On Thursday, January 12, the biannual Consensus Revenue Estimating Conference was held in Lansing.  The conference included members of the House and Senate Appropriations Committees, the directors of the House and Senate Fiscal Agencies, the State Treasurer, Nick Khouri, and the incoming State Budget Director, Al Pscholka.  After hearing testimony from the Research Seminar on Quantitative Economics at the University of Michigan, IHS Markit, and senior economists from the House and Senate Fiscal Agencies and Department of Treasury, the principals came to an agreement on economic and revenue figures for the remained of the 2017 Fiscal Year and for the upcoming 2018 and 2019 Fiscal Years. 

The administration and the legislature will use the information presented today and the agreed upon revenue numbers to craft their budgets for the upcoming Fiscal Year.  Governor Rick Snyder will present his executive recommendations on Wednesday, February 8 and the legislature will begin to introduce their budget recommendations shortly thereafter.

The presenters extended the Michigan recovery to ten years, albeit at a slower pace of growth.  A key point throughout the presentations was the discontent between consumer sentiment indexes and the sales tax revenue.  Typically, as consumer confidence in the economy increases, consumers spend more money, thus increasing sales tax revenue.  However, this has not been the case in Michigan and that has an impact on the economic forecast.  “There are many reasons given for the disconnect: consumers putting more dollars into savings or paying off debt to name a few.  However, the State is hoping this is a small hiccup and going forward, consumer spending matches that of the confidence levels,” stated Sean Mann of MLC.  

Following the conference, net FY 2017 General Fund-General Purpose (GF-GP) revenue is projected at $10.290 billion, up $152 million from estimates agreed to at the May 2016 Consensus Revenue Estimating Conference.  Net FY 2017 School Aid Fund (SAF) revenue is now estimated at $12.457 billion, up $55 million from May’s conference.  Net GF-GP revenue for the FY 2018 is forecasted at $10.523 billion, down $84 million from May, while the FY 2018 SAF revenue estimate has been revised up by $22 million to an estimated $12.783 billion.  Due to these unexpected revenue numbers, the state has nearly $330 million in added one-time revenue to invest in the FY 2018 budget.  In FY 2019, GF-GP revenue is estimated at $10.589 billion and SAF revenue is estimated at $13.132 billion.

Some key economic highlights include:

Global Forecast:

• World economic growth remains a risk factor
• The fallout from BREXIT creates uncertainty in the global market
• France and Germany are holding elections for their top leaders this year, the elections results will have an impact on the economy of those countries, and thus the global economy
• Uncertainty of oil prices going forward

National Forecast:

• Uncertainty at the national level is relatively high, comparatively to previous forecasts

• Risks to the economic outlook include the incoming presidential administration and their approach to policy; especially that of trade policy and tariffs for moving jobs overseas
• If the Affordable Care Act is repealed that, along with its replacement, will have a large impact on the national and state economies
• The number of underemployed is falling faster during the past two years, but has recently slowed and remains higher than pre-recession numbers
• Light vehicle sales in December were the highest in fifteen years, however the year over year readings show six months of improvement and six months of decline
• Markets think there is extra risk of inflation, thus long-term interest rates have been up sharply since November
• Current federal receipts have slowed thus far in the fiscal year
• Real GDP is projected to grow in 2017, and slightly decrease in 2018 and 2019
• The unemployment rate is expected to level off at 4.5% in 2018 and remain there in 2019
• Existing home sales will see a slight growth through 2019 and new construction should edge up also

Michigan Forecast:

• Its projected that vehicle sale growth has reached its peak and will gradually decline over the next three years
• Wage and salary growth is projected to be 1.9% in 2016, 0.8% in 2017, and 1.2% in 2018
• The state’s unemployment rate is forecasted to decrease to 4.7% in 2016 and 2017, 4.6% in 2018, and 4.5% in 2019
• The implementation of the road funding package in 2019 will decrease net revenue to the GF-GP by $150 million
• Reduction to the Homestead Property Tax, passed as part of the transportation funding package, will decrease revenue by $206 million in 2019
• Inflation will increase 2.2% in 2017, 1.9% in 2018, and 2.0% in 2019
• The Corporate Income Tax remains volatile, revenue fell by 14% in FY 2016, but is projected to increase 2-3% in the upcoming fiscal years
• Michigan Business Tax credits, which have wreaked havoc on the budget in the past, are projected to have peaked in FY 2016
• A risk to the forecast remains the uncertainty as to whether consumer spending will increase, in addition to how will the housing market respond to higher interest rates

Michigan Legislative Consultants is a bipartisan lobbying firm based in Lansing, Michigan. Our team of lobbyists and procurement specialists provide a wide range of services for some of the most respected companies in America. For more on MLC, visit www.mlcmi.com or connect with us on LinkedIn and Twitter.