State Revenues Exceed Expectations, But Economic Uncertainty Looms

Maryland Comptroller Peter Franchot today announced that revenues FY 2019 came in $216.6 million above the Board of Revenue Estimates’ (BRE) projections, bringing the unassigned balance of the State’s General Fund to $351 million, or less than one percent of the total FY 19 operating budget of $44.6 billion.

General Fund (GF) revenues in FY 2019 totaled $18.199 billion, an increase of 4.8% over FY 2018, and 1.2% above the BRE’s estimate. Excluding irregular distributions and transfers, revenues increased 6.3% from FY 2018.

The final closeout numbers reflect stronger-than-expected revenue growth from capital gains, as well as an increase in Sales and Use Tax (SUT) collections resulting from the 2018 U.S. Supreme Court decision (South Dakota v. Wayfair, Inc.) that allowed states to collect tax from remote online sellers. However, the report also shows weak wage growth and otherwise tepid SUT collections.

According to BRE Director Andrew Schaufele:

Growth in revenue at the levels we have just experienced is not expected to continue for two main reasons. First, much of the growth in FY 2019 is of a one-time nature, driven by tax planning incentives created by the Tax Cuts and Jobs Act as well as the systematic changes to the federal income tax that resulted in higher State tax bills for many Marylanders. Second, our forecast calls for underlying economic growth to slow.

At 121 months, the current economic expansion is the longest in U.S. history, but Schaufele points to two key economic indicators – the unemployment rate and the yield curve – signaling elevated risk of a downturn.

“The unemployment rate has typically not stayed stable and low for long… once the rate stops falling, a recession is typically not far away,” Schaufele said. “Over this time period, a recession has occurred around seven months after the unemployment rate reached its minimum level for the expansion, though the minimum is only identifiable in retrospect. In this context, the current expansion may be the longest because it took so long to return to full employment.”

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Courtesy of Andrew Schaufele, Director, Bureau of Revenue Estimates

The yield curve charts interest rates from short to long term. Usually, long-term U.S. government bonds offer higher yields than short-term ones, because buyers demand higher interest rates in return for locking up their money for longer periods of time. But recently the curve has “inverted,” meaning short-term rates exceeded long- term rates.

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Courtesy of Andrew Schaufele, Director, Bureau of Revenue Estimates

“Leaving aside the most recent inversion, an inversion of these rates has happened 9 times since 1960, with a recession following 8. Since 1960, there has not been a recession without a prior inversion in the U.S.,” Schaufele said. “On average, and ignoring the false alarm in the 1960s, a recession has begun about 11 months after the bond spread has gone negative.”

“These leading indicators are simple correlations; a low unemployment rate or inverted yield curve does not cause a recession. But given their track record in the US, while nothing is inevitable, it would be prudent to plan for a slowdown at best and a recession at worst,” Schaufele said.

Because of the potential for an economic slowdown in the near future, Comptroller Franchot is urging the Governor and the General Assembly to exercise fiscal restraint in the years ahead.

According to Comptroller Franchot:

“While revenues have again exceeded our modest estimates, this year’s figures belie several troubling indicators that increase the possibility of an economic contraction,” said Comptroller Franchot. “Unpredictable swings in trade policy and the ballooning federal deficit, coupled with an unprecedented 121 consecutive months of economic expansion and negative market indicators like the inverted yield curve, all suggest national economic volatility.”

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