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Finance Bulletin: September 2005

Economic Update

The California economy continued to expand in July. The state’s growth outpaced the nation's rate and was fairly broad-based. Construction activity moderated a bit from a surge in June, but was up from a year ago.

• California added 29,900 nonfarm jobs in July, considerably more than its share of the well-received 207,000 job gain in the nation. The state has gained jobs in every month this year. Also, the state's gain in nonfarm payrolls in June was revised upward by 1,000 to 16,600.
• Seven of the 11 major industry sectors gained jobs in July. The largest gains were in Trade, Transportation and Utilities, which added 9,900 jobs, and Construction, which grew by 9,600. Elsewhere, Manufacturing added 5,300 jobs; Professional and Business Services, 5,200; Leisure and Hospitality, 4,700; Government, 4,200; and Financial Activities, 3,400.
• The sectors that lost jobs in July included Educational and Health Services which lost 4,900 jobs; Information, 4,300; Other Services, 3,000; and Natural Resources and Mining, 200.
• Due to a quirk in 2004 employment estimates — likely due to a questionable seasonal adjustment factor — nonfarm payroll employment grew by only 189,700 over the year, or 1.3 percent. This is less than the 1.7-percent gain for the nation. Average nonfarm payroll employment during the first seven months of 2005 was 1.6 percent higher than a year ago in the state and 1.7 percent in the nation.
• From July 2004 to July 2005, nonfarm payroll jobs rose in nine out of 11 major industry sectors. Employment over the year rose by 52,400 in Construction; 38,600 in Professional and Business Services; 35,600 in Leisure and Hospitality; 18,800 in Educational and Health Services; 14,200 in Trade, Transportation and Utilities; 13,600 in Financial Activities; 13,100 in Information; 6,700 in Other Services; and 5,500 in Government.
• Over the same period, employment fell by 8,300 in Manufacturing, and 500 in Natural Resources and Mining.
• The state's unemployment rate fell 0.3 percentage point to 5.1 percent in July, the lowest rate since May 2001. Official labor force statistics, however, have been more volatile since the Bureau of Labor Statistics adopted a new local area methodology in February of this year. The national unemployment rate was unchanged at 5.0 percent in July. California's labor force declined by 15,000, and the number of unemployed persons fell by 52,000.
• After a surge in June, home building slowed in July, with new permits issued for 219,000 units on a seasonally adjusted annual rate basis. Just as June's surge was based on strong single-family home permitting, the slowdown in July was due to a substantial reduction in the pace of single-family construction — nearly 13 percent over the month. Residential construction followed a see-saw pattern during the first seven months of 2005 and is up 1.7 percent from the same months of 2004.
• Nonresidential construction also slowed in July, but is still up substantially from 2004. After rising nearly 19 percent in June, the value of nonresidential permits issued in July fell 5.3 percent. Total nonresidential permitting during the first seven months of 2005 was up over 12 percent from the same months of 2004. Service station construction was the only commercial building sector that did not improve on the 2004 pace.
• In real estate markets, both home sales and prices softened slightly in July. The median price of existing single-family homes sold in July fell to $540,900, 0.4 percent below the June median. Home sales dropped somewhat more in July, 1.3 percent. For the first seven months of 2005 as a whole, the median single-family home price was up over 16 percent from the same months of 2004. The pace of home sales, in contrast, increased only 3.3 percent.

Monthly Cash Report

Preliminary General Fund agency cash for August was $268 million above the 2005-06 Budget Act forecast of $6.285 billion. Year-to-date revenues are $320 million above the $10.573 billion that was expected.

• Personal income tax revenues to the General Fund were $226 million above the month’s forecast of $2.578 billion. Withholding was $101 million above the month’s estimate of $2.435 billion and other receipts were $128 million above the projected level of $402 million. Refunds were $1 million under the anticipated $213 million. In November 2004, the voters passed Proposition 63, which imposed a 1 percent surcharge on taxpayers' taxable income above $1 million to fund mental health service programs. 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 in August was $4 million above the forecast of $46 million. Year-to-date General Fund personal income tax revenues are $290 million above estimate.
• Sales and use tax receipts were $183 million above the month’s forecast of $2.772 billion. August cash includes the remaining portion of the final payment for second quarter sales, as well as the first prepayment for third quarter sales. It appears that both the final payment receipts and the first prepayment receipts were above forecast. Until the Board receives detailed quarterly information from retailers, we will not know what kinds of retail sales contributed to the increased receipt numbers. Year-to-date, the sales tax cash is $123 million above expectations.
• Corporation tax revenues were $130 million, $79 million below the month’s estimate of $209 million. Prepayments were $38 million below the forecast of $147 million. Other payments were $95 million less than the forecast of $181 million. Refunds were $54 million below the projected level of $119 million.
• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $9 million below the $88 million that was expected. The remaining revenues — pooled money interest income and “other” revenues — were $53 million below the month’s estimate of $638 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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