Kansas economy shrinks in 2017, but modest rebound may already be underway

? A new report from the U.S. Bureau of Economic Analysis shows the Kansas economy actually shrank by 0.1 percent in 2017, signaling a trend that, if not reversed, could threaten the state’s ability to maintain spending levels and keep its commitment to future increases in K-12 education spending.

But the BEA report also indicated that a rebound may already be underway. It showed that the overall negative performance for the year was largely due to a slump in the first half of the year, particularly in the first quarter, January through March, when the state’s economy was shrinking at an annualized rate of 6.1 percent.

Although the economy began to rebound in the third and fourth quarters of 2017, the report indicated, those gains were not enough to offset the losses in the first half.

Ed Flentje, a political science professor at Wichita State University who also served in the cabinets of former Govs. Robert Bennett and Mike Hayden, both Republicans, said he wasn’t surprised by the numbers.

“As you know, Kansas has been trailing the region and the nation fairly consistently for the last eight years,” he said in a phone interview. “If you look at the long-term trends, they’re edging upward, but still trailing the region and the nation as a whole.”

The report, which was released late last week, shows that Kansas was one of only three states, along with Louisiana and Connecticut, whose “real,” or inflation-adjusted, gross domestic product declined compared with 2016.

BEA defines a state’s gross domestic product, or GDP, as “the market value of goods and services produced by the labor and property located in a state.”

The report offers a somewhat gloomier picture of the state’s economy than Kansas revenue forecasters provided recently when they released new, higher estimates of how much tax revenue the state can expect to see through the end of the next fiscal year.

In a memo dated May 2 explaining in detail why the estimates were revised upward by nearly $534 million, the Consensus Revenue Estimating Group said it was based, in part, on the fact that “nominal” gross state product, which is not adjusted for inflation, grew by 2.3 percent in 2017, and that it is expected to grow another 4.2 percent in 2018.

But the report left open the possibility that a number of significant factors could change in both the Kansas and U.S. economies over the next several months.

“Significant concern exists for the economy as a whole relative to volatility in energy prices, tariffs or possible trade war effects on agricultural commodity prices, and consumer and business demand for products and services subject to sales taxation,” the estimating group’s memo stated.

The group said its estimates were based on the assumption that no significant downturns or disruptions will occur in either the state or national economies through the end of the next fiscal year.

But the BEA report also raised concerns about the state’s ability to keep the commitment it just made to continue increasing K-12 education funding over the next four years, as well as restoring delayed payments into the state’s pension system and restoring budget cuts made in recent years to numerous state agencies.

According to long-term projections from the Legislature’s research staff, even if the assumptions underlying the revenue estimates hold true, ending balances in the state general fund are expected to fall into negative territory three years from now, something that would force lawmakers and the next governor to either cut state spending or raise taxes.

But Larry Campbell, who is Gov. Jeff Colyer’s budget director and a member of the revenue estimating group, said he thinks the economy’s performance in the second half of 2017 shows that a recovery is already underway.

“The trend is reversed; that’s pretty apparent,” he said in a phone interview. “Based on all the latest economic news and the trends, we should be OK.”

Jeremy Hill, director of the Center for Economic Development and Business Research at Wichita State University, agreed that the third and fourth quarter figures show the Kansas economy is on the rebound.

“When you look at the annualized number, it makes it look like we’re still slowing, but we actually have sped up,” he said in a phone interview. “If you look at the last couple of quarters, we’re actually growing again.”

But Hill said there is still cause for concern about the state’s ability to meet its long-term obligations ­– not because of a lack of economic growth, but rather the lack of growth in population and personal income.

“If the population is not growing, in the longer term, and income is not growing in the longer term — and we’re deviating from the nation — that means there is less income to be spent by a not-rapidly-expanding population base,” he said. “That’s really what’s going to deteriorate the ability to pay longer-term debt.”

Flentje said that with all the recent changes in state and federal tax law, along with the unknown variables that could affect the economy, he thinks there is no way to predict what could happen to state revenues in the long term.

“The revenue picture is about as confused as it can be,” he said. “Anybody who says they can project the state revenue picture over the next five years is doing some big-time guessing.”