Those twice-a-year economic and revenue forecasts produced by Minnesota Management and Budget are treated as political documents when they are released.
How much money will the Legislature have to spend? Are program cuts required? Does the state tax too much? Too little? And what is the difference between a deficit and a structural imbalance?
But the forecasts are fundamentally economic reports. Only after assessing the current conditions of the state and national economies and making predictions of the direction of both can forecasters estimate how much money current taxes will bring in.
Politics aside, then, here are five things the February forecast says about the economy:
Minnesota and the nation are seeing a fairly rapid improvement in their economies.
In an interim report released in January, the state’s macroeconomic vendor S&P Global reported improved conditions versus what it had reported just two months earlier. At that time, it upgraded predictions for gross domestic product increases for 2023 and 2024 but decreased expectations for 2025, 2026 and 2027.
Last week, just a month later, it enhanced its outlook for all five fiscal years.
“The near-term economic outlook for Minnesota has improved since MMB’s Budget and Economic Forecast was prepared in November 2023,” the forecast stated. “Unexpectedly robust real GDP growth in late 2023, combined with the impacts of easing financial conditions since the December meeting of the Federal Open Market Committee have improved the outlook for the U.S. economy. These improvements in macroeconomic conditions positively impact the economic outlook for Minnesotans.”
What happened over the last several months to give the forecast such confidence? During the presentation of the forecast Thursday, the state’s economist Laura Kalambokidis said the basic blocks of the economy are all doing better than last predicted.
“Between January and February, there’s new information about consumer spending and consumer sentiment went up,” she said. “S&P raised their forecast for consumer spending from January to February and that helps to boost their GDP forecast.”
There is now expected to be a deceleration in growth — but growth nonetheless — in subsequent years.
“That deceleration is also good news because it is necessary to keep the growth continuing,” she said.
Unemployment still low
The balance between having a bit higher unemployment to reduce upward pressure on wages but not seeing joblessness get too high is one goal of a soft landing. Minnesota’s jobless rate and labor participation rate continue to be better than the U.S. as a whole.
“There are signs that the labor market has softened since the record low unemployment and record high job openings of two years ago, but it remains tight (low unemployment, high demand for labor),” Kalambokidis wrote.
Currently, Minnesota’s unemployment rate is 2.9%; the nation’s is 3.7%. The state number is higher than it was in 2022 but having somewhat higher joblessness is seen as positive in the fight against inflation. And while S&P thinks both will rise in the coming years, they won’t exceed 4.4%, a threshold viewed by economists as “full employment” and a level that doesn’t spur inflation.
Labor force participation is a measure of the number of people who could work holding jobs. Minnesota’s 68.1% is the fifth highest in the U.S. and exceeds the overall national rate of 62.5%.
“As employers will tell you, we still have high demand for workers across the state,” Kalambokidis said during the presentation, adding that there are more than two job openings for each unemployed worker. The retirements of Baby Boomers will continue to put pressure on employers trying to hire and could be a drag on job growth. But while worker shortages can lead to inflationary pressures due to the need to offer higher pay, the forecast estimates that following wage income increases of 5% this year, growth will settle into a steady 4.2% growth.
Corporate profits way up
Higher-than-expected collections from the corporate franchise tax drove the bulk of the increased tax revenue between November and February. Of the $1.34 billion increase in projected revenue increase shown in the forecast, more than half ($749 million) came from the corporate tax — even though it is only the third largest driver of revenue after the individual incomes tax and the sales tax.
The presentation focused more attention on the corporate tax than usual. And while that could be because of its outsized role in the increases in the latest forecast, there could be political reasons as well.
“It was also an opportunity to push back on the idea that the state’s corporate income tax, now the highest in the nation, is the economic weight the business community claims it to be,” wrote Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence.
Both Gov. Tim Walz and House Speaker Melissa Hortman used their reactions to the forecast to argue that the tax burden on business must not be that harsh if profits continue to surge.
“I think it puts to rest this myth that there’s overtaxation,” Walz said. While he said in response to a question that he’s not planning to increase corporate tax rates, “but I’m certainly not interested in lowering them.”
Inflation/interest rates
The latest forecast is predicting faster declines in interest rates as the economy sees more-rapid reductions in inflation. Interest rates are the Federal Reserve’s most-potent tool to bring down inflation, because higher rates tend to slow economic activity.
Kalambokidis said the latest forecast changed assumptions about what the Federal Reserve would do to interest rates. The November forecast assumed the Fed would increase the federal funds rate, but that didn’t happen. And it now assumes faster reductions in rates.
“The February forecast, S&P expects the Fed to implement a policy pivot and begin lowering the federal funds rate in May, followed by three more rate cuts and bring the rate to 3% in late ‘25,” Kalambokidis said.
The forecast also assumes that inflation rates will continue to decline for the post-pandemic highs around 8%.
“Declines in agriculture and energy prices, the resolution of supply chain issues … and action by the Fed, brought annual (consumer price index) inflation down to 4.1%,” Kalambokidis said. Interest rates are projected to reach the Fed’s inflation target of 2% by fiscal year 2025.
Soft landing
That’s the term economists use for success in the Fed’s battle against inflation. Too often, increasing interest rates triggers recessions along with negative economic growth and high unemployment. If the Fed can increase rates in a way that slows the economy without a recession, that’s a soft landing.
Kalambokidis said Thursday it appears that will happen.
“In this outlook, a period of deceleration in real GPD growth, a rise in the U.S. unemployment rate allow inflation to settle at the Fed’s objective, and the Fed can hold its course,” she said. After the presentation, Kalambokidis said that is one of her key takeaways from the new numbers.
“The Fed is still walking this tightrope, but they’ve gotten a lot further along the rope than many thought they would,” she wrote in response to a question.
Peter Callaghan
Peter Callaghan covers state government for MinnPost. Follow him on Twitter @CallaghanPeter or email him at pcallaghan@minnpost.com.
