Commission on Government Forecasting and Accountability
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Robert Pritchard, Co-Chair
SENATE
Donne Trotter, Co-Chair
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March 2017 Monthly Briefing
ECONOMY: THE FEDERAL RESERVE REVISITED
Edward H. Boss, Jr., Chief Economist

Analysts gave low odds for another interest rate increase as early as March; however that is exactly what the Fed did at its mid-March meeting when it raised the federal funds target range to 0.75% to 1.00%. This led to a rise in lending rates; the bank prime rate was raised to 4%, the highest since 2008. The rate on 30-year fixed mortgages edged up, although it remains low on an historical basis. To date mortgage interest rates have yet to dampen sales of new single-family homes, which in February were 6.1% above January and 12.8% higher from a year earlier.

As stated in the minutes, “It is well understood that the impact of Federal Reserve policy on the economy operates with a significant lag sometimes up to 18 months. And because of that lag, policy actions to achieve certain employment and inflation objectives are often overshot.” Assessing the current reading on employment and inflation in relation to the Fed’s objectives, it appears that inflation would be of most concern, as once ignited, it has been difficult to contain. While the unemployment rate is at a low 4.8% rate, the labor force participation rate remains extremely low. The Fed’s preferred inflation target, the personal consumption expenditure rate less food and energy, edged up from 1.5% a year earlier to 1.7% this January while the core consumer price index rose 2.2% over a year ago and the all items index 2.7%.

The minutes concluded that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate. The timing of the increases is to be determined on economic conditions as reflected by incoming data. The median forecast of Federal Reserve Board members and Federal Reserve Bank presidents for the years 2017, 2018, and 2019 are: the unemployment rate 4.5% for each year; PCE inflation sequentially 1.9%, 2.0% and 2.0%; real GDP 2.1%, 2.1%, and 1.9% respectively. Under these conditions, the federal funds rate would be 1.4% this year, 2.1% next year, and 3.0% in 2019.

REVENUE: MARCH POSTS MODEST GAIN ON MIXED RESULTS
Jim Muschinske, Revenue Manager

Overall base revenues grew $139 million in March. More than half of the gain was generated from an uptick in federal sources, while the remaining increase reflected mixed results from the economically-related sources. Strong individual tax receipts in large part were erased by significant falloffs in corporate income taxes and weak sales tax receipts.

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Through the first three-fourths of the fiscal year, base receipts are off $1.315 billion, or 5.9%. Weakness is widespread, and resulted in year-over-year losses in key areas such as income taxes and federal sources. As mentioned in earlier briefings, with renewed weakness in sales tax performance, and with only three months left in FY 2017, it will be very difficult to alter the trajectory of what has turned into a disappointing year for revenues.

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The Commission met on March 7th to discuss updated FY 2017 revenue estimates as well as the FY 2018 forecast. In addition, the same information was presented to various Senate and House committees. The table on page 8 presents the latest forecasts. The estimate of FY 2017 revenues has been revised down $674 million to $30.209 billion. The FY 2018 outlook calls for base growth of $938 million, and a forecast of $31.147 billion. For a detailed presentation of the forecasts, including comparisons to the GOMB forecasts as outlined in the Governor’s proposed FY 2018 budget, please view the documents on the Commission’s website.