Economic & Revenue Forecast Presentation to the Joint Budget - - PowerPoint PPT Presentation

Economic & Revenue Forecast

Presentation to the Joint Budget Committee

June 19, 2020

June 2020 Legislative Council Staff

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Economic Outlook

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• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8%

I II IIIIV I II IIIIV I II IIIIV I II IIIIV I IIIIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gov't Consumption & Investment Net Exports Gross Private Investment Personal Consumption Expenditures

The U.S. officially entered into a recession in March

Contributions to Real Gross Domestic Product (GDP)

Source: Bureau of Economic Analysis. Seasonally adjusted annual rates.

Real GDP

• 5.0%

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$14 $15 $16 $17 $18 $19 $20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Shape of Recovery

Real U.S. Gross Domestic Product

Dollars in Trillions

Source: U.S. Bureau of Economic Analysis and Legislative Council Staff projections, including projected 2020Q1 revisions. Real GDP is inflation-adjusted to chained 2012 levels and shown at seasonally adjusted annualized rates.

Projected Growth

Great Recession Current Contraction

2008: -0.1% 2009: -2.5%

2020: -5.7%

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10 20 30 40 50 60 70 80 90 100 $0 $100 $200 $300 $400 $500 $600 2006 2008 2010 2012 2014 2016 2018 2020

U.S. retail sales picked up in May

May Retail Sales Month-over-Month: +17.7% Year-over-Year: -6.3%

Source: U.S. Census Bureau, Advanced Retail Trade Report.

Monthly U.S. Retail Sales

Dollars in Billions

Total Retail Sales Online Sales

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30 40 50 60 70 2007 2009 2011 2013 2015 2017 2019

Contracting Expanding

While manufacturing and business activity remain in contractionary territory

Source: Institute for Supply Management.

Institute for Supply Management Indices

Diffusion Index Manufacturing Business Activity

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• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7% 8% 0.2% 1.2%

• 18.3%

4.0% 2.2%

• 7.9%
• 10.7%

4.9% 2.1% 2.1% 2.4%

Headline Core Energy Food Housing Apparel Transportation Medical Care Recreation Education Other

Deflationary risk outweighs inflationary pressure

U.S. City Average CPI-U Inflation

Year-over-Year Change in Prices

Selected Components, May 2020 Headline Core

1.2%

Source: U.S. Bureau of Labor Statistics. Inflation is calculated as the growth in urban area prices in a given period relative to the same period in the prior year. *Headline inflation includes all products and services. **Core inflation excludes food and energy prices.

0.2%

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0% 2% 4% 6% 8% 10% 12% 14% 1995 2000 2005 2010 2015 2020

Unemployment improved in May but remains at historic highs

Source: Bureau of Labor Statistics. Data are seasonally adjusted.

Unemployment Rates

Colorado April: 11.3% May: 13.3% U.S.

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Counties reliant on tourism have the highest unemployment

Source: Bureau of Labor Statistics.

April 2020 Unemployment Rates

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Dine-in restaurant service began to recover after restrictions were lifted

• 100%
• 80%
• 60%
• 40%
• 20%

0% 20% 40% 18-Feb 25-Feb 3-Mar 10-Mar 17-Mar 24-Mar 31-Mar 7-Apr 14-Apr 21-Apr 28-Apr 5-May 12-May 19-May 26-May 2-Jun 9-Jun 16-Jun

June 17

• 58.1%

Colorado Open Table Seated Restaurant Diners

Year-over-Year Percent Change

Source: Open Table.

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U.S. and Denver air travel still subdued

• 100%
• 90%
• 80%
• 70%
• 60%
• 50%
• 40%
• 30%
• 20%
• 10%

0%

March 2020 April 2020 May 2020 June 2020

U.S. TSA Passenger Traffic

Year-over-Year Change

June 16, 2020

• 83.1%

Source: Transportation Security Administration.

DIA Passenger Traffic

Year-over-Year Change

January 5.8% February 7.0% March -46.4% April

• 94.4%

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$0 $40 $80 $120 $160

Reduced travel activity continues to constrain oil markets

Source: Energy Information Administration.

12,000 14,000 16,000 18,000 20,000 22,000 24,000

U.S. Oil Supplied

Thousands of Barrels per Day

March 13 to June 12

• 19.4%

West Texas Intermediate Crude Oil Price

Dollars per Barrel

$37.32

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Outlook Summary

• Economic activity outperformed expectations in May slightly,

though the recession is still severe

• The recovery will impact economic sectors and geographic

regions differently

• Business activity and consumer spending will continue to improve,

but remain constrained by ongoing restrictions, health concerns, uncertainty, and some permanent closures

• Labor markets will remain weak in the industries most affected

by COVID-19-related closures

• Inflationary pressures will remain subdued as low energy prices,

low global demand offset global supply constraints

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Risks to the Forecast

Downside

• Strong resurgence of COVID-19
• Additional waves of layoffs
• Double-dip recession

Upside

• COVID-19 vaccine delivered sooner than expected
• Additional federal stimulus
• Structural shifts resulting in innovations

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General Fund Budget Outlook

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$4 $5 $6 $7 $8 $9 $10 $11 $12 $13

General Fund collections will decline with the contraction in business and household income, and reduced consumer activity

Source: Colorado Office of the State Controller and Legislative Council Staff June 2020 forecast.

Gross General Fund Revenue

Billions of Dollars Percentages show year-over-year changes

• 4.7%
• 9.5%

13.9%

• 15.5%
• 1.8%
• 13.0%
• 4.4%

Change Relative to May FY 2019-20: +$320.9 million FY 2020-21: +$526.1 million FY 2021-22: +$675.1 million

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Income taxes represent the largest and most volatile General Fund revenue stream…

Source: Colorado Office of the State Controller and Legislative Council Staff calculations. *Income taxes net of the State Education Fund diversion.

60.7% 27.1% 6.8% 5.5%

Individual Income Tax Sales & Use Tax Corporate Income Tax All other

Share of Total General Fund Revenue*

Based on FY 2018-19 Collections Income taxes also carry the greatest forecast risk with economic uncertainty, delayed filing deadlines, and state and federal policy changes.

*Six-year average of actual collections data, FY 2013-14 to FY 2018-19p.

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$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15 $16

TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff June 2020 forecast.

Revenue Subject to TABOR

Dollars in Billions Referendum C Five-Year Timeout Period

Referendum C Cap TABOR Limit Base TABOR Surpluses

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$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000

• $100

$100 $300 $500 $700 $900

• $100

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000

Changes relative to May: Revenue: +$320.9M on income tax policy changes Net transfer: +$145.1M on legislative changes Appropriations: -$281.3M with budget package Reserve: -$513.8M on lower reserve requirement, appropriations

Source: Legislative Council Staff forecasts based on current law.

3.07% Reserve Requirement

Current Year FY 2019-20 General Fund Reserve

Dollars in Millions

June 2020

Forecast

May 2020

Forecast Update

• $895.8M Deficit

7.25% Reserve Requirement

$364.7 million

Excess Reserve

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$0 $500

• $3,500
• $3,000
• $2,500
• $2,000
• $1,500
• $1,000
• $500

$0 1

Next Year FY 2020-21 Budget Outlook

May 2020

Forecast Update

June 2020

Forecast Changes relative to May: Beginning balance: +$746.6M carried over from FY 2019-20 Revenue: +$526.1M on income tax policy changes, slightly higher economic expectations Appropriations: -$1.44 billion lower than FY 2019-20 budget Net transfers: +$273.8 on legislative changes Reserve: -$571.7M on lower reserve requirement, appropriations

Source: Legislative Council Staff forecasts based on current law. *Amount holds FY 2019-20 appropriations constant and incorporates the May revenue forecast, current law transfers, rebates and expenditures, TABOR refund obligations, and the 7.25% reserve requirement.

• $3.3 Billion Shortfall*

2.86% Reserve Requirement

$272.7 million

Excess Reserve

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$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 1

Out Year FY 2021-22 Budget Outlook

Additional revenue available to spend or save above FY 2020-21 spending levels. Amounts hold FY 2020-21 appropriations constant and incorporate the revenue forecast, current law transfers, rebates and expenditures, and the 2.86% reserve requirement.

$1.34 Billion June 2020

Forecast This amount does not account for caseload growth or inflationary pressures

Source: Legislative Council Staff June 2020 forecast.

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$4 $6 $8 $10 $12 $14 FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22

General Fund Budget (Spending or Saving)

Source: Legislative Council Staff June 2020 forecast and current law.

Dollars in Billions

TABOR Refund

Appropriations

FY 2021-22 amounts hold FY 2020-21 constant

$1.34 Billion

Transfers Additional Revenue to Spend or Save Excess Reserve

Rebates & Expenditures

Required Reserve

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Risks to the Forecast

New Information

• Legislation from the 2020 Session
• 11 months of FY 2019-20 collections data
• Starting to understand how much economic activity declined and how

quickly we are bouncing back

Unknowns

• Extent of economic damage and its lasting effects
• Influence of the recession on income taxes
• Containment and treatment of COVID-19
• Additional fiscal and monetary policy changes

Downside risk: Prolonged economic recovery or a double-dip recession

(COVID-19 resurgence, vicious cycle)

Upside risk: Stronger near-term rebound in economic activity, less

damage to the economy than expected

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Unemployment Insurance Outlook

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Current State and Federal UI Benefits

* States are normally required to cover half the costs of extended benefit programs. However, this requirement was suspended during the Great Recession and has currently been suspended through 2020, allowing full federal funding for extended benefits. ** Expires July 2020.

Funding Source State State & Federal* Federal

Benefits Regular Extended Temporary Description Partial wage replacement for up to 26 weeks Extended benefits are triggered by persistently elevated state unemployment rates* Additional $600 per week for up to four months**; Extends eligibility to self-employed workers and independent contractors; up to 13 additional weeks of benefits Expires December 2020

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Impacts of Senate Bill 20-207

Key provisions reducing the forecast fund balance:

• Freezes the chargeable wage base at $13,600 for 2021
• Suspends the solvency surcharge for calendar years 2021 and

2022

Key provisions increasing the forecast fund balance:

• Increases the chargeable wage base incrementally beginning

in 2022 to $30,600 in 2026 and adjusts for changes in average weekly wages thereafter

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10 20 30 40 50 60 70 2006 2008 2010 2012 2014 2016 2018 2020

2019 Weekly Average: 1,900

Colorado Initial Unemployment Claims

Four-week Average, Thousands of Claims

Source: Colorado Department of Labor and Environment. Data are not seasonally adjusted.

April 2020 Weekly Average: 56,900 2009-2010 Weekly Average: 4,800 March 2020 Weekly Average: 21,450 May 2020 Weekly Average: 17,015

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Unemployment Insurance Trust Fund Revenues, Benefits Paid, and Fund Balance

Dollars in Millions Actual FY 2018-19 Estimate FY 2019-20 Estimate FY 2020-21 Estimate FY 2021-22

Beginning Balance

$922.3 $1,104.1 $74.6 ($1,606.8)

Plus Income Received UI Premium

$523.0 $531.5 $644.1 $713.5

Solvency Surcharge

$0.0 $0.0 $0.0 $0.0

Interest

$23.3 $21.1 $0.0 $0.0 Total Revenues $546.3 $552.6 $644.1 $713.5 Less Benefits Paid ($365.5) ($1,582.1) ($2,325.5) ($1,184.4) Ending Balance $1,104.1 $74.6 ($1,606.8) ($2,077.8)

Solvency Ratio* 0.87% 0.05%

• 1.10%
• 1.35%

Source: Legislative Council Staff June 2020 forecast. Totals may not sum due to rounding. *Fund balance as a share of total annual private wages.

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Questions?

Kate Watkins

Chief Economist • Legislative Council Staff kate.watkins@state.co.us • 303-866-3446 www.leg.colorado.gov/lcs