The Past Is No Longer a Good Indicator of the Future, White Said. His Firm Has Rebuilt

Moody’s Analytics: Difficult to Predict State Revenue
Calling it “the most difficult forecast ever,” Dan White, senior economist for Moody’s Analytics, delivered its state revenue predictions to the Budget Section of the North Dakota Legislature on Wednesday.

“The past is no longer a good indicator of the future,” White said. His firm has rebuilt all its economic forecasting models in an attempt to capture “changing statistical relationships.”

White said the oil boom is gone, and now the bust is on its way out, so Moody’s is developing new assumptions about future market conditions.

Much of White’s presentation focused on the difficulty in predicting the price of oil. He said the Iran deal allowed a lot of new oil to come on to the world market, which contributed to the decline in the price of oil. White said drilling technology has also radically altered the market, affecting not only the cost of producing oil, but sales taxes associated with its production.

“Sales taxes collected from new oil wells is much less now than it was just two years ago,” White said.

The revenue forecast predicts oil prices on the WTI index will climb through the $50/barrel mark and reach $61/barrel by July 2019. Moody’s also expects the state will see an increase in the number of active oil drilling rigs in North Dakota, climbing from the current 38 rigs to 50 in Fiscal Year 2018.

Financial markets also affect the revenue forecast. White said the United States has actually been experiencing deflation in the price of durable goods, noting that lumber prices are down 12 percent year over year. White said that has produced an odd scenario where Gross Domestic Product has been increasing, but state tax revenues have declined. He said prices of durable goods have fallen more in North Dakota than other areas because they were so high during the boom.

White said many market analysts expect inflation will soon be creeping in, and that the Federal Reserve will respond by raising interest rates. Since capital flows to areas with the highest interest rates, and the US is the only major economy considering a rate hike, he said it’s likely to strengthen the US dollar. That would have implications for North Dakota’s other major industry. A strong dollar makes it more difficult for agriculture producers to compete in foreign export markets.