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Finance Bulletin: August 2007

Economic Update

The effects of the housing sector downturn continued at midyear. Job gains slowed to a trickle in June as home sales and construction activity continued to slow.

• June was a disappointing month for California labor markets.  Nonfarm payroll employment grew by only 400 jobs, essentially no gain at all.  The housing downturn continued to take a toll, with weakness apparent in many sectors connected to real estate.
• Only five of the 11 major industry sectors posted job gains in June.  Education and health services added the most with 8,600 additional jobs.  Government added 4,600 jobs with local education and county government accounting for the lion's share.  Six major industry sectors lost jobs, with the biggest losses coming in housing-related sectors including financial activities, which lost 5,700 jobs, and construction losing 5,300.  Other sectors that lost jobs include manufacturing which dropped 2,700; information, 2,000; trade, transportation, and utilities, 1,000; and natural resources and mining, 199.
• On a year-over-year basis, seven major industry sectors gained jobs in June.  Employment over the year rose by 50,000 in government; 49,600 in educational and health services; 46,599 in professional and business services; 41,200 in leisure and hospitality; 32,099 in trade, transportation, and utilities; 9,399 in other services; and 800 in information.
• The leading job losers were construction and financial activities, the latter suffering its largest loss since December 1995.  Employment fell by 12,000 in construction, 7,000 in financial activities, 5,900 in manufacturing; and 100 in natural resources and mining.
• Employment in industry subsectors most closely related to home construction, real estate, and home-related consumption fell by 0.7 percent during the first half of 2007 compared to the same months of 2006.  This is a dramatic change from the 3.7-percent growth achieved during the first half of 2006.  In the remaining industries, job growth actually accelerated to 1.9 percent from 1.8 percent during the first half of 2006. 
• The state's unemployment rate held steady at 5.2 percent in June, following a 0.4-percentage point increase over the prior two months.  The national unemployment rate was unchanged at 4.5 percent.  In June 2006, California's unemployment rate was 4.9 percent.
• The fallout from the housing slump and the subprime crisis weighed heavily on new home construction during the first half of 2007.  June was the slowest month for home construction permitting since March 2000.  The pace of new home permitting during the first six months of 2007 was down nearly 32 percent from the same months of 2006.  The decline was spread across both the single and multi-family sectors. 
• Business construction, whose growth counterbalanced the slide in home building, lost some of its steam during the first half of 2007.  The value of nonresidential construction permits issued during the first six months of 2007 was up 4.5 percent from the same period of 2006.  During the first half of 2006, this construction expanded over 22 percent. 
• Sales of existing single-family homes slowed for the fourth consecutive month in June, to 366,370 units on a seasonally adjusted annual rate basis. This pace is nearly 25 percent below the year-ago pace.  The pace of home sales during the second quarter of 2007 was the weakest since the third quarter of 1995.

• The median price of existing single-family homes sold in June advanced slightly from May, to $594,260, just 3.2 percent higher than a year earlier.  This price stability, however, is likely the result of a change in the composition of home sales as the housing slump has principally impacted low-priced housing markets.

Monthly Cash Report

Preliminary General Fund agency cash for July was $267 million below the 2007-08 May Revision forecast of $5.515 billion. $150 million of the shortfall is due to timing and cash flow.

• Personal income tax revenues to the General Fund were $137 million below the month’s forecast of $2.924 billion.  Withholding receipts tracked well, being only $13 million lower than the projected level of $2.689 billion.  Other receipts were $90 million below the anticipated $496 million – July is not a significant month for income tax estimated payments or final payments.  Refunds came in $36 million over the estimate of $209 million.  Proposition 63 requires that 1.76 percent of total monthly personal income tax collections be transferred to the Mental Health Services Fund (MHSF).  The amount transferred to the MHSF in July was $2 million below the estimate of $52 million.

• Sales and use tax receipts were $31 million above the month’s forecast of $2.053 billion.  About $196 million of July receipts are attributable to payments that were due June 30.  July represents the final payment for second quarter taxable sales, which was due on July 31.  A more complete picture of second quarter sales will be available in mid-August, when all of the second quarter receipts have been processed. 

• Corporation tax revenues were $12 million above the month’s estimate of $296 million.  Prepayments were $42 million lower than the forecast of $272 million and other payments were $18 million above the $105 million that was expected.  Refunds were $36 million below the projected level of $81 million.

• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $2 million below the $61 million that was expected.  Interest income earned in July was not transferred to the General Fund until early August, so that revenue source was down by the $50 million that had been forecast.

• Other" revenues were $121 million below the month’s estimate of $131 million.  $21 million of the loss is attributable to a reduction in Indian gaming revenues relative to the May Revision estimate; the balance is primarily related to the delayed timing of Medi-Cal, child support, and gaming receipts.  

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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