Economic Update

California passed a notable milestone in May. Total industry employment set a new record by surpassing the previous peak employment level reached just before the 2001 recession. With nonfarm employment reaching a new high of 14,738,600, the state has recaptured all of the jobs lost during the last economic downturn. Moreover, California enjoyed broad-based job growth both regionally and industrially in May.

California added 17,600 jobs in May, much more than its share of a weak 78,000 job gain in the nation. The state's gain in nonfarm payrolls in April was revised down by 2,100 jobs to 18,300. From May 2004 to May 2005, nonfarm payroll employment increased by 254,500, or 1.8 percent, beating the nation's growth rate.

Nine of the 11 major industry sectors gained jobs in May. Government was the leading sector, adding 5,300 jobs in May. Private Educational and Health Services and Trade, Transportation and Utilities sectors also made significant contributions, gaining 4,300 and 4,000 jobs respectively. Elsewhere, Other Services added 1,800 jobs; Construction, 1,700; Manufacturing, 1,000; Leisure and Hospitality, 1,000; Information, 700; and Financial Activities, 100. On the negative side, Professional and Business Services lost 2,100 jobs and Natural Resources and Mining, 200.

From May 2004 to May 2005, nonfarm payroll jobs rose in ten out of 11 major industry sectors. Employment rose by 61,700 in Professional and Business Services; 50,300 in Construction; 42,500 in Leisure and Hospitality; 33,400 in Educational and Health Services; 23,600 in Trade, Transportation and Utilities; 19,400 in Financial Activities; 9,600 in Other Services; 6,700 in Information; 3,900 in Manufacturing; and 3,800 in Government. The only sector to decline over the year was the small Natural Resources and Mining sector, which lost 400 jobs.

Nearly all areas of California shared in the State's job growth over the last year. The San Joaquin Valley continued to enjoy the strongest growth pace. Southern California, led by Riverside and San Bernardino Counties, added the greatest number of jobs. San Jose-Sunnyvale-Santa Clara was the only major metropolitan area that did not add jobs over the past year.

The state's unemployment rate fell 0.1 percentage point to 5.3 percent in May. For the first time since the introduction of new unemployment methodologies by the U.S. Bureau of Labor Statistics in February of this year, there were no implausible changes in the labor force and civilian employment. The labor force grew by 35,000 in the state in May, and the number of unemployed persons fell by 8,000. The national unemployment rate was 5.1 percent in May—also a 0.1 percentage point improvement.

Following a surge in March, home building in California slowed in April. The biggest drag came from the typically volatile multi-family sector. The single and multi-family sectors were down from a year earlier by 6.9 percent and 10.7 percent, respectively. For the first four months of 2005 as a whole, residential permitting was down nearly 3 percent from the same months of 2004.

Nonresidential construction expanded for the third consecutive month in April, with gains in all building categories except service stations and stores. The value of nonresidential permits issued during the first four months of the year was up nearly 8 percent from the same months of 2004. Parking garage construction provided the biggest boost in both absolute and percentage terms. Industrial and amusement/recreation construction also made substantial gains. On the other hand, office construction, the leading commercial growth sector in 2004, slowed considerably.

The state's median existing single-family home price passed the half-million dollar mark for the first time in April, reaching $509,230. Despite passing this milestone, there are clear signs that California's real estate markets are not as robust as in 2004. The pace of home price appreciation has been slowing, affordability continues to deteriorate, inventories have risen, and the median time it takes to sell a home has lengthened.

New Employment Record

Monthly Cash Report

Preliminary General Fund agency cash for May was $390 million above the 2005-06 May Revision forecast of $5.101 billion. While this appears to be a real gain—rather than reflecting variations in short-term cash-flow, how much of this can be expected to be ongoing, in the sense that these increased payments would be repeated in the future, is unknown. A portion of this month's gain was attributable to amnesty payments which are clearly one-time receipts and another portion is attributable to a prior tax year for which most of the revenue has now been received.

Personal income tax revenues were $138 million above the month’s General Fund forecast of $1.963 billion. Withholding was $107 million below the estimate of $2.312 billion. This shortfall was offset by lower-than-expected refunds and higher-than-expected other payments. Specifically, refunds were $141 million below the estimate of $1.196 billion and other payments, which include final payments, were $105 million above the $861 million that was projected. The special fund amount transferred to the Mental Health Services Fund (MHSF) was $1 million over the estimated $14 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. The second estimated payment for the 2005 tax year is due in mid-June. It is prudent to consider the $138 million as one-time.

Sales and use tax receipts were $158 million above the month’s forecast of $2.687 billion. May represents the balance of the final payments for first quarter taxable sales as well as the first prepayment for second quarter sales. Final payments for the first quarter and the second quarter prepayments were higher than anticipated.

Corporation tax revenues were $113 million above the month’s forecast of $200 million. This increase appears to be partially reflective of a large inflow of cash in the final month of the amnesty program. It is prudent to consider this amount, also, as one-time.

Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $7 million below the $85 million that was expected, primarily due to lower-than-expected insurance tax receipts. The remaining revenues—pooled money interest income and “other” revenues—were $12 million below the month’s estimate of $166 million, due to lower-than-expected "other" revenues.

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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