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

Economic & Revenue Forecast

Presentation to the Joint Budget Committee

September 20, 2019

September 2019 Legislative Council Staff

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Economic Outlook

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Longest, and weakest, expansion on record

100 110 120 130 140 150 160 170 180 190 200 1 2 3 4 5 6 7 8 9 10

• Dec. 1983 to June 1990
• Apr. 1991 to Feb 2001
• Dec. 2001 to Nov. 2007

July 2009 to Present $14 $15 $16 $17 $18 $19 $20 $18,912.3

Source: U.S. Bureau of Economic Analysis and Congressional Budget Office. Source: U.S. Bureau of Economic Analysis.

Real vs. Potential GDP

Trillions of dollars

Index of GDP Growth During Expansions

100 = Start of expansion

Years of Expansion

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2.0%

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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

Consumers still hitting the gas, while businesses hit the brakes

Contributions to Real Gross Domestic Product (GDP)

Annualize Change over the Prior Quarter

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

Real GDP

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2009 2011 2013 2015 2017 2019

95 100 105 110 115 120 125

2009 2011 2013 2015 2017 2019

Employment growth remains strong, pressuring labor markets

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Colorado U6 rates shown as four-month moving averages. Nonfarm employment estimates include estimates of revisions expected by LCS as a part of the annual rebenchmark process.

Total Nonfarm Employment

Index 100 = January 2010

U.S. Colorado Underemployment (U6) Unemployment (U3)

7.2% 3.7% 2.9% 6.6%

17.1% 10.0%

Colorado U.S.

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$24 $25 $26 $27 $28 $29 $30 $31 2007 2009 2011 2013 2015 2017 2019

And pushing wages higher

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Adjusted for inflation using the CPI-U for all urban areas.

Real Average Hourly Earnings

2019 Dollars U.S. Colorado $28.11 $30.41

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1.8% 2.4%

• 4.4%

1.7% 2.8% 1.0%

• 1.1%

3.5% 1.3% 2.4% 2.3%

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

• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7%

2009 2011 2013 2015 2017 2019

Inflation is slowly picking up speed

Source: U.S. Census Bureau. Seasonally adjusted.

CPI-U Inflation, U.S. City Average

Year-over-Year Change in Prices

August 2019 over August 2018

Headline Core

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80 85 90 95 100 105 110 115 120 125 $0 $50 $100 $150 $200

U.S. Exports

Millions of Dollars

Goods Services

A strong dollar helps consumers, hurts exporters

Source: Federal Reserve Board of Governors & Bureau of Economic Analysis (balance of payments basis). Seasonally adjusted.

Trade Weighted U.S. Dollar

Index of the Dollar to Foreign Currencies Appreciating Depreciating

Broad Index

Major Currencies

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Tariffs are hurting some Colorado exports

• 79.8%
• 75.9%
• 56.0%
• 44.5%
• 38.4%
• 37.4%
• 23.3%
• 10.3%
• 6.4%
• 5.8%
• 5.8%

4.4%

Whiskey Cheese Wheat Corn Rawhides and skins Beer Vegetables, roots, and tubers Electrical machinery Total exports Industrial machinery Beef Pork Total exports

• 6.4%

Change in Colorado Exports

Year-over-Year Change, January through July 2019

Source: WISERTrade.

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

Contracting Expanding

Manufacturing activity contracted in August

Source: Institute for Supply Management.

Institute for Supply Management Indices

Diffusion Index Manufacturing Business Activity

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$100 $200 $300 $400 $500 $600 85 90 95 100 105 110 115

Industrial production and new orders have slowed

Source: Federal Reserve Board of Governors & U.S. Census Bureau.

Industrial Production Index

Index 2007 = 100 Durable Goods Industries All Industries

New Manufacturers’ Orders

Billions of Dollars

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Yield curves have inverted

• 1%

0% 1% 2% 3% 4% 5% 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 10-Year Minus 3-Month 10-Year Minus 2-Year

Source: Federal Reserve Bank of St. Louis.

Spread in U.S. Treasury Yields

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1 2 3 4 5 Multi-Family

Multi-Family Single-Family

Colorado’s housing markets are evening out

Source: U.S. Census Bureau. Seasonally adjusted three-month moving averages.

Colorado Housing Permits

Thousands of Units

80 100 120 140 160 180 200 220 240 260 280 2009 2011 2013 2015 2017 2019

10-City Composite 20-City Composite CO-Denver

Case-Shiller Home Price Indices

Index 100 = January 2000

Source: S&P Dow Jones Indices, LLC.

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Oil prices settled down after the September 14 spike

Source: Energy Information Administration (weekly average prices).

West Texas Intermediate Crude Oil Price

Dollars per Barrel

$0 $40 $80 $120 $160 $0 $20 $40 $60 $80 2015 2017 2019

Since January 2015

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Economic outlook through the forecast period

Growth will continue, but at slower rates

• Labor markets will remain tight, constricting growth
• Business investment and industrial production will

remain soft with ongoing trade uncertainties

• Lower interest rates will give a slight boost to the

housing market Elevated recession risk based on recent business and financial indicators

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Risks to the Economic Outlook

Upside risks:

• Resolution to trade policy uncertainty
• Uptick in global growth; resolution to Brexit
• Monetary and fiscal policy stimulus

Downside risks:

• Weakening business and consumer confidence
• Geopolitical risk and uncertainties
• Sovereign and corporate debt levels

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General Fund Budget Outlook

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What has changed since June?

New information

• Preliminary, unaudited FY 2018-19 collections

– Lower collections than expected ($76.1 million lower)

• Updates to 2019 legislative impacts

Changes to the revenue forecast

• Slight reductions in revenue expectations

– Only two months of data for FY 2019-20

• Higher recession risk, based on leading indicators

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$4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $4 $6 $8 $10 $12 $14

Forecast General Fund revenue was reduced slightly relative to June expectations

Source: Colorado Office of the State Controller and Legislative Council Staff September 2019 forecast.

Gross General Fund Revenue

Billions of Dollars

Change Relative to June Expectations FY 2018-19: –$76.1M FY 2019-20: –$76.3M FY 2020-21: –$120.9M

3.0% 2.7% 3.1%

14.1%

Year-over-Year Growth

7.2%

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$7 $8 $9 $10 $11 $12 $13 $14 $15 $16

TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff September 2019 forecast.

Revenue Subject to TABOR

Dollars in Billions Referendum C Five-Year Timeout Period

Referendum C Cap TABOR Limit Base Expected TABOR Surpluses

$169.7M

$428.3M

$18.5M

$264.3M $142.9M $134.5M

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TABOR Refund Mechanisms

Reimburse Local Gov’ts for Property Tax Exemptions Up to ~$160 million

TABOR Refund Obligation

If ~$430 million+ Temporary Income Tax Rate Reduction Next ~$270 million If the refund is large enough to fund the first mechanism and the rate reduction Sales Tax Refund Any remaining

#1 #2 #3

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$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2018-19 2019-20 2020-21 2021-22

Expected TABOR Refunds & General Fund Budget Impacts

TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year

TABOR Surplus & Set Aside: Refunded in Fiscal Year: 2019-20

2020-21 2021-22 2022-23

Source: Colorado Office of the State Controller and Legislative Council Staff September 2019 forecast. *This amount includes $0.1 million in underrefunds from the FY 2014-15 surplus.

Dollars in Millions $428.5M*

Income Tax Rate Reduction Reimbursements to Local Govts for Property Tax Exemptions

$264.3M $142.9M $134.5M

Sales Tax Refund Mechanism

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

Changes relative to June: +$28.5 million

Last Year FY 2018-19 General Fund Reserve

Dollars in Millions

Source: Legislative Council Staff forecasts based on current law.

10.0% Reserve $814.2M 7.25% Reserve Requirement $814.2M Surplus Above Required Reserve $303.3M 10.2% Reserve $331.8M

September 2019

Forecast

June 2019

Forecast

Changes reflect updates to 2019 legislative impacts Lower revenue expectations are absorbed by the TABOR surplus

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

Changes relative to June: +$24.1 million

Source: Legislative Council Staff forecasts based on current law.

8.1% Reserve $870.3M 7.25% Reserve Requirement $871.1M Surplus Above Required Reserve $97.5M 8.3% Reserve $121.6M

September 2019

Forecast

June 2019

Forecast

Current Year FY 2019-20 General Fund Reserve

Dollars in Millions

Changes reflect updates to 2019 legislative impacts Lower revenue expectations are absorbed by the TABOR surplus

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• $100

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

• $100

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

Next Year FY 2020-21 Budget Outlook Scenarios

Amounts above or below the required 7.25% reserve. Incorporates the revenue forecast, current law transfers, rebates and expenditures, TABOR refund obligations, and the reserve requirement.

$833.4M

Source: Legislative Council Staff September 2019 forecast. *2020 population and inflation projections. **Appropriations growth over the past two economic expansions.

Hold FY 2019-20 Appropriations Constant Grow Appropriations by Inflation + Population Growth (3.2%)* Grow Appropriations by Historical Expansionary Growth (6.0%)**

$421.0M $56.6M

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Revenue scenarios in the late stages of economic expansion

Reacceleration or Overheating Economy Revenue $

Near-term Recession

This figure is for illustrative purposes and does not reflect actual state revenue collections.

We Are Here

Slowdown

(Current Expectations)

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Risks to the Forecast

• Upside risks

– Ongoing income tax base-building from federal tax law changes – Out-of-state sales tax collections

• Elevated risk of recession

– Slower growth as the economic expansion matures – Leading business and financial indicators flashing warning signs

• In the current TABOR refund situation…

– The TABOR limit will constrain revenue growth – Upside surprises mean larger TABOR refunds – Downside surprises mean greater budgetary pressures

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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