• General Fund revenues through February are $145 million
above an $11.1 billion revenue target.
• Key revenue sources, sales tax collections and withholding
income tax, continue to equal or surpass budget forecast.
• Recent economic data indicate the recovery is slowly re-gaining
the traction lost this past summer and fall.
• The employment picture remains troublesome with very little
growth being reported or expected for most of this year.
• Global economic risks continue to threaten the recovery,
particularly rising gas prices and the Eurozone’s debt problems.
1
• Through February, General Fund revenues are $145 million
above a $11.1 billion revenue forecast target.
– Tax revenues are $195 million the $10.5 billion target.
• Income tax collections are 3% above target, while sales tax
collections are on target through February.
• The December/January estimated income payments were 2.3%
higher than last year.
‾ When small year-over-year changes occur in estimated payments,
no insight can be gained with respect to net final payments in
April.
• Non-tax revenues, which include short-term investment income
and judicial fees, are $50 million below the $567 million target
2
• Income tax withholding on wages and salaries is up 2.4% for
the first seven months of the fiscal year.
– Withholdings from larger employers continue to post positive
year-over-year gains and are 2.1% above target for the year.
• Baseline sales tax collections have improved significantly.
January’s collections were up 7.5% over last year.
– Baseline (tax-adjusted) sales tax collections for the first seven
months of the fiscal year were up 7.1%.
– Baseline collections for this fiscal year are slightly below where
they were for the same period in FY 2006-07, despite a
population increase of 750,000+ people.
– In other words, per capita baseline collections are down 7.2%
compared to five years ago (see chart on page 6).
3
• Net withholdings (wage and salary withholdings less refunds)
have improved significantly this past year. These gains have
flattened out over the last several months and without further
improvements in employment could begin to slip below
revenue targets.
4
• Baseline sales tax collections continue positive growth despite
a weak employment picture. If food and gas prices begin to
increase, sales tax collections will likely suffer; neither gas or
grocery store food are in the State’s sales tax base.
5
• January sales receipts were 1.5% below target. For the rest of
the fiscal year, revenue targets are fairly aggressive with
growth at 6%. Historically, sales receipts grow at just above
5%. Given that we are 7.2% below per capita collections from
5-years ago, the targets are less aggressive than they appear.
6
• There has been little change in the outlook since our last report
in November. Recent forecasts for the nation and the State
anticipate a subpar economy throughout 2012.
• Economic activity is picking up across the State with increases
in Gross State Product (a broad measure of economic activity)
anticipated with growth at or above average into 2013.
– Unfortunately, the increase in economic activity is not translating
into increases in employment.
– Employment growth should gather steam during 2012, but
growth will not be robust enough to push the unemployment rate
below 9% until late 2013 or into 2014.
7
• Employment numbers in most of the State’s industry sectors
have barely moved off recession lows.
– Since July 2011, non-farm employment has increased by only
4,500 jobs (0.5% increase).
– Since the recession ended in June 2009, non-farm employment
data shows a loss of 22,700 jobs through December 2011.
• Compared to last year, Manufacturing and Construction have
posted no gains. Education & Health Services; Trade; and the
Leisure & Hospitality sectors have gained between 1% and 3%.
• From December 2010 to December 2011:
– Private sector employment increased by 12,400 jobs.
– Government sector employment decreased by 7,900 jobs
8
• Employment is still struggling to gain traction 30 months into
the economic recovery. With almost 300,000 fewer jobs in the
State and only 41,500 jobs added since losses bottomed-out in
November 2009, strong growth in economic activity is unlikely
to occur anytime soon.
9
Source: NC Employment Security Commission
• The unemployment rate is expected to remain above 9.5% until
the 4th quarter of 2012. The State’s unemployment rate in
December was 9.9%, nearly the same as February 2011 (9.8%).
Average rate, 5.3%
10
Source: Actual data from the NC Employment Security Commission, Forecast by FRD shaded in gray
• There are signs that the job market is improving. Initial claims
(the number of jobless claims filed by individuals seeking State
jobless benefits) have lessened and are approaching the pre-recession
levels of 2007.
11
Source: NC Employment Security Commission
• One of the keys for improvement in the State is housing. The
economic headwinds caused by the housing market’s problems
still persist four years after the start of the housing decline.
Good news is the housing market is finally starting to show
some improvements.
– The housing market remains out of balance with more houses available
than buyers. Foreclosures, which have exacerbated the housing
market’s woes, have begun to abate. Nonetheless, prices continue to fall
as the market tries to clear the excess caused by falling demand and a
rise in distressed (including foreclosed) homes for sell.
– The housing surplus means there is little demand for new construction;
however, recent forecasts expect new housing starts to increase by
2013. They reached a low of 33,296 in 2010, compared to the high of
95,408 in 2006.
– Despite the State’s apparently-modest exposure to the housing bubble
in 2007, we have experienced one of the Southeast’s slower housing
recoveries. Florida and Georgia still lead the way in terms of housing
difficulties.
12
• The housing bubble began in 2002 and burst in 2008, causing
home sales to plummet. The green dashed line indicates the
long-term growth trend in existing home sales. Our forecast
indicates that existing home sales will return to trend by the
first quarter of 2013.
13
•
• Last year the economy appeared to be gaining solid footing and
growth was poised to finally accelerate. The unemployment
rate had fallen to 9.7% in May.
• Global turmoil in the Eurozone and the natural disaster in
Japan were yet to unfold. By mid-summer it was clear that
sovereign debt in Europe, supply disruptions in Japan, and
rapidly-rising gas prices would place a major drag on the
economy.
• The State’s unemployment rate began to steadily increase and
in September peaked at 10.5%.
‾ In September there were an estimated 33,000 fewer people
employed in the State than in May (seasonally adjusted).
14
• The State’s economy weathered this slowdown and avoided a
recession, revealing an underlying strength that could propel us
forward at a much-improved pace, barring a return of some of
the same old culprits.
‾ Parts of Europe may already be in a mild recession, the
debt problems are still unresolved, Japan is reporting negative
economic growth, and energy prices are rising again.
• The slowdown this summer affected the State, but many key
indicators continued to move upward from the lows of 2009
and 2010.
‾ Wage and Salary income grew each quarter of last year.
‾ Retail Sales have been steadily on the rise.
‾ The job losses from May to September have been recovered.
15
• As noted, we have been here before, and in more ways than one. Just
as with last year, the economy appears to be on more solid footing,
but trouble is looming yet again with the threat of rising prices in
commodities, continued slow employment growth, and potential
recessions in Europe and Japan.
– The US economy withstood the last round of negative economic
shocks, but remains fragile. The question is, is the economy
strong enough to withstand another round of shocks?
• Few if any economic forecasters envision our economy rising above
moderate growth levels in 2012. Some are suggesting that
employment growth is still a year or more away.
• This means that some of the assumptions made in the FY 2012-13
revenue forecast may not come to fruition. Fortunately, the biennium
forecast adhered to a cautious philosophy, which could minimize the
impact of recently downward revisions of economic forecasts.
16
• The State’s economy is expected to continue following the national
trend of slow, yet steady, economic growth.
• The economy is regaining solid footing on many fronts, but as long
as the State’s employment growth remains anemic, then the recovery
will continue along a much slower track. This will also make the
upturn in the overall economy more fragile and susceptible to
economic shocks.
• Such types of shocks have reared their head of late and are poised to
derail the recovery yet again.
• The greatest risk to General Fund revenue resulting from the fragile
economic recovery and recent global events will be to next fiscal
year’s revenue projections (FY 2012-13). Those projections were
predicated on an economy that was gaining strength with each
quarter of the year.
17