State's October Economic Update says the recession is over, but times are still tough

In my last post, I talked about what kind of state budget deficits lie ahead, and said we would have more up-to-date information when Minnesota Management and Budget released their October Economic Update. That came out on Monday, and I thought this was worth quoting:

…[T]he longest and deepest recession since World War II almost certainly has come to an end…Forecasters no longer are debating when the recession will end. Their attention has turned to the question of what kind of recovery should be expected and how long it will take to regain pre-recession levels of output and employment.

The answers are sobering.

Few forecasters expect to see increases in U.S. payroll employment until after the first of the year and most expect the unemployment rate to move higher until early summer…Payroll employment is not expected to again reach pre-recession levels until 2012 and the U.S. unemployment rate is not expected to dip below 8 percent until 2013.

What does that mean for the state’s budget, past, present and future?

FY 2008-09, the biennium that just ended: Mid-July analysis estimated that FY 2009 would end with a $188 million surplus. That $188 million carries forward and helps balance the FY 2010-11 budget. The October Economic Update reports that general fund revenues came up $142 million below projections for FY 2009.

FY 2010-11, the biennium we’re in: In July, a balanced budget for FY 2010-11 was projected. However, these October figures estimate that we started FY 2010 with $142 million less than expected. The October Economic Update further finds that general fund revenues for the first quarter of FY 2010 were down $52 million, or 1.7 percent, from projections.

The Economic Update notes that IHS-Global Insight, the state’s economic consultants, is projecting a smaller decline in GDP in 2009 than previously. However, Global Insight is now projecting slower GDP growth in 2010 and 2011. Given that, I would not be surprised if there is an adjustment in the underlying economic model with lower economic growth when the November Forecast comes out, and as a result, a deficit for FY 2010-11. But that is speculation at this point.

FY 2012-13, the biennium to come: In July, the FY 2012-13 deficit was estimated by Minnesota Management and Budget at $4.4 billion. If the November Forecast does indeed include lower economic growth projections than previously modeled, a larger deficit for FY 2012-13 seems likely.

But again, take this with all the necessary caveats, cautions and grains of salt – these are figures based on one quarter of preliminary revenue data for FY 2010. A more comprehensive analysis awaits us when the November forecast is released.

-Nan Madden

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About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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