ECONOMY: IS THE IMPROVEMENT TEMPORARY?
Edward H. Boss Jr., Chief Economist

Real GDP increased 2.9% in the third quarter, up from the 0.8% and 1.4% in the previous two quarters. This repeats the pattern of most recent years when the pace of economic activity picked up in the second half of the year. An exception was last year. The data show that the economy grew at a 1.7 % rate in the first three quarters of 2016, the slowest since 2013. Even if the 2.9% growth in the third quarter were repeated in the final quarter, growth would be 2.0% for the year, the weakest growth in all but 2 of the past 7 years.

Last quarter’s growth came from increases in consumer spending, exports, business inventories, and federal government spending. These gains were partly offset by residential fixed investment, state and local government spending, and an increase in imports. The buildup in inventories could be excessive, depending on consumer spending in the upcoming holiday season. In this regard, the Index of Consumer Sentiment reached the lowest level since October 2014 and the index of Consumer Confidence reached its lowest level since May. At the same time, while nonresidential fixed investment rose 1.2% in the quarter, equipment spending dropped for the fourth straight quarter while residential investment fell 6.2%.

It should be pointed out that one month into a quarter may not be representative of the quarter as a whole. GDP data will be revised three times by March 30th and these revisions can be quite large. It remains likely, however, that when the year is complete, this economy’s recovery will continue to rank it as the weakest economic expansion in the post WWII era.

REVENUE: OCTOBER REVENUES STUMBLE AS FEDERAL SOURCES AND CORPORATE INCOME TAX DECLINE
Jim Muschinske, Revenue Manager

Overall base revenues fell $304 million in October as weaker income taxes, particularly corporate income, along with extremely low federal source receipting, were largely responsible for the disappointing month.

Gross corporate income taxes fell $103 million for the month, or $88 million net of refunds. [With only a net total of $3 million for the month, clearly some processing anomaly at the Department of Revenue occurred]. As mentioned in previous briefings, the new ledger accounting system at IDoR has resulted in dramatic shifts in receipt patterns, making interpretation of monthly receipts very challenging. While it appears that some of the October decline is likely due to “individual income tax pass through” payments now being receipted under personal income tax designation, it still doesn’t account for the large falloff in corporate income tax receipts.
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Through one-third of the fiscal year, base receipts are down $449 million, reflecting growing concern with revenue performance for the first part of FY 2017. In particular, both personal and corporate income taxes have disappointed and federal sources to the general funds are on pace for yet another poor fiscal year. Sales tax receipts, while experiencing minor growth, is just barely clinging to last year’s levels.