Economic Update

California’s economy does not seem destined to repeat its extraordinary 2000 performance this year. Employment growth slowed significantly during the first five months of 2001. The slowdown is principally centered in the San Francisco Bay Area due to the dramatic contraction in internet-related service industries.

California’s employment picture has changed notably since the end of 2000. In May, industry employment grew by 3,200 following gains of 19,400 in April and nearly 58,000 in March. Thus far in 2001, industry employment has expanded by an average of 12,500 jobs each month compared to an average of 49,000 jobs each month in 2000.

Despite decelerating job growth, California is still the nation’s growth leader. While the state added over 3,000 jobs in May, nationally nonfarm employment fell by 19,000. Since the beginning of the year, California has accounted for 73 percent of the nation’s new nonfarm jobs.

Government was the growth leader in May, adding 8,400 jobs, with local government—mainly education—increases outweighing reductions in federal and state government employment. In the private sector, financial services added 2,100 jobs, wholesale trade was up 1,500, and transportation/utilities increased by 1,000. Services fell 6,400, due in part to a decline of 1,300 in computer services (not seasonally adjusted), the first such decline since the series was first reported in January 1996. Manufacturing employment was down 1,500 with losses in electronics industries offsetting expanding construction-related manufacturing.

At a 5.8 percent year-over-year rate, construction was the fastest growing major industry, while services added the most jobs, nearly 157,000. Manufacturing was down 5,700 with significant losses in transportation, food processing, and apparel. Nationally, factories dropped 614,000 jobs over the past year.

California's unemployment rate was unchanged in May at 4.9 percent. The rate a year ago was 5.0 percent. While still low by state and national standards, the unemployment rate of all San Francisco Bay Area counties rose in May.

Computer services—heavily concentrated in the San Francisco Bay Area—are bearing the brunt of the employment slowdown. Business service employment—which includes computer programming and personnel supply services—grew by nearly 13,000 jobs per month in 2000 but has averaged only 800 a month thus far in 2001. Within business services, the growth rate of computer services employment has been cut in half. Year-over-year industry employment growth in the San Jose Metropolitan Area—the Silicon Valley—has dropped from 5.9 percent in December 2000 to 1.3 percent in May 2001. Growth in the San Francisco Metropolitan Area over the same period dropped from 4.7 percent to 2.6 percent.

Residential construction, measured by permit activity, rose 11.2 percent in May from one year ago. Although single-family construction was effectively unchanged, the volatile multifamily sector posted a gain of 51.5 percent. Through the first five months of 2001, residential construction has averaged an annual rate of 159,000 units, well above the annual total of 149,000 units permitted in 2000.

Although nonresidential construction, measured by permit values, was down over 9 percent from May 2000, construction permitting during the first five months of 2001 ran 6.7 percent above the same period last year.

California’s real estate market is also cooling. Home sales have moderated and prices in the state’s costliest region, Santa Clara County, have softened. Statewide sales of single-family homes in May were off nearly 13 percent from one year ago. However, the median price of a single-family home in May was still up 10.7 percent from a year-ago.

Silicon Valley Computer Services Slow

Monthly Cash Report

Preliminary General Fund agency cash for June was $432 million below the 2001-02 May Revision forecast of $7.926 billion. Year-to-date, revenues are $389 million lower than the $78.781 billion that was expected.

Personal income tax revenues were $54 million below the month’s forecast of $3.879 billion. Withholding was $70 million below the month’s estimate of $2.012 billion, which represents a decline of 2 percent from the year-ago level. The second quarterly estimated payment, which was due in mid-June, came in $105 million above the $1.756 billion that was expected. Although this was higher than forecast, it was still $101 million or 5.2 percent below last June’s estimated payments. Other receipts were $17 million below the estimate of $211 million, and refunds were $72 million above the projected level of $100 million. Year-to-date, personal income tax receipts are $16 million above the May Revision forecast.
Sales and use tax receipts were $118 million below the month’s forecast of $2.211 billion. June represents the second prepayment for second quarter sales and both prepayments have been well below expectations. A more complete picture of second quarter sales will be available in mid-August, when all of the second quarter receipts have been processed. Year-to-date, sales tax receipts are $267 million less than anticipated. As a reminder, the sales tax rate was triggered down by one-quarter percent beginning with the first quarter. None of the shortfall is attributable to that rate reduction because it was taken into account in the forecast.
Bank and corporation tax revenues were $155 million less than the month’s estimate of $1.119 billion. June receipts primarily reflect the second prepayment for calendar year corporations, which were $101 million below the forecast of $1.054 billion. Other payments were down $29 million from the forecast of $148 million and refunds exceeded the $83 million expected by $25 million. Cumulatively through June, bank and corporation tax revenues are $140 million below expectations.
Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $25 million above the $410 million that was expected, due primarily to a gain in the insurance tax. The remaining revenues—pooled money interest income and "other" revenues—were $130 million below the month’s estimate of $307 million, due to a loss in "other" revenues which is primarily due to cash flow. The forecast for June had anticipated the receipt of $160 million from the sale of Agnews and this payment was not received. However, $130 million is now expected to be received in August.

General Fund Agency Cash
2001 May Revision Forecast

2000-01 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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