Minnesota s Economic Outlook for 2013 and Beyond Tom Stinson October 2012
FY 2014-15 Budget Planning ($ in millions) FY 2012-13 FY 2014-15 $ Difference % Change Forecast Revenues $33,867 $35,861 $1,994 5.9% Projected Spending 34,088 36,903 2,815 8.3% Difference $(221) $(1,042) Inflation --- 1,059 --- --- Key planning assumptions: Tax revenue growth Grow $2.7 billion (8.6 percent) Non-tax revenues Decline $0.7 billion (-27.7 percent) K-12 expenditures - Increase $1.2 billion (Impact of school shifts) Health and human services spending Increase $0.7 billion (6.7 percent) Debt service Increase $0.9 billion (Impact of tobacco bonds) Other spending areas Essentially flat $2.4 billion in school shifts remain to be repaid
More of the Same Slow Growth Forecast for U.S. in 2012 and 2013 Real GDP $ Billions 15,500 15,000 14,500 4.1 Quarter GDP (LHS) Ann Pct Chg SAAR 4.5 4 3.5 14,000 13,500 13,000 12,500 2.5 1.3 2.0 1.7 1.5 1.6 1.9 1.9 1.9 2.5 3 2.5 2 1.5 12,000 1 11,500 11,000 0.0 2011 2012 2013 0.5 0
Growth Expected to Continue Through 2013 2012 real GDP growth expected to be 2.2 percent; 2013, 1.8 percent Inflation not a problem -- 2012 CPI, 2.0% Oil prices relatively flat through 2014 Light vehicle sales at 14.2 million units by end of 2012 Housing starts 750K in 2012, 1M in 2013
Favorable Interest Rate Environment Expected Through 2014 No fed funds increase until 2015 10 year Treasury goes from 2 percent to 4+ percent by 2015 30 year mortgage will creep up slowly in 2013 and 2014 QE III will have little impact
Why We Are Not Going Into a Recession Oil prices have not increased Housing starts are increasing Auto sales are growing Consumer confidence is increasing No supply chain problems Sovereign debt problems less disruptive The great recession is one year further in the past
Why We Might Go Into a Recession in 2013 Economic growth remains sub-par Consumer spending recovery is not robust Jobs growth continues to disappoint Capital equipment spending slowing Export growth decelerating European sovereign debt crisis The federal fiscal cliff
What to Watch Over the Next Eight Months Unemployment rate / jobs Consumer sentiment / consumer spending Oil prices European sovereign debt U.S. fiscal policy decisions
The Eurozone s Problems Are Still Very Serious Europe is in a recession European and American capital markets are linked Decline in Euro affects the demand for U.S. produced goods and services But, much of the losses associated with Greek debt have already been absorbed Further financial problems in Spain or Italy remain a concern
2013 Forecasts Assume a Grand Bargain Avoids the Fiscal Cliff 2013 Real GDP Growth Annual Pct Change 5 4 3 2 2.1 2.3 2.6 2.1 2.1 1 0-1 Global Insight Blue Chip Moody's S&P CBO 2
The Fiscal Cliff Is More than the Expiration of the Bush Tax Cuts Payroll tax cut expires ------------ $110B Bush tax cut expires -------------- 160B AMT Indexing expires ------------ 125B Other changing tax provisions -- 146B Total tax increases $541B Scheduled spending cuts $144B TOTAL (Fiscal Drag) $685B
How the Fiscal Cliff Slows the Economy A combination of higher taxes and lower government spending reduces household income Households balance their budgets by drawing down their savings and by cutting back on their spending Growth in consumer spending slows, reducing the economy s overall growth rate
The Simple Arithmetic of the Fiscal Cliff 2012 Real GDP Growth @ 3.5% 475 Fiscal Drag -685 Savings Drawdown 228 Net 18 2013 Real GDP $13,580 B $13,598 B Annual Growth Rate 0.1%
The Short Term GDP Growth Rate Would Increase Under Current Policy Projected Growth Rate 2013 Real GDP 5 4.4 4 3 2 2.1 1 0 0.5 0.1-1 GII Blue Chip Moody's S&P CBO 2 CBO Base GII FC1-0.3 GII FC2 CBO Alt
Long Term GNP Growth Is Noticeably Greater in CBO s Baseline Scenario
Recent Economic and Demographic Events Have Changed the Outlook for as Far as We Can See
We Are Headed to a New Normal The Great Recession is over and the economy is growing -- but we will not return to where we once were We are moving to a New Normal The U.S. is not alone -- it is happening globally Those who recognize this and adapt first will be most successful The next four years will be critical
This Recovery Has Been Slower Than Those in the Past Percent Change from Quarter Preceding NBER Recession Call 24% 20% 16% 12% 2007-2009 2001 1990-1991 1980-1982 8% 4% 0% -4% -8% 2Q 2012-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Quarters After NBER Recession Call
U.S. Payroll Employment Fell More Than 5 Percent in the Great Recession Percent Change from Quarter Preceding NBER Recession Call 24 20 16 12 2007-2009 1980-1982 1990-1991 2001 8 4 0-4 -8 2Q 2012-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Quarters After NBER Recession Call
The Number Of Minnesotans Turning Age 65 Is Increasing Sharply This Year Census ACS and counts and Mn State Demographer forecasts, the 2012 increase is 36%
From 2010 to 2020, Minnesota Will See Large Increases Age 60s and 70s 85+ 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 -42,310-63,650-2,680-9,980-30,680 Source: Minnesota State Demographic Center, rev 2007 Numbers are rounded 16,500 8,440 41,400 54,240 61,920 47,950 5,050 47,330 36,190 20,150 91,370 112,540 102,960
Annual Percent Change Minnesota Total Labor Force Minnesota State Demographer forecast, revised January 2012 Gillaspy Demographics www.gilldem.com
World Labor Force Growth Slowing Projected Change In Working Age Population (15-64) Annual % Change 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 2000-10 2010-20 -1.5% Minnesota United States Europe China Japan Rest of Asia South America Africa Continent U.S. Census Bureau
The Old Normal + The Great Recession + Long Run Demographic Changes = The New Normal
The New Normal Probably Means Higher interest rates Labor and talent will be the scarce resources Slower economic growth A single-minded focus on productivity Increasing numbers of retirees A more diverse population More uncertainty about the future
For Many Occupations, Replacements Will Outnumber New Job Growth Projected Openings In Minnesota Occupations 2006-16 DEED projections. Percent of 2006 level
Budget Pressures Will Change More 65+ Than School Age by 2020 Census counts & State Demographer projection, revised Jan 2012
Economic Facts of Life Standard of Living depends on output per resident Output = Output per Hour * Hours Worked If the ratio of workers to residents declines productivity will need to increase if we are to maintain our current living standard
Productivity Is Not Just Producing at a Lower Cost
Increasing Productivity Also Means Making things better (improved quality) Making better things (innovation, new products)
Focusing Just On Expenditure Cuts May Be Short Sighted Long term cost saving may require investments which increase short term expenditures
The Fiscal Catch-22 If we don t make the necessary public investments in human capital, research and infrastructure, then we won t have the productivity gains needed to provide the resources to make those investments in the future
Education Achievement Gaps Are Large Minnesota High School Graduation Ratio 100% 90% 80% 70% 60% 50% 47% 73% 52% 51% 85% 53% 61% 78% 92% 40% 30% 20% 10% 0% 2009-10 Mn Dept of Education 5 year graduation rate. Percent of 9 th graders who graduate within 5 years. ACS 2009
Minnesota Has Been Very Successful Especially For A Cold Weather State at the End of the Road Our economic growth rate has exceeded the national average Our population growth rate leads the frost belt We rank with the leaders on many social and economic indicators Education has been a key contributor to the state s success
Minnesota s Current Success Is Due to Decisions Made 50+ Years Ago Far sighted private sector and public sector decision makers established the foundation for growth in Minnesota s economy Dealing with challenges brought by the baby boom was a key to our success Wise investments were made
How will Minnesotan s 50 years from now view our generation s stewardship?
I skate to where the puck will be, not to where it has been. Wayne Gretzky Famous Canadian Philosopher