Economic Update

California labor markets continued to improve in January and February, but the new statistics require some interpretation. Housing markets set new sales and price records in January. Residential construction started off slowly, but nonresidential construction surged ahead. State and local payroll employment estimates have undergone their annual benchmark revisions. Upward revisions were concentrated in the San Joaquin Valley, the Sacramento MSA, and Southern California. Most of the downward revisions were in the San Francisco Bay Area. For the state as a whole, the revision was upward. In addition to the revisions, a new method has been implemented by the Federal Bureau of Labor Statistics for estimating labor force statistics used to calculate state and local unemployment rates. As a result, estimates of state and local unemployment rates may have breaks in them. That is, the new estimates may be noticeably higher or lower than estimates made last year with the old methodology. New definitions of metropolitan areas have also been adopted.

California's nonfarm payroll employment rose by 8,500 jobs in January and 27,600 in February, for an average gain of about 18,000 jobs per month. Also, the state's job loss in December was revised downward. The newly-revised employment series shows that the state had 76,600 more jobs in December than initially reported. As a result, the average monthly job gain in 2004 is now estimated to have been 21,000, considerably more than the 12,700 average monthly gain previously reported.
Nine of the 11 major industry sectors posted net gains in jobs in January and February. Leisure and Hospitality led the way by gaining 14,000 jobs. In addition, employment rose by 10,600 in Construction; 7,000 in Education and Health Services; 5,600 in Information; 5,500 in Professional and Business Services; 3,200 in Other Services; 2,600 in Government; 1,400 in Financial Activities; and 700 in Manufacturing. Employment fell by 14,100 in Trade, Transportation, and Utilities and 400 in Natural Resources and Mining.
From February 2004 to February 2005, nonfarm payroll employment in California increased by 234,500, or 1.6 percent. Over that period, nonfarm payroll employment increased by 1.8 percent in the nation.
The state's unemployment rate was 5.8 percent in January and February, down from 6.0 percent in December 2004 and 6.4 percent in February 2004. Civilian employment was reported to have grown by 10,000 in January 2005 and 128,000 in February 2005. It is unlikely that it actually grew by that much in February, and that estimate will probably be revised downward in the coming months. The number of unemployed persons fell by 30,000 over the two months.
The national unemployment rate was 5.4 percent in February 2005, 0.4 percentage point lower than the unemployment rate in California. That gap has narrowed considerably since December 2003 and, in February was lower than it has been since November 1990.
Residential construction permitting slowed in January to 197,500 units at a seasonally-adjusted annual rate. This was 14.4 percent below the December 2004 rate and 1.7 percent below the January 2004 rate. The total number of residential units permitted in 2004 was 212,000, 8.2 percent higher than in 2003.
The value of total nonresidential building permits issued in January 2005 was 13.2 percent higher than a year earlier. The gain was concentrated in permitting for new industrial and retail and other mercantile buildings, alterations, and additions. For 2004 as a whole, total nonresidential construction permitting grew by 12.7 percent.
The median price of existing single-family detached homes sold in California rose more than $11,000 in January to $485,700—a new record and 20.1 percent higher than the median price in January 2004, according to the California Association of Realtors.
Sales of existing single-family detached homes in California reached a seasonally adjusted annual rate of 659,410 units in January—also a new record.
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.

Better Employment Picture for 2004

Monthly Cash Report

Preliminary General Fund agency cash for February was $389 million below the 2005-06 Governor’s Budget forecast of $4.228 billion. Year-to-date, revenues are $359 million higher than the $49.285 billion that was expected.
Personal income tax revenues were $197 million below the month’s General Fund forecast of $1.441 billion. Withholding receipts were $39 million below the estimate of $2.435 billion. Other receipts were $19 million above the projected level of $281 million, refunds were $178 million higher than the forecast of $1.265 billion, and the special fund amount transferred to the Mental Health Services Fund (MHSF) was $1 million under the estimated $10 million. Since February is the first month of several significant months for 2004 tax year refunds, it is not clear how much this month's increase may be due to cash flow. 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. Year-to-date cash receipts for this revenue source in the General Fund are $285 million above estimate; January revenues were revised up by $42 million from the last Finance Bulletin.
Sales and use tax receipts were $281 million below the month’s forecast of $2.525 billion. February cash includes the remaining portion of the final payment for fourth quarter 2004 sales, which was due January 31. In addition, the first prepayment for first quarter of sales for 2005 was due in February. The shortfall in sales was likely due to lower than expected sales in the fourth quarter of 2004, and a weak first prepayment for the first quarter of 2005. Some portion of this shortfall could be recovered by the end of the first quarter of 2005.
Corporation tax revenues were $10 million above the month’s forecast of $129 million. Prepayments were $47 million below the estimate of $138 million, and other payments were $13 million below the forecast of $113 million. Refunds provided the offset, and were $70 million below the projected level of $122 million. Year-to-date, corporation tax revenues are $314 million above the forecast. February is not a significant month for this tax. March, however, is a critical collection month and will provide a more meaningful measure since final payments for calendar year corporations are due by mid-month.
Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $5 million above the $74 million that was expected. The remaining revenues—pooled money interest income and “other” revenues—were $74 million above the month’s estimate of $59 million. The gain is due to "other" revenues (such as revenue from abandoned property and State lands royalties), which are beginning 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.

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