Signs of Stability After a Rocky Year
Washington’s Economic and Revenue Forecast Council (ERFC) released its final forecast of the year on Tuesday, and for the first time since spring, the news wasn’t as bad as it was in September. After two major drops in the June and September forecasts, this latest update shows things are starting to level off. We’re not in a recession, though the chances of one remain higher than usual, and the overall message was clear: the economy is cooling, but not crashing.
Economic Conditions: Slow Growth and Stubborn Inflation
The report highlighted several trends that have been developing throughout the year:
- Oil prices are lower than expected.
- Inflation remains higher than anyone would like.
- Most parts of Washington’s economy are growing, but very slowly.
Personal income is expected to grow slightly faster than earlier projected, but job growth continues to be a concern. Forecasters expect no job growth in 2026, with most industries shrinking except for health care and government. Construction and manufacturing have seen the biggest declines—down roughly 1.5% to 2% since last year—and other sectors like professional business services are also softening.
Housing activity isn’t much stronger. Permits for 2025 ticked up slightly, but the overall pace of growth remains sluggish.
Revenue Picture: A Small Steadying After Two Big Forecast Drops
After two sharp reductions earlier this year, state revenues appear to be stabilizing somewhat in the current biennium, although revenue is trending in the wrong direction for 2027-29.
Here are the highlights:
- 2025–27 budget: Up $101 million, though the General Fund is still down slightly.
- 2023–25 budget: Up $13 million.
- 2027–29 budget: Down $185 million in the General Fund.
The biggest change came from a downward revision in sales tax collections—nearly $100 million less than previously expected. Business & Occupation tax and use tax collections also dipped slightly. A routine tobacco settlement payment helped boost a few agency forecasts.
Retail sales showed a bit of life, growing 2–3%. That’s slower than normal but still a positive sign. Real estate excise tax collections also improved since the spring but have flattened out in recent months.
Jobs, Recession Signs, and What Comes Next
During the discussion, legislators focused on employment trends. Historically, slow job growth in Washington has aligned with national recessions, and while that pattern is concerning, forecasters emphasized that current indicators don’t show a recession underway—yet. One unusual dynamic is that the labor force has shrunk over the last four months, but unemployment hasn’t risen, something staff will be watching closely.
Lawmakers also asked which industries are slowing the most. The answer: construction and manufacturing are feeling the most pressure, while health care and government are the main sectors holding things up.
Looking ahead, forecasters said that unemployment data and labor-force participation will be key metrics when the next numbers come out in February.
Looking Ahead: What This Forecast Means for the Governor’s Budget and the 2026 Session
This is the last revenue forecast before Governor Bob Ferguson releases his proposed budgets in mid-December. Even though today’s numbers were steadier, they come on the heels of two major downturns. Because of those earlier drops, state budget writers are preparing for a multi-billion-dollar shortfall in the 2025–27 supplemental operating budget, with the state expected to fall into deficit by 2027 if nothing changes.
That means the upcoming 2026 legislative session will play a major role in deciding how to close the gap. The Washington State Standard recently reported that Senate Operating Budget Chair June Robinson has already warned lawmakers not to expect any additional operating budget spending this year. At this point, it’s unclear whether the Legislature will pursue an all cuts approach to the supplemental budget, look at new revenue options, or try a mix of both. Either way, the Legislature must leave Olympia in March with a balanced four-year budget.
One thing is certain: today’s steadier forecast offers a bit of breathing room, but hard budget conversations are still ahead when the Legislature reconvenes in January.