A pandemic like no other produced a recession like no other, and economists continue to have trouble projecting the fallout from COVID-19 on the national and state economies.
Further evidence of how the novel coronavirus was not kind to the dismal science came Monday in the latest revenue and economic update from Minnesota Management and Budget, which shows state tax collections continuing to soar over predictions. In the five months since the official February forecast — the document used by the Legislature to build the current state budget — tax revenues came in $2.684 billion higher than expected.
That’s 11.2 percent more than the February forecast, a document that already showed a big improvement over the previous November’s forecast, which itself was a massive improvement over the May 2020 forecast. In a little over a year, the state’s financial position has shifted from a deep budget deficit to a sizable surplus — a trajectory that followed a record collapse in the national economy and then a record recovery.
In just the last three months of the 2020-21 two-year state budget — April, May and June — collections were 28.7 percent, or $2.12 billion, more than was expected in February. Some of that money reflects an improved 2020, which came in via the individual income tax that wasn’t fully collected until May. But other increased tax dollars are from 2021 economic activity.
None of this money was accounted for in the $52 billion state budget approved last month. But both the collections and updated economic forecasts included in the latest report suggests that the state’s November economic and revenue report will show a surplus in the $2 billion to $3 billion range.
All that is only one of several caches of money in state accounts. The approved 2021-22 budget left a rainy day savings account of $2.36 billion. It also left $1 billion unspent from the money sent to Minnesota by Congress under the American Rescue Plan.
The better-than-expected revenue collections showed up in all of the state’s major taxes. The individual income tax was up 12.4 percent from what the February forecast projected. The general sales tax was up 5.5 percent from forecast. And net corporate tax receipts were 38.4 percent higher than expected.
Changes to the economic projections contained in the latest collections report suggest that collections will continue to exceed forecast between now and November. IHS Markit, an international economics firm contracted by the state to provide broad economic forecasting, has upgraded its growth projections from the U.S. economy this year and next. Rather than projecting a real gross domestic product growth rate of 5.7 percent for the current calendar year, IHS Markit is projecting a 6.6 percent rate. For 2022, the growth forecast has been increased from 4.1 percent to 5 percent. IHS Markit has downgraded its growth projections from 2023, 2024 and 2025 but part of the reason is that pandemic recovery activity has been moved from the longer-term economy to the shorter-term economy.
The reasons for the improved outlook, according to IHS Markit, is that most of the metrics it has been watching to gauge the recovery from the COVID recession have all been stronger than predicted. “The main factors driving the strong near-term economic recovery are (1) continued fiscal and monetary support, (2) the rising share of the U.S. population that is fully vaccinated, and (3) re-openings of state economies,” the MMB update states.
None of the numbers reflect any potential positive economic impact from a national infrastructure investment plan being discussed by President Biden and Congress.
The one negative in the updated national number is unemployment. Citing federal Bureau of Labor Statistics numbers, the update notes the jobless rates remain higher than the pre-pandemic reports. “The Bureau of Labor Statistics (BLS) reports that in June the seasonally adjusted U.S. unemployment rate was 5.9 percent, down from 14.8 percent at the peak of unemployment reported in April 2020, but still 2.4 percentage points higher than the pre-pandemic level in February 2020,” the update states. That represents 9.5 million people.
Long-term joblessness — measured as a worker being without employment for 27 weeks or more — remains elevated. There are 4 million workers in that category, or 2.9 million more than in February of 2020. “IHS expects that the U.S. unemployment rate will decline through mid-2023, reaching an average of 4.9 percent in the fourth quarter of 2021 and an average of 3.8 percent in the fourth quarter of 2022,” the report states.
Minnesota has recovered about 57 percent of the jobs lost to the COVID recession, according to the Department of Employment and Economic Development.