Economic & Revenue Forecast

Presentation to the Joint Budget CommitteeSeptember 18, 2020

September 2020 Legislative Council Staff

2

Economic Outlook

3

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20192020

Gov't Consumption & Investment

Net Exports

Gross Private Investment

Personal Consumption Expenditures

Second quarter plunge in U.S. economic activity was the

worst on record

Contributions to Real U.S. Gross Domestic Product (GDP)

Source: U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates.

Real GDP

-31.7%

Contributions to Real GDP

4

Shape of Recovery

Real U.S. Gross Domestic ProductDollars in Trillions

Source: U.S. Bureau of Economic Analysis and Legislative Council Staff September 2020 projections.

Real GDP is inflation-adjusted to chained 2012 levels and shown at seasonally adjusted annualized rates.

Projected

Growth

2020: -5.7%

$14

$15

$16

$17

$18

$19

$20

2007

2008

20

09

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

20

20

2021

2022

Projected

Growth

2008: -0.1%

2009: -2.5%

5

Unpreceded federal stimulus has supported economic

activity by offsetting wage losses and boosting consumption

Source: U.S. Bureau of Economic Analysis.

*Includes direct payments to households under the federal CARES act and other transfer receipts.

$0

$2

$4

$6

$8

$10

$12

Jan Feb Mar Apr May Jun Jul

$0

$2

$4

$6

$8

$10

$12

Jan Feb Mar Apr May Jun Jul

Employee Compensation

Other, including

Economic Impact

Payments*

Unemployment Insurance

Social Security, Medicaid,

Medicare, and Veterans' Benefits

Government

Transfer Payments

Selected Components of U.S. Personal Income in 2020Trillions of Dollars, Seasonally Adjusted Annualized Rates

6

0

10

20

30

40

50

60

70

80

90

100

$0

$100

$200

$300

$400

$500

$600

2006 2008 2010 2012 2014 2016 2018 2020

U.S. retail sales exceed pre-pandemic levels

August 2020 Retail Sales

Month-over-Month: +0.2%

Year-over-Year: +1.2%

Source: U.S. Census Bureau, Advanced Retail Trade Report.

Monthly U.S. Retail SalesDollars in Billions

Total

Retail Sales

Online Sales

7

Tourism-related sectors continue to struggle

Source: Colorado Department of Revenue.

Colorado Retail Sales Relative to January 2020 LevelsIndex January 2020 = 100

0

50

100

150

200

250

Food & Beverage Stores

Nonstore (Online) Retailers

Accommodation Services

Restaurants & Bars

Motor Vehicle

Parts & DealersTotal Retail Sales

January 2020 Levels

8

30

40

50

60

70

2007 2009 2011 2013 2015 2017 2019

Contracting

Expanding

Manufacturing and business activity return to

expansionary territory

Source: Institute for Supply Management.

Institute for Supply Management Indices

Diffusion Index

Manufacturing

Business Activity

9

Inflationary pressure remains subdued

U.S. City Average CPI-U InflationYear-over-Year Change in Prices

Selected Components, August 2020

Headline

Core1.7%

Source: U.S. Bureau of Labor Statistics.

Inflation is calculated as the growth in urban area prices in a given period relative to the same period in the prior year.

*Headline inflation includes all products and services. **Core inflation excludes food and energy prices.

1.3%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1.3%

1.7%

-9.1%

4.1%

2.1%

-5.9%

-4.1%

4.5%

1.3%

1.7%

2.2%

Headline

Core

Energy

Food

Housing

Apparel

Transportation

Medical Care

Recreation

Education

Other

10

0%

2%

4%

6%

8%

10%

12%

14%

1995 2000 2005 2010 2015 2020

Unemployment continues to decline, but remains elevated

Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted.

Unemployment Rates

Colorado July: 7.4%

August: 8.4%U.S.

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-208,100-342,300

-400 -300 -200 -100 0

Total Nonfarm JobsAccomodation & Food ServicesHealth Care & Social AssistanceArts, Entertainment & RecreationRetail TradeOther ServicesAdministrative & Support ServicesConstructionManufacturingLocal GovernmentTransportation & UtilitiesEducational ServicesWholesale TradeReal EstateMining & LoggingManagement of Companies & EnterprisesProfessional, Scientific & Technical ServicesFinance & InsuranceInformationFederal GovernmentState Government

Colorado has regained 39 percent of jobs lost since the

pandemic began

Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted.

Thousands of Job Losses

Job LossesFebruary to April

Job LossesFebruary to July

+134,200

Jobs RegainedApril to July

12

$0

$40

$80

$120

$160

Reduced travel activity continues to keep downward pressure

on oil prices and new exploration in Colorado and nationally

Source: Energy Information Administration and Baker Hughes.

West Texas Intermediate

Crude Oil PricesDollars per Barrel

$42.93

0

20

40

60

80

100

120

140

Active Rig Counts in Colorado

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Outlook Summary

• The economic recovery over the past three months has outpaced expectations

• Damage has nevertheless been extensive, and the pace of improvement shows signs of slowing

• Business activity and consumer spending will continue to improve, but remain constrained by ongoing restrictions, health concerns, uncertainty, and some permanent closures

• Labor markets will remain weak, and layoffs could extend beyond the industries first affected by COVID-19-related closures

• Inflationary pressures will remain subdued as low energy prices, low global demand offset global supply constraints

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Risks to the Forecast

Downside

• Strong resurgence of COVID-19

• Additional waves of layoffs

• Pullback in consumption and investment

Upside

• COVID-19 vaccine delivered sooner than expected

• Additional federal stimulus

• Structural shifts resulting in innovations

15

General Fund Budget Outlook

16

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

$14

General Fund collections will decline with the contraction in

business and household income, and reduced consumer activity

Source: Colorado Office of the State Controller and Legislative Council Staff September 2020 forecast.

Gross General Fund RevenueBillions of Dollars

Percentages show year-over-year changes+2.4%

-11.6%

10.3%

-15.5%-1.8%

-13.0%-4.4%

Change Relative to June

FY 2019-20: +$893.8 million

FY 2020-21: +$542.1 million

FY 2021-22: +$209.4 million

5.6%

17

Income taxes represent the largest and most volatile

General Fund revenue stream…

Source: Colorado Office of the State Controller and Legislative Council Staff calculations.

*Income taxes net of the State Education Fund diversion.

60.7%

27.1%

6.8%

5.5%

Individual Income Tax

Sales & Use Tax

Corporate Income Tax

All other

Share of Total General Fund Revenue* Based on FY 2018-19 Collections

Income taxes also carry the greatest forecast risk with economic uncertainty,

delayed filing deadlines, and state and federal policy changes.

18

Projections for FY 2020-21 are based on limited data

Source: Colorado Office of the State Controller and Legislative Council Staff calculations.

*Six-year average of actual collections data, FY 2013-14 to FY 2018-19.

7%

14%23%

31%

38%46%

57%

62%69%

83%

90%

99%

100%

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Period 13

Available General Fund Collections Data as a Share of Total Fiscal Year Collections*

How Much Do We Know About FY 2020-21?

September Forecast

December Forecast

March Forecast

June Forecast

19

$0

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TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff September 2020 forecast.

Revenue Subject to TABOR

Dollars in Billions

Referendum C

Five-Year

Timeout Period

Referendum C Cap

TABOR Limit Base

TABOR Surpluses

20

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800 Changes relative to June:

Revenue: +$893.8M on much

stronger than expected

income tax collections for

2019

Truing up actuals

Net transfer: +$47.1M

Appropriations: +$35.3M

Source: Legislative Council Staff forecasts based on current law.

Required

3.07% Reserve

Completed Year FY 2019-20 General Fund ReserveDollars in Millions

September 2020

Forecast

June 2020

Forecast

$364.7 million

Excess Reserve

$1.27 billion

Excess Reserve

13.8%

Reserve

6.2%

Reserve

21

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Current Year FY 2020-21 General Fund Revenue

Changes relative to June:

Beginning balance: +$900.9M

carried over from FY 2019-20

Revenue: +$542.1M on higher

collections to date, slightly higher

economic expectations

Truing up current law estimates

Net transfers: -$45.1M

$272.7 million

Excess Reserve

Source: Legislative Council Staff forecasts based on current law.

Required

2.86% Reserve

September 2020

Forecast

June 2020

Forecast

$1.67 billion

Excess Reserve

18.6%

Reserve

5.4%

Reserve

22

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1

Next Year FY 2021-22 Budget OutlookAdditional revenue available to spend or save above FY 2020-21 spending levels.

Amounts hold FY 2020-21 appropriations constant and incorporate the revenue forecast,

current law transfers, rebates and expenditures, and the 2.86% reserve requirement.

$2.90 Billion

September 2020

Forecast This amount does not account for

caseload growth, inflationary, or

other budgetary pressures

Source: Legislative Council Staff forecasts.

• Elevated uncertainty

• Rising from recessionary spending levels

• $143M+ increase in state aid for K-12

education (see page 15)

• CARES Act CRF moneys no longer

available (see page 8)

• Election outcomes

$1.34 Billion

June 2020

Forecast

23

$0

$2

$4

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$8

$10

$12

$14

FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22

General Fund Budget (Spending or Saving)

Source: Legislative Council Staff September 2020 forecast and current law.

Dollars in Billions

TABOR Refund

AppropriationsFY 2021-22 amounts hold

FY 2020-21 constant

$2.90 Billion

Transfers

Additional Revenue to Spend or Save Excess Reserve

Rebates & Expenditures

Required Reserve

24

Risks to the Forecast

New Information

• 2019 income tax collections from delayed filing

• 2 months of FY 2020-21 collections

Unknowns

• Extent of economic damage and its lasting effects

• Impacts of coming off of the federal stimulus

• Influence of the recession on 2020 income taxes

• Containment and treatment of COVID-19

• Additional fiscal and monetary policy changes

Downside risk: Prolonged economic recovery or a double-dip recession (COVID-19 resurgence, vicious cycle)

Upside risk: Stronger near-term rebound in economic activity, less damage to the economy than expected

25

Questions?

Kate WatkinsChief Economist • Legislative Council Staff

kate.watkins@state.co.us • 303-866-3446

www.leg.colorado.gov/lcs