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Mickey A. Hepner, Dean, College of Business Administration, University of Central Oklahoma
With consumer confidence plummeting and national job growth stalling, the national economic news seems to get bleaker each week. Yet if you listen to state budget officials, the Oklahoma economy is doing fine. But is Oklahoma really immune to the national economic ills?
State officials certainly seem to be upbeat. State Treasurer Ken Miller wrote in his office’s latest Oklahoma Economic Report that “the state’s economy is still healing nicely from the recession.” Gov. Mary Fallin, in response to the latest state general revenue report recently released by the Office of State Finance, stated “The latest revenue report brings us more great news and is further proof the Oklahoma economy is moving in the right direction.”
The reason for their optimism is that at $1.3 billion, state general revenues through the first three months of the fiscal year are 12.1% higher than last year. These higher revenues clearly indicate that overall economic activity is significantly greater than at this time last year. Upon closer inspection, however, the condition of state revenues and the overall state economy are less rosy than they appear.
State officials certainly are correct in their assumption that the condition of state revenues can be an important indicator for the condition of the economy. The problem is that officials commonly use year-over-year growth in state revenues as their key metric. While this measure tells us about economic performance over the last 12 months, it does not necessarily provide much information about the current state of the economy. Consequently, such a measure tends to miss the economy’s turning points.
A much better approach would be to rely upon monthly tax collections, as current economic changes immediately impact the data.
Of course, monthly tax receipts are highly seasonal: Sales tax collections are highest in December during the Christmas season, while income tax collections are highest in April during tax season. Still, economists have tools to seasonally adjust the data to account for these factors.
Since consumer spending is the largest component of state economic activity, and consumer spending is correlated with sales tax collections, my personal preference is to focus on seasonally adjusted sales tax collections. Over the past few years, this measure has accurately mirrored the state economy’s path through the energy boom, the financial crisis and the fragile recovery. Throughout the first half of 2011, the data show that the Oklahoma economy performed very well. In fact, in April, seasonally adjusted sales taxes reached an all-time high (not adjusted for inflation).
But since then, the news is not so positive.
After hitting the April high, collections have fallen significantly — the largest and most sustained decline since the recovery began in October 2009. In other words, current data
Three-Month Moving Average indicates that the Oklahoma economy might well be contracting again.
If true, it wouldn’t yet appear in the year-over-year comparisons used by state budget officials. Essentially, the spring expansion continues to inflate the year-over-year comparisons. Furthermore, if the Oklahoma economy is contracting again, it wouldn’t be much of a surprise. The congressional dysfunction on display this summer in Washington, D.C., has resulted in a worrisome decline in consumer and business confidence, while the financial crisis gripping Europe threatens banks on this side of the Atlantic, too. In short, the national economy is teetering on the brink of another recession and bringing the Oklahoma economy down with it. For the last few years, Oklahoma’s economy has outperformed the rest of the nation, mainly because we didn’t face the same housing boom and financial crisis as other states, nor did we have the same reliance upon manufacturing (which has been decimated). However, Oklahoma is not as immune to a decline in consumer confidence.
In the coming months, data clearly will tell us if this was just a momentary pause in the expansion, or another turning point. With the gloomy state of the national economy, this data shows that state policymakers have a very good reason to be concerned.