Last week’s January Revenue and Economic Update gave us some mixed news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that while state revenues for the end of 2016 came in below projections, national economic growth is now expected to be stronger for the next few years.
1. End of year 2016 revenues are below projections. November and December 2016 revenues came in $29 million below projections; that’s 0.8 percent less than projected in the November 2016 Economic Forecast. This is due primarily to lower than expected income tax receipts.
2. Higher national economic growth projected for 2016 and onward. U.S. economic growth for 2016 was higher than expected, due to growth in consumer and business spending. The new economic growth projections through 2019 consistently surpass the projections from the November forecast. However, the update notes that considerable policy uncertainty remains a risk to the economy and the accuracy of these projections.
3. The national economy is improving. The latest jobs numbers show that the U.S. labor market is getting close to full employment and recent wage gains are strong. Nationally, unemployment is expected to drop in 2018 and 2019.
4. Despite policy uncertainty, forecasters remain confident in projected economic growth. The forecasters assign a 65 percent chance to their baseline forecast. They also give a 20 percent chance for a more pessimistic scenario where the U.S. sees a recession in early 2018, in which various trade relations are compromised and global economies worsen. They assign a 15 percent probability to a more optimistic scenario where productivity growth improves due to business investment encouraged by policy changes and new technologies.
5. We’ll receive updated forecast numbers next month. The November forecast projected surpluses of $678 million for the remainder of the FY 2016-17 budget cycle and $1.4 billion for FY 2018-19. This week’s update suggests that we are likely to see surpluses again in the February forecast. Some data in the update point to the potential for a larger surplus, and some point to a smaller one. We’ll have to wait to see next month which trends have a larger influence on the overall numbers, as well as how expenditures come into play.