The recently released July Revenue and Economic Update gave us somewhat good news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that state revenues for the past fiscal year have come in slightly above expectations. It also reports that the national economy is expected to grow this year, but then that growth will taper off over the next few years.
Some of the top takeaways from the Update include:
1. State revenues are coming in above projections. A preliminary look at the state’s revenues for FY 2019, which ended on June 30, shows they came in $636 million above projections; that’s 2.8 percent more than projected in the state’s February 2019 Economic Forecast. The increase is primarily due to higher income taxes received. A complete picture of FY 2019 revenues will be in the October update.
2. Long-term economic growth is still expected to be low. The national economic forecasters have increased their predictions for national GDP growth for 2019, from the 2.4 percent predicted in February to 2.6 percent in the July update. Next year though, they still expect growth to start tapering off, reaching 1.6 percent in 2022. This slowdown is predicted given the context of slowing global growth, the effects of tariffs on businesses, and constrained employment growth from a tight labor market.
3. National unemployment rate expected to remain low for now. Nationally, unemployment was 3.7 percent in June, and is expected to drop to as low as 3.5 percent later this summer before drifting back up next year.
4. Forecasters are somewhat confident in their projections. The forecasters are less optimistic about their baseline scenario than in February. They assign a 55 percent chance that their baseline forecast is correct. They also give a 35 percent chance for a more pessimistic scenario in which there’s a recession next year, and assign a 10 percent probability to a more optimistic scenario. This reflects greater uncertainty than in February, when forecasters gave the baseline projection a 60 percent probability and the pessimistic scenario a 25 percent probability.
This week's Update brings us good short-term news: revenues are up, and the economy is growing at a good pace this year. However, lower economic growth projected in the future and a greater risk of a recession in the next year should give us pause. With potentially gloomy news in the future, policymakers should be focusing on strengthening the state's budget reserve. However, earlier this year policymakers decided to take almost $500 million out of the state's rainy day fund in 2021 to help fund the state's budget. This is an irresponsible budgeting choice that could mean that the state is drawing additional funds from the state's rainy day fund right when Minnesotans will need those funds the most.