HdL and Beacon Economics analyze the economic forces affecting California’s local government agencies and forecast future spending patterns in the major business industry groups. 

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SALES TAX TRENDS & ECONOMIC DRIVERS

Overview: Steady household spending, despite historically low unemployment, has shielded the economy from recession, a unique situation even as inflation exceeded Federal Reserve targets and interest rates on loans and credit cards rose. In California, sales tax performance for fiscal year 2022-23 grew by 2.1%, but it lags far behind the double-digit growth seen during the pandemic recovery. Looking ahead, households face tight budgets, and various industries grapple with challenges like labor costs, inventory issues, and competition. Spending generating sales taxes is expected to dip slightly in fiscal year 2023-24, with limited expansion anticipated in the following year. A PDF of this report is available HERE

 

TOTAL

2023/24: -0.6%  |  2024/25: 2.1%

 

Asset 33
 Autos/Transportation

2023/24: -2.2%  |  2024/25: 2.0%

First-quarter rains delayed construction, with a slight second-quarter rebound in home improvement sales. Cement and asphalt plants saw increased activity, but overall sales didn’t surpass last year due to reduced customers and big-ticket purchases at major home improvement stores. Lumber prices dropped significantly, down 42% compared to last year. Rising interest rates, reaching a 20-year high in the third quarter, have hampered both commercial and residential development. Slow progress in public infrastructure projects hasn’t fully offset the decline in private development. Conditions will likely persist through the end of 2023, with mild growth expected by the close of fiscal year 2023-24. Improvements may be seen starting in 2024-25, and further gains are anticipated from 2025-26 onward, driven by more favorable mortgage rates.

 

Asset 424x
Building/Construction

2023/24: -1.8%  |  2024/25: 3.5%

Prior to the end of CY 2022, new home construction starts declined significantly, but other types of construction posted stable activity levels. In Q1 of 2023, four noteworthy trends were observed. First, adverse weather limited building activity which impacted painting, groundwork and foundation sets. Wet weather also decreased seasonal homeowner spending on yard improvements. Second, the value of lumber retail prices plummeted as much as 64% compared to a year ago as retailers finally sold off the pricier inventory. The direct result led to a big decrease in comparative sales totals. Third, pro builders started pulling back on new starts until the price of other construction inputs and financing rates rolled back to more profitable levels. Lastly, the fourth trend relates to the average consumer who is now purchasing fewer big-ticket items and scaling back on DIY projects. Expect returns from Q2 2023 to reflect contractors making up for delays. However, short term receipts are predicted to weaken due to the continuous decline of lumber prices and the pause in general construction taking place.

 

Asset 434x
Business/Industry

2023/24: 2.0%  |  2024/25: 2.2%

In Q2 2023, this category showed resilience with a statewide growth of slightly over 3%. Fulfillment centers, making up around 30% of B&I revenues, continued to expand as e-commerce increasingly relies on California-based warehouses. This shift redirects some indirect allocations from countywide pools directly to agencies with fulfillment centers. Excluding fulfillment centers, the remaining segments experienced a minor decline of 0.2%. Certain sectors, such as trailers/auto parts, farm/construction, and business technology, saw increases due to strong equipment sales. However, medicalbiotech declined as post-pandemic product needs decreased, and industrial sectors also dipped due to inventory, labor, and demand challenges. Taking into account these influencing factors, HdL anticipates modest overall growth, mainly driven by fulfillment center revenues. Predictions at the local level vary depending on the size and nature of local businesses and industry companies.

 

Asset 414x
Food/Drugs

2023/24: 1.0%  |  2024/25: 2.0%

Mixed performance was evident in 2Q23, with grocery stores showing growth while all other sectors experienced declines. Convenience store purchases decreased, drug stores saw contractions with some closures and increased online shopping. Cannabis tax revenue remained challenging, with county sales performance ranging from $4.55 to $75.55 per capita according to CDTFA data. Looking ahead, price fluctuations driven by inflation and limited growth in new taxpayers constrain the outlook for the current year to a 1% growth rate. However, annual year-over-year gains are expected to gradually increase, reaching 2% starting in fiscal year 2024-25.

 

Asset 404x
Fuel/Service Stations

2023/24: -4.6%  |  2024/25: 0.5%

Fuel sellers are facing upward price pressure due to slowing demand and consumption of fuel, including oil barrel, regular, and diesel prices. Reduced consumption of jet fuel is attributed to a pilot shortage, leading to fewer aircraft in operation with lower fuel needs. The price of West Texas Intermediate crude has risen significantly compared to the previous quarter’s forecast, and global oil production is limited until the end of 2023. As a result, HdL has adjusted its projections, raising each of the next four quarters by 5% from the previous forecast, with an overall expected growth of only 0.5% over 2022-23. Taxes are anticipated to increase by around 2% per year starting in fiscal year 2024-2025.

 

Asset 32
General Consumer Goods

2023/24: -1.2%  |  2024/25: 1.4%

Tax proceeds from General Consumer Goods showed a decline of 4.8% in the second quarter compared to the same period in 2022. This marks the second consecutive quarter of contraction following eight quarters of expansion. The slowdown was expected, with major business types experiencing a more pronounced sales pullback as household finances tighten. Major retailers are forecasting modest declines in the remainder of 2023, particularly in general merchandise categories. While consumer spending remains supportive of the economy, nontaxable service spending is gaining a larger share compared to goods, which is reducing demand for many retail types. The outlook suggests a continued mild decline in direct tax allocations for the remainder of the year, with limited growth expected in the second half of 2024.

 

Asset 394x
Restaurants/Hotels

2023/24: 3.0%  |  2024/25: 3.0%

Restaurant sales remain strong, with patrons allocating around 40% of their food budget to dining out. Younger diners increasingly prefer food delivery over dining in. While menu prices are stabilizing after a year of rapid growth, operating costs remain high, and profit margins are slim. The campus food category saw improvement as employees spent more time in office buildings, while fine dining experienced a decline as consumers seek more budget-friendly options. HdL’s projections have only slightly moderated from the previous forecast, anticipating year-over-year gains of 3% for the next few years.

 

Asset 29
State and County Pools

2023/24: -0.5%  |  2024/25: 2.0%

In response to recent trends, there was a decrease in out-of-state inventories for e-commerce sales in California. Despite an overall increase in online sales, pool collections saw a 2% decline. This was partly offset by more in-state fulfillment from large warehouses and existing retail outlets. Economic experts have differing opinions on the outlook for the holiday season in 2023, ranging from lackluster to potentially stressful. While most agree that consumers will continue to increase online spending, estimates for local poolrelated revenues are expected to dip slightly in fiscal year 2023- 24 due to existing sales tax law allocations, with subsequent years showing modest increases.

 

 

While Proposition 172 (1/2 cent designated for Public Safety) projections closely track with the statewide Bradley-Burns, calculations vary somewhat due to the state’s allocation methodology. HdL projects an average statewide decrease of 0.8% for fiscal year 2023-24 and a 2.1% increase for 2024-2025. Projections reflect the recent change in county allocation factors published by the SCO in late August. As Bradley-Burns countywide pool allocations are reduced to reflect direct allocations for changes to internet-related sales in the first part of fiscal year 2023-24, Proposition 172 pro-rata factors can shift considerably for many counties. 

 

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NATIONAL & STATEWIDE ECONOMIC DRIVERS

 

U.S. Real GDP Growth

2023/24: 2.2%  |  2024/25: 1.2%

Real GDP growth reached 2.1% in the second quarter, a slight improvement from the 2% growth recorded in the first quarter. Over the past four quarters, from the third quarter of 2022 to the second quarter of 2023, GDP growth has averaged 2.5% on an annualized basis, driven by robust consumer spending. Job growth continues, industrial production remains close to record highs, profits and wages are on the rise, and U.S. debt markets show minimal signs of stress. This economic strength is expected to carry into the second half of the year. According to the GDPNow estimate from the Atlanta Fed, third-quarter growth for this year could range between 5% and 6%.

  

U.S. Unemployment Rate

2023/24: 3.7%  |  2024/25: 4.2%

Unemployment in the U.S. remains exceptionally low at the beginning of 2023, standing at 3.8% in August and 3.6% in the second quarter, despite challenges such as higher interest rates and inflation. In August, the economy added 187,000 jobs, and the labor force participation rate continues to rise. These trends indicate that increasing incomes are encouraging more people to join the workforce, albeit at a slower pace. The issue is that labor supply is struggling to keep up with demand, not the other way around. The nation appears to be on course for what’s often referred to as a ‘soft landing’—a scenario where inflation subsides without a rise in unemployment.

 

CA Unemployment Rate

2023/24: 4.7%  |  2024/25: 5.2%

The Bureau of Labor Statistics reports that in California, there are currently more job openings than unemployed individuals, with a ratio of 0.86. This situation stems from a reduction in California’s labor force during the pandemic, which has yet to return to prepandemic levels. As of the second quarter of 2023, the state’s labor force remains about 168,000 workers short of its January 2020 levels. In contrast, the national labor force has expanded during the same period. This presents a paradox: California has added jobs since the pandemic, but there are fewer active workers in the state’s economy. One plausible explanation is an increase in multiple job holders, where workers hold more than one job. Looking ahead, labor shortages will likely impede job growth in the state, largely due to California’s severe housing shortage.

 

CA Total Nonfarm Employment Growth

2023/24: 1.3%  |  2024/25: 0.4%

In the second quarter of 2023, California’s total nonfarm employment grew by 2.3% year-over-year, down from the 2.8% growth in the first quarter. However, recent data from the BLS for July indicates a 2% increase in jobs since May 2022, with the state adding about 29,000 jobs. While California has added a significant number of jobs compared to other states, this is mainly due to its large population, where even a small percentage increase results in a substantial job count. In terms of percentage growth, California lags behind states like Texas and Florida. Moreover, employment growth in California is slowing, partly due to the state’s high housing costs, which have led to significant domestic migration losses.

 

CA Median Existing Home Price

2023/24: $672,968  |  2024/25: $709,999

Median home sale prices have fallen 10.6% from their pandemic peak in April 2022 to February 2023. However, they started to rebound in March 2023 and have shown year-over-year growth since July 2023. As of July, prices are 33% above pre-pandemic levels and only 6.4% below the peak. If this trend continues, California home prices will surpass the pandemic peak by Q1 2024. The state’s severe housing shortage is a primary reason for the price increase, even as sales decline. Existing homeowners, locked into low mortgage rates, are also contributing to the housing shortage by hesitating to sell.

 

CA Residential Building Permits

2023/24: 140,369  |  2024/25: 147,7444

California’s severe housing shortage has been a longstanding issue. Some estimates suggest that the state was short by 3.5 million homes needed to accommodate its population in 2016. Although there has been a rapid increase in housing construction in recent years, with around 377,000 units built from 2020 to 2023 according to the California Department of Finance, this pace must be sustained or even accelerated for a decade or longer to make a significant impact on the housing shortage. Additionally, the updated forecasts from the CDF indicating essentially zero population growth in California over the next several decades will also need to materialize to address the problem effectively.

 

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