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Finance Bulletin: October 2005

Economic Update

California's broad-based economic expansion continued in August.  Employment grew at a good pace, commercial construction continued to exceed last year's pace, and home sales held up well in the face of rising prices.

• California has created jobs every month this year, at an average monthly rate of 20,400.  Another 17,200 were added in August.  Trade, Transportation and Utilities added 7,400 jobs; Leisure and Hospitality, 5,300; Construction, 4,900; Financial Activities, 2,100; Educational and Health Services, 2,100; Professional and Business Services, 1,600; and Natural Resources and Mining, 300.
• Government sector employment was unchanged in August, while Information lost 4,000 jobs, Manufacturing, 1,500, and Other Services, 1,000.
• From August 2004 to August 2005, California payroll employment grew by 223,300, or 1.5 percent.  Employment rose in nine out of 11 major industry sectors.  Employment rose by 60,900 in Construction; 40,700 in Professional and Business Services; 40,400 in Leisure and Hospitality; 22,300 in Trade, Transportation and Utilities; 22,000 in Educational and Health Services; 14,300 in Financial Activities; and 12,100 in Government.  Information and Other Services each added 5,600 jobs. 
• Over the period, employment fell by 500 in Manufacturing and 100 in Natural Resources and Mining.
• The state's unemployment rate has improved steadily during the first eight months of 2005, from 6.0 percent in December 2004 to 5.2 percent in August.  However, the labor force statistics have been uncharacteristically volatile since the Bureau of Labor Statistics adopted a new local area methodology in February of this year.  Civilian employment made extraordinary jumps in February, April, and August.  Estimated unemployment fell precipitously in March and July.  
• Even though home building slowed in August, this year is still on track to match the healthy pace achieved in 2004.  Residential building permits were issued at a seasonally adjusted, annual rate of 212,000 units during the first eight months of 2005.  This is slightly better than the 210,000-unit pace set during the same months of 2004.  Single-family construction picked up enough over last year to more than compensate for a slight slowing in the multi-family sector.
• Nonresidential construction permitting slowed in August by 9 percent after a very strong July.  All building categories slowed, but the steepest declines were in the Industrial and Store sectors.  For the first eight months of 2005 as a whole, nonresidential construction was up over 12 percent above the same months of 2004.
• California home prices continued to rise despite somewhat softer sales.  The median price of existing single-family homes sold in August climbed to $568,890, a 20-percent increase from a year earlier, while the pace of home sales slowed to an annual rate of 632,240 units.
• Home prices may have received a boost from the anticipation of rising mortgage rates. Both long-term fixed and adjustable mortgage rates drifted higher in July and August, which may have been taken as a signal of higher rates to come.

Monthly Cash Report

Preliminary General Fund agency cash for September was $897 million above the 2005-06 Budget Act forecast of $8.899 billion. Year-to-date revenues are $1.222 billion above the $19.472 billion that was expected.

• Personal income tax revenues to the General Fund were $376 million above the month’s forecast of $4.367 billion.  Approximately 50 percent of the gain was attributed to estimated payments, which were $189 million above the projected level of $2.122 billion – an impressive 28.1-percent increase over the prior year.  It is unknown how much of this growth is due to underlying strength in the economy and how much may be due to higher-than-expected liability from the 1 percent surcharge that became effective January 1, 2005.  In November 2004, voters passed Proposition 63, which imposed a 1-percent surcharge on taxpayers' taxable income above $1 million to fund mental health service programs.  Receipts from wage withholding came in $61 million above the month's estimate of $2.264 billion. Other receipts, which include items such as final payments, audit collections, and withholding on real estate, were $120 million higher than the forecasted $255 million. Refunds were $13 million below the anticipated level of $196 million.  Pursuant to the Proposition, the cash amount transferred to the Mental Health Services Fund (MHSF) during fiscal year 2005-06 is 1.76 percent (0.0176) of total monthly personal income tax collections.  The special fund amount transferred to the MHSF was $7 million above the forecast of $78 million.  Year-to-date General Fund tax revenues are $666 million above estimate.
• Sales and use tax receipts were $66 million above the month’s forecast of $2.098 billion.  September represents the second prepayment for third quarter taxable sales.  A more complete picture of third quarter sales activity will be available when final payments for the quarter are received in late October and early November.  At this time, it is not known how much of the gain is attributable to gasoline sales which will eventually be allocated to the Transportation Investment Fund, rather than to the General Fund.  Year-to-date, the sales tax cash is $194 million above expectations. 
• Corporation tax revenues were $2.118 billion, $524 million higher than the month’s estimate of $1.664 billion.  Prepayments were $638  million higher than the forecast of $1.471 billion. Other payments were $96 million less than the forecast of $302 million.  Refunds were $17  million higher than the projected level of $110 million. Some of the strength in corporation tax revenues may be attributable to a 2004 federal law, the American Jobs Creation Act, which provided for a one-year reduction in tax rates if corporations “repatriated” dividends to the United States.
• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $23 million above the $564 million that was expected. The remaining revenues—pooled money interest income and “other” revenues—were $92 million below the month’s estimate of $206 million.

For more information, please contact the California Department of Finance, Room 1145, State Capitol, Sacramento, CA or call (916) 323–0648.

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