November 2012 DNR Economic Revenue Forecast

by David Chertudi, DNR Economist

money tree economic forecast

U.S. Economy and Housing Market. The U.S. economy continues its plodding and sluggish recovery from the Great Recession. The unemployment rate, which peaked at 10.0 percent in October 2009, is down to 7.9 percent as of October and there are now 4.1 million more nonfarm jobs than at the end of 2009. GDP growth remains modest at below two percent on an annual basis through the first three-quarters of 2012. Manufacturing is now a weak link in the recovery but consumer confidence is perking up a bit. The housing market continues to show positive indicators: new housing starts in September were at a seasonally adjusted annual rate of 872,000, their highest level in over four years, and average U.S. housing prices have increased in each of seven months through August. However, the U.S. economy faces significant challenges. There are still too many unemployed workers, the European financial crisis drags on and many European countries are moving into recession, China’s economy is slowing, and Washington, D.C., is now turning its attention from the 2012 elections to addressing the so-called “fiscal cliff” with its many potential impacts to the U.S. economy.

Log and Lumber Prices. Pacific Northwest log prices have been flat in 2012 to date. The price for a “typical” DNR log delivered to the mill averaged $473/mbf over the first ten months of 2012, down from $481/mbf for all of 2011. West Coast lumber prices have been moving up through the year and they are up from last year: the Random Lengths’ Coast Dry Random and Stud composite lumber price averaged $303/mbf for the first nine months of 2012, compared with $270/mbf for all of 2011.

Timber Sales Volume. Projected timber sales volumes for FYs 2013-2017 are unchanged from the September Forecast. Timber sales volumes are forecast to be 560 mmbf for FY 2013 and 562 mmbf for FY 2014. Sales volumes for FYs 2015 through 2017 are predicated to be about 587 mmbf per year.

Timber Sales Prices. Predicted timber sales prices are also unchanged from the September Forecast. The FY 2013 average sales price is predicted to be about $280/mbf; timber sales prices have averaged $276/mbf in the first four months of FY 2013. Based on plans for the timber mix to be offered for sale and on increasing confidence in a genuine (albeit slow) recovery in the U.S. housing market, timber sales prices are projected to be about $315/mbf in FY 2014, $335/mbf in FY 2015, $319/mbf in FY 2016, and $308/mbf in FY 2017.

Timber Removal Volume and Prices. DNR timber purchasers indicate they will somewhat delay harvests on volume under contract compared with what they reported for the September Forecast; predicted timber removal volumes and prices have changed accordingly. Removal volumes for FYs 2013-2017 are forecast to be 490 (-48), 598 (+15), 617 (+15), 583 (+2), and 587 mmbf respectively. Projected timber removal prices are forecast to be $285 (+$2.0), $290 (-$0.9), $310 (-$.07), $325 (-$0.1), and $320/mbf for each of the fiscal years in the Forecast period.

Bottom Line for Timber Revenues. Due to change in the timing of removals, forecast timber revenues have changed, with the greatest impact felt in FY 2013. The timber revenue projection for the 2011-2013 Biennium is revised downward four percent from $320.1 million to $307.4 million. For the 2013-2015 Biennium, the projected revenue from timber removals is revised upwards two percent from $356.5 million to $364.7 million. Revenues for the 2015-2017 Biennium are predicted to be $377.3 million, up slightly from $376.8 million.

Uplands and Aquatic Lands Lease (Non-Timber) Revenues. In addition to revenue from timber removals on state  lands, DNR also receives sizable revenues from managing leases on uplands and aquatic lands. Compared to the previous Forecast, revenues from agricultural and other upland leases are unchanged at $24.7 million in FY 2013, $23.5 million in FY 2014, $23.9 million in FY 2015, $24.6 million in FY 2016, and $25.0 million in FY 2017. There is no change in the predicted $9.5 million in commercial lease revenues for FY 2013, or in any of the others years of the Forecast period, at $9.7, $9.9, $9.9, and $9.9 million respectively. Projected aquatic lands revenues in all years are increased by less than one percent to $29.9 million in FY 2013, $30.3 million in FY 2014, $31.2 million in FY 2015, $32.1 million in FY 2016, and $33.0 million in FY 2017. These increases reflect a very modest upward revision to expected geoduck auction prices in the coming years.

Total Revenues. Total 2011-2013 Biennium revenues are projected to be $448.0 million, down $12.5 million (three percent) from the September Forecast. For the 2013-2015 Biennium total revenues are projected to be $493.1 million, up $8.6 million (two percent) from the previous projection. Revenues for the 2016-2017 Biennium are expected to total $510.9 million, up $0.9 million from the September estimate.

Risks to the Forecast. The largest risk to the Forecast is falling short of projected timber sales volumes due to potential environmental and policy issues (e.g., timber harvest in marbled murrelet habitat and riparian areas).  Also on the downside are the many challenges to U.S. economic recovery cited in the opening paragraph above. On the upside, there is a chance that the recovery in the U.S. housing market will be quicker and stronger than anticipated.