March 2014 Monthly Briefing
ECONOMY: SPRING FORWARD?
Edward H. Boss Jr., Chief Economist
As spring officially began on March 20th and clocks turned ahead one hour, it was only the calendar that seemed to realize seasons had changed. The severe winter weather was a factor in a dramatic slowing in economic activity. After rising at a 4.1% annual rate in the third quarter of 2013, the final report for the last quarter of the year showed real GDP revised lower to 2.6%. And, the latest estimate by Global Insight has real GDP rising at an estimated 1.4% annual rate in the first quarter of this year. It takes consistent growth of 2.5% to 3% to significantly improve the employment situation.
A major sector affected was housing. Privately-owned single family units in February were 10.6% lower than a year earlier while new building permits were 2.0% below. The major question is whether these short falls can be recouped or whether something more fundamental exists. An upward increase in mortgage interest rates and higher prices have tempered interest from investors, while the affordability index for first time home buyers has decreased, limiting access to some potential purchasers. Finally, pending home sales now have fallen for eight straight months at a time when short sales and foreclosures are lessening, limiting the supply in the market. Consumer spending is by far the largest contributor to GDP and its ability to show renewed vigor may be limited. For example, real hourly earnings rose 1.5% in February from a year earlier, but when combined with a 1.5% decrease in the average workweek with more part time workers, real weekly earnings were unchanged from a year earlier.
Other than the weather, there are several risks to any sustained resurgence. On the policy front, monetary policy appears to continue to reduce its asset purchases at a specified pace. Fiscal policy proposals plan spending gains in many areas, although cutting defense reduces armed forces to their lowest level prior to WWII. At the same time Russia’s incursion into the Crimea and troop buildups in areas bordering Russia create great uncertainty. The U.S. imposed limited sanctions and threatens to increase them. Any Russian retaliation through limiting energy availability not only would weaken much of Western Europe but would have repercussions in the U.S. as well. And, Russia is not the only geopolitical issue, there remains China’s territorial dispute with Japan, the war in Syria, the Iran situation and the entire Middle East.
Despite all the possible factors that could slow the pace of economic activity, much of the country is anxiously awaiting spring, raising spirits. This may be reflected by the recent increase in Consumer Confidence released by the Conference Board for March to its highest level in six years. Thus, despite the doom and gloom experienced last winter, spring could spark an increase in economic activity. Whether this would be sustainable given the fundamentals, however, is still in question.
REVENUE: THIRD QUARTER ENDS ON POSITIVE PERFORMANCE – UNCERTAINTY LOOMS IN APRIL
Jim Muschinske, Revenue Manager
Overall base revenues grew $254 million in March. The larger economically related sources of income and sales taxes fared quite well. A one-time deposit of approximately $59 million from a prior year overpayment to SERS fueled other sources.
Readers of the monthly briefings will remember the “April Surprise” that occurred in 2013. A record month for income tax receipts and federal sources caused revenues to leap $1.521 billion that month.
To recap, in 2013, strong final and estimated payments stemmed from actions taken by taxpayers in efforts to minimize the tax consequences of the higher 2013 federal tax rates. Individuals shifted revenues they would have routinely booked in 2013 and later, into the end of tax year 2012, thereby reducing the effect of higher tax rates. Nationally, it was reported that many wealthy individuals sold investments, even businesses and homes, to avoid higher taxes. If able, some partnerships also distributed monies prior to the higher taxes. On the corporate side, businesses made sure bonus payments were done in 2012 rather than in 2013, also a number of companies were said to have accelerated income and dividends into 2012. The net action of all of those types of transactions caused a “bubble” of income tax receipts.
But that was then—what will be the consequence on this April’s receipts? That uncertainty was paramount in CGFA’s decision to delay revising its personal income tax receipt estimate in February. Despite a year removed, questions remain as to the exact nature of last year’s phenomenal growth: true “one-time” revenues, increased base growth, simply an acceleration of future revenues, or the most likely scenario of a mixture of the three.
To wrap up, despite occurring nearly a year ago, the “April Surprise” of 2013 carries with it considerable uncertainty. How revenues will ultimately be characterized in FY 2014 will largely be shaped by what occurs in the coming month.