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Minnesota Economic Forecast

Latest: December 2, 2016

EXECUTIVE SUMMARY

Minnesota’s budget and economic outlook remains stable, despite continued slow economic growth. While actual revenues collected in FY 2016 improved compared to previous estimates, revenues in fiscal years 2017-19 are lower than prior estimates. Slower projected economic growth and a lower consumer spending forecast contribute to a lower general sales tax revenue forecast in FY 2017-19. Revenue forecast reductions are offset by lower spending estimates in fiscal years 2016-19, due to enrollment and cost changes in the Medical Assistance (MA) program. The FY 2016-17 biennium is now projected to end with a balance of $678 million, after the statutory allocation of $334 million to the budget reserve.

The balance between revenues and spending in the next biennium has been reduced compared to prior estimates. General fund revenues in FY 2018-19 are expected to grow to $45.3 billion, while projected current law spending is estimated to be just under $44.6 billion. The $678 million ending balance forecast for the current biennium adds to resources available for the next biennium. As a result, a $1.400 billion balance is projected to be available for the upcoming FY 2018-19 biennial budget.


U.S. Economic Outlook. The outlook for U.S. economic growth has weakened since Minnesota’s Budget and Economic Forecast was last prepared in February 2016. A reduction in business building and equipment purchases in the first half of this year slowed U.S. economic growth for 2016. Since February, Minnesota’s macroeconomic consultant, IHS Markit (IHS), has decreased their forecast for real GDP growth in 2016 from 2.4 percent in February’s outlook to 1.5 percent in November. Lower forecasts for consumer spending and business capital purchases reduce the 2017 growth forecast from 2.8 percent in February to 2.2 percent in November. Consumer spending growth is expected to remain modest and helps lower the economic growth forecasts for 2018 and 2019.

The IHS November U.S. outlook was released on November 7 and does not reflect possible post-election U.S. policy changes. There is considerable uncertainty in this forecast about which policy changes may be enacted in the coming years and the economic impact of those changes. IHS has said that they are examining the president-elect’s policy proposals and trying to determine their likelihood of enactment. As that becomes clearer, IHS will incorporate them into their forecast. It is likely that IHS’s assessment of the impacts of U.S. policy will change with each monthly outlook release until policies become more settled. Until then, the impact of potential policy changes on several key economic sectors—including energy, banking, international trade, health care, and immigration—remain sources of risk to this forecast.

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