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Kentucky's Economy
Kentucky's personal income is estimated to be $134.8 billion for the second quarter of FY 2008, an increase of 5.9 percent from a year ago. U.S. personal income grew by 6.0 percent during the same period. Wages and salaries constitute a little over half of personal income. Income derived from wages and salaries is estimated to have grown by 5.3 percent in FY 2008:2. Both personal income and wage and salary income have been driven up largely by a spike in inflation.
Employment data is commonly used to gauge the strength of the state's economy, primarily because of its timely availability and its impact on consumer spending and confidence. Nonfarm employment in Kentucky is estimated to have increased by 13,200 jobs in the second quarter of FY 20008 compared to one year earlier, resulting in a growth of 0.7 percent. The current growth rate is almost half of the average growth rate in the period 2002-2006. It clearly indicates that the national slowdown has had an impact on the Kentucky economy.
The largest gain in employment is in mining (up 3.2 percent for an increase of 700 jobs). In terms of the total number the jobs the biggest gain is in the educational services sector (up 1.9 percent with an increase of 4,500 jobs). The industries in this sector include both public and private colleges as well as training centers. It seems reasonable that given the nature of the changing economy, especially the pronounced shift in manufacturing employment, workers would tend to drop out of the labor force for training in new fields of employment, thus increasing employment in educational services.
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The contract construction sector (up 1.4 percent with an increase of 1,200 jobs) is growing in spite of the woes associated with residential housing. The relative strength of construction employment is from the demand for specialty trade contractors. This includes pouring concrete, site preparation, plumbing, painting, and electrical work. Nationally, however, employment in construction is down 1.7 percent.
Historically the focus of Kentucky's economy has been on the manufacturing sector. It is the third-largest sector in the Kentucky economy after government and trade, transportation, and utilities. Manufacturing employment accounts for about 15 percent of all nonfarm employment in Kentucky compared to 11 percent nationally. Over the last four years manufacturing employment declined sharply due to both the relocation of production facilities abroad, and increased domestic productivity. During the second quarter manufacturing was down 1.6 percent with a loss of 4,200 jobs.
General Fund
Projected General Fund revenues for the next three quarters are shown in Table 2. General Fund revenues were $4.243 billion in the first two quarters of FY 2008, a decline of 0.4 percent from the same period a year earlier. Revenues stalled due to slower economic growth related to the subprime mortgage crisis and its impact on housing construction and the real estate market. The drop was most pronounced in the corporation income tax, which also declined as a result of statutory changes enacted by HB 1 of the 2006 Extraordinary Session.
Anticipated revenues are $4.377 billion, with a corresponding growth rate of 1.5 percent. Some major accounts like the corporation income tax, property taxes, and the lottery are forecasted to decline.
Projected revenues for the last two quarters of FY 2008 vary from the January 16, 2008 consensus revenue estimate due to differences in the sales and use tax forecast. The consensus estimate projects total FY 2008 receipts of $8.633 billion, which is $12.4 million above this interim forecast.
Sales and use tax receipts for the first two quarters of FY 2008 totaled $1.446 billion, representing a growth rate of 2.6 percent from a year ago. The projected rate of growth for the remaining two quarters of FY 2008 is 2.1 percent. Sales and use tax receipts for the first quarter of FY 2009 are forecasted to grow 3.4 percent to $753.0 million.
The interim forecast for the individual income tax calls for a rise of 13.3 percent for the remainder of FY 2008, amounting to collections of $1.749 billion in the final six months. The individual income tax rose by 8.2 percent in the first two quarters of the fiscal year, boosted by a change in reporting requirements for limited-liability pass-through entities. For the entire fiscal year, individual income tax receipts are projected to rise by 10.8 percent. Collections in the first quarter of FY 2009 should reach $848.0 million or 3.1 percent over collections in the same period of the previous year.
The outlook for the corporation income and limited liability entity taxes is for a decrease of 28.6 percent in the final two quarters of FY 2008, representing collections of $335.7 million. These anticipated collections will bring the FY 2008 total to $644.5 million, a decline of 34.8 percent from FY 2007. The same statutory changes that have led to increases in individual income tax revenues will work to depress corporation income tax receipts. Revenue from the limited liability entity tax will offset some of the losses. In the first quarter of FY 2009, the continuing decline of 3.5 percent is linked to the outlook for U.S. corporate profits.
The coal severance tax dipped modestly in the first two quarters of FY 2007, but the forecast is for growth to resume in the final half of the fiscal year. Receipts in this account are expected to rise by 2.0 percent in the final two quarters, reflecting recent increases in coal prices. Collections in this account will rise by 2.4 percent in the first quarter of FY 2009.
Taxes on cigarettes and other tobacco products rose by 0.7 percent in the first two quarters of FY 2008. The outlook for the remaining six months of the fiscal year is for $90.1 million in revenue, with a corresponding growth rate of 1.9 percent. For the first quarter of FY 2009, receipts are forecasted to decline by 1.7 percent when compared to the first quarter of the current fiscal year.
Property tax revenues totaled $304.2 million in the first two quarters of FY 2008, representing growth of 4.1 percent from a year earlier. Receipts in property taxes are sensitive to timing of payments in the second quarter. It is expected that in the second half of the fiscal year, receipts will fall by 3.7 percent. Overall for the fiscal year, property taxes are expected to grow by 0.9 percent. Property taxes in the first quarter of FY 2009 will grow by 3.9 percent.
Lottery revenues grew by 4.2 percent in the first half of FY 2008. In the next two quarters, lottery revenues are expected to decline by 2.9 percent when compared to a year ago due to a difference in the timing of dividend payments to the state. For the first quarter of FY 2009, lottery revenues should grow by 1.2 percent.
The "other" category contains estimates for the remaining accounts in the General Fund. During the last two quarters of FY 2008 this category should experience a decline of 8.3 percent. Receipts in this category will decline by 3.1 percent in the first quarter of FY 2009, with receipts totaling $129.6 million.
Road Fund
Road Fund revenues are forecasted to grow by 2.7 percent over the final six months of FY 2008 and 0.9 percent in the first quarter of FY 2009 as shown in Table 3. This forecast is identical to the official revenue estimate as approved by the Consensus Forecasting Group on January 16, 2008.
Motor fuels tax receipts are forecasted to grow by 7.2 percent in the last two quarters of FY 2008. The increase is principally due to the higher gasoline prices and their effect on the statutory motor fuels tax rate. Growth in this account will continue into FY 2009 with receipts in the first quarter totaling $164.7 million.
Motor vehicle usage tax collections are expected to fall by 2.4 percent in the final two quarters of FY 2008. Receipts in the first two quarters were up 2.8 percent from a year earlier. Growth is expected to flag as declining automobile sales will impact receipts in the upcoming months. Collections in the first quarter of FY 2009 will decline by 2.2 percent.
To estimate the growth of all other components of the Road Fund, the Governor's Office for Economic Analysis assessed recent growth patterns as well as administrative and statutory factors. Weight distance tax revenue should rise by a slight 0.2 percent for the remainder of FY 2008 and decline by 2.3 percent in the first quarter of FY 2009. Motor vehicle license taxes are forecasted to rise by 3.9 percent in the final two quarters of FY 2008 and grow by 18.4 percent in the first quarter of FY 2009. Motor vehicle operators' license fees are forecasted to decline by 2.6 percent in the second half of FY 2008. Receipts in the first quarter of FY 2009 should be lower by 5.0 percent. Investment income should fall by 14.1 percent in the final two quarters due to lower balances in the Road Fund, and the declines should continue into the first quarter of FY 2009 with a loss of 47.1 percent. All other revenues should combine for a growth of 6.6 percent in the final two quarters of the current fiscal year, and decline by 2.4 percent in the first quarter of FY 2009.
Economic Outlook
The economic outlook presented here is for the three-quarter period from January to September 2008. In terms of fiscal years this period is the second half of FY 2008 (quarters 3 and 4) and the first quarter of FY 2009. The economic outlook is identical to the one the Consensus Forecasting Group used in arriving at their forecast this month. Both the national and state forecast are based on a 5:4 weighted average of Global Insight's Control and Pessimistic scenarios.
State Economy
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