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

September 2019 Legislative Council Staff Economic & Revenue Forecast Presentation to the Joint Budget Committee September 20, 2019

Economic Outlook 2

Longest, and weakest, expansion on record Real vs. Potential GDP Index of GDP Growth During Expansions Trillions of dollars 100 = Start of expansion $20 200 Dec. 1983 to June 1990 190 Apr. 1991 to Feb 2001 $18,912.3 $19 Dec. 2001 to Nov. 2007 180 July 2009 to Present 170 $18 160 $17 150 140 $16 130 120 $15 110 $14 100 1 2 3 4 5 6 7 8 9 10 Years of Expansion Source: U.S. Bureau of Economic Analysis. Source: U.S. Bureau of Economic Analysis and Congressional Budget Office. 3

Consumers still hitting the gas, while businesses hit the brakes Contributions to Real Gross Domestic Product (GDP) Annualize Change over the Prior Quarter 8% 6% Real GDP 4% 2% 2.0% 0% -2% -4% Gov't Consumption & Investment Net Exports -6% Gross Private Investment -8% Personal Consumption Expenditures -10% I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4 Source: U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates.

Employment growth remains strong, pressuring labor markets Total Nonfarm Employment Index 100 = January 2010 17.1% 125 Colorado Underemployment (U6) 120 U.S. 115 10.0% U.S. 110 7.2% 6.6% 105 Colorado Unemployment (U3) 100 3.7% 2.9% 95 2009 2011 2013 2015 2017 2019 2009 2011 2013 2015 2017 2019 Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Colorado U6 rates shown as four-month moving averages. Nonfarm employment estimates include estimates of revisions expected by LCS as a part of the annual rebenchmark process. 5

And pushing wages higher Real Average Hourly Earnings 2019 Dollars Colorado $31 $30.41 $30 $29 U.S. $28.11 $28 $27 $26 $25 $24 2007 2009 2011 2013 2015 2017 2019 Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Adjusted for inflation using the CPI-U for all urban areas. 6

Inflation is slowly picking up speed CPI-U Inflation, U.S. City Average Year-over-Year Change in Prices August 2019 over August 2018 7% Headline 1.8% Core 6% 2.4% Energy -4.4% 5% Food 1.7% 4% Headline Housing 2.8% 3% Core Apparel 1.0% 2% Transportation -1.1% 1% Medical Care 3.5% Recreation 1.3% 0% Education 2.4% -1% Other 2.3% -2% -3% 2009 2011 2013 2015 2017 2019 7 Source: U.S. Census Bureau. Seasonally adjusted.

A strong dollar helps consumers, hurts exporters Trade Weighted U.S. Dollar U.S. Exports Index of the Dollar to Foreign Currencies Millions of Dollars 125 $200 120 Major Currencies 115 Services $150 Broad Index 110 105 $100 100 95 Goods $50 90 Appreciating 85 $0 Depreciating 80 8 Source: Federal Reserve Board of Governors & Bureau of Economic Analysis (balance of payments basis). Seasonally adjusted.

Tariffs are hurting some Colorado exports Change in Colorado Exports Year-over-Year Change, January through July 2019 4.4% Pork Beef -5.8% Industrial machinery -5.8% -6.4% Total exports -6.4% Total exports -10.3% Electrical machinery -23.3% Vegetables, roots, and tubers -37.4% Beer -38.4% Rawhides and skins -44.5% Corn -56.0% Wheat Cheese -75.9% Whiskey -79.8% Source: WISERTrade. 9

Manufacturing activity contracted in August Institute for Supply Management Indices Diffusion Index 70 Business Activity Expanding 60 50 Manufacturing 40 Contracting 30 2007 2009 2011 2013 2015 2017 2019 10 Source: Institute for Supply Management.

Industrial production and new orders have slowed Industrial Production Index New Manufacturers’ Orders Index 2007 = 100 Billions of Dollars 115 $600 All Industries 110 $500 105 $400 Durable Goods 100 Industries $300 95 $200 90 85 $100 11 Source: Federal Reserve Board of Governors & U.S. Census Bureau.

Yield curves have inverted Spread in U.S. Treasury Yields 5% 4% 10-Year Minus 3-Month 3% 2% 1% 10-Year Minus 2-Year 0% -1% 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Federal Reserve Bank of St. Louis. 12

Colorado’s housing markets are evening out Colorado Housing Permits Case-Shiller Home Price Indices Thousands of Units Index 100 = January 2000 280 5 10-City Composite 260 20-City Composite Multi-Family 4 240 CO-Denver Single-Family Multi-Family 220 3 200 180 2 160 140 1 120 100 0 80 2009 2011 2013 2015 2017 2019 Source: S&P Dow Jones Indices, LLC. Source: U.S. Census Bureau. Seasonally adjusted 13 three-month moving averages.

Oil prices settled down after the September 14 spike West Texas Intermediate Crude Oil Price Since January 2015 Dollars per Barrel $80 $160 $60 $120 $40 $80 $20 $40 $0 2015 2017 2019 $0 14 Source: Energy Information Administration (weekly average prices).

Economic outlook through the forecast period Growth will continue, but at slower rates • Labor markets will remain tight, constricting growth • Business investment and industrial production will remain soft with ongoing trade uncertainties • Lower interest rates will give a slight boost to the housing market Elevated recession risk based on recent business and financial indicators 15

Risks to the Economic Outlook Upside risks: • Resolution to trade policy uncertainty • Uptick in global growth; resolution to Brexit • Monetary and fiscal policy stimulus Downside risks: • Weakening business and consumer confidence • Geopolitical risk and uncertainties • Sovereign and corporate debt levels 16

General Fund Budget Outlook 17

What has changed since June? New information • Preliminary, unaudited FY 2018-19 collections – Lower collections than expected ($76.1 million lower) • Updates to 2019 legislative impacts Changes to the revenue forecast • Slight reductions in revenue expectations – Only two months of data for FY 2019-20 • Higher recession risk, based on leading indicators 18

Forecast General Fund revenue was reduced slightly relative to June expectations Gross General Fund Revenue Year-over-Year Growth Billions of Dollars 3.1% $14 2.7% $14 Change Relative to June Expectations $13 3.0% 7.2% FY 2018-19: – $76.1M $12 14.1% $12 FY 2019-20: – $76.3M $11 FY 2020-21: – $120.9M $10 $10 $9 $8 $8 $7 $6 $6 $5 $4 $4 Source: Colorado Office of the State Controller and Legislative Council Staff September 2019 forecast. 19

TABOR Outlook Revenue Subject to TABOR Expected TABOR Surpluses Dollars in Billions $134.5M $142.9M $16 $264.3M $428.3M $15 $18.5M $14 $13 $169.7M Referendum C Cap $12 $11 $10 TABOR Limit Base $9 Referendum C $8 Five-Year Timeout Period $7 Source: Colorado Office of the State Controller and Legislative Council Staff September 2019 forecast. 20

TABOR Refund Obligation TABOR Refund Mechanisms Reimburse Local Gov’ts for #1 Property Tax Exemptions Up to ~$160 million If ~$430 million+ Temporary Income Tax Rate Reduction Next ~$270 million #2 If the refund is large enough to fund the first mechanism and the rate reduction Sales Tax Refund #3 Any remaining 21

TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year Expected TABOR Refunds & General Fund Budget Impacts Dollars in Millions $428.5M* $450 $400 $350 Income Tax Rate $300 $264.3M Reduction $250 Sales Tax Refund $200 Mechanism $142.9M $134.5M $150 $100 Reimbursements to Local Govts for Property Tax Exemptions $50 $0 TABOR Surplus & Set Aside: 2018-19 2019-20 2020-21 2021-22 Refunded in Fiscal Year: 2019-20 2020-21 2021-22 2022-23 Source: Colorado Office of the State Controller and Legislative Council Staff September 2019 forecast. *This amount includes $0.1 million in underrefunds from the FY 2014-15 surplus. 22

Last Year FY 2018-19 General Fund Reserve Dollars in Millions June 2019 September 2019 Forecast Forecast $1,200 $1,200 10.2% Reserve 10.0% Reserve Changes relative to June: Surplus Above +$28.5 million $1,000 $1,000 $331.8 M $303.3 M Required Reserve $800 $800 Changes reflect updates to 2019 legislative impacts 7.25% $814.2M $814.2M $600 $600 Reserve Lower revenue Requirement expectations are absorbed $400 $400 by the TABOR surplus $200 $200 $0 $0 Source: Legislative Council Staff forecasts based on current law. 23

Current Year FY 2019-20 General Fund Reserve Dollars in Millions June 2019 September 2019 Forecast Forecast $1,200 $1,200 8.3% Reserve Changes relative to June: 8.1% Reserve Surplus Above +$24.1 million $1,000 $1,000 Required Reserve $121.6 M $97.5 M $800 $800 Changes reflect updates to 2019 legislative impacts 7.25% $870.3M $871.1M $600 $600 Reserve Lower revenue Requirement expectations are absorbed $400 $400 by the TABOR surplus $200 $200 $0 $0 Source: Legislative Council Staff forecasts based on current law. 24