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

Economic & Revenue Forecast

Presentation to the Joint Budget Committee

March 15, 2019

March 2019 Legislative Council Staff

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Economic Outlook

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2.6%

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8%

I III I III I III I III I III I III I III I III I III I III I III 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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

Economic activity continues to expand, but momentum has slowed

Contributions to Real U.S. Gross Domestic Product (GDP)

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

Real GDP

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Employment growth is slowing as the labor market tightens

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Data are through February for the U.S. and January for Colorado. Colorado U6 rates shown as four-month moving averages.

10.0% 8.2%

15.7%

6.3%

17.1%

2008 2010 2012 2014 2016 2018

95 100 105 110 115 120 125

2008 2010 2012 2014 2016 2018

Total Nonfarm Employment

Index 100 = January 2010

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

7.3% 3.8% 3.7%

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10% 20% 30% 40% 50% 60% 70% 80% 90% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018p

While labor force participation rates have risen, labor shortages persist in many industries

Source: U.S. Bureau of Labor Statistics. Annual data through 2018. Labor force as a share of the civilian population over age 16. p = Preliminary. *Data are not available after 2014.

25 to 34 years 35 to 44 years 45 to 54 years

65 years and older

16 to 19 years* 55 to 64 years 20 to 24 years

Colorado Labor Force Participation Rates by Age

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$23 $24 $25 $26 $27 $28 $29 $30 $31

Wages are rising, yet consumer activity has slowed

Colorado

United States

$27.55 $30.00

Real Average Hourly Earnings

2019 Dollars

Source: U.S. Bureau of Labor Statistics and U.S. Census Bureau. Data are inflation adjusted using the CPI-U average for all U.S. cities. Data are seasonally adjusted and through January 2019.

$350 $375 $400 $425 $450 $475 $500 $525 $550

Real Retail Sales

Billions of 2019 Dollars

United States

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Manufacturing activity has slowed considerably on lower crude oil prices and the global economic slowdown

20 30 40 50 60 70 80 2007 2009 2011 2013 2015 2017 2019

Source: Institute for Supply Management and Federal Reserve Bank of Kansas City. The Tenth District composite index is adjusted to the ISM scale.

54.2 ISM (U.S.) 51.0 Tenth District (Includes CO)

Contracting Expanding

February 2019

Manufacturing Activity Diffusion Indices

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$0 $20 $40 $60 $80 $100 $120 $140 $160 $180 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Trade tensions pose ongoing uncertainty for several industries, impacting supply chain, demand, and prices

Source: WiserTrade. Monthly exports, three month moving average.

Colorado Exports

Millions

U.S. Exports

Billions 2018 +3.3% 2018 +7.6%

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Contribution to Change in Colorado Exports

Year-over-Year Percent Change, 2018Q4 over 2017Q4

Tariffs and the global economic slowdown are dampening Colorado export activity

Source: WiserTrade.

• 3.0%

+2.0%

• 7.1% in 2018Q4 over

year-ago levels

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Home price appreciation has slowed considerably in the higher-cost areas of the state

FHFA Home Price Indices

Index 100 = January 2008

Source: Federal Housing Finance Agency (FHFA). FHFA data are seasonally adjusted data through 2018Q4.

70 80 90 100 110 120 130 140 150 160 170 180 2008 2010 2012 2014 2016 2018

Grand Junction

United States

Pueblo Colorado Springs

Colorado

Denver Greeley Boulder Fort Collins

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Economic Summary

Economic activity remains elevated but has slowed

• Growth will continue to moderate through 2021

– Labor market shortages will dampen business growth – Global economic slowdown

Uncertainties remain elevated

• Trade tensions, policy uncertainty, and slower

economic activity have led to a shift toward more cautious optimism among investors and consumers

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General Fund Budget Outlook

13

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

Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook

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

Gross General Fund Revenue

Billions of Dollars FY 2018-19: -$260.4M FY 2019-20:

• $249.4M

Change Relative to December

FY 2020-21:

• $168.9M

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Growth in wage withholding remains strong, while sales tax collections growth has slowed

$100 $150 $200 $250 $300 $350 $400 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Source: Colorado Office of the State Controller and Department of Revenue. Monthly collections shown on a cash basis. February data are preliminary.

Millions Millions $200 $300 $400 $500 $600 $700 $800 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2018-19

FY 2017-18 FY 2016-17

Monthly State Revenue Collections

Wage Withholding Sales Tax Collections

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$0 $200 $400 $600 $800 $1,000 $1,200 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2018-19

FY 2017-18 FY 2016-17

Estimated payments of individual income tax are the largest source of General Fund forecast volatility

$0 $200 $400 $600 $800 $1,000 $1,200 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Estimated Payments

Source: Colorado Office of the State Controller and Department of Revenue. Monthly collections shown on a cash basis. February data are preliminary. *Wage withholding, estimated payments, and cash with returns, minus refunds.

Millions Millions

TCJA Impacts: Income shift into 2017 tax year

Monthly State Revenue Collections

Net Individual Income Tax*

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

Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook

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

Gross General Fund Revenue

Billions of Dollars FY 2018-19: -$260.4M FY 2019-20:

• $249.4M

Change Relative to December

FY 2020-21:

• $168.9M

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

Revenue growth is expected to moderate throughout the forecast period

Gross General Fund Revenue

Billions of Dollars

14.1%

4.0% 3.7% 2.8% Year-over-year growth

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

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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 March 2019 forecast.

Revenue Subject to TABOR

Dollars in Billions Referendum C Five-Year Timeout Period

Referendum C Cap TABOR Limit Base Expected TABOR Surpluses $18.5M $64.8M

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$0 $10 $20 $30 $40 $50 $60 $70 2017-18 2018-19 2019-20 2020-21

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: 2018-19

2019-20 2020-21

No Surplus

Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. *This amount includes the $18.5 million FY 2017-18 surplus and $21.3 million in under-refunds from the FY 2014-15 surplus.

Dollars in Millions $39.8M* $64.8M No Surplus

Reimbursements to Local Governments for Property Tax Exemptions

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Changes from December: +$76.0 million

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

Current Year FY 2018-19 General Fund Reserve

Dollars in Millions

Source: Legislative Council Staff forecasts based on current law.

9.9% Reserve $813.3M 7.25% Reserve Requirement $811.9M Surplus Above Required Reserve $296.7M 10.6% Reserve $372.7M

March 2019

Forecast

December 2018

Forecast

+$13.7 million in TABOR exempt Wells Fargo settlement moneys While revenue expectations were reduced, the budget situation improved.

• $41.7 million TABOR refund
• bligation on lower cash fund

revenue expectations

• $19.3 million spending

from FY 2018-19 supplemental package

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Next Year FY 2019-20 Budget Outlook

General Fund available above FY 2018-19 appropriations to spend, save, or return to taxpayers

$1.18 billion*

Source: Legislative Council Staff March 2019 forecast based on current law and FY 2018-19 appropriations.

*Reflects revenue expectations and transfers required under current law for FY 2019-20. Since a budget has not yet been set for FY 2019-20, this amount assumes FY 2018-19 appropriations and reserve requirements. Any changes to current law, including FY 2018-19 appropriations, will result in changes to this amount.

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Risks to the Forecast

• Elevated uncertainty in FY 2018-19 and FY 2019-20

– Expect surprises as taxpayers adjust to federal tax policy changes – Out-of-state sales tax collections pose upside risks

• With close proximity to the Referendum C cap…

– Upside surprises mean (larger) TABOR refunds – Downside surprises mean fewer funds available

• Longer-term risks are skewed to the downside

– Slower growth and rising risk of recession as the economic expansion matures

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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