Economic Update

While the California economy continued to expand in 2005, some noticeable contrasts from 2004 were evident during the first five months. Industry job growth accelerated, but home building, which made major gains in 2004, slowed. The growth of existing home sales also cooled somewhat from last year's heated pace.

California added 93,100 industry jobs during the first five months of 2005, putting industry employment in May 1.7 percent ahead of its year-earlier level. This was considerably stronger than the 1 percent growth achieved in 2004 as a whole. Moreover, the pattern was notably different. Manufacturing employment stabilized at mid-2004, grew during the second half of the year, and then fell again in the first five months of 2005. Employment in Financial Activities expanded steadily throughout 2003 and 2004, riding a rising tide of home buying and refinancing, only to reach a plateau at the beginning of 2005. Moreover, employment in Trade, Transportation and Utilities has fallen in 2005 after trending upward in 2004. Public sector employment, on the other hand, expanded each month of 2005 through May after shedding jobs throughout 2003 and 2004. Likewise, employment in the Information sector expanded in the first five months of 2005 after declining during 2004. Other sectors, like Professional and Business Services, Educational and Health Services, and Other Services, saw employment gains grow in the first five months of 2005. Construction was the leading growth industry in 2004 as well as the early months of 2005.
Distinct regional variations were also evident in the latest job reports, with job creation strongest in the San Joaquin Valley and softest in the San Francisco Bay Area. Employment in the combined Bakersfield, Fresno, and Stockton metropolitan areas during the first five months of 2005 was up 2.1 percent from the same months a year ago. Employment in the Sacramento region grew 1.4 percent. Bay Area employment, however, grew by only 0.4 percent.
Home building slowed dramatically at the beginning of 2005, but has since improved. The year began with a near 20 percent drop in building permits from December 2004. Between January and May, however, both single and multifamily construction permitting gradually improved. In May, new permits were issued for 208,000 units, on a seasonally adjusted annual rate basis. This was a 3.6 percent improvement from a year earlier. Nonetheless, residential construction permitting during the first five months of 2005 was down 1.3 percent from the same months of 2004.
In contrast, the value of nonresidential permits issued during the first five months of the year was up nearly 11 percent from the same months of 2004. Amusement and recreation building was the fastest growing sector—up over 71 percent—while store construction grew the most in absolute terms, $13.6 million. On the other hand, office construction—the leading commercial growth sector in 2004—slowed considerably, off 17 percent from the first five months of 2004. Recently though, this sector has picked up. Office construction permits issued in May were up over 16 percent from May 2004.
After breaching the half-million dollar mark in April, the median price of existing single-family homes sold in May climbed to $522,590. Despite the record levels, the April and May gains were the slowest pace recorded since February 2003. Year-over-year gains in the state's median single-family home price averaged nearly 21 percent in 2001, but only 16.2 percent during the first five months of 2005, and gained only 12.6 and 12.8 percent in April and May respectively.
The run-up in prices dealt a severe blow to home affordability. According to the California Association of Realtors, the state’s home affordability index—the percentage of households that can afford to purchase a median-priced home—fell to 17 percent in April. This is 3 percentage points lower than a year earlier. The affordability rate of the nation as a whole also slid over the past year, but from a much higher level. The nation's home affordability index in April was 50 percent, down 7 percentage points from a year earlier.

Strong Growth in the Central Valley

Monthly Cash Report

Preliminary General Fund agency cash for June was $97 million above the 2005-06 May Revision forecast of $9.479 billion. Year-to-date revenues are $553 million higher than the $85.372 billion that was expected.

Personal income tax revenues were $1 million above the month’s forecast of $4.513 billion. Withholding was $10 million above the month’s estimate of $2.243 billion and the second quarterly estimated payment for the 2005 tax year came in $220 million above the projected level of $1.818 billion—a 26.3-percent increase over June 2004. The special fund amount transferred to the Mental Health Services Fund was $32 million—the same as forecast. Higher-than-expected refunds and lower other receipts offset the gain from withholding and estimated payments. Refunds were $35 million above than the anticipated $197 million and other receipts were $194 million below the estimated $681 million. Other receipts include amnesty collections. At the time this bulletin was prepared, it was unknown as to how much of the shortfall in other receipts might be related to amnesty—either weaker-than-projected collections or cash flow delays. Year-to-date General Fund personal income tax receipts are $140 million above the May Revision forecast.
Sales and use tax receipts were $229 million above the month’s forecast of $2.597 billion. How much of this might be due to payments made under the amnesty program, and hence either one-time or already counted for the out-years, is not yet known. June represents the second prepayment for second quarter sales. A more complete picture of second quarter sales will be available in mid-August, when all of the second quarter receipts have been processed. Prior months have been revised upward, thus year-to-date, sales tax receipts are $453 million more than anticipated.
Corporation tax revenues were $110 million below the month’s estimate of $1.668 billion. June receipts primarily reflect the second prepayment for calendar year corporations, which was $53 million below the forecast of $1.534 billion. Other payments were $81 million below the forecast of $267 million. Refunds, which were $24 million less than the projected level of $133 million, partially offset the prepayments and other payments. Cumulatively through June, corporation tax revenues are $3 million above expectations.
Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $7 million above the $520 million that was expected. The remaining revenues—pooled money interest income and “other” revenues—were $30 million below the month’s estimate of $181 million.

General Fund Agency Cash
2005-06 May Revision 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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