Monday’s October Revenue and Economic Update gave us some unwelcome news. The quarterly report from Minnesota Management and Budget (MMB) showed that while revenues for FY 2016 came in above projections, state revenues are starting to come in lower than expected, and forecasters have once again lowered their projections for national economic growth.
1. FY 2016 ends above projections, FY 2017 begins behind projections. FY 2016 ended on June 30, 2016, with revenues $220 million above projections; that’s $10 million less than reported in the July update. State revenues from the first quarter of FY 2017 were $97 million, or 2.1 percent, lower than projected in the February 2016 Economic Forecast adjusted for legislative changes.
2. Lower national economic growth projected for 2016 and onward. Expected U.S. economic growth for 2016 has been lowered to 1.4 percent. Real GDP growth is then expected to be above 2.2 percent each year from 2017 to 2019; these are lower rates of growth than prior projections. These new growth projections are associated with uncertainty around the outcome of the presidential election, whether the Federal Reserve will raise interest rates, and around OPEC’s oil production and pricing decisions. The impact of Hurricane Matthew is another source of uncertainty.
3. Unemployment remains low. Despite the slower economic growth projections, the economy is expected to continue to see low unemployment of 4.9 percent, a level that traditionally has been characterized as “full employment.”
4. This is the last update before the November Economic Forecast. The quarterly economic updates are helpful in giving us an idea of how revenues and the national economy stack up to previous projections. However, for a fuller picture, we look to the more comprehensive November and February economic forecasts, which project both state revenues and expenditures. The November Economic Forecast will give Governor Mark Dayton the baseline information he needs to put together his proposed budget for the FY 2018-19 biennium that he will release in January.