Economic Update

California's employment picture improved during the first quarter of 2005. Commercial construction extended a healthy growth trend that stretches back to early 2004. Home building activity, though, slowed during the first two months, and California's blistering real estate markets showed signs of moderating.

California's nonfarm payroll employment rose by 17,600 jobs in March. The state's payrolls totaled 14,699,300, which is 1.7 percent higher than a year ago. This level is also just about 30,000 jobs shy of the state's pre-recession peak employment level in March of 2001.
Six of 11 major industry sectors added jobs in March. Information and Trade, Transportation and Utilities were the leading sectors, adding 6,800 and 6,200 jobs, respectively. Leisure and Hospitality, gained 4,300 jobs; Construction, 3,900; Other Services, 1,400; and Professional and Business Services, 300.
Among the losing industries, Manufacturing lost 2,500 jobs; Educational and Health Services, 2,000; Government, 600; Financial Activities, 100; and Natural Resources and Mining, 100.
Employment over the year rose by 61,300 in Professional and Business Services; 55,500 in Construction; 38,300 in Leisure and Hospitality; 35,100 in Trade, Transportation and Utilities; 22,700 in Educational and Health Services; 22,400 in Financial Activities; 6,500 in Other Services; 5,600 in Manufacturing; and 2,200 in Information. Employment fell by 5,100 in Government; and 400 in Natural Resources and Mining.
The state's unemployment rate fell to 5.4 percent in March from a revised 5.8 percent in February. This dramatic drop was principally due to an unprecedented 71,000 drop in the number of persons unemployed. This is the largest one-month decline in the current employment series dating back to 1990. A good portion of this drop was likely due to the introduction of new methods of counting the unemployed used by the U.S. Bureau of Labor Statistics.
Residential construction permitting picked up in February, after slowing in the two preceding months. The pace of permits issued reached 191,000 units at a seasonally adjusted annual rate, a 5.4-percent gain from January.
For January and February combined, however, permitting was down 7.4 percent from a year ago. Construction permitting slowed throughout Southern California. Building in the San Francisco Bay area, however, picked up sharply.
Following a similar pattern, the value of nonresidential building permits issued improved slightly in February, halting a two-month slowdown. New industrial and store construction accounted for much of the improvement; however, office construction lagged.
On a year-over-year basis, nonresidential building showed more strength than home building. For the first two months of 2005, total nonresidential construction permitting was up by nearly 15 percent over the same months of 2004. Strong gains in industrial, store, hotel and motel, as well as amusement and recreation building offset a sharp slowdown in office construction. Permitting in the San Francisco Bay Area is up nearly 25 percent. Southern California activity grew over 9 percent, led by Los Angeles County where new industrial permit values were up 252 percent and retail construction, 42 percent.
The median price of existing single-family detached homes sold in California softened in February to $471,620 from $485,700 in January, according to the California Association of Realtors. This price is in line with the narrow price range that California home prices have been in since April 2003. Diminished home affordability appears to have dampened demand. Despite still-favorable home mortgage rates, sales of existing single-family detached California homes slowed in February. Sales, totaling 608,170 units at a seasonally adjusted annualized rate, were down 7.8 percent from the January pace. The Unsold Inventory Index for existing, single-family detached homes—the number of months needed to deplete the supply of homes on the market at the current sales rate—was 3.9 months in February, twice the 1.8-month reading from twelve months earlier, according to the California Association of Realtors.

Mixed Building Activity

Monthly Cash Report

A special caution is needed in introducing news of the cash account because of the unusual effect of the amnesty program. Preliminary General Fund agency cash for March was $2.949 billion above the 2005-06 Governor’s Budget forecast of $5.345 billion. Year-to-date, revenues are $3.317 billion higher than the $54.63 billion that was expected. The gains are primarily due to unexpected corporation tax receipts related to amnesty, described below.

Personal income tax revenues were $243 million above the month’s General Fund forecast of $1.409 billion. Withholding receipts were $51 million above the estimate of $2.562 billion. Other receipts were $192 million above the projected level of $562 million, refunds were $2 million lower than the forecast of $1.705 billion, and the special fund amount transferred to the Mental Health Services Fund (MHSF) was $2 million over the estimated $10 million. Proposition 63, passed by the voters in November 2004, imposed a surcharge of 1 percent on taxpayers' taxable income above $1 million for funding mental health service programs. Pursuant to the Proposition, the cash amount transferred to the MHSF during fiscal year 2004-05, beginning January 2005, is 0.7 percent (0.007) of total monthly personal income tax collections. April personal income tax receipts will be critical as final returns for the 2004 tax year are filed. Year-to-date General Fund tax revenues are $537 million above estimate; February receipts were revised up by $9 million from the last Finance Bulletin.
Sales and use tax receipts were $50 million above the month’s forecast of $1.811 billion. March represents the second prepayment for first quarter sales and use tax liabilities. Year-to-date, sales and use tax revenues are $103 million below forecast.
Corporation tax revenues were $2.685 billion above the month’s forecast of $1.661 billion. Although March is a significant month for this revenue because the final payments for 2004 calendar year-corporations were due, dramatic revenue gains in other payments caused the increase. Prepayments were $67 million above the estimate of $382 million. Refunds were $44 million above the forecast of $120 million. Other payments, which include final payments and audit and settlement payments, were $2.662 billion above the $1.399 billion estimate. The gain is concentrated in audit and settlement payments and it appears that corporations made large protective payments to avoid higher post-tax amnesty penalties. At this time it is unknown how much of the gain will be refunded and how much is simply acceleration from future years. Because much, and perhaps most, of the gain could be refunded, or represents payments already anticipated in ongoing revenue estimates for 2005-06 and subsequent years, much of this cash increase may not represent a real long-term increase. More information on these receipts is expected to be available for the May Revision estimate. The first prepayment for 2005 calendar-year corporations is due mid-April. Year-to-date, corporation tax revenues are $3 billion above the forecast. A responsible approach would count no more than 10 percent of this number as net new revenue that would not otherwise have been received, albeit in later years.
Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $64 million below the $395 million that was expected due to lower-than-expected insurance tax receipts. The remaining Revenues—pooled money interest income and “other" revenues—were $35 million above the month’s estimate of $69 million. The gain is due to "other" revenues (such as revenue from abandoned property and State lands royalties), which are continuing to make up January's shortfall.

General Fund Agency Cash
2005-06 Governor's Budget Forecast

2004-05 Comparison of Actual and Forecast
Agency General Fund Revenues

For more information, please contact the California Department of Finance,
Room 1145, State Capitol, Sacramento, CA or call (916) 323-0648.

Return to the Department of Finance Home Page