Making sense of conflicting economic numbers
“Soft landing” is now the phrase du jour. But looking at state and local government budgets, you’d think we were headed for a downturn.
Happy Finance Friday, readers! Updated numbers on third quarter economic growth are out and while the 4.9% revised growth is slightly lower than previously reported, it’s still the strongest third-quarter growth in nearly two years. So why don’t people feel like the economy is doing OK?
This week, I’ll (try to) make sense of the economic numbers heading into 2024 and what it means for state and local budgets.
#SorryNotSorry and other conflicting messages
To say that the economy is sending mixed signals is an understatement. On the plus side, inflation is down, the unemployment rate is still low and fears of a recession in 2024 have eased.
“The combination of decelerating inflation and low unemployment has raised hopes that the Fed is managing a so-called soft landing — raising rates just enough to tame inflation without causing a recession,” the Washington Post noted this week.
Great! Except one more thing. If you pay attention to state and local government budget news, you’d think we were headed for a downturn.
California legislative analysts just announced the state is headed for its largest-ever budget deficit—a whopping $68 billion—through fiscal 2025;
Other states like Illinois, Maryland and New York are also contending with shortfalls;
So are some major cities like San Francisco and New York City;
And counties in California, Hawaii, Maryland, Pennsylvania and Utah.
It might be tempting to say this is just what happens when federal aid ends and budgets come back down to earth. And maybe that’s a little true.
But budget forecasters planned for that. As I reported earlier this year, fiscal 2024 budgets were generally downsized to account for inflation and the expected end or weaning off of federal pandemic relief. This week, the National Association of State Budget Officers fall survey reported that 2024 enacted budgets projected a 1.8% decline in revenues.
Not to be all California-centric, but the Golden State (and New York for that matter) tend to be a bellwether for other places—particularly those with progressive income taxes. The two states’ reliance on capital gains income, combined with their higher tax rates on the wealthy, typically means their shortfalls tend to be more extreme and hit sooner than elsewhere. So let’s look at what the heck is going on in California.
A $68 billion problem
The Legislative Analyst’s Office (LAO) report notes that there have been “signs of revenue weakness over the past year.”
Wage income tax revenue was down 2% over the last twelve months compared to the preceding year.
Sales tax collections have been essentially flat, despite above‑average growth in consumer prices.
In fact, according to the LAO’s recession indicators, the state entered a downturn in 2022. Due mostly to higher interest rates, home sales are down by about half and investment in startups has slowed significantly. These warning signs also were why lawmakers were tasked with closing a projected $30 billion shortfall during their fiscal 2024 budget negotiations earlier this year.
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