At our September Appropriations meeting this week, Secretary of Finance Stephen Cummings gave our committee an update on how Virginia’s economy is shaping up now that we are two months into the new fiscal year, which began on July 1. The good news is that the Virginia economy continues to chug along!
As I outlined in a previous column, Virginia’s budget for fiscal year 2024 took a conservative approach given the Governor’s concern last fall that our economy was on the precipice of a recession due to high inflation and interest rates, a potential federal government shutdown, and rising geopolitical tensions. However, this recession never materialized and the Virginia economy outperformed all expectations in the last fiscal year. Virginia’s general fund revenues were $1.5 billion higher than the previous year and exceeded the revised forecast by $1.17 billion.
Now, the labor market is healthy, with Virginia adding 4,800 jobs in July, and unemployment sitting at a comfortable 2.7 percent. Consumer spending remained strong over the summer, and year-to-date revenues are up 8 percent ($303.3 million), driven mainly by higher net individual income and sales taxes.
”The upcoming election will impact our economic outlook, and we will see those results in the December revenue forecast just before the holidays.”
In fact, with inflation under control, the Federal Reserve has indicated that they will finally lower interest rates at their Wednesday meeting for the first time since 2020. Many expect a half-point percentage cut. Gradual moderation in inflation stalled in late 2023, so the Feds have maintained interest rates in a “higher for longer” position. In June, the Consumer Price Index (CPI), which excludes food and energy, fell from 3.4% to 3.3%, however, the Core Personal Consumption Expenditure Price Index (Core PCE), the Fed’s preferred inflation measure, remained unchanged at 2.6 percent. The Feds prefer to adjust inflation using the CPE due to its broader picture of the US economy’s health. The CPE is adjusted monthly instead of annually, tracks the spending of both urban and rural consumers, and includes expenditures made on behalf of employees by employers, spending by Medicare and Medicaid, and spending by nonprofits on households. Because the PCE is updated more frequently, it better reflects any abrupt changes in consumer spending patterns. This was especially true at the outset of the pandemic when consumption rapidly switched from services to goods.
Also, the upcoming election will impact our economic outlook, and we will see those results in the December revenue forecast just before the holidays.