1 “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.” New Hampshire Economic.

1

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

New Hampshire Economic Forecast

January 7, 2013

Dennis [email protected]

Board of DirectorsSheila T. Francoeur, Chair

David Alukonis

Michael Buckley

William H. Dunlap

Eric Herr

Richard Ober

James Putnam

Stephen J. Reno

Stuart V. Smith, Jr.

Donna Sytek

Brian F. Walsh

Martin L. Gross, Chair Emeritus

John D. Crosier, Sr.,

Todd I. Selig

Kimon S. Zachos

Directors Emeritus

2

Anecdotal evidence from Fed Bank of Boston,

Nov. 28, 2012

• New England reports reflect a growing economy, although the pace has slowed.

• Retailers cite mixed sales results, manufacturers note slow growth, and software and IT services firms report disappointing results.

• Staffing firms are seeing a pick-up in growth. • Commercial real estate contacts indicate that fundamentals

remain flat, and sentiment has soured somewhat in recent weeks.

• Residential real estate respondents say growth in home sales has slowed, but home prices are rising modestly in some areas.

• Some firms cite shortages of specialized workers, few are hiring, none extensively, and no one mentions upward wage pressures.

3

Calculated Risk has the clearest picture of the problem we face:

4

3 Themes

• NH Recovery is Stalling• State revenues and the downside risk

• State Expenditures

5

New Hampshire – Less of a decline, but slow recovery

Index of Total NonFarm Employment (Seasonally Adjusted)

92.0

93.0

94.0

95.0

96.0

97.0

98.0

99.0

100.0

101.0

Jan-

07

May

-07

Sep-0

7

Jan-

08

May

-08

Sep-0

8

Jan-

09

May

-09

Sep-0

9

Jan-

10

May

-10

Sep-1

0

Jan-

11

May

-11

Sep-1

1

Jan-

12

May

-12

Sep-1

2

Dec

200

7 =

100

US NE NH

New England

United States

New Hampshire

6

Many NH Employment Sectors Have Not Recovered

Change in New Hampshire Jobs

-14000-12000-10000

-8000-6000-4000-2000

02000400060008000

Man

ufac

turin

g

Constr

uctio

n

Trade

& T

rans

porta

tion

Financ

ial A

ctivit

ies

Prof &

Bus

Ser

vices

Edu &

Hea

lth S

ervic

es

Leisu

re &

Hos

pitali

ty

Gover

nmen

t

Nov07 to Nov09Nov09 to Nov12

7

NH Unemployment Rate Still Higher than Average

Monthly NH Unemployment Rate, January 1969 - November 2012

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

01/6

9

01/7

0

01/7

1

01/7

2

01/7

3

01/7

4

01/7

5

01/7

6

01/7

7

01/7

8

01/7

9

01/8

0

01/8

1

01/8

2

01/8

3

01/8

4

01/8

5

01/8

6

01/8

7

01/8

8

01/8

9

01/9

0

01/9

1

01/9

2

01/9

3

01/9

4

01/9

5

01/9

6

01/9

7

01/9

8

01/9

9

01/0

0

01/0

1

01/0

2

01/0

3

01/0

4

01/0

5

01/0

6

01/0

7

01/0

8

01/0

9

01/1

0

01/1

1

01/1

2

% o

f Lab

or F

orce

Une

mpl

oyed

Long-term average - 4.4%

Grey boxes represent recessionary periods

88

NH Forecast from May 2008 compared to Dec 2012

Non Farm Employment-NH

560

580

600

620

640

660

680

700

00Q1

01Q1

02Q1

03Q1

04Q1

05Q1

06Q1

07Q1

08Q1

09Q1

10Q1

11Q1

12Q1

13Q1

14Q1

15Q1

16Q1

Th

ou

san

ds

of

Job

s

5/0812/12

NEEP Forecast Comparisons for New Hampshire

You are here

99

NH Real Estate May (Finally) Have Hit Bottom

NH Single-Family Residential Home Sales and Price (MLS)Source: NH Association of REALTORS

0

5,000

10,000

15,000

20,000

25,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Units sold Median Price

Median Home Price

Number of Units Sold

Decline from the Peak:Sales -40% from 2004Price -25% from 2005

2012 YTD thru November

10

NEEP Forecast for New Hampshire

Dec. 2012• Next four years should be better than the last four

years.• Policy Missteps: Debt Ceiling Fight Club in March

2013?• No 2013 recession assuming the Euro sovereign debt

crisis is resolved and world economy gains traction.• Fed Reserve has foot on the accelerator through 2016

(or until UR hits 6.5%).• Foreclosures are no longer a drag.• A housing-led recovery.

11

3 Themes

• NH Recovery is Stalling

• State revenues and the downside risk

• State Expenditures

12

This Recession has been very hard on state revenue

New Hampshire General and Education Trust Fund Revenue

$500.0

$1,000.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

EstimateActual

13

This Recession was very hard on state revenue forecasts

NH State Revenue Annual Forecast Error

0.0%

3.2%

5.8%

1.9%3.7%

-2.9%

-14.2%

-1.5% -2.0%-0.4%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

14

This Recession was very hard on state revenue forecasts

NH State Revenue Growth Rates Over Prior Year

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8% -6% -4% -2% 0% 2% 4% 6% 8%

Expected Growth

Act

ual G

row

th

15

NHCPPS Model Showing Revenues are Tracking Well

NHCPPS Projection of 2013 Combined General Fund & Education Trust Fund Revenues

(in millions of $)

-$400

-$300

-$200

-$100

$0

$100

$200

July

Au

g

Se

pt

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

Month of Fiscal Year Completed

Ab

ov

e (

Be

low

) B

ud

ge

t

16

US Economy Alternative Scenarios

• Stronger Near Term Rebound – Jobs and housing grow more than expected (10% probability)

• Mild 2nd Recession – US business confidence drops & Europe debt crisis worsens (25% probability)

• Deep 2nd Recession – Hiring falls with stock market decline, Greece leaves Euro-zone, but less severe than the 2008-2009 downturn (10% probability)

Source: Moody’s Analytics, October 2012

17

NH Revenue Forecasts in an Uncertain World

New Hampshire Unrestricted Revenue in Millions

$1,950.0

$2,000.0

$2,050.0

$2,100.0

$2,150.0

$2,200.0

$2,250.0

$2,300.0

$2,350.0

$2,400.0

2008 2009 2010 2011 2012 2013 2014 2015

Baseline (50% prob)

Stronger Near-TermRebound (10% prob)Mild Recession (25% prob)

Deep Recession (10%prob)

Actual Forecasts

18

New Hampshire Revenue Growth Lagging Other States

• Most states saw growth in state tax revenue during 2Q 2012.– US Personal Income taxes up 5%– US Sales taxes up 0.7% (Slowest in 2 Years)– US Total state taxes up 3.2%

• New Hampshire state tax revenue declined by 2% in 2Q 2012.

Source: Rockefeller Institute (www.rockinst.org)

19

3 Themes

• NH Recovery is in Danger of Stalling• State revenues and the downside risk.

• State Expenditures

20

State Revenues, Expenditures, and Gross State ProductGrowth from 1988 Levels

1.01.11.21.31.41.51.61.71.81.92.02.12.22.32.42.52.62.72.8

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

State Fiscal Year

1988

= 1

.0

General Fund Expenditures

Gross State Product

General Fund Revenues(without Medicaid Enhancement)

21

Annualized Growth in Selected Factors Driving State Expenditures

1982 - 2012

State Spending Drivers

1.2%

5.8%

2.9%

6.5%

0%

1%

2%

3%

4%

5%

6%

7%

Population Title XIX MedicaidCaseloads

Inflation Total Fund Spending

Annu

aliz

ed In

crea

se 1

982

to 2

012

22

Spending Options Grow Narrower

• “Natural” increases complicate efforts to restore cuts to state programs from the last round of budget-writing.

• Requests for new spending are significant (UNH, DHHS).

• A sluggish economy dictates the terms of policy debates.

232323

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

New Hampshire Center for Public Policy Studies

Want to learn more?

• Online: nhpolicy.org

• Facebook: facebook.com/nhpolicy

• Twitter: @nhpublicpolicy

• Our blog: policyblognh.org

• (603) 226-2500

Board of DirectorsSheila T. Francoeur, Chair

David Alukonis

Michael Buckley

William H. Dunlap

Eric Herr

Richard Ober

James Putnam

Stephen J. Reno

Stuart V. Smith, Jr.

Donna Sytek

Brian F. Walsh

Martin L. Gross, Chair Emeritus

John D. Crosier, Sr.,

Todd I. Selig

Kimon S. Zachos

Directors Emeritus

24

State Revenues Grew Because of New Taxes and Non-Tax Sources

NH General Fund Revenues 1988 to 2011 (Current $)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

State Fiscal Year

Mil

lio

ns

of

Do

llar

s

Taxes and rates in place in 1988

Medicaid Enhancement New taxes Increased rates

$543

$936m

$1,369m$1,353

25

Two Thirds of NH Revenue Does Not Grow with Economy,

or Is Volatile2010 New Hampshire State Tax Revenue by Type

$765.3

$243.5

$444.7

$679.8

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Per UnitUnchanged

Per Unit Changed Ad Valorem Stable Ad Valorem Unstable

Mill

ion

s o

f D

olla

rs

26

Does New Hampshire Have a Structural Deficit?

“New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.”

KPMG Peat Marwick

February 13, 1992

27

Structural Deficit: So What?

• Recognize to scale back on state activities OR recognize the necessity to raise tax rates or add new taxes to maintain a constant level of services.

• Results in more detailed review of all state programs every biennium because there is always a looming shortfall.

• Creates regular atmosphere of crisis and stress.• Reduces possibility of surpluses for investment in

desirable one-time projects.• Makes long-term strategic planning more difficult. • Should not be used as a political weapon to bludgeon

the other political party.