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Finance Bulletin, February 2008

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Economic Update

Labor market indicators for December were mixed.  Even though payroll employment made a commendable and well-distributed gain, the state's unemployment rate rose sharply.

  • The industry, or payroll, employment estimate is considered the more reliable labor market indicator.  It comes from a larger and more comprehensive survey than the household survey used to gauge the unemployment rate.  The December payroll survey turned up a respectable 15,500 new jobs, widely distributed across nine of the 11 major industry sectors.
  • The biggest gains in December were in education and health services, leisure and hospitality, and government.  Educational and health services added 5,900 jobs; leisure and hospitality, 5,600; government, 3,700; professional and business services, 2,800; information, 1,500; trade, transportation, and utilities, 1,100; manufacturing, 500; other services, 400; and natural resources and mining, 200.
  • The housing slump continued to be the principal source of employment losses.  Financial activities lost 4,200 jobs; and construction, 2,000.   Retail trade, which is part of the trade, transportation and utilities industry sector, lost 2,200 jobs—evidence that holiday spending was lackluster.
  • The state's unemployment rate increased by 0.5 percentage point to 6.1 percent in December.  This jump was the biggest since February 1992—although from a much lower level.  Since the Bureau of Labor Statistics revised its method for calculating state and local unemployment rates a few years ago, the underlying labor force statistics have been notoriously volatile.  For example, the number of unemployed Californians increased by 88,000 or 8.5 percent in December, which was the biggest month-over-month increase going back to 1976.  Unemployment likely trended up from September to December, but the upcoming annual benchmark revisions, which will be released in late February, should tone down much of this volatility.
  • In December, home building continued a see-saw pattern of alternating gains and losses that started in August.  After slowing dramatically in November, the pace of home building improved in December, even though it remained at a very sluggish pace.  Residential permitting in December reached 91,000 units on a seasonally adjusted annual rate basis—off nearly 35 percent from a year earlier.
  • Nonresidential construction permitting jumped 17 percent from November to December.  During 2007 as a whole, permitting was up 6.3 percent from 2006.  Nonresidential construction has been on a gradual slowing trend since early in 2006.
  • Sales of existing single-family detached homes improved for the second consecutive month in December, reaching 301,040 units on a seasonally adjusted annual rate basis.  Still, they were down over 33 percent from December 2006, according to the California Association of Realtors
  • Firming sales, however, did not halt the slide in home prices.  The median price of existing single-family homes sold in December dropped 2.9 percent from November.  The price, $475,000, was down almost 16.5 percent from a year earlier—the fourth consecutive year-over-year decline.  Some of the drop was likely the result of a shifting composition of the types of home sold.  Credit limits and tightening credit conditions most likely reduced the proportion of total sales accounted for by upper-end homes.

      

Monthly Cash Report

Preliminary General Fund agency cash for January was $277 million below the 2008-09 Governor’s Budget forecast of $11.6 billion.  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 $137 million above forecast.

  • Personal income tax revenues to the General Fund were $188 million below the month’s forecast of $8.333 billion.  Withholding receipts were $114 million below the estimate of $4.156 billion.  Other receipts were $7 million below the projected level of $4.613 billion and refunds came in $70 million higher than the anticipated $287 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 January was $3 million below the estimate of $149 million.  Year-to-date General Fund income tax revenues are $28 million below estimate.

  • Sales and use tax receipts were $193 million below the month’s forecast of $2.76 billion.  January cash represents the final payment for fourth quarter 2007 sales, which is due on January 31.  A portion of the sales tax on gasoline and diesel fuel that is shown here as General Fund cash revenue will be transferred to certain transportation funds and will not be recorded as a General Fund revenue in the state's financial statements.  Year-to-date, the sales tax cash is $206 million below expectations.

  • Corporation tax revenues were $88 million above the month's estimate of $308 million.  Prepayments were $104 million above the forecast of $322 million.  Other payments were $10 million higher than the forecast of $97 million and refunds were $26 million above the projected level of $111 million.  Year-to-date revenues are $58 million above estimate. 

    Of note is that although January is a significant month, December was more important because the final estimated payment for 2007 calendar year corporations was due mid-month; calendar year corporations account for roughly 70 percent of the total tax.  December's estimated payments were notably weak – down $604 million or 28.2 percent on a year-over-year basis.  Because these payments were not known in time for the Governor's Budget forecast, Finance's cash estimates currently assume that the weakness in the December estimated payment will be recovered when calendar year corporations make their final payments in March.  Projected March cash includes $490 million in payments that were expected in December.  Preliminary data indicate that while some of the weakness was in industries that reported poor fourth-quarter results (notably finance and real estate), results for other industries were quite varied.  Due to the turbulence and uncertainty in the business outlook and liquidity problems at year-end, it is plausible that some corporations took a conservative stance in making their final estimated payment.  On the other hand, we do note that there is downside risk

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  • Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $1 million below the $61 million that was expected.  The remaining revenues—pooled money interest income and “other” revenues—were $17 million above the month’s estimate of $138 million.

For more information, please contact the California Department of Finance, Room1145, StateCapitol, Sacramento, CA or call (916) 323-0648.