The state received a note of caution – with revenues on track but lower projected national economic growth – in the recent July Revenue and Economic Update from Minnesota Management & Budget (MMB). Here are our top takeaways:
1. FY 2016 ended with revenues slightly ahead of projections. State revenues in FY 2016 were $230 million, or 1.1 percent, higher than projected in the February 2016 Economic Forecast. The largest portion of these higher than expected revenues are from the corporate franchise tax, due to both higher payments and lower than projected refunds.
2. Lower national economic growth projected for 2016 and onward. Economic growth is now expected to slow to 1.9 percent, with slightly higher growth in 2017 to 2019. The start of 2016 showed some of the weakest economic growth in the past few years, due to several factors, including a struggling manufacturing sector and weak global economic growth.
3. It’s not all doom and gloom. Despite the lower projections, the U.S. economy is showing some positive signs, like higher consumer spending and greater housing activity. And despite last month’s vote by the United Kingdom to leave the European Union (often referred to as Brexit), national economic projections for the U.S. are still solid.
4. Economic forecasters are confident in their projections of economic growth. They only give a 20 percent chance for a more pessimistic scenario where a short recession is spawned by slower productivity and a deep decline in consumer and business confidence. They also assign a 15 percent probability to a more optimistic scenario where higher productivity and foreign growth boost the national economy.
5. The economic update is an important reminder that economic projections can swing. While they are only one factor in the state’s budget outlook, the weaker economic growth projections in the July update hint at smaller state budget surpluses.