December 2016 Monthly Briefing
ECONOMY: Entering a New Year
Edward H. Boss Jr., Chief Economist
Even as GDP figures for the third quarter were revised upward, fourth quarter estimates are forecast at half that pace. When combined with a sluggish first half of the year, for only the second time since 2010, growth in 2016 will come in below 2.0%. Even so, as the year came to an end, the pace of activity appeared to pick up the pace. Last minute shopping helped retailers rack up bigger holiday sales. According to the research firm, Customer Growth Partners, November and December sales are on a path to be up an estimated 4.9%, the biggest year-over-year growth since the recession. The Conference Board’s Index of Consumer Confidence rose to its highest level in 15 years in December and the stock market rose to a new high, up 8% following the election. Similar improvement had been shown by the University of Michigan’s Consumer Sentiment Index which in December was at its highest point since the beginning of 2007.
As we enter 2017, whether or not the improved pace of economic activity is maintained, slows, or speeds up will depend on how the various factors behind current activity evolve. Proposed corporate and personal tax cuts, the reflow of corporate funds held abroad, and reduced regulation auger well for improved economic activity. At the same time, large proposed increases in infrastructure and military spending and tightening labor markets are expected to put upward pressure on prices. As fiscal policy takes over from total dependence on monetary policy, interest rates are likely to rise as well as a further strengthening in the U.S. dollar that could provide some restraints. Of course the major factor that may decide the state of the economy in the New Year may well depend on events both inside and outside the country in an increasingly dangerous world.
REVENUE: December Revenues Drop With First Half Performance Reminiscent of Past Recessionary Levels
Jim Muschinske, Revenue Manager
Overall base revenues fell $257 million in December. Troubling weakness in income tax receipts coupled with continued dismal federal source reimbursements were responsible for the bulk of the decline.
With half of the fiscal year completed, base receipts are off $865 million, or 6.1%. Readers of the last several briefings likely have noticed growing concern with each successive month’s disappointing revenue performance. Embedded within the overall falloff of 6.1%--of which a large part is due to a drop of $290 million or 22.4% in federal sources—is the combined drop of 4.5% from the “Big Three” [gross personal, gross corporate, and sales]. While that percentage falloff may slightly overstate the decline due to timing aspects still related to the income tax rate phase down, perhaps most unsettling is that the last time the Big Three experienced a combined decline during the first half of a fiscal year [absent tax rate changes] was during the recessionary years impacting FY 2009 and FY 2010, when performance was -0.9% and -10.4%, respectively. That is not to say we are in recession, as most economic measures would indicate otherwise, but rather gives context to what only can be described as troubling revenue performance thus far in FY 2017.
To summarize, to date the State has experienced across the board revenue weakness. The most closely economically-tied major sources are experiencing levels of weakness not seen since the last recession. This poor receipt performance has limited the ability to direct more resources to reimbursable spending and as a result, federal source receipts have also suffered. That being said, economic conditions as measured by most conventional indices would reflect weakness, but not at recessionary levels. In addition, non-wage income from strong stock market performance in 2016 could translate into more positive performance in final payments. Additionally, as the Commission has indicated in earlier briefings, the DoR’s ledger conversion has altered historical receipt patterns, likely contributing to some of the year to date declines experienced thus far. As we near the end of the first year’s impact of that accounting conversion, the potential exists for a return to less volatile monthly swings, which up until now, has trended toward the negative.