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Finance Bulletin: September 2006

Economic Update

Cooling real estate markets continued to challenge California's economy.  Construction was the only major industry to lose jobs in August.  In July, real estate markets continued to soften as home building slowed and home sales fell for the fourth consecutive month.  Home prices also slipped in July, but were still up from a year ago.  Nonresidential building remains a bright spot, led by healthy gains in office construction.

• California gained 36,900 jobs in August, and the gain in July, initially estimated at a meager 900, was revised up to 6,600.  Along with the July revision, the August gain pushed California nonfarm payroll employment above 15 million for the first time (15,026,300).  Nationally, nonfarm payroll employment increased by 128,000 jobs in August.  California contributed a whopping 29 percent of that.
• Over the 12 months from August 2005 to August 2006, California nonfarm payroll employment grew by 192,000 jobs, or 1.3 percent, the same as the nation as a whole.
• Job growth in August was broad-based as ten of the 11 major industry sectors gained jobs.  Government led the way again with a gain of 10,300 jobs.  Professional and business services added 7,900. Education and health services contributed 5,900, as did information, leisure and hospitality added 4,100, manufacturing, 3,200, financial activities, 2,000, trade, transportation and utilities, 600, other services, 600, and natural resources and mining, 200.
• Construction lost another 3,800 jobs, which brought its year-to-date losses up to 17,100 jobs.
• Ten of 11 major industry sectors gained jobs over the 12 months ending in August 2006.  Professional and business services added 48,800, leisure and hospitality, 42,200, government, 33,600, education and health services, 30,800, financial activities, 13,400, trade, transportation, and utilities, 11,800, other services, 11,200, construction, 6,800, manufacturing, 1,800, and natural resources and mining, 900.  Information was the only declining sector, losing 9,300 jobs.
• The state's unemployment rate rose by 0.1 percentage point to 4.9 percent in August.  The national unemployment rate fell by 0.1 percentage point to 4.7 percent.  The state's unemployment rate was 5.2 percent a year ago in August 2005.
• Home building in California slowed precipitously in July.  The pace of residential construction permitting—135,000 units—dropped nearly 37 percent from a strong June.  It was also down over 40 percent from a year earlier.  The decline was significant among both single-family and multi-family construction.  During the first seven months of 2006, the pace of homebuilding was down over 15 percent from the same months of 2005.  Single-family building was down nearly 22 percent and, despite the drop in July, multi-family building was up 3.5 percent year-to-date.
• Nonresidential construction also slowed in July, but was still up on a year-over-year basis.  The value of nonresidential construction permits issued in July was nearly 3 percent greater than a year earlier.   This growth was led by strong gains in office, hotel/motel, and parking garage construction and alterations and additions.  Permitting for industrial construction was off nearly 29 percent from July 2005.
• Home sales in California slowed in July for the fourth consecutive month.  Sales of existing single-family homes slipped to a seasonally adjusted annual rate of 454,000 units—over 6 percent below the June pace.  This is also nearly 30 percent slower than a year earlier and was the slowest sales pace since July 1997.  Overall, existing home sales during the first seven months of 2006 were down 22 percent from the same months of 2005.
• Home prices slipped in July from the record high levels set the month before.  The median price for single family homes sold in July was $567,360.  This is still at the upper end of the $540,000-$570,000 range that California home prices have been in since June 2005. By climbing only 5.1 percent on a year-over-year basis, July was the third consecutive month of sub-10 percent appreciation.

Monthly Cash Report

Preliminary General Fund agency cash for August was $45 million below the 2006-07 Budget Act forecast of $6.367 billion.  Year-to-date revenues are $381 million above the $10.883 billion that was expected.

• Personal income tax revenues to the General Fund were $184 million above the month’s forecast of $2.951 billion.  The gain was due to higher-than-expected collections from prior-year activity (e.g. audit receipts).  The "other receipts" category, which includes prior-year payments, was $157 million above the estimate of $532 million.  Withholding was $23 million above the projected level of $2.665 billion and refunds were $7 million below the forecast of $193 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 2006-07 is 1.76 percent (0.0176) of total monthly personal income tax collections.  The special fund amount transferred to the MHSF in August was $3 million above the forecast of $53 million.  Year-to-date General Fund tax revenues are $162 million above estimate.
  
• Sales and use tax receipts were $474 million below the month’s forecast of $3.047 billion.  August cash includes the remaining portion of the final payment for the second quarter sales, as well as the first prepayment for third quarter sales.  As was noted in last month’s bulletin, final payments that normally would have posted as August cash were posted in July generating substantially more revenue than estimated.  As expected, the August numbers have offset the larger than expected gains from July.  Year-to-date, the sales tax cash is $44 million below forecast.   
  
• Corporation tax revenues were $17 million above the month’s estimate of $185 million.  Prepayments were $2 million lower than the forecast of $160 million and other payments were $21 million above the $113 million that was expected. Refunds were $2 million above the projected level of $88 million.  Year-to-date revenues are $82 above estimate.
• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $9 million below the $70 million that was expected.  Of the remaining revenues, pooled money interest income was $45 million above the month's estimate of $37 million, and other revenues were $192 million over the expected level of $77 million. At this time, the gain in other revenues appears to be primarily due to receiving certain Medi-Cal fee revenues earlier than expected..
• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $3 million below the $60 million that was expected.  The remaining revenues—pooled money interest income and “other” revenues—were $44 million below the month’s estimate of $123 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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