Economic & Revenue Forecast Presentation to the Joint Budget - PowerPoint PPT Presentation

June 2020 Legislative Council Staff Economic & Revenue Forecast Presentation to the Joint Budget Committee June 19, 2020

Economic Outlook 2

The U.S. officially entered into a recession in March Contributions to Real Gross Domestic Product (GDP) 8% 6% Real GDP 4% 2% 0% -2% -4% Gov't Consumption & Investment -5.0% Net Exports -6% Gross Private Investment -8% Personal Consumption Expenditures -10% I II IIIIV I II IIIIV I II IIIIV I II IIIIV I IIIIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3 Source: Bureau of Economic Analysis. Seasonally adjusted annual rates.

Shape of Recovery Real U.S. Gross Domestic Product Dollars in Trillions Current $20 Contraction $19 $18 $17 Projected Great Growth Recession $16 2020: -5.7% $15 2008: -0.1% 2009: -2.5% $14 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: U.S. Bureau of Economic Analysis and Legislative Council Staff projections, including projected 2020Q1 revisions. Real GDP is inflation-adjusted to chained 2012 levels and shown at seasonally adjusted annualized rates. 4

U.S. retail sales picked up in May Monthly U.S. Retail Sales Dollars in Billions $600 100 Total Retail Sales 90 May Retail Sales $500 Month-over-Month: +17.7% 80 Year-over-Year: -6.3% 70 $400 60 $300 50 40 $200 30 20 $100 Online Sales 10 $0 0 2006 2008 2010 2012 2014 2016 2018 2020 Source: U.S. Census Bureau, Advanced Retail Trade Report. 5

While manufacturing and business activity remain in contractionary territory Institute for Supply Management Indices Diffusion Index 70 Business Activity Expanding 60 50 Manufacturing 40 Contracting 30 2007 2009 2011 2013 2015 2017 2019 Source: Institute for Supply Management. 6

Deflationary risk outweighs inflationary pressure U.S. City Average CPI-U Inflation Year-over-Year Change in Prices Selected Components, May 2020 8% Headline 0.2% 7% Core 1.2% 6% Energy -18.3% 5% Food 4.0% 4% Housing 2.2% 3% Core Apparel -7.9% 2% 1.2% Transportation -10.7% 1% Medical Care 4.9% 0.2% 0% Recreation 2.1% Headline -1% Education 2.1% -2% Other 2.4% -3% -4% Source: U.S. Bureau of Labor Statistics. Inflation is calculated as the growth in urban area prices in a given period relative to the same period in the prior year. 7 *Headline inflation includes all products and services. **Core inflation excludes food and energy prices.

Unemployment improved in May but remains at historic highs Unemployment Rates U.S. 14% May: 13.3% 12% April: 11.3% Colorado 10% 8% 6% 4% 2% 0% 1995 2000 2005 2010 2015 2020 8 Source: Bureau of Labor Statistics. Data are seasonally adjusted.

Counties reliant on tourism have the highest unemployment April 2020 Unemployment Rates 9 Source: Bureau of Labor Statistics.

Dine-in restaurant service began to recover after restrictions were lifted Colorado Open Table Seated Restaurant Diners 40% Year-over-Year Percent Change 20% 0% -20% June 17 -40% -58.1% -60% -80% -100% 18-Feb 25-Feb 3-Mar 10-Mar 17-Mar 24-Mar 31-Mar 7-Apr 14-Apr 21-Apr 28-Apr 5-May 12-May 19-May 26-May 2-Jun 9-Jun 16-Jun 10 Source: Open Table.

U.S. and Denver air travel still subdued U.S. TSA Passenger Traffic DIA Passenger Traffic Year-over-Year Change Year-over-Year Change 0% January 5.8% -10% February 7.0% March -46.4% -20% April -94.4% -30% -40% -50% -60% June 16, 2020 -70% -83.1% -80% -90% -100% March 2020 April 2020 May 2020 June 2020 Source: Transportation Security Administration. 11

Reduced travel activity continues to constrain oil markets West Texas Intermediate U.S. Oil Supplied Crude Oil Price Thousands of Barrels per Day Dollars per Barrel $160 24,000 March 13 to June 12 22,000 -19.4% $120 20,000 $80 18,000 16,000 $40 $37.32 14,000 $0 12,000 12 Source: Energy Information Administration.

Outlook Summary • Economic activity outperformed expectations in May slightly, though the recession is still severe • The recovery will impact economic sectors and geographic regions differently • Business activity and consumer spending will continue to improve, but remain constrained by ongoing restrictions, health concerns, uncertainty, and some permanent closures • Labor markets will remain weak in the industries most affected by COVID-19-related closures • Inflationary pressures will remain subdued as low energy prices, low global demand offset global supply constraints 13

Risks to the Forecast Downside • Strong resurgence of COVID-19 • Additional waves of layoffs • Double-dip recession Upside • COVID-19 vaccine delivered sooner than expected • Additional federal stimulus • Structural shifts resulting in innovations 14

General Fund Budget Outlook 15

General Fund collections will decline with the contraction in business and household income, and reduced consumer activity Gross General Fund Revenue Billions of Dollars Percentages show year-over-year changes $13 13.9% -4.7% Change Relative to May $12 FY 2019-20: +$320.9 million -9.5% $11 FY 2020-21: +$526.1 million $10 FY 2021-22: +$675.1 million $9 $8 -13.0% $7 -4.4% $6 -15.5% -1.8% $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff June 2020 forecast. 16

Income taxes represent the largest and most volatile General Fund revenue stream… Share of Total General Fund Revenue* Based on FY 2018-19 Collections Individual Income Tax 60.7% Sales & Use Tax 27.1% Corporate Income Tax 6.8% All other 5.5% Income taxes also carry the greatest forecast risk with economic uncertainty, delayed filing deadlines, and state and federal policy changes. Source: Colorado Office of the State Controller and Legislative Council Staff calculations. *Six-year average of actual collections data, FY 2013-14 to FY 2018-19p. 17 *Income taxes net of the State Education Fund diversion.

TABOR Outlook Revenue Subject to TABOR Dollars in Billions $16 $15 $14 Referendum C Cap $13 $12 $11 $10 TABOR Surpluses $9 $8 TABOR Limit Base $7 $6 $5 $4 Referendum C $3 Five-Year $2 Timeout Period $1 $0 Source: Colorado Office of the State Controller and Legislative Council Staff June 2020 forecast. 18

Current Year FY 2019-20 General Fund Reserve Dollars in Millions June 2020 May 2020 Changes relative to May: Forecast Forecast Update $1,000 $1,000 Revenue: +$320.9M on $900 $900 $900 $364.7 million income tax policy changes $800 $800 Excess Reserve 7.25% $700 $700 $700 Reserve Net transfer: +$145.1M on $600 $600 Requirement legislative changes $500 $500 $500 $400 $400 Appropriations: -$281.3M $300 $300 $300 3.07% with budget package $200 $200 Reserve $100 $100 $100 Requirement Reserve: -$513.8M on lower $0 $0 reserve requirement, -$100 -$100 -$895.8M Deficit appropriations Source: Legislative Council Staff forecasts based on current law. 19

Next Year FY 2020-21 Budget Outlook June 2020 May 2020 Changes relative to May: Forecast Forecast Update Beginning balance: +$746.6M $272.7 million carried over from FY 2019-20 Excess Reserve $0 $500 Revenue: +$526.1M on income 1 tax policy changes, slightly -$500 $0 2.86% higher economic expectations Reserve -$1,000 Requirement Appropriations: -$1.44 billion -$1,500 lower than FY 2019-20 budget -$2,000 Net transfers: +$273.8 on legislative changes -$2,500 Reserve: -$571.7M on lower -$3,000 reserve requirement, -$3.3 Billion Shortfall* appropriations -$3,500 Source: Legislative Council Staff forecasts based on current law. *Amount holds FY 2019-20 appropriations constant and incorporates the May revenue forecast, current law transfers, rebates and expenditures, TABOR refund obligations, and the 7.25% reserve 20 requirement.

Out Year FY 2021-22 Budget Outlook Additional revenue available to spend or save above FY 2020-21 spending levels. Amounts hold FY 2020-21 appropriations constant and incorporate the revenue forecast, current law transfers, rebates and expenditures, and the 2.86% reserve requirement. June 2020 Forecast $1.34 Billion $1,400 This amount does not account for $1,200 caseload growth or inflationary $1,000 pressures $800 $600 $400 $200 $0 1 Source: Legislative Council Staff June 2020 forecast. 21

General Fund Budget (Spending or Saving) Dollars in Billions $1.34 Billion TABOR Refund Additional Revenue to Excess Reserve $14 Spend or Save Required Reserve Transfers $12 Rebates & Expenditures $10 Appropriations $8 FY 2021-22 amounts hold FY 2020-21 constant $6 $4 FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22 Source: Legislative Council Staff June 2020 forecast and current law. 22

Risks to the Forecast New Information • Legislation from the 2020 Session • 11 months of FY 2019-20 collections data • Starting to understand how much economic activity declined and how quickly we are bouncing back Unknowns • Extent of economic damage and its lasting effects • Influence of the recession on income taxes • Containment and treatment of COVID-19 • Additional fiscal and monetary policy changes Downside risk: Prolonged economic recovery or a double-dip recession (COVID-19 resurgence, vicious cycle) Upside risk: Stronger near-term rebound in economic activity, less damage to the economy than expected 23