In between each Budget & Economic Forecast , we also prepare a quarterly Revenue & Economic Update in January, April, July and October of each year. The Revenue & Economic Update reports on how actual revenue collections for the current year compare to the previous forecast as well as provide notes on changes in the national and state economic outlook.
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April 10, 2015
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Revenue. Minnesota’s net general fund receipts totaled $2.269 billion during the months of February and March, $100 million (4.6 percent) more than projected in the February 2015 Budget and Economic Forecast. Higher than expected net corporate income tax payments contributed the largest amount of additional revenue. Of the major tax types, only general sales tax receipts were below expectations for the period.
Economy. The forecast for U.S. economic growth has weakened slightly since Minnesota’s Budget and Economic Forecast was last prepared in February. Several temporary factors have held back U.S. growth in the early part of 2015: slower oil drilling activity resulting from lower crude prices, the effects of unfavorable winter weather conditions on home construction and auto sales, and supply-chain interruptions due to the West Coast dock disruptions. As a result, MMB’s macroeconomic consultant IHS Economics (IHS) has lowered its forecast of real GDP growth in the first quarter of 2015 to just 1.2 percent (annual rate), from 2.4 percent expected last February.
Despite economic weakness in the first quarter, IHS continues to forecast a strong rebound in the middle of 2015, with annualized real GDP growth averaging 3.2 percent in the second and third quarters of the year. As the weather warms up, solid gains in consumer spending – supported by a gasoline dividend – are expected to more than offset weakness in energy-related investment from sharply lower oil prices and higher imports from the stronger dollar. A tightening labor market closer to full employment should also put upward pressure on wages and productivity, buoying consumer demand later this year and in 2016.
Minnesota. Sluggish global demand and excess supply have sent crude oil prices plummeting. Brent oil prices have fallen from a 2014 high of $112/barrel last June to around $56/barrel in early April. Lower prices mean reduced capital investment and drilling exploration among energy producers, but also big savings for consumers of gasoline and other petroleum products.
Minnesota is not an oil-producing state. Thus the net positive effects from the recent decline in crude prices are likely to outweigh the negative impacts on the energy sector. According to the U.S. Energy Information Administration, the average price of a gallon of gasoline in Minnesota was just $2.30 in early April, down from $3.53/gallon (or 35 percent) a year earlier and seasonally the lowest in six years. Lower gas prices are comparable to a tax cut, freeing up disposable income for spending on non-gasoline goods and services. The IHS April 2015 baseline calls for the quarterly average price of a barrel of Brent crude oil to reach a low point of $50 during the second quarter of 2015 before rising to $62 by the end of the year. If that forecast materializes, MMB economists estimate spending on gasoline in Minnesota will be as much as $2.0 billion less in 2015 than it was in 2014. This is equal to about 0.8 percent of disposable income and represents an average savings of more than $900 per Minnesota household. This will provide a boost to state economic activity in 2015 and 2016.