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Finance Bulletin: February 2006

Economic Update

California's economy turned in a solid performance in 2005, though there were signs of deceleration in housing markets.  Job growth improved markedly from 2004.  The pace, however, peaked at midyear.  Home building was very strong during most of the year, but slowed noticeably during the final quarter.  The pace of existing home sales also deteriorated during the last three months of the year.

• California gained 24,300 industry jobs in December.  November's job gain, initially reported as 20,400, was revised upward to 32,500.  With these two strong months, California topped the nation in annual job growth—1.6 percent to 1.5 percent.
• Employment growth was broad-based. Construction added 6,600 jobs, or 27 percent of the total gain. Professional and business services added 5,700 jobs, educational and health services, 3,200, financial activities, 2,400, manufacturing, 2,000, government, 1,800, information, 1,700, other services, 1,700, and natural resources and mining, 200. Two sectors lost jobs, leisure and hospitality, and trade, transportation, and utilities.
• On a year-over basis, all 11 major industry sectors gained jobs. Construction added 67,700, leisure and hospitality, 35,800, professional and business services, 33,300, government, 30,700, educational and health services, 25,200, trade, transportation, and utilities, 15,500, financial activities, 11,400, information 6,600, manufacturing 3,600, other services, 3,600 and natural resources and mining, 300.
• California's unemployment situation improved markedly over the course of 2005, even if the underlying details were erratic. December's unemployment rate, 5.1  percent, was down from an upwardly-revised 5.3 percent in November and 6 percent in December 2004. Civilian employment grew by an unlikely 115,000 in December while the number of unemployed Californians fell by 22,000. Monthly changes in civilian employment are often taken lightly because the small survey of households upon which they are based often yields volatile results.
• Another question arises from unusual trends in California's unemployment statistics. Civilian employment grew 3.2 percent over the last 12 months, widely outpacing the 1.6-percent growth in the nonfarm payroll employment derived from an extensive survey of employers. Moreover, civilian employment jumped sharply in February, April, August, and December, with each increase far greater than the strongest one-month gain recorded in recent years. Large drops in civilian unemployment occurred in January, March, and July, again significantly greater than the largest one-month drops in recent history.
• New building energy-efficiency standards, imposed by the California Energy Commission and effective October 1, somewhat clouded home building conditions at year-end. Residential permitting accelerated in September in anticipation of the new requirements and then slowed in October—down nearly 43 percent from September. But, modest construction in November and December clearly showed that home building was decelerating at the end of 2005. Permitting activity during the last four months of the year (including the September surge) was off nearly 10 percent from the same months of 2004. For the year as a whole, the number of residential units permitted was down 2.7 percent.
• In contrast, commercial construction grew steadily throughout 2005. The value of nonresidential building permits issued during the final three months of 2005 was up almost 27 percent from the same months of 2004. For 2005 as a whole, nonresidential construction increased 16 percent from 2004, based on strong gains in office, store, and industrial construction.
• California home prices essentially held steady in December. The median price of existing single-family homes sold was $548,430—right in line with the prices recorded since June of this year.
• December was the third consecutive month that the pace of home sales slowed both on a month-to-month and a year-over-year basis. Sales of existing, single-family homes fell over 8  percent in December to a seasonally adjusted annual rate of 531,900 units. This was also a 17.6-percent drop from December 2004. Overall, during the final quarter of 2005, the pace of home sales slowed 10.6 percent from the same months a year earlier.

Monthly Cash Report

Preliminary General Fund agency cash for January was $78 million above the 2006-07 Governor’s Budget forecast of $10.582 billion. The variance between January and year-to-date cash results for differences between actual and estimated December revenues. In total, December revenues were $243 million below forecast, due largely to timing of sales tax and Medi-Cal fee receipts.

• Personal income tax revenues to the General Fund were $41 million below the month’s forecast of $7.690 billion. Withholding, which includes the impact of year-end bonuses, was $91 million under the estimate of $3.749 billion. Estimated payments for the fourth quarter of 2005, which were due in mid-January, were $68 million above the projected level of $3.956 billion. Refunds were $31 million below the anticipated $293 million and other revenues were $50 million under the forecast of $416 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 Proposition 63, 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 January was $1 million below the forecast of $138 million. Year-to-date General Fund tax revenues are $10 million below estimate.
• Sales and use tax receipts were $115 million above the month’s forecast of $2.433 billion. January cash represents the final payment of fourth quarter 2005 sales, which is due on January 31. Year-to-date, the sales tax cash is $63 million below expectations due to revisions to October revenues.
• Corporation tax revenues were $261 million, $22 million below the month’s estimate of $283 million. Prepayments were $30 million above the forecast of $225 million. Other payments were $10 million higher than the forecast of $84 million. Refunds were $62 million above the projected level of $26 million.
• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $5 million above the $55 million that was expected. The remaining revenues—pooled money interest income and “other” revenues—were $21 million above the month’s estimate of $121 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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