January 2007 Economic Review and Revenue Forecast Update State of Vermont Emergency Board and Legislative Committees January 16, 2007 Montpelier, Vermont Prepared By: Economic & Policy Resources, Inc. and Kavet, Rockler & Associates Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

Revenue Forecast Summary Revenue receipts are running virtually “on target” through December of FY 2007, within one-tenth of one percent of July 2006 projections… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

Revenue Forecast Summary Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting …Resulting in only minor recommended revenue adjustment

U.S. Economic Situation/Outlook Businesses are in stellar financial shape… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. Situation/Outlook Growth will rebound after a transition… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. Economic Situation/Outlook But the risk of recession is now rising…. Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. Economic Situation Oil Prices have declined since the July peak…but for how long? Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. Economic Situation Gasoline prices have followed suit, but remain over $2.30/gallon… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. Economic Situation Job growth is slowing but still remains positive as employers slow the rate of hiring (but do not cut jobs)… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. Economic Situation The Fed’s “tightening” campaign has curbed housing starts… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S/VT Economic Situation The housing market correction is now well-underway… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

U.S. / VT Economic Situation Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Economic Situation And housing prices are also moderating and will likely decline before the real estate market correction is over... Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Economic Situation Jobs in VT have surpassed pre-recession levels in all major job sectors except 3 (of 11 major sectors)... Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Economic Situation Vermont’s factory sector has been in a long-term job decline, but this has been the case regionally and nation-wide… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Economic Situation VT’s unemployment rate has been lower than the U.S. average… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

But Vermont’s position among the 50 states has slipped from 2 nd to 15 th since last May... Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting VT Economic Situation

VT’s labor market recovery remains historically restrained… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Economic Situation And will likely continue to remain so… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Situation/Outlook At a level somewhat below the U.S. average... Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Personal Income Tax Base Tax year 2005 income disparities persisted... Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Personal Income Tax Base Though were less pronounced than in tax year Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Personal Income Tax Base But will likely support somewhat higher personal income receipts in both FY07 and FY08, despite the risks of heightened income volatility Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

VT Meals and Rooms Tax Base Despite strong Fall tourism visitation, poor start to winter recreation season could cost State more than $2 million in FY07 tax revenues Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

Forecast Risks Most forecast risk remains on the downside for fiscal , with a more rapid decline in housing and real estate as the primary risk… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

Forecast Risks Reprinted: Courtesy of Moody’s Economy.com Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting Half the nation's housing may be overvalued...

Which could impact both consumer spending, through wealth effects and financial markets – both domestic and international… Reprinted: Courtesy of Moody’s Economy.com Forecast Risks Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting Share of foreign holdings of U.S. financial assets % (right scale) $b (left scale) Foreign Holdings of U.S. Mortgage-Backed Debt

Forecast Risks The deteriorating Federal budget situation and U.S. current account deficit are also significant risks… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting Sources: CBO, Moody’s Economy.com Ten Year Cumulative Budget Deficit, FY Reprinted: Courtesy of Moody’s Economy.com

Forecast Risks Which could reignite inflationary pressures and limit Fed policy options… Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting

For Further Information Contact -Vermont Legislative Joint Fiscal Office ( ) -Office of Budget and Management of the State of Vermont ( ) Jeffrey B. Carr Consulting Economist to the Vermont State Agency of Administration Economic and Policy Resources, Inc. (802) Ext. 108 Thomas E. Kavet Consulting Economist to the Vermont State Legislature Kavet, Rockler & Associates, LLC (802) Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting