Colorado's economy is expected to show strong growth through the rest of 2019 and into the next two years, but warning signs of a slowdown, or even a recession, continue to pop up, say state economists.
The September revenue forecast gives lawmakers and the governor their first look at what they may have available to spend in the next budget year. The forecasts comes out quarterly; the next one will be issued around Dec. 20.
The legislature's Joint Budget Committee on Friday reviewed the September 2019 revenue forecasts submitted by Gov. Jared Polis' budget director and by the General Assembly's Legislative Council economists.
Colorado’s economy has strengthened in recent months, but growth is expected to slow over the next few years, according to the forecast from Legislative Council economists. The strength comes from growing wages and employment, which encourages consumer activity, the forecast said. But the tight labor market is putting the skids on business growth.
Uncertainty in federal trade policies and weak growth in the global economy also are playing a role, said economist Meredith Moon. "We're not forecasting a recession, but risks are elevated" based on these economic indicators, she said.
"Despite stronger headwinds, the outlook for economic growth in 2019 remains positive," the Legislative Council forecast reported.
Polis weighed in on the economic news Friday.
“Colorado’s economy is the envy of the nation, but we must ensure we have an economy that works for everyone in our state," he said in a statement." That is why my administration is focused on keeping Colorado on the right path by lowering the cost of health care, investing in education and helping small businesses.
"This forecast shows that our economy is growing but it’s clear that if the Trump administration continues to drag out misguided tariffs and trade wars then Colorado’s important and thriving sectors like agriculture, manufacturing, and outdoor industries will continue to suffer and our economic success will continue to be threatened.”
The Governor's Office of State Planning and Budgeting (OSPB) said state tax receipts are down slightly, due to a dip in corporate income tax collections and slightly less cash fund revenue.
The OSPB's forecast for general fund revenue -- made up primarily of corporate and individual income tax -- grew 7.3% in FY 2018-19 and is estimated to grow by another 4.1% in FY 2019-20, although the 2019-20 forecast came down by about $44.1 million, "due largely to weaker growth expectations for corporate profits," the OSPB report said.
Cash funds -- money that primarily comes from fees and other collections that go to specific purposes (for example, oil and gas severance taxes or state park entrance fees which cover the budget of state parks) -- grew by 5.9% in 2018-19, but are expected to fall by 2.7% in 2019-20, the forecast said.
Despite those declines, state revenues exceeded spending limits set by state constitution's Taxpayer's Bill of Rights by $428.3 million in 2018-19, and are expected to exceed the cap by $348.1 million in 2019-20 and by $551.6 million the following year.
The 2018-19 surplus will be refunded to taxpayers through several mechanisms in 2020. The first two are reimbursements to local governments to cover the senior homestead property tax exemption and the disabled veterans property tax exemptions; the next is a temporary reduction in state income tax.
But future refunds will depend on how voters decide Proposition CC in November, which would permanently allow the state to keep any revenue it collects, even those funds that exceed revenue limits set by TABOR.
The OSPB forecast did note one of the traditional first signs of a recession -- an "inverted yield curve" from the U.S. Treasury -- may not be as strong an indicator of a recession as it has been in the past. An inverted yield curve takes place when short-term interest rates are higher than long-term interest rates. It has been an early warning sign for the last seven recessions.
"While the yield curve provides useful information on financial market expectations for the economy," the OSPB forecast said, "it should be considered alongside a broad range of useful leading economic indicators, most of which are signaling continued economic expansion."
Many of the leading indicators could be signs of an impending recession, said Kate Watkins, the Legislative Council's chief economist. The council agreed with OSPB on the amount of a TABOR revenue that will hit taxpayers' wallets in 2020, at $428.3 million. However, it differed on the expected refund for the following year, at $264.3 million.
The number the JBC focuses on -- how much more in general fund revenue they'll have to put into the state budget for 2020-21 -- is $833.4 million, or growth of 6.3%. If state appropriations grow by inflation and population growth, the forecast said, that amount is reduced to $421.0 million. That's what lawmakers will have for new programs or expansion of existing programs when they begin looking at the 2021-22 budget.
The risks of recession, according to the economists, comes in the form of taxpayer adjustments to the federal Tax Cuts and Jobs Act, recent court decisions on corporate income tax payments and changes from sales tax reform, including online sales taxes. Those changes "pose both upside and downside risks to the revenue forecast," the report said.
The Legislative Council economists had a different take on cash funds than OSPB, largely due to a rebound in oil and gas taxes. The council report said cash fund revenue for 2018-19 increased by $136.3 million over the previous fiscal year, due to a rebound in severance tax collections on higher oil and gas production activity and is expected to be higher by nearly 2% the following year.
Democratic state Rep. Shannon Bird of Westminster, who is not a JBC member, sat in on the hearing and asked about the potential for recovery for Colorado agriculture should trade tariffs be lifted anytime soon.
"It would help," Watkins said, but compared to other states, Colorado's agriculture producers have limited exposure to tariffs. The real issue is low commodity prices, Watkins explained. If tariffs went away, those low commodity prices will continue, she said.
But Bird argued that tariffs play a bigger role. "I think we have broader exposure because we have heavy dependence upon global capital finance markets," Bird told Colorado Politics.
In addition, she said, with the recent decision by the Federal Reserve to cut interest rates, that lessens the effectiveness of that policy as a tool for responding to a downturn, "and that will impact everybody, not just Colorado."
As to trade, Bird said, "I'm very worried about that. People who have been previous purchasers of our ag products are now finding other suppliers.
Reuters reported Thursday that China has granted export licenses to eight beef plants in Argentina. While Mexico and Canada are Colorado's top export markets for agriculture, China is third, with the top export to China from Colorado meat and meat products.
"Those are relationships and markets that took years and generations to develop, and I don't know how we recover that in the absence of tariffs," Bird said.