Economic Update

California received good economic news on retail sales as 2004 drew to a close. Home sales and home construction were also strong. Real estate prices appear to have stabilized. Commercial construction was also strong. However, the news on jobs was disappointing, although the unemployment rate held steady at 5.8%.

Retail hiring was softer than usual in December, as the gain in retail employment from November to December, on a seasonally unadjusted basis, was about 40 percent lower than the average gain in 1991 through 2003. But retailers added more jobs than usual in October and November of last year. Holiday hiring followed that same pattern in the nation as a whole, where it was attributed to retailers having generally high expectations in the fall for the coming holiday buying season, only to have them dashed by disappointing sales on weekend following Thanksgiving.
Home building bounced back in November. Home building permit issuances surged over 40 percent in November after dropping nearly 23 percent in October. The issuance of permits for 247,000 units on a seasonally adjusted annual rate basis was 31 percent above the pace set in November 2003. Single-family permits registered a 15.6 percent year-over-year gain, while the more volatile multi-family sector posted a 72.3 percent increase from a year ago. For the first 11 months of the year as a whole, residential construction permitting is up 6.3 percent from the same months of 2003.
November was also a good month for nonresidential building. The value of permits issued increased smartly in November after four consecutive months of deceleration. A resurgence in office permits boosted November's construction pace 25 percent above its year-ago rate. During the first 11 months of 2004, office building permit issuances were up nearly 46 percent from the same months of 2003.
California's home prices regained some ground in November, after sliding in September and October. The median price of existing single-family homes sold in November, $473,260, was a 2.9 percent increase from October and is over 23 percent higher than one year ago. This price is still within the range that the state's median has bounced along in since May 2004. From May through November the median price averaged $467,000, increasing an average of only 0.6 percent each month.
Sales of single-family homes have shown similar stability. Even though home sales reached a seasonally adjusted annual rate of 653,000 units in November, the average pace of sales since August 2003 has been 627,000 units. The rate has varied little from this average in all but a couple of months.
The loss of 25,000 nonfarm payroll jobs in December was disappointing news for California. This drop, though, is not necessarily indicative of general weakness, as two industries, retail trade and motion pictures were largely responsible for the drop.
In contrast, the nation gained 157,000 jobs in December.
The motion picture industry is typically a volatile industry, and December's weakness followed strong gains in October and November. Even though it shed jobs in December, Motion Picture and Sound Recording employment (unadjusted) was up 2,100, or 1.5 percent, from a year ago.
Six of 11 major industry sectors gained jobs in December. Construction led the way with a gain of 5,300, not surprising given the recent strong construction activity. In addition, employment rose by 3,900 in Professional and Business Services; 2,200 in Financial Activities; 800 in Manufacturing; and 100 each in Education and Health Services, and Natural Resources and Mining.
Employment losses were led by 16,400 in Trade, Transportation and Utilities, reflecting the weaker than normal retail hiring. Information employment dropped 10,800, with Motion Picture and Sound Recording largely responsible. Leisure and Hospitality lost 4,200; Government, 4,200; and Other Services, 1,800.
The state's unemployment rate held steady at 5.8 percent in December (November's rate was originally reported at 5.7 percent). The national unemployment rate also was unchanged in December, at 5.4 percent. Over the past year the state's unemployment rate has dropped 0.7 percentage point while the nation's fell only 0.3 points. The number of employed Californians dropped by 22,000, while unemployment fell by 10,000 in December .

Have Home Prices Hit a Ceiling?

Monthly Cash Report

Preliminary General Fund agency cash for January was $420 million above the 2005-06 Governor's Budget forecast of $8.340 billion. The variance between January and year-to-date cash results from differences between actual and estimated December revenues.
In total, December revenues were $287 million above forecast.

Personal income tax revenues were $344 million above the month's forecast of $5.605 billion. Withholding receipts were $35 million below the forecast of $3.047 billion. January's estimated payments were up $364 million above the forecast of $2.541 billion, 28.6 percent on a year over-year basis. Even though the fourth quarter estimated payment for the 2004 tax year is not due until January 15, 2005, many taxpayers make their payment in December in order to take advantage of the federal itemized deduction for state taxes paid during the year. For December and January combined, estimated payments were about $485 million above the forecast of $3.599 billion, which suggests that end of-year non-wage income (e.g., investment income) was higher than expected. January's other receipts were $75 million above the projected level of $225 million, and refunds were $57 million higher than the forecast of $169 million. In addition, the amount transferred to the Mental Health Services Fund (MHSF) was $3 million higher than the estimated $39 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 2004-05, beginning January 2005, will be 0.7 percent (0.007) of total monthly personal income tax collections. Year-to-date cash receipts for this revenue source in the General Fund are $440 million above estimate.
Sales and use tax receipts were $92 million above the month's forecast of $2.15 billion. January cash represents the final payment for fourth quarter 2004 sales, which was due on January 31. Some of the cash from this final payment spills over into February. Based on the first few days of February cash, January's gain appears to be a cash acceleration. Year-to-date sales tax cash is $128 million above estimate.
Corporation tax revenues were $237 million above the month's forecast of $196 million. Prepayments were $30 million above the estimate of $207 million and other payments, primarily audit and settlement moneys, were $122 million above the $104 million estimate. Refunds were $85 million less than the $115 million estimate. Year to-date corporation tax receipts are $304 million above estimate.
Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $1 million above the $73 million that was expected. The remaining revenues-pooled money interest income and "other" revenues-were $254 million below the month's estimate of $316 million. This shortfall appears to be due simply to cash flow factors, such as receipts in January not matching historical patterns used to allocate the forecast throughout the year. The shortfall is expected to be made up in the coming months.

General Fund Agency Cash
2004-05 Budget Act 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.

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