January 2007 Economic Review and Revenue Forecast Update State of Vermont Emergency Board and...

January 2007 Economic Review and Revenue Forecast Update

State of Vermont Emergency Board and Legislative Committees

January 16, 2007Montpelier, Vermont

Prepared By: Economic & Policy Resources, Inc. and Kavet, Rockler & Associates

Policy Resources, Inc.EPR Economic & Kavet, Rockler & Associates, LLCEconomic and Public Policy Consulting

Revenue Forecast Summary• Revenue receipts are running virtually “on target” through

December of FY 2007, within one-tenth of one percent of July 2006 projections…

Policy Resources, Inc.EPR Economic &

Revenue Collections Through the 1st Half of FY 2007,Diff. From Target Through December

$0.4

$(1.4)

$(0.1)

$(1.0)

$(5.0)$(4.0)$(3.0)$(2.0)$(1.0)

$-$1.0$2.0$3.0$4.0$5.0

G-Fund T-Fund E-Fund Combined

Mil

lio

ns

of

Do

llar

s

Kavet, Rockler & Associates, LLCEconomic and Public Policy Consulting

Revenue Forecast Summary


Recommended Net Revenue Changes from July 2006 Forecast - Current Law Basis

$0.9

$17.4

-$0.1

$0.1

$1.4

-$0.4

-$5.0 $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0

Education Fund

Transportation Fund

General Fund

Millions of Dollars

FY2007

FY2008

…Resulting in only minor recommended revenue adjustment

U.S. Economic Situation/Outlook


• Businesses are in stellar financial shape… Corporate Profits Soar as Rising Productivity Drops to the Bottom Line

(U.S. corporate profits with inventory valuation and capital consumption adjustment; Source: US BEA)

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

1700

1980Q

1

1980Q

4

1981Q

3

1982Q

2

1983Q

1

1983Q

4

1984Q

3

1985Q

2

1986Q

1

1986Q

4

1987Q

3

1988Q

2

1989Q

1

1989Q

4

1990Q

3

1991Q

2

1992Q

1

1992Q

4

1993Q

3

1994Q

2

1995Q

1

1995Q

4

1996Q

3

1997Q

2

1998Q

1

1998Q

4

1999Q

3

2000Q

2

2001Q

1

2001Q

4

2002Q

3

2003Q

2

2004Q

1

2004Q

4

2005Q

3

2006Q

2

Bil

lio

ns o

f U

.S.

Do

llars


U.S. Situation/Outlook


• Growth will rebound after a transition…

Real GDP is Expected to Decelerate Further Before Resuming Growth at About 3%(Percent Change vs. Year Ago, Sources: U.S. Bureau of Economic Analysis and Economy.com)

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1988Q

1

1988Q

4

1989Q

3

1990Q

2

1991Q

1

1991Q

4

1992Q

3

1993Q

2

1994Q

1

1994Q

4

1995Q

3

1996Q

2

1997Q

1

1997Q

4

1998Q

3

1999Q

2

2000Q

1

2000Q

4

2001Q

3

2002Q

2

2003Q

1

2003Q

4

2004Q

3

2005Q

2

2006Q

1

2006Q

4

2007Q

3

2008Q

2

2009Q

1

2009Q

4

Perc

en

t C

han

ge V

s.

Year

Ag

o Q

uart

er

FORECAST


U.S. Economic Situation/Outlook• But the risk of recession is now rising….


Wall Street Journal Survey of 55 Economists' Expectations for Recession in 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fe

b-0

6

Ma

r-06

Ap

ril-06

Ma

y-0

6

Ju

ne

-06

Ju

ly-0

6

Se

pt-0

6

Oct-0

6

No

v-0

6

De

c-0

6

Pro

ba

bilit

y o

f R

ec

es

sio

n A

mo

ng

Ec

on

om

ists

Po

lle

d

High

Low

Average

U.S. Economic Situation• Oil Prices have declined since the July peak…but for how long?


Price of West Texas Intermediate Crude, January 1996-January 2007

$0$10$20$30$40$50$60$70$80

1996:1

1997:1

1998:1

1999:1

2000:1

2001:1

2002:1

2003:01

2004:01

2005:01

2006:1

2007:1

Month/Year

Pri

ce ($

Per

Bbl

.)


U.S. Economic Situation• Gasoline prices have followed suit, but remain over $2.30/gallon…


Price of Regular Gasoline, January 1996-January 2007 (U.S. Average)

$0.00

$0.50$1.00

$1.50

$2.00

$2.50$3.00

$3.50

1996:1

1997:1

1998:1

1999:1

2000:1

2001:1

2002:1

2003:01

2004:01

2005:01

2006:1

2007:1

Month/Year

Pri

ce ($

Per

Gal

lon)


U.S. Economic Situation• Job growth is slowing but still remains positive as

employers slow the rate of hiring (but do not cut jobs)…


U.S. Quarterly Average Payroll Job Change,2003:Q1-2006:4

-88.7

-26.3

18.0

134.3

174.3199.0

115.3

210.3

160.3 166.7 154.7178.7 176.3

115.3

185.3

135.7

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

Q1 2003

Q2 2003

Q3 2003

Q4 2003

Q1 2004

Q2 2004

Q3 2004

Q4 2004

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Quarter/Year

Pay

roll

Jobs

(T

hous

ands

)


U.S. Economic Situation• The Fed’s “tightening” campaign has curbed housing starts…


Federal Funds Target Rate vs. Housing Starts

(Sources: Federal Reserve Board of Governors, U.S. Census Bureau)

1

2

3

4

5

6

7

8

9

Jul-9

0

Jul-9

1

Jul-9

2

Jul-9

3

Jul-9

4

Jul-9

5

Jul-9

6

Jul-9

7

Jul-9

8

Jul-9

9

Jul-0

0

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Fed

era

l F

un

ds

Ta

rge

t R

ate

%

700

900

1100

1300

1500

1700

1900

2100

2300

Ho

us

ing

Sta

rts

SA

AR

(00

0)

Federal Funds Target Rate - Left Axis

Housing Starts - Right Axis


U.S/VT Economic Situation• The housing market correction is now well-underway…


Residential Construction Wanes as Interest Rates Rise

1.00

1.50

2.00

2.50

3.00

3.50

Jan-9

6

May-9

6

Sep-9

6

Jan-9

7

May-9

7

Sep-9

7

Jan-9

8

May-9

8

Sep-9

8

Jan-9

9

May-9

9

Sep-9

9

Jan-0

0

May-0

0

Sep-0

0

Jan-0

1

May-0

1

Sep-0

1

Jan-0

2

May-0

2

Sep-0

2

Jan-0

3

May-0

3

Sep-0

3

Jan-0

4

May-0

4

Sep-0

4

Jan-0

5

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Source: F.W. Dodge, McGraw-Hill

Ind

exed

to

Jan

uary

1996 =

1.0

0 U.S.

Vermont


U.S. / VT Economic Situation


What Goes Up, Must Come Down (and it's started)...

(Residential Construction Starts Peak in Vermont at More Than $700M in March - 12 month moving total basis)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

550.0

600.0

650.0

700.0

750.0

Dec-6

9

Dec-7

1

Dec-7

3

Dec-7

5

Dec-7

7

Dec-7

9

Dec-8

1

Dec-8

3

Dec-8

5

Dec-8

7

Dec-8

9

Dec-9

1

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Source: F.W. Dodge/McGraw-Hill

Mil

lio

ns o

f D

oll

ars


VT Economic Situation• And housing prices are also moderating and will likely decline

before the real estate market correction is over...


OFHEO Vermont Housing Price Index Percent Change Vs. Year Ago

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1984Q

1

1984Q

3

1985Q

1

1985Q

3

1986Q

1

1986Q

3

1987Q

1

1987Q

3

1988Q

1

1988Q

3

1989Q

1

1989Q

3

1990Q

1

1990Q

3

1991Q

1

1991Q

3

1992Q

1

1992Q

3

1993Q

1

1993Q

3

1994Q

1

1994Q

3

1995Q

1

1995Q

3

1996Q

1

1996Q

3

1997Q

1

1997Q

3

1998Q

1

1998Q

3

1999Q

1

1999Q

3

2000Q

1

2000Q

3

2001Q

1

2001Q

3

2002Q

1

2002Q

3

2003Q

1

2003Q

3

2004Q

1

2004Q

3

2005Q

1

2005Q

3

2006Q

1

2006Q

3

2007Q

1

2007Q

3

2008Q

1

2008Q

3

2009Q

1

2009Q

3

2010Q

1

2010Q

3

2011Q

1


VT Economic Situation• Jobs in VT have surpassed pre-recession levels in all major job

sectors except 3 (of 11 major sectors)...


Job Growth in Vermont Since Last Cyclical Peak (July 2001) and Trough (April 2003)

-10.0 -5.0 0.0 5.0 10.0 15.0

Total - All Industries

Construction

Manufacturing

Trade, Transportation & Utilities

Retail Trade

Financial Activities

Professional & Business Services

Private Education Services

Health Care & Social Assistance

Leisure & Hospitality

Other Services

Total Government

Change in Employment (000) Source: Vermont Department of Labor

Since Last Peak - July 2001

Since Last Trough - April 2003


VT Economic Situation• Vermont’s factory sector has been in a long-term job decline, but

this has been the case regionally and nation-wide…


Structural Change: Manufacturing Employment in Vermont, N.E. and the U.S.

(seasonally adjusted data, indexed, January 1990 = 1.00)

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

Source: U.S. Bureau of Labor Statistics

Ind

exed

to

Jan

uary

1990 =

1.0

0

Vermont

U.S.

NewEngland


VT Economic Situation• VT’s unemployment rate has been lower than the U.S. average…


Vermont Unemployment Rate Relative to U.S. Unemployment Rate

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Jan

-69

Jan

-71

Jan

-73

Jan

-75

Jan

-77

Jan

-79

Jan

-81

Jan

-83

Jan

-85

Jan

-87

Jan

-89

Jan

-91

Jan

-93

Jan

-95

Jan

-97

Jan

-99

Jan

-01

Jan

-03

Jan

-05

Verm

on

t R

ate

/U.S

. R

ate


• But Vermont’s position among the 50 states has slipped from 2nd to 15th since last May... Unemployment Rate by State - November 2006

Seasonally Adjusted Data, Source: U.S. Bureau of Labor Statistics

7.5%6.9%

6.6%6.4%

6.0%5.5%

5.4%5.3%

5.2%5.2%

5.1%5.1%

5.0%5.0%5.0%

4.9%4.8%

4.7%4.7%4.7%

4.6%4.6%

4.5%4.5%4.5%

4.4%4.3%4.3%

4.2%4.2%

4.1%4.1%4.1%

3.9%3.9%3.9%

3.7%3.6%

3.5%3.4%

3.3%3.3%3.3%

3.2%3.2%

3.1%3.0%3.0%

2.8%2.6%

2.3%

0.0% 2.0% 4.0% 6.0% 8.0%

MississippiMichigan

South CarolinaAlaska

District of ColumbiaKentucky

OhioOregon

ArkansasRhode Island

MissouriWest Virginia

MassachusettsTennesseeWashington

North CarolinaIndianaMaineTexas

WisconsinCaliforniaGeorgia

LouisianaNew J ersey

PennsylvaniaConnecticut

KansasNew Mexico

NevadaNew York

ArizonaColorado

IllinoisMaryland

MinnesotaOklahoma

VermontDelaware

New HampshireIowa

FloridaIdaho

North DakotaAlabama

South DakotaNebraska

VirginiaWyomingMontana

UtahHawaii


VT Economic Situation

VT Economic Situation• VT’s labor market recovery remains historically restrained…


A Tale of Four Employment Cycles in Vermont - Redux

(Total Vermont Nonagricultural Employment Relative to Prior Cyclical Peak, Source: US Bureau of Labor Statistics)

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1 2 3 4 5 6 7 8 9 10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

Months After Prior Cyclical Peak

Em

plo

ym

en

t L

ev

el

Ind

ex

ed

to

Pri

or

Cycli

cal

Pe

ak (

Pri

or

Peak =

1.0

0)

Aug-74

Jul-81

May-90

Jul-01

15 Months

25 Months

34 Months

46 Months

Month of Cyclical Peak


VT Economic Situation• And will likely continue to remain so…


Calendar Year Forecast Comparison: United States, New England, and Vermont (November 2006 NEEP Forecast)

2001 2002 2003 2004 2005 2006 [1] 2007 2008 2009 2010Real Output (% Change)U.S. Gross Domestic Product 0.8 1.6 2.5 3.9 3.2 3.5 2.9 3.2 3.2 3.0N.E. Gross Domestic Product 0.8 -0.3 2.3 4.1 3.3 1.7 2.1 2.5 2.6 2.6Vermont Gross State Product 4.3 2.0 3.7 4.5 3.0 0.9 1.9 2.4 2.4 2.1

Non-Farm Payroll Jobs (% Change)U.S. 0.0 -1.1 -0.3 1.1 1.5 1.9 1.2 1.0 1.4 1.3New England 0.1 -1.1 -0.3 1.1 1.5 1.4 1.0 1.1 1.4 1.4Vermont 1.1 -0.9 -0.1 1.3 0.8 0.8 0.7 0.7 0.8 0.8

Personal Income%Change (2000 Dollars)

U.S. 1.4 0.4 1.2 3.5 2.3 3.9 3.1 3.4 3.3 3.2New England 1.9 -0.7 0.6 3.5 2.3 1.9 2.5 2.8 2.7 2.5Vermont 2.9 0.3 1.4 3.1 2.3 2.0 2.4 3.0 2.8 2.4

Unemployment (Percent)U.S. 4.7 5.8 6.0 5.5 5.1 4.7 4.8 4.8 4.6 4.5New England 3.6 4.8 5.4 4.9 4.7 4.6 4.8 4.7 4.6 4.5Vermont 3.3 4.0 4.4 3.7 3.5 3.3 3.4 3.4 3.2 3.2

----------------------------Actual-------------------------- --------------------------Forecast-------------------------


VT Situation/Outlook• At a level somewhat below the U.S. average...

U.S. And Vermont Employment% Change Year Over Year

0.00.20.40.60.81.01.21.41.61.8

2005 2006 2007 2008 2009 2010

Year

Ann

ual P

erce

nt C

hang

e

Vermont

U.S.


VT Personal Income Tax Base• Tax year 2005 income disparities persisted...


Percent Change in Adjusted Gross Income in Vermont, 2005 vs. 2004 by Income Class

-10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

$0-$5

$10-$15

$20-$25

$30-$35

$40-$45

$50-$60

$75-$100

$125-$150

$200-$300

$500-$1,000

Percent Change Source: Vermont Department of Taxes

Average Percent Change for All Vermont Residents = 8.3%

VT Personal Income Tax Base• Though were less pronounced than in tax year 2004...


Percent Change in Adjusted Gross Income in Vermont, 2004 vs. 2003 by Income Class

-10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

$0-$5

$10-$15

$20-$25

$30-$35

$40-$45

$50-$60

$75-$100

$125-$150

$200-$300

$500-$1,000



VT Personal Income Tax Base• But will likely support somewhat higher personal income receipts in both

FY07 and FY08, despite the risks of heightened income volatility


Percent Change in Net Vermont Income Tax Paid, 2005 vs. 2004 by Income Class

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

$0-$5

$10-$15

$20-$25

$30-$35

$40-$45

$50-$60

$75-$100

$125-$150

$200-$300

$500-$1,000



VT Meals and Rooms Tax Base• Despite strong Fall tourism visitation, poor start to winter recreation

season could cost State more than $2 million in FY07 tax revenues


Forecast Risks• Most forecast risk remains on the downside for fiscal 2007-09, with a

more rapid decline in housing and real estate as the primary risk…


Vermont vs. U.S. OFHEO Housing Price Index Percent Change Vs. Year Ago(Sources: Office of Federal Housing Enterprise Oversight, Economy.com, Vermont J oint Fiscal Office)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Vermont

U.S.FORECAST

Forecast Risks


0

20

40

60

80

100

120

140

160

84 86 88 90 92 94 96 98 00 02 04 06

0

5

10

15

20

25

30

35

40

45

50

# elevated risk markets (L)# very high risk markets (L)% housing stock at risk (R)

Reprinted: Courtesy of Moody’s Economy.com


Half the nation's housing may be overvalued...

• Which could impact both consumer spending, through wealth effects and financial markets – both domestic and international…

Policy Resources, Inc.EPR Economic & Reprinted: Courtesy of Moody’s Economy.com

Forecast Risks


Share of foreign holdings of U.S. financial assets % (right scale)

600

1600

2600

3600

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

16

18

20

22

24

26

28

30

32

$b (left scale)

Foreign Holdings of U.S. Mortgage-Backed Debt

Forecast Risks• The deteriorating Federal budget situation and U.S. current account

deficit are also significant risks…


0

1

2

3

4

5

6

Current law Plus: I raq Plus: Taxcuts

permanent

Plus:Discretionary

spending

Plus: AMT

$ trilShare of GDP

Sources: CBO, Moody’s Economy.com

Ten Year Cumulative Budget Deficit, FY2006-2015

Reprinted: Courtesy of Moody’s Economy.com

Forecast RisksThe U.S. "Imbalance" of Trade Reaches Unprecedented Proportions

Balance on Current Account, Seasonally Adjusted Data, Source: U.S. Bureau of Economic Analysis

-250000

-200000

-150000

-100000

-50000

0

50000

1960Q1

1961Q2

1962Q3

1963Q4

1965Q1

1966Q2

1967Q3

1968Q4

1970Q1

1971Q2

1972Q3

1973Q4

1975Q1

1976Q2

1977Q3

1978Q4

1980Q1

1981Q2

1982Q3

1983Q4

1985Q1

1986Q2

1987Q3

1988Q4

1990Q1

1991Q2

1992Q3

1993Q4

1995Q1

1996Q2

1997Q3

1998Q4

2000Q1

2001Q2

2002Q3

2003Q4

2005Q1

2006Q2

Mill

ions

of D

olla

rs

• Which could reignite inflationary pressures and limit Fed policy options…


For Further Information Contact

- Vermont Legislative Joint Fiscal Office (828-2295)

- Office of Budget and Management of the State of Vermont (828-2376)

Jeffrey B. CarrConsulting Economist to the Vermont State Agency of AdministrationEconomic and Policy Resources, Inc.(802) 878-0346 Ext. [email protected]

Thomas E. KavetConsulting Economist to the Vermont State LegislatureKavet, Rockler & Associates, LLC(802) [email protected]


mailto:[email protected]

mailto:[email protected]

January 2007 Economic Review and Revenue Forecast Update State of Vermont Emergency Board and...

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Transcript of January 2007 Economic Review and Revenue Forecast Update State of Vermont Emergency Board and...