With Fed poised to cut rates, Va. economy 'performing really well'

With the Federal Reserve Board poised to cut interest rates, Virginia is no longer expecting a recession, with state revenues running about $206 million ahead of forecast in the first two months of the state fiscal year.

Secretary of Finance Steve Cummings presented a modest, but upbeat assessment of state finances in August — "a very quiet month" — to the General Assembly budget committees on Tuesday.

But his attention is focused on the Fed meeting on Wednesday to consider lowering its overnight lending rate for the first time in more than two years.

"The debate is not if ... it's actually how much of a rate cut," Cummings told the Senate Finance & Appropriations Committee in the first of two revenue presentations.

The expected move reflects the shifting of the Fed's priorities from curbing inflation to bolstering the flagging job market to avoid an economic slowdown. The rate of inflation declined to 2.5% in August over the previous year, down from a high of 9.2% in June 2022, when the U.S. economy was recovering from the COVID-19 pandemic, untangling of global supply chains and a flood of federal emergency spending.

The two-year state budget that Gov. Glenn Youngkin presented in December and the General Assembly rewrote this winter anticipated a mild recession that never occurred.

The state ended the fiscal year on June 30 with $1.2 billion excess revenues, much of which already has been committed to priorities that lawmakers marked as contingencies for additional state spending.

Youngkin, who is about to enter the final year of his single term, promised lawmakers last month that he will continue to press for tax cuts and spending on economic development in the budget that he will present in December.

"The Commonwealth continues to be in a very strong financial position," the governor said Tuesday. "Despite August not traditionally being a significant month, this report shows consistent revenue in state government led by the record number of Virginians working."

"As we continue to monitor national financial data, including potential actions by the Federal Reserve this week in response to the slowing national job growth and other economic challenges, our focus remains on expanding opportunity in the Commonwealth for all Virginians," he said.

Cummings, a retired banker and financial executive, said the state's economic outlook is reassuring.

"Virginia continues to perform really well," he said.

In jobs, for example, the state added 4,800 jobs in July, a 2% increase over the previous year, and the unemployment rate remains 2.7%. Revenues in the state's general fund, which pays for core government services such as education and public safety, rose by 2% in August, which had one fewer payroll deposit day for income taxes withheld from paychecks — the single largest source of state tax revenues.

As a result, withholding revenues fell by about $18 million in August, but they still increased by $158 million in the first two months of the fiscal year, which began on July 1.

Estimated income taxes paid by sole proprietors and investors — not withheld from paychecks — increased by $63 million in August and significantly outpaced the forecast for the fiscal year to date, but September will be a better indicator with quarterly estimated payments due.

Sales tax revenues were "modestly higher" for the month, as consumers continue to spend, Cummings said.

Compared with the revenue forecast adopted last fall, state general fund revenues rose about $206 million in the first two months of the fiscal year, primarily because of income and sales taxes, which more than offset a $44 million decline in corporate income taxes and less money than expected from interest on state deposits and taxes on court filings, such as deeds.

"Nothing really exciting for us to talk about," House Appropriations Committee Chairman Luke Torian, D-Prince William, said on Tuesday.

The good news is that the economy continues to grow rather than shrink, with the U.S. Gross Domestic Product expanding by 3% in the second quarter of the year.

"We aren't going into a recession," said state Sen. Creigh Deeds, D-Charlottesville, "and that's good."