State forecast indicates economic slowdown will linger

By Brad Shannon | The Olympian • Published June 19, 2008

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The ongoing slowdown in the Washington economy will trim $50 million from the state’s expected reserves, dropping the state’s expected surplus to $801 million by next summer, forecasters said today.

Democrats called the forecast good news overall. But top state forecaster Steve Lerch said it appears the economic slowdown, led by a falloff in construction activity and drops in retail sales, might not reverse course until the end of the year.

“Housing is starting to come back later this year. We see that coming back not at an incredibly fast pace. But we do start to see a turnaround coming toward the end of this year,” Lerch told the Economic and Revenue Forecast Council’s quarterly meeting on Thursday.

“We are forecasting that Washington is not going to be in a recession. We are showing positive job growth throughout this forecast period but it is pretty weak,” Lerch added. “We are really looking at sort of a bigger turnaround out in the next biennium.”

The revenue announcement was important because it lets state budget writers know what parameters they are working with for next year’s spending plans. But it also set the tone for the summer campaign season, when Republicans are expected to emphasize that deficits are looming and Democrats could have to cut spending or raise taxes in future years.

“The new forecast clearly suggests revenue growth is continuing to settle down toward a normal level. Unfortunately, a more traditional level of revenue growth isn’t enough to uphold all the promises made over the past four years and the corresponding 33 percent increase in state spending,” Republican Sen. Joseph Zarelli of Ridgefield said in a statement released after the council’s meeting.

Zarelli called for caution in state spending and even a “soft” freeze on hiring by state agencies. Zarelli said the state faces a potential $2.5 billion shortfall in the next budget cycle and that he thinks the housing industry won’t start reviving until later in 2009.

Lerch’s forecast showed revenue collections will be $50 million less than predicted in February for the budget cycle that ends in June 2009; the drop-off is $166.8 million for the cycle ending in June 2011. Adding in the effect of law changes adopted by the Legislature this year, the total drop in future anticipated revenue is nearly $224 million.

Lerch’s report also predicted state revenue will grow at a 0.8 percent rate in the 2009 budget year, less than half what his predecessor ChangMook Sohn predicted in February. But Lerch said the rate could be 4.8 percent in 2010 and 5.3 percent in 2011, the latter rising from the earlier forecast of 4.6 percent.