July 24, 2024

See below from our government relations consultant Marcy Savage at Reid, McNally and Savage.

———- Forwarded message ———
From: Reid McNally Savage <info@lobbywr.com>
Date: Wed, Jul 24, 2024 at 2:58 PM
Subject: FY 2025 NYS Enacted Budget Financial Plan First Quarterly Update Released

FY 2025 NYS Enacted Budget Financial Plan First Quarterly Update Released

The FY 2025 NYS Enacted Budget Financial Plan First Quarterly Update was released earlier today. Please find below highlights from the report. The full report is linked here. 

The State’s FY 2025 began on April 1, 2024 and ends on March 31, 2025. The Enacted Budget Financial Plan for Fiscal Year (FY) 2025 was published on May 24, 2024. On June 5, 2024, Governor Hochul announced that the implementation of congestion pricing in Manhattan, which had been expected to go into effect on June 30, 2024 to fund a portion of the MTA’s 2020-24 Capital Plan, would be paused indefinitely. This action does not materially impact the State’s FY 2025 Financial Plan. The Division of the Budget (DOB) expects that the revenue shortfall to the MTA will be temporary and, if not resolved sooner, would be addressed as part of the FY 2026 Budget process.

State operating results through the first quarter of the fiscal year (April through June 30, 2024) were generally modest and attributable to fluctuations in timing of transactions. All Funds tax receipts, excluding Pass-Through Entity Tax (PTET) business tax collections, were 0.9 percent higher than forecasted mainly due to positive personal income tax (PIT) estimated and refund performance. All Funds spending was $942 million below the Enacted Budget estimates due primarily to routine timing delays of various capital construction projects, and assistance and grants spending across nearly all major functional and program areas.

The marginal receipts and timing related spending variances, coupled with minor revisions to economic indicators, do not provide an impetus for DOB to revise annual projections of receipts and disbursements. As such, the annual projections in the Financial Plan (and the general assumptions upon which they are based) remain unchanged from the FY 2025 Enacted Budget Financial Plan1 in this First Quarterly Update (the “Financial Plan”). The DOB expects to review and update its Financial Plan projections of receipts and disbursements, as needed, following the close of the second quarter.

Economic Update

The economic outlook for 2024 moderated after the strong growth performance of the U.S. economy in 2023 which reflected its resilience in the face of the Federal Reserve’s tighter monetary policy. Labor markets started to slow in 2024 following their robust performance throughout the previous two years. Wage growth also slowed further in the first half of 2024.

However, the first quarter readings of consumer price inflation were high, leading to a delay in the expected easing of monetary policy. As a result, the restraints on economic activity continued into the first half of 2024. New economic data released since the publication of the Enacted Budget suggest output and job gains in the first half of 2024 are slightly lower than initial forecasts.

U.S. Real GDP Growth

DOB’s U.S. economic outlook for the First Quarterly Update of the Financial Plan reflects a slight downward revision to the annual economic growth rate for 2024 due to weaker than expected growth in the first quarter. U.S. real Gross Domestic Product (GDP) growth is projected to decelerate to 2.3 percent in 2024 — a 0.1 percentage point downward revision from the Enacted Budget forecast — from 2.5 percent in 2023. 

However, looking ahead, the growth momentum remains steady for the second half of 2024 and into 2025. The real GDP growth rate for 2025 is revised up slightly by 0.1 percentage point to 1.9 percent in 2025. Moreover, the longer-term economic outlook remains essentially unchanged from the Enacted Budget forecast. The downward revision to the economic growth forecast for 2024 is mainly driven by more tepid consumer spending and exports throughout the year. However, better than expected monthly indicators in the second quarter suggest a somewhat stronger economic growth momentum for the rest of 2024 than in the first half of the year.

Employment and Income

United States. Labor market indicators suggest that U.S. labor demand and supply are moving into better balance, but the pace of the adjustment might be uneven and slower than previously projected. Monthly job gains of 177,300 on average in the second quarter of 2024 marked the lowest three-month average since the post-pandemic job recovery began. This suggests the moderation in wages and overall incomes is likely to continue amid falling inflation and eventually lower interest rates.

DOB’s employment outlook for 2024 and 2025 is essentially unchanged from the Enacted Budget forecast. U.S. total nonfarm employment growth is estimated to continue decelerating gradually to 1.7 percent in 2024 from 2.3 percent in 2023. Employment is forecast to grow by 1.0 percent in 2025. The unemployment rate ticked up to 4.1 percent as of June 2024, slightly higher than projections in the Enacted Budget economic outlook. DOB expects the U.S. unemployment rate to remain around current levels and average 4.0 percent for 2024 compared to 3.6 percent in 2023, and slightly rising to 4.2 percent in 2025.

New York State. While the U.S. labor market outlook in the First Quarterly Update of the Financial Plan remains essentially the same as the one presented in the Enacted Budget, the outlook for New York State reflects a slight improvement for 2024 based on new data available from Current Employment Statistics (CES). Employment growth has been revised up by 0.1 percentage point (corresponding to about 13,600 jobs) and is now projected to grow by 0.9 percent in 2024 following 2.2 percent growth in 2023. However, employment growth is still expected to slow down to 0.6 percent in 2025, unchanged from the Enacted Budget forecast. DOB’s long term employment projections reflect moderate economic growth and stagnant population levels in the State. Slowing global and national economic growth and elevated interest rates will continue to pose challenges to the State’s labor markets for the remainder of the year. Despite recent large monthly job gains, New York State labor markets have been generally lagging the national economy.

Average job gains of 12,330 per month in 2023 were noticeably down from an average of 20,990 in 2022. More recently, monthly employment growth averaged 19,800 in the State through May 2024. However, the rise in employment has been concentrated in the Health Care and Social Assistance sector. In contrast, employment in the Information sector fell by 13,400 (-4.7 percent) over the last 12 months after peaking in July 2022. Since then, the industry has been losing jobs following a nationwide trend.

According to the Quarterly Census of Employment and Wages (QCEW) data, the latest available data for State wages through the last quarter of 2023 have been 0.5 percentage point higher than earlier estimates. This revision, coupled with a slightly stronger employment forecast for the first quarter of 2024, has resulted in an upward adjustment of FY 2024 wage growth from 3.4 percent in the Enacted Budget forecast to 3.5 percent. Additionally, the stronger employment forecast led to an increase in wage growth projections for FY 2025 from 4.0 percent to 4.1 percent. State personal income data for the first quarter of calendar year 2024 has recently been released, showing that non-wage personal income closely aligned with DOB’s forecast, being only 0.05 percent higher than the projection in the Enacted Budget Financial Plan. Due to the upward revision in wages, the growth rate for FY 2024 personal income has been adjusted from 3.7 percent to 3.8 percent and is not expected to have a material effect on the receipts projections. 

However, the growth rate for FY 2025 has been revised downward by 0.1 percentage point to 4.4 percent, consistent with the revisions to the US non-wage personal income for that year.

Inflation and Monetary Policy

The June 2024 Consumer Price Index (CPI) report suggests that the downward trend of price growth toward the Federal Reserve’s 2 percent inflation target resumed in the second quarter of 2024 after a temporary interruption in the first quarter. The 12-month change in the headline CPI dropped to 3.0 percent in June from 3.5 percent in March. This was the lowest reading since March 2021. Accordingly, DOB revised down CPI inflation to 3.1 percent in 2024 and 2.4 percent in 2025, both of which are 0.1 percentage point below the Enacted Budget forecast.

Considering an improving inflation outlook and a cooling labor market, DOB expects the Federal Open Market Committee (FOMC) to start cutting rates in September 2024 (instead of July) with two rate cuts in 2024. Given longer term projections of the economy and interest rates, rate cuts are expected to end somewhat earlier than expected in 2027. 

This results in an upward revision to the projected path of the Federal funds rate between 2024 and 2028. In the meantime, longer-term interest rates were lower than expected, suggesting financial conditions may boost economic growth in 2024.

The full report is linked here.