Forecast leads to economic anxiety

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Members of the House Ways and Means Committee expressed concern about the state of the economy during a presentation of the state’s February Economic Forecast.

The forecast shows a $1.16 billion improvement in the state’s overall budget outlook for the next two-year budget cycle, which begins July 1. Minnesota Management & Budget Commissioner Jim Schowalter said the projection is “good news”; still, it leaves lawmakers with a $5.03 billion budget shortfall to fix.

“We’re certainly pleased to give you a better view of the economy,” Schowalter said.

But the view didn’t look all that great to some members. Rep. Frank Hornstein (DFL-Mpls) expressed concern about unrest in the Middle East driving up gas prices, which could hurt consumer spending and slow economic recovery.

“I think this is very, very significant,” he said.

State Economist Tom Stinson said a $10 per barrel increase in the price of oil over a year leads to a decrease of 0.5 percent in national gross domestic product. He noted that oil prices today rose from $97 a barrel to $116 a barrel.

“That’s a pretty hefty change, and if that holds up it could be reflected in gasoline prices very quickly,” Stinson said.

Rep. Keith Downey (R-Edina) asked whether capital gains projections, which account for much of the $1.16 billion improvement in the forecast, are immune to global economic turmoil. Stinson replied that “there are no guarantees,” and that capital gains are an “incredibly volatile” source of income for the state.

Stinson said there is some reason for optimism, as “all the pieces are in place for stronger employment growth” than what is projected in the forecast. He said the higher-than-usual unpredictability in the forecast could be either positive or negative for the state.

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