Wednesday, September 28, 2022 6:15 am

Pollack warns of possible $1B state deficit


The Monday Morning Quarterback  / A quick analysis of important economic data released over the past week

Arizona Snapshot:

While Arizona weekly unemployment claims were down 32.6% from a year ago for the last week in June, they are up 0.6% from the prior week.

Arizona personal income grew by 0.9% in the first quarter of 2014 and now stands 4.0% over a year ago.  On average, state personal income for the U.S. as a whole increased 0.8% in the first quarter and 3.5% over the year.

Statewide lodging performance improved in May versus a year ago.  Occupancy was up to 61.7% compared to 58.4% a year ago.

deficitFor Arizona, the story still revolves around employment and the housing market.  However, there is another data point to start tracking.  The state government is at risk of running a significant cumulative deficit if things do not turn around rather quickly.  One estimate calls for a worst-case scenario of a $1.0 billion deficit by the end of FY 2017.  For those that aren’t familiar with fiscal years, FY 2015 begins tomorrow.  Now part of this depends on the outcome of a court case.  But, even under optimistic settlement assumptions, the cumulative (structural) deficit will still be very large.  The danger is the state (and other local government entities) having to operate as if we were in a recession even though we might be in the middle (or on the tail end) of an expansion.  This means that we won’t have anything left for the next downturn.  This does not come at a good time; when we need to be talking about competitiveness and infrastructure and workforce, etc.  Solutions to this issue must come swiftly.

National overview  

This week’s data releases included an initially surprising figure for real GDP growth in Q1: negative 2.9%.  In more normal situations this would have scared investors out of the market and created a worrisome weekend for many individuals.  However, a downward revision to the data wasn’t unexpected.  While the negative 2.9% figure is indeed worse than the forecasted negative 1.8%, the scale of the discrepancy is common.  Also, as has been noted in this weekly report and many others, the decline is expected to be a one-time event.  Recall that unusually bad winter weather caused sharp cutbacks in production and consumption in Q1.  Inventories were not maintained which exacerbated the decline.  Interestingly, there was a large inventory investment in the latter parts of 2013, which boosted real GDP growth then and allowed for the Q1 depletion.  Don’t be surprised if Q2 looks strong and Q3 posts some slight weakness.  This will be due more to how rates of growth are impacted by activity shifting from one quarter to the next, rather than the overall health of the U.S. economy.

Also keep in mind that recessions are not just based on GDP data anymore.  Economists look at incomes, production, and employment, among other things.  Most of these other categories that identify economic health have been growing, just not at the rates we had hoped.  Individuals and businesses have also expressed continued optimism in the economy.  This bodes well when looking forward.

U.S. Snapshot:

Personal income grew by 0.4% in May and now stands 3.5% over a year ago. Disposable personal income was also up 0.4% and 3.7% over the same time periods.  Personal consumption expenditures grew at a slightly slower pace, rising 0.2% from a month ago and 3.7% from a year ago.

Consumer confidence, according to the Conference Board, now stands at 85.2.  This is the highest level reported since early 2008.  Yet, consumer confidence as measured by the University of Michigan survey, while still high, lags year earlier levels.

Existing homes sales increased 4.9% in May following a 1.5% increase in April.  This is the first back-to-back gain since April and May of last year.  May’s seasonally adjusted annual rate of 4.89 million existing home sales is still below the 5.15 million a year ago.  The median price, at $213,400, was up 5.1% over a year ago.

New home sales surged beyond expectations in May up 18.6% over April.  They are up 16.9% from a year ago.  The median price of $282,000 was up 4.6% over the month and 6.9% over the year.


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