Wednesday, October 25, 2017

CREG Confirms New Economic Stability

Friend: "Do you watch 'The Walking Dead'?"
Me: "No, but I want term limits for them."

I don't know how we got on the topic of horror shows on TV, but we started out discussing the Wyoming economy. Yesterday the Wyoming Tribune Eagle spent half its A2 page on that particular topic. The article was surprisingly sober, almost somber, in its realism and messaging.

Before we get to the details, it is actually a big deal to see how the media - and the government figures they interview - have changed their tone over the summer. The euphoria over the slightest breeze of economic activity has been replaced with responsibility and realism. I assume that the reason for this is that the journalists hear a different tone from our elected officials: neither our legislators nor our governor can run away from reality anymore.

I have personally received reassurances from influential legislators that they will not allow tax increases to get through the 2018 session. That is reassuring, but we still need to hold their feet to the fire. More importantly, we need to not take our eyes of them just because we re-elect - or do not re-elect - incumbents in next year's election. What does not get through this coming session could pop up again in the near future.

A proposal for higher taxes is like the walking dead. Just when you thought you had put it to rest, it gets up and starts running around again.

Hopefully, the latest news on the Wyoming economy will help keep dead tax proposals in the grave. Here is what yesterday's Wyoming Tribune Eagle had to say (page A2, print edition):
The second quarter [of 2017] continued to show increased mining activity that provided a boost to the economy, but [state chief economist Jim] Robinson said it appears that growth is starting to level off. "My takeaway is that boost we're getting from mining pretty much had its impact in the first two quarters of 2017, and we're probably to a point now where we're not going to get much more from mining going forward," he said. 
The Tribune Eagle also reports that
The latest job numbers that came out Friday showed Wyoming is still down 3,100 jobs from September 2016. Robinson said it's an improvement because at that time, Wyoming's estimated job losses were around 11,500. 
This is what happens when we transition from an economic downslope to a "new normal".

Again, kudos to state chief economist Robinson and the Wyoming Tribune Eagle for more honest analysis and reporting. Hopefully, this will be the tone of the conversation as we move forward, especially considering the October CREG report. While sharing some good news about tax revenue coming in marginally ahead of its January forecast, this the latest CREG report only predicts a stabilization of General Fund revenue over the next few years. Overall, GF revenue will drop some nine percent from where it is today, through 2022, but the drop will happen in the next year or two.

In the past, I have had many questions about CREG's forecasting methods, and I still do. That said, this forecast is consistent with my own outlook on the Wyoming economy.

It is important for our legislators, our current governor and gubernatorial candidates to understand the macroeconomic message in these numbers. Jim Robinson's comments on the immediate future of the Wyoming economy - comments that in their conclusions are consistent with my analysis from months ago - corroborate the CREG revenue forecast. A stagnant economy will produce stagnant tax revenue.

It is worth noting that both Robinson and CREG speak out about the stagnant state of our minerals industry. There seems to be a consensus that severance tax revenue will not recover in the foreseeable future. While I am instinctively skeptical of consensus among economists and assorted forecasters, I am inclined to accept this particular one. Many people seem to pin their hope for a minerals recovery on President Trump's aggressive deregulations; the president deserves a big thumbs up for doing so, but with a global economy that is barely growing (and the outlook for both China and Europe is less than optimistic), the world will have an excess supply of energy minerals for several years to come. Deregulations help mitigate, and possibly end, the decline over the past couple of years, but we should not expect much more than that. At least not for now. We will see if there is reason for more optimism on this front once we know what tax cuts Congress will pass (if any).

It is worth noting that in Table 3, Severance Tax Assumptions, CREG actually predicts a slight decline in the price of coal - and they also predict a slight decline in coal production. When price and volume decline together, it is a strong signal that there is excess supply on the market.

The outlook for trona, natural gas and oil are not as pessimistic, but still nowhere near optimistic. 

Again, it is good to hear others line up behind my long-standing message, namely that Wyoming has a weak economy, that we are in a frail state of low economic activity and that we absolutely should not make the mistake of expecting some kind of economic rebound. The prudent, rational approach is that we are in a new state of long-term stability.  

Tomorrow we will take a closer look at recent macroeconomic data and see what they tell us about the future. That will include an analysis of the Economic Analysis Division's latest macro report on the Wyoming economy.

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