The Monday Morning Quarterback /A quick analysis of important economic data released over the past week
Elliott D. Pollack & Co.
Policymakers at multiple levels of government are currently looking at how tax revenues shaped up for the fiscal year that ended June 30th. The state offers the best example of how the issue has been misinterpreted. This lesson can be applied to all levels of government.
Historically, especially during times of economic expansion, the economic data that is reported each week, month, or quarter offered insight into the extent tax revenues would grow in the coming year or two. Economic models could be developed and relatively accurate forecasts could be assembled. It is a different process this time around. Historical patterns between the economic data and tax collections are much weaker than in previous expansion periods. This adds to forecast uncertainty.
When a budget is assembled, one of the most critical factors is maintaining a reasonable level of certainty. While it is not good to under-forecast revenues, over-forecasting revenues is far worse. If a forecaster desires a high degree of certainty in what is being tabulated and implemented in the construction of a budget, then the revenue forecast must be more conservative. The higher the desired level of certainty, the lower the forecast must be.
This brings us to today’s issue: is the state going through a process of under-forecasting revenues for political reasons? After all, the projected shortfall is now a $266M surplus for FY2015.
In this case the right policy is being employed. The gains are a very small percentage of the overall budget, come from revenue sources than can be quite volatile, and are not assured to be available in the future (maybe not even next year).
The state should not go out and spend the “surplus”. Current economic data is not strong enough to support that kind of spending policy and may not be strong enough for the duration of this expansion.
This applies to all policymakers taking a look a how this last fiscal year ended. For the most part, the various government entities in the state have done a decent job of managing this weak economic expansion. Now is not the time to ramp up spending.
Now for the economic data that is showing signs of improvement (but not enough so to warrant a government spending spree).
Arizona Snapshot:
Arizona retail sales were up 11.3% from a year ago in May. Maricopa County sales were up 13.3% from a year ago.
According to R.L. Brown, Greater Phoenix permits were up 57.2% (about 611 permits) in June over the same month last year. Year-to-date, permit activity is up 35.7% over the same period last year. This is good news for the Greater Phoenix housing recovery.
U.S. Snapshot:
The index of leading indicators rose 0.6% in June following an upwardly revised 0.8% increase in May (see chart below). The recent strength, boosted by the outlook for the housing sector, points to continued strength in the economic outlook for the second half of the year.
Total existing homes sales increased 3.2% in June to their highest pace in over eight years. The rise of demand and limited supply helped push the median sales price to an all-time high of $236,400. The June median sales price is 6.5% above last year and surpasses the peak median sales price set in July 2006.
National new home sales plunged 6.8% in June, but monthly volatility is common for new home sales. Over the year, new home sales were up 18.1%. The good news is that the supply of new homes on the market increased 3.4% over the month. Greater supply points to greater future sales.
