November 2016 Monthly Briefing
ECONOMY: RETURN OF FISCAL POLICY
Edward H. Boss Jr., Chief Economist
After depending on the Federal Reserve to stimulate the economy, it appears that fiscal policy may take its place. Dependence on monetary policy through manipulation of interest rates operates with a significant lag whereas fiscal policy, through cutting taxes and/or increasing government spending, has a more direct impact. After years of targeting zero to near zero interest rates, the policy did little to lift economic growth. Even with improvement expected in the final quarter, GDP growth is likely to be around 2%, the weakest in all but 2 of the past 7 years. Savers, particularly the elderly, have been punished by a low return on their C/Ds and treasury securities while pension funds return well below that assumed by actuaries.
The Fed set guidelines as to what it wanted to achieve, an unemployment rate of 5% and inflation at 2%. The unemployment rate in November was 4.6% and has been 5% or lower for 14 months. Consumer prices rose 1.6% from a year earlier while the core rate, which excludes food and energy, was up 2.1%. Upward revisions to retail sales, coupled with forecasts of an increase in holiday sales auger well for further improvement. In addition, Consumer Sentiment is at its highest since July. Adding credence to rising confidence is the post-election upward movement in the stock market. The optimism is thought to emanate from policies that would reduce tax rates, repatriate vast sums of U.S. corporate funds held abroad, reduced regulations, and increasing infrastructure spending.
Should these actions lead to acceleration in growth, further increases in interest rates and prices would follow. However, the money supply has been rising at a rapid pace while the velocity, or turnover of money, has decreased since 2007. This means consumers and firms are holding on to cash instead of spending. As confidence is restored and velocity picks up, the sharply rising supply of money will begin to put upward pressure on prices. Since monetary policy operates with a significant lag, the Fed will have to be alert so as to avoid rapidly rising prices which, once taken hold, are difficult to reverse.
REVENUE: NOVEMBER RETURNS WEAK AS CONCERN GROWS
Jim Muschinske, Revenue Manager
Overall base revenues fell $159 million in November largely due to yet another extremely low federal source receipting month. While personal income tax managed to post decent gains for the month, they were offset by feeble performance of corporate income tax and weak sales tax revenues.
With almost half of the fiscal year completed, base receipts are down $607 million through November. Last month’s briefing mentioned concern with FY 2017 revenue performance—that concern continues to grow. Unfortunately, the weakness is in the largest revenue sources such as income and sales taxes, thereby limiting the State’s ability to engage in reimbursable spending, resulting in very poor federal source performance.
In late October, the GOMB released a five-year budget forecast which contained an updated FY 2017 revenue estimate. The following table depicts the differences between the GOMB’s revised forecast and the Commission’s July estimate. As shown, the Commission remains lower in the estimates of all of the major revenue categories. In total, the differences equate to $1.028 billion. When the income tax revenues diverted to the Fund for the Advancement of Education and Commitment to Human Services Fund are included, the differential grows further to $1.052 billion.