This is the third article in our 10 part series reporting on contract settlement trends. This article highlights some of the recent economic developments most likely to impact your negotiations outlook.
In our recent Blog, Jim Cline noted the relatively strong Seattle economy as contributing to the continued outpacing of the Seattle CPI over the All Cities CPI. The November 2016 “Economic and Revenue Update” from the Washington State Economic and Revenue Forecast Council (WSERFC) describes a strong Washington State economy:
- Significant increases in the Seattle housing market.
- Housing construction lower than expected
- Exports down from a year ago but up from the beginning of the year so there is a hope that things are turning around.
- Ongoing job growth with unemployment dropping from 5.8 in January to 5.6 in September 2016.
- Revenue collections in October for both the General Fund and Revenue Act taxes (sales, use, business and occupation, utility and tobacco products taxes) up from September and from a year ago.
The WSERFC Washington State Economic and Revenue Forecast, September 2016 predicts that the Washington economy will continue to outpace the national economy. (page 25). Numerous other reports seem to confirm this expectation.
As always, the most important variable for your contract is your local economy and your employer’s fiscal condition but the larger state and national trends have an immediate bearing on those and are worth an examination. WSERFC created a slide presentation with accessible presentations of recent and future Washington Statewide economic conditions:
Kiplinger’s October forecast for GDP growth rate describes the economy as “muddling along”. Weaknesses in the economy are matched by growth in other areas. GDP was up but attributed to exports which may not continue.
September to November 2016 reports from other sources indicate signs the U.S. economy is showing signs of stable growth; however, these indicators were measured prior to the results of the presidential election and only time will tell if they will hold:
- Manufacturing: October 2016 showed an increase in Manufacturing numbers.
- The Washington State and US September 2016 Unemployment Rate measured 5.6% and 5% respectively, both were 0.1% lower than the prior year.
- Consumer spending rose during the summer 2016 and did not take the usual dip in September but held steady at the August rate.
- Consumer confidence climbed in November 2016 to its highest level since June driven by an improved outlook on the economy.
- Retail Sales for October 2016 were up 0.8% from September and up 4.3% from October 2015. “The increase in October was above expectations and the previous two months were revised up; a very strong report.”
While these last few months are encouraging, the end of 2015 and first quarter of 2016 showed very slow growth. The economy is showing some movement but it is incremental and unsteady. Federal Reserve Board Governor Lael Brainard’s June 3, 2016 speech on the US Economic Outlook and Implications for Monetary Policy stated,
In recent months, financial conditions have eased, and there are encouraging signs that consumption has regained momentum. On the other hand, there are tentative signs of slowing in the labor market and risks remain.1 We cannot take the resilience of our recovery for granted.
Progress toward our goals of full employment and 2 percent inflation will depend importantly on solid growth in aggregate demand. Following disappointing gross domestic product (GDP) growth in the fourth quarter of last year and the first quarter of this year that averaged only 1.1 percent, I have been very attentive to incoming data, especially on consumption…
…the relative stabilization in the dollar and oil prices in recent months has boosted somewhat the likelihood of a return to 2 percent inflation over the medium term. However, the data on progress toward our inflation objective are equivocal. Measures of underlying inflation have yet to convincingly signal a move back to 2 percent, and inflation expectations appear low…
Brainard discusses mixed economic developments including a weakness in business investment and global demand as well as a decrease in unemployment and steady consumer spending. The decrease in productivity growth since 2009 is particularly concerning with the average growth of 2.25% being replaced with a post-2009 average figure of 0.5% per year.
Are we going to see inflationary growth in 2017? Since her speech, the United Kingdom’s Brexit referendum and U.S. election results are known, and these impending changes add uncertainty regarding the economy. The Wall Street Journal surveyed a group of more than 60 economists and 45% of them answered that the presidential election process introduced much more uncertainty into the markets and the economy. If the “somewhat more uncertainty” is added to the “much more uncertainty” survey responses the total is 86.8% of these 60 economists. Wall Street Journal, Economist Q&A Forecast Edition: November 2016.
Economists tentatively indicate that “proposals to reduce taxes and invest in infrastructure will amount to a substantial fiscal stimulus” with trade wars as the biggest economic risk. The likely changes implemented by the new administration could push the US economy into a higher growth pattern. The forecasts are that the economy could expand 2.2% in 2017 and 2.3% in 2018 as this stimulus is put in place. This would be up from a 1.5% over the last 12 months. However, quickly enacted restrictions on trade or immigration “could do swift harm to the economy”. Growth potential is present but uncertainty is high. WSJ, Josh Zumbrun, Nov. 13, 2016.