Monday, July 14, 2008

Oh no, it's coming! Believe us, it's coming! 

(or, Dude, who stole my recession?)

On January 15, Tom Stinson, Minnesota state economist, said there was no doubt the state was in a recession. In May, he had not changed his mind. On that basis the state issued a forecast for the budget that led to the closing of a tax loophole, a few minor spending cuts, and the rest of the money coming from reserve accounts. As Phil Krinkie pointed out last month, there was very little spending cuts. I had argued for more reliance on the reserve because I had suggested the recession forecast in the budget report might be more pessimistic than real.

I love it when I turn out to be right.
Minnesota�s net general fund receipts for FY 2008 are now estimated to total $16.257 billion, $389 million (2.5 percent) more than forecast in February. The individual income tax and the corporate income tax accounted for more than 75 percent of the positive revenue variance.
They got more money than they expected on 2007 individual income taxes. But lest you be cheery, the state forecasters are not backing off their doom and gloom:
Thus far the U.S. economy has been stronger than was projected at the start of the year. Unfortunately, the good news ends there. Economists now see few signs that economic growth will return to its 3 percent, trend level before mid-2009. Energy prices have increased to levels well beyond those previously projected, housing markets remain severely depressed, and the financial sector�s problems have yet to be fully resolved. The current economic weakness is now expected to extend into early 2009.

Households received their stimulus package rebate checks ahead of schedule, but that simply shifted some rebate-related spending from the third and fourth quarters of this year into May and June. Accelerating payment of the rebates helped second quarter growth, but it also reduced the amount available for the remainder of the year.
The forecasters in the WSJ Economic Forecasting Survey don't project 3% on average, but the slowest growth rate forecasted is for Q4 at 0.6%. 2% growth is projected for 2009:II. Global Insights, the vendor that sells its forecast to the Department of Finance, has the most negative number in the forecast for that fourth quarter, at -1.7% (and -0.7% versus an average of +1.3% for 2009:I; it anticipates a sharp bounceback in 2009:II to 2.5% growth.) That is, the Minnesota Department of Finance is basing its forecast for the state budget on a recession call beginning in the fourth quarter, nine months after the initial Stinson statement.

I've certainly bunged up my share of forecasts before, and it's not like GI or Stinson were alone in their recession call. And it's quite possible they're right this time -- I've thought for awhile that the fourth quarter is the key to whether we skirt the recession or not. But the new report lacks some humility in calling for a new recession based on higher oil prices. We have had increased oil prices in percentage terms that like that in the past; why does it matter so this time?

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