Minnesota economy remains on stable, solid ground with projections for marginal growth

If there is a word to describe the Minnesota economy and in turn its state tax collections it would be steady.

A quarterly update released Tuesday by Minnesota Management and Budget shows tax collections have come in above what was expected by the last official economic and revenue forecast in February. Between that estimate and the end of the state fiscal year June 30, state taxes collected $630 million more than expected, about 2.1% above forecast on an expected base of $30 billion for the year.

Then, from July 1 to the end of September – the first quarter of the 2024 fiscal year – tax collections were $400 million more than expected, about 6.7 %. Taken together, tax collections have brought in more than a billion dollars more than was forecast last February.

All major state taxes were in positive territory from July to September. While those are big numbers, they are not the types of wild swings in collections that Minnesota and most states experienced during the pandemic. They reflect a recent trend of collections reports that are close to what was expected.

But perhaps the better news from the October revenue and economic update comes in what it says about the overall national and state economies. The outlook for growth in U.S. real gross domestic product – the inflation adjusted measurement of the value of goods and services produced within the country – has been upgraded since February.

In February the state’s macroeconomic consultant S&P Global thought the U.S. economy would grow 0.7% this year and 1.6% next year. It now predicts it will grow 2.5% this year and the same 1.6% next year. It has lowered slightly its forecast for the years 2025 to 2027 – from an average of 1.8% growth to 1.5% growth.

Stronger economic growth often translates into higher individual income tax collections, corporate franchise tax collections and sale tax collections.

It is the last quarterly economic update before the November revenue forecast that will tell Gov. Tim Walz and then the Legislature how much current state taxes will raise and how much the current state budget will spend. While Tuesday’s numbers don’t drive the decisions of the 2024 legislative session, they are the last indication from economists as to where the economy is going and what the revenue forecast might look like.

“The improved near-term economic outlook is the result of the economy’s remarkable resilience throughout the year in the face of tightening financial conditions,” the Tuesday MMB update states.

That is reflected in estimates of consumer spending. In February, S&P Global forecast consumer spending to grow by 1% this year. It now expects it to grow by 2.3%.

Employment has also been stronger.

“S&P expects an unemployment rate of 3.7% in the fourth quarter of this year, 0.7 percent points below their February forecast,” the MMB update states. That rate doesn’t reflect who not looking for work.

The so-called labor force participation rate nationally was 62.8% in September, the highest rate since the pre-pandemic number of 63.3%. But the U.S. labor force grew by 90,000 in September, lower than the average of 260,000 in the previous 12 months.

According to last month’s employment report by the state Department of Employment and Economic Development, the labor force participation rate in the state held steady over-the-month at 68.5% and Minnesota’s unemployment rate ticked up one-tenth of a point to 3.1% in August.

Inflation remains a concern of forecasters with S&P Global expecting the Federal Reserve Board to hold the federal funds rate above 5% for the near future to continue to contain inflation. That is the rate charged when banks borrow from each other and influence most consumer borrowing costs. The consultant expects that rate to reach a peak of 5.6% in the first quarter of 2024 and then drop below 5% in 2025.

The same consultants now expect inflation this year to be 4.1% – up from 4% in their February forecast. Then now expect 2.4% inflation next year, compared to their February estimate of 2.3%

What could make this forecast wrong? It could prove too optimistic if banks tighten lending and worsening conditions in Russia and Ukraine leads to higher energy prices. It could be too pessimistic if lending by banks loosens, the war in Ukraine is resolved sooner than expected.

September tax collections in Minnesota continue a trend of slightly positive but less volatile variances in collections above forecast. After a February collections report that was $99 million below forecast, the monthly memos issued by MMB’s economists have shown relatively minor but positive numbers each month, except May when they were a near spot-on minus $7 million, this in a state government that collects an average of $2.5 billion a month.