Monday, July 31, 2017

CREG: State's Economy in New Normal

The Consensus Revenue Estimating Group, CREG, has released its report for July. I am planning a longer article about it, placing it in its proper macroeconomic context, but because of this week's Revenue Committee meeting in Thermopolis, I wanted to put up a short note on the report before they get started. (By the way, in case you happen to be in the area, the meeting is Wednesday and Thursday.) So here goes.

The report's leading message is that:
As of July 28, 2017, FY 2017 actual GF revenue across all sources, including distributed capital gains and losses, is tracking $143.6 million or 14.2 percent above pacing expectations for the year ... with two months of most revenue sources yet to be received. 
Sounds good, does it not? How many of you noticed the six little words after "sources"? The attention grabber is the passage about "14.2 percent above pacing expectations for the year". All of a sudden, it sounds like the state's deficit problems are about to vanish in a plume of financial smoke. 

That, of course, is not the case. Those six little words, "including distributed capital gains and losses", make all the difference in the world. Alas, the CREG report continues:
Without including capital gains and losses, GF revenue is still outpacing projections by $14.2 million or 1.4 percent ... on the strength of severance taxes and the “all other” category. 
So now, all of a sudden, the big shiny pile of new revenue collapsed by about 90 percent. A revenue uptick of $14.2 million is basically the margin of error for the billion-dollar General Fund. 

That said, there is an economic message in the CREG report that we should not rob them of: the decline in the state's revenue is coming to an end. Just like the Workforce Services report that I mentioned yesterday, this publication from CREG verifies what I have been saying for six months: our state is transitioning out of a decline, and into a new state of lower-level stability. We are not returning to the good old gravy-train days

I keep pointing this out, because if you read this CREG report casually - which is not how CREG expects you to read it - you easily get the impression that state tax revenue is no the rebound. In reality, all that is happening is that capital gains, from the state's vast investment portfolio, once again saves the day. Capital gains revenue accounts for nine out of every ten dollars of "better than forecasted" revenue; because of this imbalance between investment-based revenue and revenue from real-sector economic activity, the underlying weakness of the Wyoming economy is once again placed behind a veil of rosy colors. 

There are two more points to be made here. First, the revenue from sales and use taxes is actually trailing CREG's own forecast from January. The margin is very small, -0.9 percent, but it is nevertheless worth mentioning: sales and use taxes are the quickest "messengers" from the private sector to government about what is happening in the economy. The fact that tax revenue from this category barely even keeps up with forecasts from the beginning of the year again verifies that there is no macroeconomic rebound underway

Secondly, the "better than the trend" kind of data that CREG is reporting on, represents an improvement not over actual economic activity, but over a previous forecast. I have previously pointed out that CREG has been notoriously optimistic in their forecasts, a problem that definitely contributed to the legislature's inaction on this economic crisis. Since last fall, CREG has slowly turned around and begun forecasting as if there actually is a crisis; with their January report they even gave a gloomy picture of the state's revenue future.

Now, that trend has turned out to be at least marginally pessimistic. There is really only one substantial indicator of that, namely a modest increase in severance tax revenue - again over the previous forecast. But all that this means is that CREG, in their January report, failed to account for the possibility that the downslope in the economy was going to morph into a new state of stability.

To me, this indicates that CREG is not doing underlying macroeconomic assessments for their revenue forecasts. This would be strange, of course, but it is nevertheless what I read out of their notoriously odd trend reporting. 

To sum up: this CREG report does not tell us that the economy is in a rebound. It does not tell us that the budget crisis is over. All it does is verify my analysis: welcome to a new, lower-level normal.

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