January economic update shows good and bad news

State revenues are coming in much higher than expected. The January 2013 Economic Update from Minnesota Management and Budget told us that bit of good news. However, there’s some also not-so-good news.

First, the up side. For November and December of 2012, revenues were $114 million higher than projected, mostly due to an unusual increase in corporate income tax collections. However, the higher-than-expected revenues are believed to be one time, rather than due to increased economic activity. So we can’t read too much into these figures.

Now to the not-so-good news: Federal lawmakers reached a deal to avoid the fiscal cliff, but they still left much to be resolved at a later date. The major issue addressed in the update was whether they will increase the debt ceiling so the United States can meets its spending commitments. The update assumes that lawmakers realize the severity of the situation and that the ceiling will be raised, an assumption validated by recent actions at the federal level to suspend enforcement of the ceiling until May.

However, even assuming the debt ceiling is raised, the state’s macroeconomic consultants predict that the U.S. economy will grow in 2013, but more slowly than it did in 2012. They still project a 20 percent probability of a recession early in 2013.  They also project a 20 percent probability that the debt ceiling deal will go very smoothly and the economy will improve above expectations.

But that’s not the end of the story. On February 28, the February 2013 Economic Forecast will be released. This forecast will give state legislators the final financial numbers they will use when they construct the state’s FY 2014-15 budget. The Minnesota Budget Project will be releasing materials explaining what’s in the forecast when it comes out, so stay tuned!

-Caitlin Biegler

About Clark Goldenrod

Clark Goldenrod is the Minnesota Budget Project's senior policy analyst.
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