Commission on Government Forecasting and Accountability
Jil Tracy, Co-Chair
Michael Frerichs, Co-Chair
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June 2014 Monthly Briefing
Jim Muschinske, Revenue Manager

FY 2014 concluded on a positive note as overall receipts grew $259 million. The larger economic sources were mixed with the personal income tax and sales tax showing strength, while corporate taxes weakened. Other transfers had a poor month, but a comparatively strong month for federal sources significantly contributed to the monthly advance, as did one extra receipting day.
For FY 2014, base general funds finished up $654 million or 1.8%. Sales tax managed to post good gains throughout the fiscal year, finishing up $321 million. Other sources added $123 million to the overall yearly advance, due mostly to earlier one-time deposits of court settlement proceeds and prior year overpayments to SERS. While gross personal income taxes only grew $65 million, or $104 million net of refunds, underlying strong performance was hid by the April falloff related to the previous year’s “April Surprise”.

While the final tally for the fiscal year shows gains of only $654 million or 1.8%, that really doesn’t paint an accurate picture of the fiscal year’s success. Sales taxes performed well the entire year, and although the net changes in both personal and corporate income taxes were on the surface minor—those growth rates mask the impact of last year’s April surprise which had the effect of dramatically inflating one-time revenues in FY 2013. Given that perspective, and adding that the fiscal year finished $1.272 billion higher than originally budgeted, it’s clear that revenues performed very well in FY 2014.
The table on page 5 shows how the most recent CGFA estimate performed in relation to final figures. As shown, actual receipts finished very close to CGFA’s May-14 estimate, exceeding expectations by only $57 million. Also included in the table is a comparison of actual receipts to those estimated under HR 389, which was used as the revenue framework back in spring 2013 during the construction of the FY 2014 budget. As shown, that forecast was easily exceeded by actual revenue performance, as receipts exceeded the amounts spelled out in the resolution by $1.272 billion.

Edward H. Boss Jr., Chief Economist

Final revisions to Gross Domestic Product for the first quarter show economic growth plunged at a 2.9% annual rate, the steepest drop since the last recession. This compares to real GDP growth of 1.9% in 2013, 2.8% in 2012, 1.8% in 2011 and continues the weakest business recovery in the post WWII era.

The magnitude of last quarter's drop in growth surprised even the most pessimistic of market watchers. Particularly sharp was the deterioration in personal consumption expenditures falling from a growth rate of 3.1% reported a month ago, revised down to show only a 1.0% gain. Sectors with negative growth included: inventory investment, exports, state and local government spending and fixed investment.

Even before the release of the latest GDP data, the Federal Reserve reduced its economic projections for 2014, lowering its central tendency range of GDP growth to a range of 2.1 to 2.3, down from 2.8 to 3.0. The weaker outlook for this year, however, is expected to be temporary. GDP growth in 2015 is projected at 3.0 to 3.2, the same as last March.

According to improved business reports in recent months, economic growth resumed during the second quarter. Even so, the strength of any rebound could be at odds with those reports.

The largest component of GDP is personal consumption, and here there are some restraints. While the employment sector has shown improvement, real earnings fell in May for the third consecutive month while May's personal spending rose a modest 0.2% and adjusted for inflation decreased 0.1% following a decline of 0.2% in April.

While inflation remains low, food and energy prices that are not part of the core rate have been rising sharply while wars and unrest in the Middle East have increased uncertainty and driven up oil prices, particularly for gasoline just as the summer driving season gets underway.

In conclusion, it appears the key to faster growth once again lies with the consumer. It will take improving labor market conditions, both in terms of raising the number employed as well as increasing the labor force participation rate through reducing the number of discouraged workers while pursuing policies that achieve these goals.
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