% below typical volumes. Restrictions and Cascadia From studies conducted at the Cascade Gateway land Laurie Trautman, Ph.D. crossings, it is estimated that over 7 million Canadian visits Director, Border Policy Research Institute at WWU were made to Washington in 2019. Over 80% of those visits were for discretionary purposes such as shopping, vacation, On February 29, 2020, the first death from COVID-19 and recreation. Since all of these trip purposes are considered occurred in Washington State. Over the weeks following, both ‘non-essential,’ and currently prohibited, this is by far the Washington State and British Columbia implemented various most visible impact on our state’s economy from the border efforts aimed at reducing the spread of the virus. These restrictions. The nature and extent of these impacts are state and provincial measures aimed at limiting mobility disproportionate across the state, and have the greatest overlapped with the bilateral decision by the U.S. and Canada impact on particular sectors and locations. to limit cross-border travel. The border restrictions, which For example, Canadian shoppers have a significant impact went into effect on March 21st, placed limits on all ‘non- on Whatcom County’s taxable retail sales revenues. Studies essential’ passenger travel between the two countries, while conducted by the Border Policy Research Institute estimate maintaining the flow of commercial cargo. Such restrictions that retail sales in Whatcom County fell by $54-$65 million in have never before been implemented between the U.S. and Q1 and Q2 of 2020 solely due to the COVID-19 pandemic and Canada and their impacts are considerable. associated border restrictions, representing a 5%-6% decrease in total retail sales compared to 2019. The small towns The Washington – Canada Relationship of Blaine and Sumas receive additional tax revenues from Washington State has long enjoyed a very close trade Canadians buying fuel and picking up mail order purchases. relationship with our neighbors to the north. In 2019, Canada Preliminary estimates suggest that at least an additional $40 was our top trading partner, receiving 14% of state exports million is spent annually by Canadians on food, lodging, and and supplying 28% of state imports. Even though commercial travel in the County. traffic is unaffected by the border restrictions, truck traffic dropped by 20% following the restrictions, largely as a result An Uncertain Future for Cross-Border Travel of supply chain disruptions and weakened consumer demand. While the true impact of the border restrictions remains Truck volumes have since increased and are currently near to be seen, it is clear that we are facing both short-term and typical volumes. However, trade value remains lower than long-term consequences. The former have direct impacts on normal. retail spending, tourism, families, and property owners while The relationship between Washington State and Canada is the latter could lead to adjustments not just in consumer of course about much more than just trade flows. Every year, spending and tourism, but in foreign direct investment and millions of Canadian visits are made across the border by real estate ownership. In addition, the business partnerships tourists, business travelers, property owners, and families. In and collaborative relationships that have built up over time 2019, travelers entered Washington from British Columbia could weaken from a lack of face-to-face interaction. This can (B.C.) via a diverse network of cross-border infrastructure affect trade scenarios and other business negotiations that including air service, Amtrak require trust and relationship building. Cascades rail, the Coho Ferry, Victoria Clipper, and Figure 1. Northbound Passenger Vehicle Volume Washington State Ferries. in the Cascade Gateway With the exception of air travel (which is not subject 8 1.1 to the restrictions on non- 1 essential travel), all of 6 these routes are currently 0.9 suspended. There are also 4 five ports-of-entry in the 0.8 2 region, collectively known as 0.7 the ‘Cascade Gateway’. Last Vehicles of Millions year, over 12 million people 0 0.6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Exchange Rate (CAD/USD) entered Washington State through these land ports. Year Since the implementation of US Vehicles CAN Vehicles Exchange Rate [email protected] • 360-650-3909 CENTER OF ECONOMIC AND BUSINESS RESEARCH • 9

It is difficult to predict how the border restrictions and the COVID-19 pandemic will influence cross-border travel WA State Economy in years to come. Historically, the exchange rate between Steve Lerch the U.S. Dollar (USD) and Canadian Dollar (CAD) has been a Executive Director & Chief Economist powerful determinant of Canadian crossing volume, though Washington State Economic and Revenue Forecast its power has varied throughout time (Figure 1). For example, the relationship between the exchange rate and Canadians The Washington Economic and Revenue Forecast Council crossing weakened in the years following 9/11. This highlights released a preliminary economic forecast on September 3rd how external events and policy responses can influence cross- (available on the ERFC website erfc.wa.gov); a final economic border flows. This correlation has again been disrupted with and revenue forecast will be released on September 23rd. The the COVID-19 health crisis. COVID-19 pandemic continues to have a large impact on It is possible that the border restrictions will remain in place the Washington economy and creates a substantial degree of long enough for Canadians to adjust their shopping habits uncertainty in regard to this forecast and consumer behavior to re-orient away from cross-border travel. At the time of writing, the restrictions have been in Interest Rates place for five months, with no timeline or discussion by either Since the previous (June) forecast, the Federal Reserve has government to ease them. With the upcoming federal U.S. maintained the federal funds rate in a range of 0% – 0.25%; election, high infection rates in the U.S., and strong Canadian we assume this will continue to be the case through the end of public opinion in favor of maintaining the restrictions, it is our forecast period in 2025. unlikely that we will return to a fully functioning border prior to 2021. That said, anything can happen. Fed Funds Rate 6

Cross-Border Collaboration in Action 5 Although the lack of engagement at the federal scale 4 is discouraging, there is a great deal of commitment and 3 perseverance by local and regional actors to continue to Percent collaborate across the border and advance solutions to the 2 current crisis. Organizations such as the Cascadia Innovation 1 Corridor (CIC), which have supported robust cross-border 0 networks across sectors continue to highlight the ways that the region is stronger together. With the support of Microsoft 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3 2018Q2 2019Q1 2019Q4 2020Q3 2021Q2 2022Q1 2022Q4 2023Q3 and leadership of B.C. Premier John Horgan and Washington September June Governor Jay Inslee, the CIC has created cross-border linkages Oil in the health sciences, higher education, and transportation, Oil prices are slightly higher than expected in the June including a cross-border high-speed ground transportation forecast but also decline slightly more rapidly. The latest study. The border restrictions, which created an urgent need futures prices indicate that the refiner acquisition price of to incorporate public health data into the border screening crude will average $43 per barrel in the fourth quarter of 2020 process, are bringing together the tech talent in Seattle and compared to $39 in the June forecast. By the fourth quarter Vancouver with the border expertise at the Pacific Northwest of 2025 the refiner acquisition price of crude is expected to Economic Region and Border Policy Research institute to average $50 per barrel compared to $49 per barrel in the June develop solutions to the restrictions. Such solutions have the forecast. potential to establish global standards and be exported to Refiners' Acquisition Price - Oil other border regions around the world. Much work remains to $140 be done. $120

$100 U.S. Census Bureau U.S. Bureau of Transportation Statistics $80 Border Policy Research Institute, "COVID-19 and the US-Canada Border: Canadians

$/Barrel $60 and Taxable Retail Sales within Whatcom County" (2020). Border Policy Research Institute Publications. $40 https://cedar.wwu.edu/bpri_publications/122. $20

$0 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3 2018Q2 2019Q1 2019Q4 2020Q3 2021Q2 2022Q1 2022Q4 2023Q3

September June

360-650-3909 • [email protected] 10 • THE PUGET SOUND ECONOMIC FORECASTER

WA State Economy continued... Washington Personal Income After completion of the June forecast, the U.S. Department Washington Nonfarm Employment of Commerce, Bureau of Economic Analysis (BEA) released We have two months of new Washington employment state personal income estimates for the first quarter of 2020. data since the June forecast was released. Employment According to these estimates, Washington personal income continued to rise in June and July following the historic rose from $503.1 billion (SAAR) in the fourth quarter of 2019 decline in April. Total nonfarm payroll employment rose to $506.3 billion in the first quarter of 2020. The reported 137,500 (seasonally adjusted) in June and July which was 2.6% growth rate (SAAR) in Washington personal income was 63,000 more than expected in the June forecast. Private the 19th largest among the states and District of Columbia services-providing sectors added 118,400 jobs in the two- and slightly exceeded the 2.3% growth rate for the U.S. as a month period. Construction employment increased by 10,700 whole. As has been the case for several years, Washington jobs and manufacturing added 1,600 jobs despite the loss of income growth was boosted by information (which includes 1,900 aerospace jobs. Government payrolls increased by 6,900 software publishing and other IT services such as internet jobs in June and July. We expect Washington employment publishing and web search portals) and retail trade (which to decline 11.0% this year, well down from the pre-COVID includes electronic shopping). On the other hand, there 1.8% growth we had expected in the February forecast. After was a sharp drop in durable manufacturing wages as most declining in the second and third quarters of 2020, we expect Boeing employees did not receive an annual bonus this year. employment to increase in the fourth quarter and continue Construction wages also declined in the first quarter. to increase through the forecast period. However, it will not reach levels expected in the pre-pandemic February forecast WA Personal Income until 2024. $600 We have also incorporated another quarter of benchmark $550 employment data from the Quarterly Census of Employment $500 and Wages (QCEW). The new QCEW data and other revisions $450 subtracted 2,900 (0.1%) from the estimated level of total $400 employment in May 2020. July employment is 60,100 (1.9%) $350

higher than expected in the June forecast because of the SAAR; Billions of Dollars$300 faster-than-expected employment growth in June and July. $250 After falling to an all-time low of 3.8% in February,

Washington’s unemployment rate increased to 16.3% in April. 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3 2018Q2 2019Q1 2019Q4 2020Q3 2021Q2 2022Q1 2022Q4 2023Q3 The April unemployment rate was a new all-time high in the September June series that dates back to 1974. In July, the unemployment rate was 10.3%; it is expected to average 9.0% for all of 2020. The Our personal income forecast for 2020 is higher compared unemployment rate is forecast to decline to 7.5% in 2021, to June. This is due to higher than expected actual transfer 5.9% in 2022 and 4.8% in 2023. payments such as stimulus checks but also due to the assumed passage of another stimulus package extending the additional $600 unemployment insurance payments WA Nonfarm Employment which expired in July and providing an additional stimulus 3,700 payment in September. When we finalize the September

3,600 economic forecast, we will revisit this assumption based on Congressional activity at that time. 3,500

3,400 Real Estate and Construction 3,300 Seattle-area home prices declined for a third consecutive Jobs 3,200 month in June following eleven consecutive increases. 3,100 According to the S&P/Case-Shiller Home Price Indices, 3,000 seasonally adjusted Seattle home prices decreased 0.2% in

2,900 June following declines of 0.2% and 0.3% in April and May.

2,800 The composite-20 index was unchanged in June. Seattle home prices were still up 6.5% over the year. In comparison, the

2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3 2018Q2 2019Q1 2019Q4 2020Q3 2021Q2 2022Q1 2022Q4 2023Q3 composite-20 index was up 3.5% over the year. In June, Seattle September June home prices were up 100% since the December 2011 trough and exceeded the May 2007 peak by 39%. The reported June figure is for the three months ending in June. [email protected] • 360-650-3909 CENTER OF ECONOMIC AND BUSINESS RESEARCH • 11

in June. However, this is still more than 24,000 jobs below WA Building Permits 2019 manufacturing employment. We expect manufacturing 70 employment to decline 2.6% in 2021 and average about 0.5% 60 growth annually in 2022 through 2025. 50 The disruption of airline travel is expected to reduce 40 demand for new aircraft for some time. Boeing has indicated 30 that there will be significant reductions in employment, 20 particularly in the commercial airplane division. As of July, 10 Washington aerospace employment had already declined by 0 6,300 since April when Boeing first announced major job cuts.

2007Q12007Q42008Q32009Q22010Q12010Q42011Q32012Q22013Q12013Q42014Q32015Q22016Q12016Q42017Q32018Q22019Q12019Q42020Q32021Q22022Q12022Q42023Q3 We assume a decline of another 9,300 aerospace employees

September June by the end of the year. The forecast makes no assumption concerning a possible consolidation of 787 production in South Carolina. Although well below the $7.3 billion average for the first three months of 2020, total statewide real estate sales ISM Manufacturing Index (seasonally adjusted) subject to the real estate excise tax have 80 trended up slightly from $4.8 billion in May $6.9 billion in 70 July. Current sales activity is similar to the levels of the first 60 50 half of 2017. 40

Washington housing construction declined in the second Percent 30 quarter but exceeded the June forecast. Washington housing 20 units authorized by building permits averaged 40,300 (SAAR) 10 in the second quarter of 2020, down from 49,800 in the first 0 quarter. Second quarter permits consisted of 17,800 single- 1/1/00 9/1/01 7/1/02 5/1/03 3/1/04 1/1/05 9/1/06 7/1/07 5/1/08 3/1/09 1/1/10 9/1/11 7/1/12 5/1/13 3/1/14 1/1/15 9/1/16 7/1/17 5/1/18 3/1/19 1/1/20 family units and 22,600 multi-family units. The June forecast 11/1/00 11/1/05 11/1/10 11/1/15 predicted 12,300 single-family units and 16,700 multi-family US WA units for a total of 28,900 units in the second quarter. Housing Exports construction remained moderate at the beginning of the third Washington exports declined over the year for a seventh quarter. In July, single-family permits improved to 23,600 consecutive quarter. Year-over-year exports decreased 42.9% units (SAAR) and multi-family units slowed to 17,400 for a in the second quarter of 2020. The large decline was mostly total of 41,000 units. because of transportation equipment exports (mostly Boeing We now expect housing permits for 43,800 units this year planes) which fell 83.7% over the year. The second quarter compared to our June forecast of 37,100. We expect housing of 2019 had already been severely depressed by Boeing’s permits to average 41,000 units per year from 2021 through suspension of 737 Max deliveries in March 2019. Second 2025, up from the average of 39,000 units in the June forecast. quarter exports of agricultural products decreased 2.8% Washington construction employment is expected to over the year and exports of all other commodities (mostly average 200,900 jobs this year, about 10,000 jobs more than manufacturing) declined 16.4% over the year. in the June forecast. We expect construction employment to decline to 198,200 jobs annually for 2021 through 2025. Year-over-year growth in export value, major trading partners 100% Manufacturing 80% The Institute of Supply Management - Western Washington 60% Index (ISM-WW) indicated declining manufacturing activity 40% 20% again after briefly indicating growth. The index, which 0% measures conditions in the manufacturing sector, declined to -20% 48.9 in August from 56.4 in July and 50.9 in June (index values -40% above 50 indicate growth while values below 50 indicate -60% contraction). The index was below 50 in March, April, and -80% May. The inventory and deliveries components indicated China Canada Japan South Korea All Other expansion in August while the employment component 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 indicated contraction. The production and orders components Data sources: were neutral at 50. Washington Economic and Revenue Forecast Council, Washington Department of Washington manufacturing employment is now expected Revenue, Washington Employment Security Department, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, U.S. Department of Energy, IHS-Markit, to be 269,500 in 2020 or 3,800 above the 265,700 expected WISERTrade, Institute for Supply Management

360-650-3909 • [email protected] 12 • THE PUGET SOUND ECONOMIC FORECASTER

adjusted for fraudulent claims. As of increased production after deliveries in Leading Index July, there are still 234,679 continued the single digits the past few months. claims (benefits received for more than Air travel demand has been hit hard by Rock Bottom? one week in a row). Compare this to pandemic, and as each month goes by In June, we titled our leading index 18,311 continued claims in the Puget recovery seems farther off. The closure article “A Long Way Down.” Well, it Sound in July 2019. It’s hard to conceive of 787 production at the Everett plant appears we have travelled the distance. of the level of unemployment. – which has been brought up but not The leading index fell 17.2 percent year- Consumer demand has also taken been confirmed – would severely curtail over-year in Q2 2020, its largest drop a hit, although there has been some economic recovery in the region. on record. This has brought the index surprising resilience. Our durable goods We hate to leave readers on a note down to the level it was at in 2012 – sales index fell 11.4 percent year-over- of doom and gloom, but it is a global erasing all the gains of the past decade. year in Q2 2020; this is largely due to pandemic after all. The best that can That news would be more sobering poor performance in April. In some be hoped for is a quick, effective, and if it was the least bit surprising. areas, retail sales are back at or above widely available vaccine. For now, keep The COVID-19 pandemic has so their pre-pandemic levels. This appears those masks on and help each other. fundamentally altered our daily to be a temporary phenomenon brought lives, from remote working for the on by government stimulus – early lucky few to an uncertain financial research indicates that legislation future for many low-income workers like the CARES act kept millions of in the hardest hit sectors. Even as Americans from falling below the Boeing Backlog-Delivery Ratio employment numbers began to slowly poverty line. 1.03 1987=1.00 creep up from the lows of April, One bit of good news last quarter 0.98 unemployment insurance claims was that online-help wanted ads had remained at historic levels. remained strong in our region, even 0.93 In fact, the largest contributor to into April. This demand has evaporated, with the total number of ads falling the decline in the leading index is the 0.88 mammoth number of unemployment from 110,000 in April to 66,500 in June. Our Boeing backlog-index actually claims. From April to June at least 0.83 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 530,711 initial claims were filed in our registered growth in Q2 (2 percent four-county region – this has been year-over-year) as the model projects Puget Sound Initial Claims for Unemployment Insurance

1987=1.00 Puget Sound Index of Leading Economic Indicators 1.03 0.98

1987=1.00 0.93 1.35 0.88

0.83

1.25 0.78 0.73 Note: series inverted 0.68 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1.15

Puget Sound Help-Wanted Advertising 1.10 1987=1.00 1.05 1.05

1.00 0.95 0.95

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0.85 0.85 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 0.80 Shaded areas show recessions. 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

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