Minnesota agency reports lower than forecast revenue and lower economic growth in 2018

On Tuesday, Minnesota Management and Budget released its Revenue and Economic Update.

State government revenues

On revenue, it reported that tax receipts for the months July to September had come in $66 million (1.4%) below February’s forecast. Other revenues, income tax, and sales tax revenues all came in below projections. Only Corporate Franchise Tax revenue matched expectations.

It would be premature to worry about this just yet. As with last year’s figures, these could be revised at some point to close much of this gap. Also, this release covers only the revenue side of the government. A comprehensive review that will also look at spending is due out after Thanksgiving.

National economic growth outlook

On economic growth, the state’s economic consultant, IHS Markit, lowered its projected 2018 growth for the United States from 2.7% to 2.4%. This has cut is driven by IHS Markit’s expectation that Congress will pass neither a tax reform bill nor an infrastructure spending bill.

The outlook for 2018 remains uncertain. Recent natural disasters will exacerbate economic volatility through the first quarter of 2018. At the same time, expectations for fiscal stimulus effects in 2018 have faded. With their October baseline, IHS has removed their previous assumptions of tax cuts and infrastructure spending that would boost growth in 2018. IHS now expects annual real GDP growth of 2.4 percent in 2018, followed by a steady 2.2 percent pace over the following three years. The IHS October baseline forecast for 2017 growth matches the Blue Chip Consensus, the median of 50 business and academic forecasts.

The national unemployment rate is forecast to continue more or less as it is, 4.4%. The Fed funds rate, currently 1.00 – 1.25%, is projected to rise to 3.00% by the end of 2019.

IHS Markit assigns probabilities to central, pessimistic, and optimistic scenarios. The central scenario, reported here, has a 65% probability. The risk are seen slightly more on the downside. The optimistic scenario gets a probability of 15% and the pessimistic one of 25%.

John Phelan is an economist at the Center of the American Experiment.