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Finance Bulletin: February 2007

Economic Update

California ended 2006 with generally good notes.  Job growth was healthy.  The unemployment rate was low.  While still subdued from a year ago, residential construction and real estate markets showed some signs of increased stability.

• California's labor market finished 2006 gaining 17,200 jobs in December after posting an upwardly-revised 17,300 boost in November.  These gains pulled the average monthly gain up to 14,200 for the year.  However, this was weaker than 2004 and 2005 when the monthly gains averaged 20,000 and 24,000 and when the state's housing sector was still adding jobs at a good clip. 

• Nevertheless, the gains at the end of the year were impressive given the softness in the construction sector.  Other industries took up much of the slack.  From December 2005 to December 2006, California nonfarm payroll employment grew by 170,300 jobs, or 1.1 percent.  Employment in sectors outside of construction grew 1.3 percent over the year.  Over that period, jobs grew by 1.4 percent in the nation. 

• Nine of the major industry sectors gained jobs over the 12 months ending in December 2006. Professional and business services led with 45,000.  Government added 39,100; leisure and hospitality, 33,400; education and health services, 33,300; trade, transportation, and utilities, 11,400; financial activities, 10,100; information, 7,600; other services, 6,400; and natural resources and mining 1,200.  Construction lost 15,900 jobs and manufacturing 1,300.

• Recent volatility in California's unemployment readings made the labor market picture difficult to discern.  The state's reported unemployment rate became more volatile from month to month with the introduction of the U.S. Bureau of Labor Statistics' new method for estimating unemployment rates in January 2005.  The rate jumped up 0.2 percentage point to 4.8 percent in December following a 0.1 percentage point bump in November and a 0.3 percentage point drop in October.  The December rate returned to where it stood in September.  The actual rate is most likely between 4.5 and 4.8 percent, still a very low level.

• After making a modest rebound in November, the pace of home building in California held steady in December, even though it remained subdued compared to a year earlier.  The pace of residential construction permitting slowed dramatically and fitfully after peaking in mid-2005.  October 2006 was the weakest month since September 2001.  In November, home construction permitting improved nearly 12 percent on October.  The pace improved just slightly in December, reaching 132,000 units on a seasonally adjusted annual rate basis.  The December pace was nearly 25 percent lower than a year earlier.

• Similar to home building, the value of nonresidential construction permits held steady in December, following three consecutive month-over-month drops.  The seasonally adjusted value of nonresidential permitting during the final three months of 2006 was 9.7 percent greater than during the same months of 2005.

• California's existing home market brought mixed news in December.  The pace of existing home sales slowed slightly, while the median price of homes sold picked up.   At a seasonally adjusted annual rate of 451,000 units in December, existing single-family home sales were down 15 percent from a year earlier.

• The median price of existing single-family homes sold in December was $567,690, a 3.7-percent gain from a year earlier.  The year-over-year appreciation in December 2005 was nearly 16 percent.   Even though the state's median price was still below its August peak, it hovered close to $555,000 throughout the last four months of 2006.

Monthly Cash Report

Preliminary General Fund agency cash for January was $973 million below the 2007-08 Governor's Budget forecast of $12.127 billion.  Year-to-date revenues are $898 million below the $54.408 billion that was expected. The variance between January and year-to-date cash results from differences between actual and estimated December revenues, as well as revisions to prior months.  In total, December revenues were $114 million above forecast.

• Personal income tax revenues to the General Fund were $1.034 billion below the month’s forecast of $8.969 billion.  Withholding, which includes the impact of year-end bonuses, was $107 million above the estimate of $3.97 billion.  The fourth estimated payment for the 2006 tax year, which was due in mid-January, came in $1.08 billion below the projected level of $5.031 billion.  This represented a year-over-year decline of 1.8 percent and is in sharp contrast to the first three estimated payments, which had year-over-year growth rates of 22 to 25 percent.  Additional information on this reversal will not be known until after final 2006 income tax payments are made in mid-April.  Refunds were $117 million above the anticipated $222 million and other revenues were $37 million above the forecast of $351 million.  Year-to-date General Fund income tax revenues are $1.146 billion below estimate.  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 January was $19 million below the estimate of $161 million. 

• Sales and use tax receipts were $36 million above the month’s forecast of $2.617 billion.  The final payment for fourth quarter taxable sales was due at the end of January and a portion of this payment is received in early February.  At the time that this bulletin was prepared, early February receipts were not yet complete; a clearer picture of fourth-quarter sales will be available by late February.  Year-to-date, the sales tax cash is $147 million below forecast.

• Corporation tax revenues were $63 million above the month’s estimate of $323 million.  Prepayments were $19 million above the forecast of $287 million and other payments were $20 million above the $114 million that was expected.  Refunds were $24 million below the projected level of $78 million.  Year-to-date revenues are $411 million above estimate, primarily due to strong fourth quarter prepayments in December

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• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes were $8 million above the month's forecast of $53 million.  Of the remaining revenues, pooled money interest income was $18 million below the forecast of $42 million and "other" revenues were $28 million lower than the 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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