HdL presents an update on California’s Retail Economy based on current 3rd Quarter 2022 data. Over the last few months, slight inflation improvements materialized in various industries, however real change has yet to take hold. Households remain nervous about the economy sliding into a recession. Nevertheless, customer spending remained strong through the holiday season. Experts vary on whether a recession will occur and to what extent. Unemployment rates remain a key indicator of whether this adverse economic situation will occur. From a sales tax perspective, the forecast does reflect a slowdown in taxable merchandise spending to 0.4% in FY 2023/24 as the higher cost of utilities, food and other necessities limit dollars available for discretionary and non-essential items. Watch the recording below. 

Additional Resource: HdL & Beacon Economics' Sales Tax Trends & Economic Drivers Report

Transcript

By way of introduction, I'm Bobby Young, Director of Client Services here at HdL Sales Tax. I'm joined also by Bret Plumlee and Tracy Vesely, fellow teammates on our Sales Tax team. We are all, along with quite a few others, responsible for meeting with clients every quarter to deliver your local sales tax information.

We’re very pleased to announce that later this year, we're going to be celebrating our 40th year in service for clients throughout California. It is quite the milestone for us. We're happy to have been able to help. We have over 500 clients Statewide. We’re very blessed to have a client retention rate of over 99%. 

3rd Quarter 2022 Statewide Results

3Q overall bottom line, we experienced an 8% growth. This is 3Q calendar year, the July, August, September period. This is when gas prices were higher and up 22%. Consumers were spending. Most notably, you see these two big categories at the top. Autos & Transportation, Building Construction. Summer months are usually the time when the economy is booming with those types of transactions happening, even with the feds raising interest rates and working through financing being a little bit more expensive. 

Autos & Transportation and Building & Construction still grew over last summer of 2021, which was that post pandemic rebound that we experienced. And here again in 3Q22 with another big jump. Restaurants & Hotels spending, and economy recover and rebound strongly since the pandemic.

Remember, as we're talking through this forecast, 3Q Is the start of the Fiscal Year for many of you, with a July to June fiscal period. 3Q is the very beginning of what will be Fiscal Year 22-23. 

At the start of the 2022 – 2023 Fiscal Year, we see a strong 8% growth. The major metropolitan areas continue to expand and grow. Bay Area, Southern California, get the biggest nods here. San Joaquin and Sacramento continue with their consumer spending, but then also, we get the consolidation of distribution centers and that online component that is still helping benefit through the summer of 2022.

Forecast Considerations

Major considerations.  We can't avoid inflation and the higher prices of goods, interest rates and what the feds have done all throughout 2022. Some of the positive aspects, is employment or unemployment rate being where it's at right now. Very positive momentum there, but also debt, personal debt, and savings. This is going to be a big reason for that post pandemic boom that we experienced. The never-ending supply chain issues. It seems to be a little more on the marketing/reason for higher prices. Leaving consumers with anxiety or fear of missing out. We've got issues at the port like we experienced last year or distributors from outside the United States, with goods coming in. 

All of this leads back into us as individuals and the greater overall spending economy, as consumer demand and consumer sentiment, and how consumers are going to feel moving forward.

CA Unemployment

Through November, unemployment rate was 4.1%. Extremely low with everything considered. You can see the continual decline that we've been experiencing. Those folks who want a job likely to have a job. There are a lot of jobs still available. Certain industries can't staff up enough and that speaks to the restaurant industry. So, unemployment is actually a great thing for our economy, really allowing for folks to continue spending. 

Historical comparison of unemployment. You see the dramatic rise that happened during the Great Recession in 2009, 2010, and 2011. Where we are now is where we were pre-pandemic with regards to unemployment. 4.1% is exactly where we were at the end of 2019, before COVID came into our lives and started to dramatically affect unemployment. A good thing overall for our economy, the spending economy, and as we think about what's to come out of 2023. 

Savings & Disposable Income

Personal savings and debt are going in an inverse relationship, and it is rather low. Our focus on this period is where we saw dramatic increases in personal savings and disposable income. As we try to contextualize what happened after the pandemic and why we saw this immediate boom. and that fear that consumers are out spending themselves. And maybe they weren't. Maybe they saved quite a bit to then be able to spend. 

Interest Rates

Interest rates overall, the unavoidable factor of what the feds have done. Throughout 2023, all the rate changes that they've put in place, added up to a total bottom line change of 425 basis points increase in 2022. Overall, this is what the Feds have done for interest rates. When they start to talk about slowing the rate of increase, this is what we must remind ourselves and why. If in 2023, the feds might raise overall rates maybe 3/4 to 175 to 100 basis points. That'll be dramatically slower than the 425 that we just experienced in 2022. Setting this as our benchmark to keep in perspective when we talk about interest rates going forward. We've already seen likely the most dramatic parts here in 2022.

Inflation & Sales Tax

When we talk about inflation does it mean a bad thing for overall sales tax receipts? As I start to change the demand feature from strong to more steady demand, it still may otherwise have upward pressure on pricing, which will have upward pressure on overall spending and sales tax revenue over receipts. Supply chain bottlenecks, which we talked about, but also labor shortages, could have downward pressure on supply, which would then have upward pressure on prices, thereby still having upward overall upward pressure on spending and sales tax receipts. These things are intertwined and it's not until we see one of these wheels come to a complete stop where we'll see revenues take a dramatic drop. Inflation is not always a bad thing when it comes to sales tax receipts.

Credit Card Spending

Those other parts were setting the tone for some of the optimistic and some of the pessimistic sides of the economy. Obviously, interest rates, but then also credit card spending. Yes, it has dramatically jumped overall for our consumers. Here, in these 30 to 59 ranges, not quite back to where we were pre–Great Recession, to a big drop during the Great Recession. But all credit card spending is up across the ranges. A dramatic drop happened in credit card spending again, because consumers had the savings there to be able to spend on the credit cards to then be able to pay off the bills. It doesn't necessarily mean that everybody is overspending within the economy.

We're watching this and mindful of where consumers are headed.

Inflation Adjusted

We do take inflation into consderation, but not necessarily on our annual forecasts. It's more on a cash basis and the activity and the levels of revenue that you're receiving that we focus on. We've got calendar years focused on the bottom. Once we get 4Q22 data, then we'll be able to solidify that. But this is the lead in for our forecast. Once we inflation adjust it back to the year 2000, you can see this blue line here over these last five years, if we look in comparison, we had eclipsed or gone back to where we were pre–Great Recession. Then as we come out, we're going to be forecasting that all the inflation changes we've experienced, were higher than where we were back in 2006. So just for a perspective when it comes to inflation.

HdL Statewide Trend Quarterly Outlook

What happened in 3Q? 8% growth overall. Just as a reminder, where we were forecasting 3Q just last quarter, we were at 8.3%. A smidge softer than what we were expecting, but I think it as we talk about it around the table, hopefully we're experiencing less volatility, less surprises within the economy. 

We do watch cash receipts that have come into date, but you can see overall we are expecting a solid 4Q. 5.5% overall for 4Q. Normal holiday shopping period. You can see where we're going to be anticipating certain things from this time, October, November, December, still good. As we start Calendar Year 2023, it’s starting to level off as we finish the Fiscal Year 22-23. 

Then you start to see it overall negative, you'll see a longer sustained decreases and negatives that we've built in by sector. Towards the back end of the Calendar Year is when we expect a lot of the inflation and interest rate increases to have a bigger affect back on our overall results as an economy. 

We're not in a position nor do we have data or feel like the economy is in a full pull back recessionary state, more of a slowdown. As we prepare budgets for our clients, that's what it's going to be looking like. It's a little bit more of a slowdown, rather than a full recession. Getting back to something a little bit more positive, as we as you see here on the report, going out to 2024.

Breaking that down between the place of sale, which is POS and those local results throughout 2023 there’s a slight decrease to flat results expected, where total overall is up above. And the reason most notably, is still sustained growth out of the pools versus your local businesses directly.

Autos Prices

We're going to get into all the major industry groups now. We have positive news in every sector in 3Q22, starting with Autos and Transportation. This first chart about prices. Pricing has been the biggest positive impact on the Sales Tax in this sector.

Looking at 3Q22, prices are still going up, but the increase is slowing down year over year. Growth in prices slowed. 2Q22 was up 13 1/2% and 3Q22 up 9.6%, but it remains significantly elevated. The increase is the past two quarters were slower compared to 1Q22 when the prices were up 22.8%.

Autos: 3Q-2022 Trends

There is now clearly evidence of a slowing of demand. But the California Auto Outlook is anticipating more than 5% increase in registrations in Calendar Year 2023. We've been talking about the drop in volume, and it overall significantly dropped vehicles in 2022, but we do anticipate that an easing in supply chain issues, combined with higher interest rates, is going to moderate the prices in 2023. 

Autos & Transportation Forecast

When we look at the overall forecast, we had projected 8%. The actual was very positive, an almost 6% increase in the quarter, and the overall summary is inventory is finally increasing from historic lows due to that easing of supply chain disruptions. Lack of inventory which had caused prices for the new and used vehicles to soar. It's not as much of an issue now.

We're seeing expensive branded trucks for those agencies. Those of your agencies that have a significant amount of Sales Tax being generated from trucks that are in strong demand and we're looking at an increase observing that in the dealer lots. Used car prices are now declining. Financing costs are continuing to escalate. 

This is expected to crimp auto demand and result in a minor dip. We've had significant growth going all the way back to the pandemic and post pandemic and another positive quarter. We are anticipating one more positive quarter. You can see 4Q22 a 5% growth and then a flattening out in the first couple of quarters of this calendar year that we're now living in, and we are going to experience. We're anticipating in the forecast a 3% overall reduction in this sector for Fiscal Year 23-24. Then when we look at the out years 24-25 all the way out to 27-28, we're back to more normal annualized levels of growth, 3% projected all the way out into the long term.

WTI Crude Oil Price

Fuel and Service stations, another positive impact on the overall forecast is coming from this sector.

The global inventory of oil, when we look at crude oil prices, they're expected to fall slightly in the first half of 2023 and pick up throughout the second half. The WTI, or the West TX intermediate crude oil that we base the pump prices on, is expected to average roughly $85 in 2023. This fluctuates so significantly. It was at $80 a barrel yesterday, down to $77 by the end of the day, and $73 about half an hour ago. So, it demonstrates how significantly the fluctuation is in the WTI prices. The forecast calls for an average production year for US refineries and there has been the ban on Russian petroleum products. That is going to continue to provide some price uncertainty. 

CA Retail Gas Price Per Gallon – Quarterly Average

The average pump price, that has played such a significant role in continuing to boost the Sales Tax generated, that's a common theme. Consumer demand really has driven up the Sales Tax in almost every major industry group. And this is one of those key categories where the pricing has significantly contributed to the Sales Tax. The pump prices peaked in 2Q22, but they're still well above year ago levels and the prices are continuing to fall. They've been falling and that we can expect to have some local tax declines in this segment as it rebalances from 2022 price impacts.

Fuel & Service Stations Forecast

Looking at the overall forecast, we can see the actual results were almost a 22% increase in 3Q22. We had projected 35%. So, we didn't quite hit that mark but still growth.

In summary, the sector is experiencing downward pressure and all factors. Prices at the pump got to the lowest point at the end of Calendar Year 22. Other factors pushing Sales Tax in this sector down, are reduced oil barrel prices, diesel, and jet fuel prices have been down. There's been a paring back on the consumption and demand for fuel and the volatility tied to those Federal Reserve rate increases. As a result, we have lowered our forecast for the next 3 quarters.

We've got one more positive quarter in the 4Q22 and then, five quarters, six quarters in a row there of drops. First and Second quarter of 2023 down 10 to 15% and then all Fiscal Year 23-24, we've got an almost 8% reduction built into our statewide forecast.

Long term, when we're looking at the out years 24-25 that is flat, and then back to normal annualized increases, between 25-26 all the way out to 27-28, we've got a 2% projected increase there in this sector.

Construction Factors

Real growth was experienced in this sector once again, due to many factors. The Federal Reserve Bank has continued to increase federal fund rates at 4.5%. 

They're at the highest level now since 2007, so they're at 4.5%, prime rate at 7.5%. What that means in this sector, is we’re anticipating homeowners are going to stay put and invest in the nest, and that's going to lead to positive results from home improvements. In this sector, mainly in Building and Materials, the biggest business type within Building & Construction and an anticipated increase in the Sales Tax associated.

Higher mortgage rates are good for home improvement centers. We have the 30-year, 15-year rates increasing and higher than they were last quarter. And we also are expecting new projects in 2023 resulting from the Infrastructure Investment JOBS Act. So that's going to play a positive factor throughout this calendar year. 

Building & Construction Forecast

Looking at the overall forecast, you can see growth that we experienced. 7.8% and we had projected pretty much hitting the target throughout most of the sectors this quarter, we had 7.5% projected and came out 7.8%. 

We've had one more positive quarter anticipated. 8% is forecast in 4Q22. Inflation has been driving the results now. Prices for concrete, steel, copper, electrical, system components, and lumber are still elevated, and they're well above the pre-pandemic levels. The demand for the home improvement sector is still very strong. Prices of material are expected to decline in 2023, and that's why you see a significant flattening out six quarters in a row there, and through the remainder of Calendar Year 2023 and on into the next Fiscal Year.

As housing starts to slow, infrastructure projects which offset those drops, are going to expand with that Infrastructure Act federal funding that I mentioned.

As a result of the combination of all these factors, we have that one more projected quarter of growth followed by a flattening out through 23-24. And then when we get out to the out years 24-25 through 27-28, we have normal annualized levels of growth projected 4.5% to 5% annually from 24-25 through 27-28.

Food & Drugs Forecast

Food and drugs. This is one of the most stable sectors and it has been going all the way back to the pandemic. It also is, as a reminder, the smallest sector throughout the state. We had projected 2% growth. The actual results are very flat in the quarter at .4%. The sector is flattening out. There was again in 3Q22 coming from grocery stores, and that was offset by a drop from the cannabis related businesses and those sales.

The prices of food, although they're increasing, most of food sales are nontaxable. The higher cost of groceries is pushing the consumers to eat out more, and we'll see that when we talk about restaurants. Long term, we are continuing to forecast annual 2% growth in this sector.

General Consumer Goods

It's mostly good news for 3Q. I am going to talk about a few of the bigger groups here, starting with General Consumer Goods. This group encompasses retail statewide. Comprised of about 28 different categories from discount department stores, which is one of the largest, down to jewelry stores, pet stores etc.. We’re close in our forecast with General Consumer Goods. I think we forecasted growth of 2.8%. It came in at 2.9% for the 3Q results. 

Discount department stores are at a 10.6% growth over a year ago. If you pull them out of the mix overall General Consumer Goods would be down .5%. 

Consumer spending slowed in 3Q and it was trending that way a little bit in 2Q. Discount department stores is propping up this group in a big component of that is fuel. So, we have a lot of big discount department stores that have fuel pumps on premises and are a part of their sales tax reporting. That is what is driving a little over half of that 10.6% growth. If we pull fuel out of the discount department store mix, its growth is closer to 5% and partially boosted by some brick-and-mortar stores filling online orders. 

So, a shift in brick-and-mortar shopping starting in 2Q. It's slowing down, but it's coming off some big highs. So, it's that negative.

Preliminary Holiday Results

This is MasterCard spending pulse. They have a pretty good hand on the pulse of what spending is looking like, particularly online, but with credit card transactions, they were looking forward into preliminary holiday results. 

A couple big takeaways here, a balance of spending related to goods and experiences. The consumer is not all goods anymore we were, during the pandemic, that's all we could do. Now there's certainly a shift to experiences as we see on this chart. Restaurants up projecting to be up by MasterCard 15.1%. Restaurants were up in 3Q, projecting that going forward as well. And that's more on the experience side. 

A little shift away from spending on goods like electronics and jewelry. Some of these industries really had their 15 minutes of fame during the pandemic. Now coming back to some more normalized levels.

General Consumer Goods Forecast

General Consumer Goods growth trends had a big jump here in 2Q21 and a big spending surge, and then coming back down in 3Q21 and leveling down up until the current quarter that we're talking about, 3Q22. Seeing flat or contraction in some of the larger categories, including department stores, family apparel, home furnishings, and specialty stores. Specialty stores include things like pet stores, beauty stores, some of those odds and ends that don't really fit in the bigger categories.

Some slowing happening there. Looking at the forecast for general retail or General Consumer Goods, and again we're talking brick and mortar here, this is going into the store and buying stuff. As I mentioned, 3Q came in at 2.9%. We projected 2.8%. Looking forward at 4Q growth of about 1.5%. So, we're coming down in that forecast. This is coming off some big double-digit growth the year prior, right when we look at 4Q21. 

So really starting to pull back. A lot of things are impacting buyer choices right now. Bobby discussed most of these. Interest rates are high, and our spending is now being dictated by available cash. So, we don't have as much in savings, and we are depleting that, and now we're putting more on credit cards. So, I think there's some purchasing decisions around that bubble of spending that is driving our forecast a little bit. So, coming down to 1.5% growth, again it's still growth flat in the 1Q23 and then we see a step down of 1% going forward.

A lot of this not only is just local spending in the stores, but it is also a decline in gas prices. Discount department stores are one of the largest categories in this group, and gas prices are driving a lot of those positive results. As we anticipate gas prices to continue to come down, we'll see that impact on the net sales tax. So, that is one of the factors that are contributing to that 1% decrease all through Calendar Year 23 and then we slowly start to come back as we go into Calendar Year 24.

County Pools: Trends

General Consumer Goods, brick and mortar shopping countywide pools. This is indirect allocation of spending. Each agency gets a proportional share of the pool based on their Bradley Burns sales tax. 

We can see General Consumer Goods, from 3Q19, a huge boost in sales tax growth here from 4Q19 to 4Q20. This is AB147. Marketplace Facilitators Act. and it is also our frenzied pandemic spending during that period. General Consumer Goods were the lion share of revenues coming into the pools. 

Then 1Q21, we cross. Part of this is attributed to a chunk of the pool revenues now coming out of the pools going into direct allocation. So, we see this decrease here, but we're also seeing a big growth in the other industry groups here compared to General Consumer Goods. A big part of this is a related to Business & Industry and its impact on pool revenue.

Looking at Business & Industry, it is growing more than the other groups that contribute to the pool. Pool revenues, we break them out by the same major industry groups we do for the Bradley Burns sales tax. Business & Industry up 10% in growth compared to a year ago. General Consumer Goods down 1.5%. General Consumer Goods are still the largest chunk of revenues in the pools, but growth is negative compared to the Business & Industry. Now just to clarify, not to be confused with the 2.9% in General Consumer Goods, in the brick-and-mortar Bradley Burns that I just spoke about. This is General Consumer Goods in the pools and largely related to online activity, if not entirely. 

County Pools : B&I Major Categories

Focusing on Business & Industry, the big categories that are driving the pool revenues. There are 6; Medical biotech, light and heavy industry, office equipment purchases, as well as a big electrical equipment purchases, often related to the energy sector. And then lastly office equipment.

A lot of office equipment purchases this last couple of quarters, largely attributed to people coming back into the office. Businesses refiguring there office models and part of that too is infrastructure for IT. So, we're seeing a lot of IT purchases in that area as well. So, you can see Business & Industry very, very strong this last year and a half in the pools.

Country Pools Forecast

Again, we closely projected a 6% growth for the pools. We came in at 7.4% for the quarter. Very similar to preceding quarters, private party auto sales strong are very strong. So that is a big component of the pools, is private party auto sales through the DMV very strong. We're seeing auto sales starting to soften. Anticipating a little bit of softening going forward about third party sales, we can see 4Q still strong at 7%, and then coming down to 4% and 5% in the succeeding quarters.

As a point of reference, ecommerce makes up about 1/6 of the total county pool revenues. We do anticipate ecommerce is here to stay. It will continue to grow. And as part of this growth here.

Fulfillment Centers

Let's shift gears and talk about the Business & industry group as part of the Bradley Burns sales tax. I went from Bradley Burns to the pools. Now I'm back to Bradley Burns, focusing a lot on Business & Industry. This is a group that has been front and center of this last year. Fulfillment centers fall into this group. They are the largest business type in the fulfillment center group. They comprise about 24% of the revenues for the entire Business & Industry group. It grew 11.5% for the quarter. This is the one group where our projections were a little bit different.

Looking at fulfillment centers. We see big growth from 4Q19 to 4Q20. This is a AB17, this is marketplace facilitators, this is pandemic spending. Then we get into 1Q21, and it shoots right back up again. Huge growth. This is related to that shift of some pool revenues coming out of the pools into direct allocation, related to California fulfillment centers in orders being filled for California in these fulfillment centers. Therefore, they are considered a place of sale. 

This really changed the complexion of the Business & Industry group, with fulfillment centers taking up almost 25% of the total revenues.

And then coming down to 1Q22, we see a stabilization for growth. While we still saw growth in the 3Q22, we expect going forward stable growth in fulfillment centers.

Business & Industry: Top BT’s

Looking at the Business & Industry group, the top business types in this group are on the screen. The group itself has 21 different, very diverse, business types that contribute. Ranging from motion pictures, equipment, winery equipment, to medical biotech, industrial business to business. 

Medical biotech, a huge in the group, along with heavy and light industry, I tend to group them together. Pretty much every key group saw growth in the quarter. These top ten averaging growth of about 9.4% in 3Q. The only group in this top ten that did not grow was Garden and Agricultural supplies, down just a little bit, and farming construction equipment was up. So, there's a little bit of a distinction between those two.

Industry Trends

California fulfillment centers continue to grow. We are filling more and more online or remote seller orders out of our California fulfillment centers. This has boosted those direct allocations. Do anticipate that to continue at a pretty even trend line.

Pharmaceutical construction equipment continues to be in demand. That group was up in 3Q. I mentioned agricultural supplies down. These two groups are driven by seasonality and certainly now driven by the impacts of the drought. 

The drought is still there and farming and agricultural shifting their business models, buying equipment to accommodate that.

Pharmaceutical and biotech got a boost from COVID. And a huge boost from the vaccines and the research around that. Vaccine research is still very strong. And with that, something we don't talk about as much these days, but crop research is very strong in the biotechnology industry. We're seeing spending in that sector as well. In the industry, the ISM, which is the Institute for Supply Management, the manufacturing index is leaned on heavily in this industry. It contracted for the first time in 29 months. Part of that is just reporting a slight softening in demand. Partially a result of higher interest rates, more difficult to acquire affordable loans for big projects. However, even with this little bit of warning, the industrial sector continues to be strong.

Business & Industry Forecast

3Q22 came in at 9.7%. We projected 5%. So, this is the one group where our projections were far more conservative than the actual results. Part of that in Business & Industry. Fulfillment centers are up 11.5%. 

Part of what drove some of that change is some of those, preholiday sales happened in 3Q where in the past they've been in 2Q. So that drove a little bit of revenues higher than what we had initially anticipated.

Going forward, still seeing strength in 4Q up 6%, not double-digit growth, but strong.  Leveling down going into 2023, more modest growth, more in the 2% range going forward. Not seeing a rebound until we get into 24-25 Fiscal Year up into about the 3% range of growth. So again, 3Q was high. A lot of one-time projects buying still happening in 3Q.

Restaurants: Industry Trends

Cost for groceries continues to push consumers into restaurants. Food at home is at 13.2% and food away from home up 8% as far as cost. When Bret talked about Food and Drugs, how it came in and 3Q less than 1%, modest growth. Part of that is during 3Q, we were out at the restaurants; we were out experiencing the fun of going out to dine. 

Leisure and entertainment experiences are in demand. Overall spending, folks are certainly looking at experiences over goods or balancing the two. And I mentioned earlier the MasterCard spending plus report slide that I threw on the screen, restaurants were forecasting up 15% nationally. 

We're falling in line with that, and that just comes into that leisure and entertainment sector.

In California, wine is a big industry for us. Wine tasting fees more than doubled in the last six years. Part of that is related to labor costs, supply chain challenges, wine bottles, the inflationary factors. Wine tasting fees are up, wine costs are up still in area of purchasing though. We're still buying and drinking wine. 

Hotels are doing well. Occupancy is expected to reach recovery in 2023, pretty much close to pre pandemic levels. The only sector that is really struggling is Business. Recreational travel is back. We are out doing stuff back to that experience component, right? Business sectors travel a little slower. International travel into the country a little slower, but certainly rebounding. Hospitality industries margins are a little tighter than they've been previously. As folks travel more, we're seeing that that sector rebound. Huge increases in 3Q for the hotel sector.

Looking forward, this slide is looking at cash receipts as posted by the CDTFA for October and November. This is just raw gross cash. We don't have the data behind this. I can't tell you exactly what's driving this, but for their category of food services and drinking places, we’re up 9% in October, 8% in November, seeing growth in this sector of looking forward into 4Q. 

3Q was at 10.2%, we anticipated 9%. We're close looking at 4Q to be strong and we just looked at some of the cache data that supports that 10% growth and 4Q 11%, in this quarter that we're in right now, 1Q23 and this really leveling off at a higher baseline growth at 4% 2Q, and then 2%-3% going forward.

HdL Statewide Trend – Annual Outlook (FY)

Fiscal Year 22-23 on a statewide basis, almost 4% growth. It has just about everything to do with the first half of the Fiscal Year. Then the July through the December period, the growth cooling off as we start 2023. In the Red Circle, 23-24 is where we're getting down closer to what we're anticipating right now. More flat results out of that Fiscal Year. For many of you as expenditures continue to go up, if you experience flat growth out of Fiscal Year 23-24, it's probably going to feel like a recession, you're going to feel that slowdown.

It's why we're not talking about a recession even though slowing of revenues is going to is going to feel that way. Once we go out into Fiscal Year 24-25 and beyond getting back into normal historical growth patterns, I think it's constant reminder that, November 2024 is going to be another national election. We can't lose sight of the fact that the feds, as it works towards a national election, will want to keep the economy in good fashion. Now we'd be many who will want the economy even stronger than it is right now. In a lead up to 2024, I think we got to keep that in mind when we're talking about sales tax and what we expect out of receipts. I have then now I look to the feds and how much they've responded to cool inflation for the overall economy is.

If we do fall back, and if there are certain markers that that they don't like, there's more propensity to then reduce interest rates and probably try to stimulate the economy. As we look back and we've gotten a lot of these questions of; What does it look like failback? This graph right here is a constant reminder looking back into 2019 when we completely closed the economy there at the end of the Fiscal Year, 2Q and we ended up with down only 2%. Obviously, we've seen all this growth post pandemic periods.

Are we going to go back to 2019 levels? I think it's important to keep note of what dollars we're talking about now. Back in 1920, which is the mark here, we were about 7 billion overall statewide receipts. And you can see here for Fiscal Year 21-22 with that which was already wrapped up or in more of the 9 range. Are we going to go back to 2019 levels? Not likely. A higher price of goods. Wages likely. 

We talked about unemployment being low and employment being high, there's availability to be able to spend and buy at this at the level that we are right now, which then leaves receipts back up at this level. So that's how the overall dollar receipts trend out with these growth factors up above.

Q&A

Q: Do you feel like upward pressure on prices impacting essentials such as grocery, food, hygiene, dining, fuel, etcetera is resulting in reductions and desires wants, such as electronics and designer apparel and jewelry?

A: Most certainly. When we think about the California spending economy, there's two pieces to it: demand spending and discretionary spending. Demand is the everyday goods that we must buy just to live. It's where we're at when we talk about autos, we are car country, California. Everybody has a car to be able to get to and from and commute around. 

What is their demand spending and then how much will they have leftover for discretionary purchases? Likelihood more is going to be placed on demand spending, less on discretionary. So most certainly, I believe it's going to be the case. That's why we've cooled off our expectations for the economy or at least for receipts.

Q: Do you think consumer sentiment will eventually be affected by lower quality customer service impacted by tight labor and unemployment and low unemployment? 

A: That's a piece of the consumer sentiment perspective, right? It's that quality level of service. I see it a lot when I read feelings about tipping in restaurants. If you're getting poor service from one location, if you as a consumer shift to another location, you're still spending. And I think, when it comes to the forecast overalls, you've still spent. That's really what's going to keep sales tax going up. So, it's less of a tangible correlation, especially if the consumer still spends somewhere.