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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
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.
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.
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 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.
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.
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.
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.
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.
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: 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.
HdL presents an up-to-date view on California’s Retail Economy based on current 2nd Quarter 2022 data. Though a new fiscal year commenced in July, many of the economic challenges seen in early 2022 remain prevalent. Inflation will continue to top historical norms into 2023. Despite a fourth interest rate hike, prices on taxable goods show no signs of lessening. More expensive mortgage rates will slow housing sales and cause weakened demand for appliances, furnishings and other related products. Crude oil prices have dipped from extraordinary peaks allowing consumers to budget in other areas of life. The shift back to experiences and services plays a significant role in the forecasted decelerated growth. Overall, consumer’s confidence in the economy is best described as uncertain. Watch the recording now.
Additional Resource: HdL Companies and Beacon Economics: Sales Tax Trends and Economic Drivers Report
The Federal Government is now releasing the second tranche of American Rescue Plan Act (ARPA) funding, $33 billion in direct aid to every county, city, town and borough in America. Agencies have until year-end 2024 to allocate the funds and year-end 2026 to spend it. In this webinar, HdL and Yiftee discuss how communities are using ARPA funding and eGift Card programs to boost their local economies and strengthen small businesses for the future.
- Get access to ROI case studies of simple, free community gift card programs.
- Learn how to run a 'shop local' campaign in your community in time for the holiday season, benefitting residents and merchants alike.
Q: Did the participants you referenced in this webinar use ARPA funds?
A. All the cities we discussed in this webinar did use ARPA funds. Oakley, for instance, is in a couple of rounds of this. Oakley is a small city, so when the Feds changed the ARPA rules, the City didn't have to show all that revenue loss. They didn't have any revenue loss originally, so they were able to move that to their general funds and that will fund future rounds of their Yiftee program. And again, there's no rush to allocate or even spend all of your money in the first couple of years. You can allocate it until the end of 2024 and spend it through 2026. We are able to stretch this out and do more with it and doing digital gift cards is something that you can continue to do beyond this year and in the future.
Q. Can nonprofit organizations apply for ARPA funds?
A. They don't get a direct allocation for it, but they can apply to the city that they're in.
Q. Aside from covering the promotional money for a Buy One, Get One program, can ARPA funds cover administrative cost for a gift card program, for example hdl’s cost for assistance and administering the gift card?
A. Absolutely. That’s certainly an eligible expense. Within the 20 communities that we're assisting, any cost for HdL is able to be covered out of your ARPA funds.
Q. Can you start at one level and then scale up?
A. Absolutely. We recommend a modest start. Once you see how successful the program is, you can go back and add more or tweak the program in whatever way needed. Building enthusiasm, especially for council members, that you've had some initial success, like in Oakley and Murietta, is really important.
Q. If we are paying for the gift card balance, what does ARPA cover?
A. ARPA can pay for the cost of the program, the Buy One, Get One free option, etc. They are all eligible expenses that can be structured however you feel is appropriate. Typically, we'll also help with determining who you want to target in terms of businesses. Restaurants, boutique retailers and service providers like nail salons, barbershops, etc. are common audiences. It’s helpful to look at what businesses were negatively impacted the most.
Typically the ARPA funds pay for the bonus cards. So, if a consumer pays their own money to buy a $100 gift card and there's a $100 match, that match/bonus card is paid for out of ARPA funds. So that's what makes this program pretty unique. We do have other sponsors for programs like this. We've seen banks and some corporations sponsor the bonus cards, but right now the big opportunity is the availability of these ARPA funds.
Q. Is there a digital connection with Apple or Google Pay platforms?
A. It's not available yet. We expect to be able to do so sometime next year.
Q. How do you determine what businesses can participate?
A. You can structure that to really fit the needs of your community. Typically the participants for businesses are going to be your small independent owned businesses, not the giant corporate companies like Walmart and McDonald's. A lot of communities have allowed franchisees, but they need to be local franchisees. Really focusing on the small, independently owned businesses can help provide direction.
Also, any merchant that can process a manual entry MasterCard can participate. Bowling alleys and car washes for example. The card does work online, so if your merchants have ecommerce sites, the card can be used online as long as the value of the shopping cart is less than or equal to the amount of money on the card. (It's a prepaid card, so there's only so many dollars on it.)
Q. What are the fees for HdL and Yiftee?
A. HdL charges a modest fee with a not-to-exceed on an hourly basis to set up and structure your program. It will really depend on your community. As for Yiftee's fees, when someone buys a card, there's an e-delivery fee that's applied, just like a convenience fee if you bought a Fandango movie ticket. That fee is $1.00 and 5% of the face value of the card. Out of that fee, we're paying the credit card processing costs on that transaction. So about half of that margin goes to us to keep the lights on here at Yiftee. Also, when the bonus cards expire, there's a restocking fee of 10% of the initial card value. Whatever's left on the card after that is returned to you, to your ARPA pool, so that of helps fund the company long-term. The third component of the revenue model is that purchased cards do not expire as long as it is used once every 12 months. And Yiftee sends reminders every month to use the card. If it goes untouched for twelve consecutive months, then we can take an inactivity fee of up to $3.00 a month off the card balance, and that funds the company long-term going forward so that we don't have to charge you or the merchants anything for the program.
Q. Can ARPA dollars be used in the marketing for the program?
A. Absolutely. Marketing, design, structure, any administrative cost… all of that is eligible to be funded out of ARPA funds.
Q. Can the page that a person goes to purchase the card be in a second language?
A. Absolutely. HdL has the capability to provide translation for all your flyers, surveys, etc. - whatever your program requires, and all of that is eligible to be compensated with ARPA funds.
HdL presents an up-to-date view on California’s Retail Economy based on current 1st Quarter 2022 data. Watch the recording, download the presentation, and follow along with the transcript and Q&A. (The recording will be made available at the bottom of the page after completing the form to the right.)
Additional Resource: HdL Companies and Beacon Economics: Sales Tax Trends and Economic Drivers Report
Welcome everyone! Let's navigate forward by way of an introduction. I am Bobby Young, Client Services Director here at HdL and I'm joined today by both Bret Plumlee and Tracy Vesely, fellow principals here with us. We all work on the team, meeting with clients each quarter to review and analyze sales tax revenue that your community has received. We've been serving communities for over 37 years now. We currently represent and work with over 500 agencies that include cities, counties, and special districts and we're blessed to maintain over a 99% client retention rate. So, thank you all as clients, and even as non-clients, we are so glad you're able to join us and start walking through the latest sales tax results that we have.
---1st Quarter 2022 Statewide Results---
Alright, splash results! We are looking at 1Q22 data today. As a reminder, that refers to the calendar year, first quarter, so we’re looking at the January, February, March time frame right there at the beginning of the calendar year. A lot of dynamic things going on, but the splash there on the left side of the screen, very bottom circled for you, a large 17% increase over 1Q21. A year ago we had already seen the economy start to reopen, consumers back in shopping. We had already talked last quarter about the phenomenal 4Q results. It just continued. The economy. The beginning of the calendar year, roaring right straight through the holidays. We had anticipated even a bit of a slowdown we were forecasting about 11% gain, and you could see that it ended up becoming about 6% higher than what we were forecasting. So, no doubt as you were looking at your coffers and looking at the sales tax revenue seats that came in might be a little bit shocked and I can tell you right now our entire team was pleasantly surprised when we saw the results up 17%.
So, two big categories. We’re going to be talking about all these categories throughout the presentation today, but just taking note of a couple of very large ones, feel owned service stations, as we hit on, we all have been experiencing extremely high gas prices and prices at the pump 47% gain. This is 1 category that exceeded our expectations. And rightfully so, I think we weren't anticipating such surprises that we've been experiencing.
Also, restaurants and hotels strong, very strong, almost 40% gain statewide. Tracy will be talking about later in the presentation, but a pleasant surprise for all our communities. We know that staffing has been short at restaurants. We know prices have been higher, but this 40%, almost 40% gain statewide, really a testament to us here in the state as consumers and our desire to eat out and patronized restaurant. So, it is a great result there.
Then the one of the biggest surprises that that caught us this quarter, Autos and Transportation up an additional 15%. For many of you that have a lot of car dealerships within your agencies, we have been talking throughout the pandemic period and post pandemic period, about how well Autos were doing, and we know that there's limited inventory but statewide, up 15%. Again, this is most certainly a category that blew us away. It’s both the good and the bad, and we'll talk about that and those feelings that we all have. But here in 1Q, it contributed very strong to the overall bottom line gains that we saw.
Where did it happen? Where did it hit? Where did it come from? You can see there on the right side of the screen all throughout the state, double-digit gains for north as we all can understand as a little bit limited with regards to its sales tax generators and didn't take as big of a hit during the pandemic. So, the rebound and sense we have seen it just a nice soft steady gain but everywhere else strong double digits and no doubt the major industry group results, you see it a little to the left contributed very heavily to each one of those regions.
As we go, we gave you the results and kind of what we are looking at what we've taken into consideration, this is just kind of all you know a microcosm of all the things going on in the economy, whether it be the continuing Russia and Ukraine crisis that's probably gone on longer than we had originally anticipated. Still, issues with supply chain and obviously that comes by way of demand, consumer demand and kind of as we will be talking about with regards to whether it be inflation and prices that you see just below that or interest rates and that all of that contributing there and working its way back through the supply chain then also wages is a consideration. You will hear me talk just shortly here about unemployment and why that probably benefits the economy, at least through the end of the calendar year is going to be benefiting he sales tax economy as we see it.
So let's touch quickly on interest rates. Obviously, topic de jour for all of us continuing to watch the Fed treasury and what their anticipations are. And you can see more to the right of the screen here as we look at the most recent meetings that the Fed treasury has had in the dynamic games or jumps that they've been pushing up the Fed funds rate 25 basis points, 50 basis points, 75. Just here this month and with all anticipation of anywhere from 50 to 75 basis points next month and it's July meeting, all with the goal that the Fed funds rate should be around 3% come the end of the calendar year. So, get ready to continue to hear the Fed's talk about the Fed funds rate and increasing again. No surprise for us as they continue to try to control inflation. And this has a lot to do with us as consumers. We have to continually remind ourselves, we here in California are a bit different than the rest of the nation. A lot of population, a lot of income and therefore a lot of spending.
And so, the shock to us as consumers is a bit to tell us to stop spending so much. And the Fed, the Fed treasury is looking at the Fed funds rate and thereby interest rates to shock the system a bit. And those the term obviously we are all hearing, but it’s really to tell us to hey, cool off a little bit and then the dip may not be as bad, and we'll talk about that coming up. This is just that kind of look and where we were we expect to see it. So, it shouldn't be a surprise to those of us that continue to watch through the end of the calendar year, continue to hear about the Fed raising interest rates or raising the Fed funds rates, which then results in higher interest rates.
The bright side if there was one from the standpoint of how this trickles back, hopefully this is clear enough for everybody really. It is the lines here. So, for California unemployment. If we were talking about inflation and everything else and unemployment was still really high, then we would have a large concern over how that's going to generate sales tax going forward, given that in that overall California unemployment has been steadily dropping and relatively speaking, back to pre-pandemic points. 4.3% California unemployment rate right now, but the graph below is just give you some historical context. We're back down to where we would otherwise normally be and, with unemployment being so low means that folks are able to get a job.
We know that wages are continuing to go up, even if moderately speaking those us may or may not feel those increases. We do know for the greater majority of our economy that wages are continuing to increase. Balancing out the cost of higher goods and that all means more money than to spend and keeps the sales tax economy fairly strong or at least. That’s then where we start to look at what we're anticipating.
---Inflation and Sales Tax---
This is a chart that we had last quarter continuing again here. As we go with higher prices and strong demand, obviously that means higher prices of goods. But so long as we, the consumers, continue to buy either about the same amount or even a little bit less than what we did previously, we still expect sales tax revenue to continue to be generated and stay otherwise in a growth sector or a growth trend, it may not be nearly as strong as what we've been experiencing. You will see that here on the next couple of graphs. But it still should remain steady.
---HdL Statewide Trend Quarterly Outlook---
To give you a little context of this graph; far left you can see we are in the depths of the pandemic. To Q20, the double digit gains we've been experiencing and talked about all throughout Calendar Year 2021 and now 1Q22 show right here at this strong 17.1% increase.
How do we see this going forward from any of you, as you look to 2Q and the wrap up of Fiscal Year 21-22 for a lot of your agencies? We are anticipating about an 8 1/2 percent growth out of out of 2Q. Given that 1Q was very strong, it probably means the forecast we did for a lot of you just last quarter are probably already on pace to exceed where we anticipated you to be. Obviously better to be on that end than on the reverse or underneath chasing it. But with all anticipation now we have Fiscal Year 21-22 to remain very strong.
Then as we go into Fiscal Year 22-23, you can see strong through the end of the calendar year. Again, as we talked about Fed funds rate and thereby interest rate and that shock of the system, it may take a while for us as consumers to start slowing down a little. So, we do anticipate the remainder of Calendar Year 22 to be fairly steady.
The first glimpse, I'll show this to you again at the very end as we wrap up and we can see Fiscal Year on a perspective, but it's the back end of Fiscal Year 22-23 where we do anticipate these percentage gains to flatten down quite a bit. Start to flatten out a little and the perspective that I keep reminding myself and sometimes give to others is that, when we go from double digit and high double digit for some of you agencies, when we go from double digit gains on sales tax into single digits and then possibly low single digits, that pull back, that slowdown will likely feel like a recession. Especially when your expenditures are going to be up higher closer to the double-digit gains because cost of goods are higher, labor costs are higher.
So now we get back into that. Wow, wait a second here. Are we building in a recession? Is the biggest question we keep asking ourselves. No, but that slowed down compared to your expenditures might end up feeling like what we've all known as a historical normal recession. So again, I'll recap this at the very end coming up.
---Local Place of Sale (POS)---
So again, percentage changes overtime, you can see just marking those periods of the pandemic and the rebound and the pool growth, the dramatic pool growth, that we've we had experienced during 2021. Now even that starting to cool off just a little. I think we got a little pop in here, and the difference there so, local place of sale was up 17.9%. So, the gap there, the difference would be the results on pool which Tracy will speak about in just a just a little bit.
So, you can see how that forecasts out, and now let's jump into the major industry group. I'm going to turn it over to Brett to start off with autos.
Thank you, Bobby. And as Bobby mentioned, Tracy and I are going to start talking about overall better than anticipated news for every sector. Most of the sectors in this quarter are very good news. Starting with Autos and Transportation in the Q1. As we start our discussion here on Autos and Transportation, we're comparing here the volume with the prices, and we continue to see record prices being set and volume declines, but the pricing is offsetting any volume declines in this group.
Once again, the overall increase in new motor vehicles and used motor vehicles is combined with the really strong demand again, even better than what we anticipated as Bobby mentioned and that's primarily responsible for the overall increase in sales tax in this sector. So, as we go through each sector, we want to tell you the story as we do in the individual client meetings. We're doing this at the statewide level, but overall, very good picture.
The prices as I mentioned, record prices being set and continuing all throughout the pandemic. Ongoing post pandemic prices have increased and, in this quarter, we're talking about today nationwide prices increased 23% in the first quarter compared to the same period a year ago. So really that is driving the story of the increase in sales tax.
In terms of the outlook over the next 12 months, what we're going to see are production levels expected to drive the sales instead of the demand. So, we've had really strong demand, stronger than what we anticipated all through the pandemic post pandemic. And now as we head into future quarters and future fiscal years, we are definitely going to see combination, but more led by production levels driving the sales.
---Autos and Transportation Forecast---
When we looked at how that impacts the overall forecast, we can see that the actual results were 15% compared to 7% in this quarter and we are projecting two more quarters. So good news in those agencies especially that have the biggest percentage of your sales tax generated with Autos and Transportation, you're going to experience very likely, we're projecting above average growth in sales tax for two more quarters. Then following that, as Bobby mentioned, we're going to definitely see a flattening out, a slowing down of the overall growth and annualized levels 3% in this sector all the way out to Fiscal Year 26-27.
So now we're going to talk about the Fuel and Service Stations sector. Bobby mentioned really contributing significantly to the overall statewide picture in this quarter and even better than what we had anticipated. And we had pretty strong growth built in, and what's happening is the consumption of fuel outpaced the production throughout the pandemic. And now post pandemic and that's really continuing to be the primary factor significant increase in sales tax received. We are anticipating this to remain high throughout Calendar Year 22 and we've had now seven quarters of drawing down on the stock of fuel. Now the EIA is forecasting consumption to be below the production through 2023 and that's really what we're showing in this particular chart. So, despite the consumption being below the supply, it is still expected to continue to exceed the factor here
---WTI Crude Oil Price---
As we look forward in the big factor it also is driving prices and it's associated with the prices at the pump. The West Texas Intermediate crude oil price, their forecast as we can see in this chart here, is to remain above $100 a barrel through calendar year 2022. That’s still going to be up fairly high in our overall statewide forecast. We have it at $90.00 a barrel through 2023.
And what that means? How that translates to the sales tax, is we anticipate its projected. Each $10 increase in oil barrel is roughly a quarter increase at the pump. At a national level, crude oil prices determine at least half of the price of each gallon of gas. So, since the oil barrel prices are expected to remain high through the end of this calendar year on into Calendar Year 23, we are continuing to anticipate high prices.
So, we get the question often; where we think that where they we think the prices are going and prices there's no indication right now that the prices are going to come back to normal any time soon.
---Fuel and Service Stations Forecast---
Overall our forecast then mentioned, the really good 1Q22 and every factor is pushing the sales tax upward in this sector. So that's including a restriction of supply coming from the Russian Ukraine crisis, continued record oil barrel and prices at the pump, and Saudi Arabia was anticipated and had made a promise to increase the production of global supply, but they have been slow to implement that increase in the production.
That is continuing to provide upward pressure on the overall sales tax, and we're continuing to anticipate, and you can see it that the quarter that we're living in right now, we're almost done with 2Q, but really strong demand continuing in road and air travel and people that are out on the streets. And really, we're not seeing especially in California when we talk about global factors that Bobby mentioned the macro factors and then we drilled down to California. Our economy is continuing to visually and we're seeing the factors at the pump and the sales tax grow really strongly.
---Building and Construction Forecast---
So now I'm going to go to the Building and Construction Forecast this sector, as you remember had stabilized the quickest during the beginning of the pandemic and continued to remain stable throughout the post pandemic. Now in this 1Q22 we realize results that were quite a bit better than what we anticipated. We had projected a 6% increase in the actuals, 15%.
So, when Bobby talked about every sector coming in very strongly, Building and Construction was somewhat of a surprise in this quarter as well. We've seen an increase in materials and plumbing and electrical equipment and that is getting passed along to the owners. So, the contractors have been passing this along. As a result, it's upward pressure on the sales tax received. The valuation of statewide construction permits in this particular quarter increased 13%. So once again upward pressure.
At this point, our construction forecast shifts from neutral, what we had 1/4 ago to now more of growth over the next couple of quarters and that is reflective of those factors I mentioned the price inflation, and the uptick, that we've seen experienced with the statewide permit results. And as a result, we're projecting 5 ½ % increases now over the next two quarters and that takes us through the end of Calendar Year 22.
Two fairly flat quarters in the first half of 23, and on into Fiscal Year 23-24 after that in our statewide forecast, we have increases of 5% annually all the way out to 26-27. And we always mentioned in our individual meetings, we try to mention it during this webinar that we fine tune it to your individual agency when we're analyzing the results in any quarter and we're looking at future quarters as well.
---Food and Drugs Forecast---
Food and drugs. This has been a stable industry all throughout the pandemic. We have seen now, post pandemic drops in grocery store sales tax, drug stores, the cannabis related businesses that we had seen really growing strongly all throughout the pandemic. We've now talked about it for several quarters of flattening out that's taking place. So, the cannabis portion of this sector, the business sales have plateaued. They're back to pre-pandemic levels, and really, the only growth that we're seeing now is expansion of some the same market and it's just being shared by more retailers.
So, we are continuing to project at the same forecast that we had the last several quarters, but 2% annual growth, fairly stable all the way out to Fiscal Year 26-27. And at this point, I am going to turn it over to Tracy.
---General Consumer Goods---
All right. Thanks, Bret. So, let's take a look at General Consumer Goods. This is a lot of the stuff we buy in a daily basis. And what you can see just said by way of introduction to the to the group, there are 28 different business types that comprise general consumer goods. What you see in this donut is just a depiction of each of those business types, what piece of the pie or donut they are of a percentage of the whole. Overall, the group increased 10.5% from last quarter. And as you can see the by far the largest sector in this group are discount department stores and they make up about a third of the overall group.
---General Consumer Goods: Growth Trends---
So let's look at this slide. I just mentioned that the group overall increased 10.5%. Yes, it did. Let's talk about what drove that and what didn't drive that. So, in looking at this chart, this is tying each of these quarters back to 2019 using 2019 as a benchmark period. I'm really comparing each quarter back to the similar quarter in 2019. As you can see since 2Q20, you know that big COVID trough that we have all been you know we're all familiar with this. We've seen nothing but growth in General Consumer Goods. A lot of this is you know we bought a lot of stuff during the pandemic and at this period of time are still buying stuff. Many of the business types within General Consumer Goods have rebounded to pre- pandemic levels or gaining that momentum to get there.
But despite an overall growth of 10.5%, most of the core business types started to slow down. And interestingly, all but one business type slowed in 1Q22, which just kind of indicates some belt tightening as gas and food prices really started to spike during this period. So, I would say kind of the middle of that first quarter period in February is when we all really started to feel that pinch.
You could see this dip starting to happen here compared to 2019. So, for example, in 4Q21 the results compared to 4Q19 were 6% growth. When we look at 1Q22 and compare that to 1Q21, it really is only 4% growth. So that growth is starting to taper off a little bit and hence this little trend line that we see here.
---What about Discount Department Stores?---
Alright, I mentioned all but one business type started to demonstrate some growth in 1Q, except for one. Discount Department Stores. So, what's going on with Discount Department Stores? Well, they had a stellar 1Q22 performance and frankly they perform pretty well throughout the pandemic these are a lot of stores that we did most of our shopping at early in the pandemic as we were buying toilet paper and other things. But 1Q22, just a really, really big uptick. And why is that? Many of the retailers in this group also have fuel operations as part of their operations, and as Bret discussed with the high price of fuel and continued increases in consumption,
A related sales tax revenue from gas really boosted up the discount department store results. The key take away there, is even despite the high gas prices that we're all we're all really feeling now and it's adding pressure to our discretionary income. We're seeing a positive impact on the general consumer goods group from a taxable sales perspective from gas. So even though Bret kind of covered that within the fuel group, we're really seeing some of that impact in the General Consumer Goods group as well.
---General Consumer Goods Forecast---
So looking forward, let's look at 1Q22. We had projected growth of about 9%. It came in at 10.5% as I mentioned, pretty close projection. Going forward in the upcoming quarters, low single digit growth from this group going forward, lifted a little bit in the short run here by higher fuel cost. As Bret mentioned, anticipating the price of gas to be higher, and that's again going to drive that discount department store revenue up.
Then really coming down a little bit in the out quarters and fiscal years. Higher prices, growing wages, and wages continue to grow and spending, we're still spending. We haven't quite stopped, yet. Keeping those sales tax level levels pretty, pretty high through Fiscal Year 22-23 and really anticipating that slowdown here kind of the second half of 2023 Calendar Year going into the 23-24 Fiscal Year.
---County Pools: Performance---
Alright, so let's talk about the pools. I think we're officially in what the third day of summer. So, let's go swimming for a minute. Talk about these crazy pools. A lot has been going on in the countywide pools these past two years. We have had these discussions with our clients for the last couple of years. Let's take a look at this graph. We can really see and let's dissect this a little bit we can just almost as bell curve of growth in the pools. So, as a point of reference, the pools are comprised of revenues from all the sales tax groups. There's a couple that contribute more than others, and we'll talk about that in a moment. You can see this notable spike in the 2Q19 is related to the beginning of the implementation of AB147 and the collection of sales tax from remote sellers, which is frankly all new sales tax.
Then you see a larger spike that started in 4Q19 and continued all the way to 3Q20 that this is largely the implementation of marketplace facilitators related to AB 147, and these facilitators collecting and remitting local taxes on behalf of their marketplace sellers or their third-party affiliates. This is all new revenue that came into California, and I guess on the upside, just in time for the pandemic. It really kind of boosted our sales tax revenues during the pandemic period.
As we all know, the pandemic really changed our shopping behavior and really propelled us into online purchasing, which has not stopped, nor do we anticipate it to stop. But it has slowed down a little bit. We saw it in the third quarter and fourth quarter results. You can kind of see that here slower than normal kind of slower than previous growth, but it's not just that that caused it.
Part of it is, some taxes shifted out of the pools into direct allocation due to some business changes, and as a result we see that change here in the growth in the pools. So, we see some reductions in Pool revenues attributed to this change in allocation methodology. You can see in 4Q21, that this was actually a stellar fourth quarter return from buying during the holiday season period, but it dipped 3%. And again, this is in part because of that shift of revenues out of the pools into direct allocation, and also in part because we all got off our computers and we went into the stores, we got tired of looking at the screen and decided to actually be in the stores and touch things.
So, before you close off here, I mean, look at look at 1Q22 big, 13% swing up kind of flies in the face of the previous 3 quarters. What is driving that? What's going on in 1Q22?
---County Pools: Make Up---
So looking at the slide, as I mentioned, there are a number of business groups that really make up the pool revenues, Business and Industry and General Consumer Goods are two of the largest. And if you look at the business and industry revenues right here, you could just really see huge, huge disparity quarter over quarter. So, what is causing that? Largely related to an infusion of capital into a number of sectors like energy, medical, biotechnology, electrical equipment, and some of the heavy and light industry, a lot of big equipment purchases and in those manufacturing arenas. So huge fairly one-time revenues infused into that first quarter with that money to spend. So, that really boosted up the pool revenue. That stuff being purchased from outside of California and coming into the pools.
General Consumer Goods are a large contributor to the pool revenue as well and actually can’t tell by the graph, but they actually declined. That group declined half a percent compared to a year ago. Again, punctuating the fact that as consumers we did a little less online shopping and a lot more in store shopping during 1Q22.
One other unique pool revenue trend, I do want to highlight, and you can see it in this graph right here is related to restaurants and hotels. So, this is not normally a group that we talk about when we're talking about the pools, but it is now and it's because of food delivery companies. This is a new trend. It has really emerged during the pandemic period and candidly, we're all getting very used to it. These third-party food delivery companies are now complying with AB 147 and remitting there their revenues into the pools instead of as direct allocations. So, for those restaurants that are hiring these third-party companies for delivery, they're not receiving direct sales tax, it's the agency is not where the restaurant is located. It's actually going into the pools.
That’s been a new kind of phenomena and we'll talk a little bit more about that when we look at the restaurant and hotels category. But you can see here they are not comparable; this is a new source of revenue into the countywide pools.
---County Pools Forecast---
All right. So, looking at our projections for the pools, we projected growth of 2% for 1Q22. It actually came in at 13.4%, OK, we undershot that one. And again, the business and industry group really were the culprit there. That is where we saw that big swing come in. But even with the 1Q22 increase, we are projecting moderate growth going forward. A 3 to 4 to 5% in the quarter over quarter in the pools and fiscal years going forward.
Fulfillment centers. All right let's shift over to the Business and Industry group. We've talked a little bit about this with its relationship with the pools, but now as a standalone sales tax group, Business and Industry, the fulfillment centers are 25% of that total group, so by far the largest. You can see in this graph this massive ramp up of growth in the fulfillment centers. A lot of it when we look at 4Q19 to 4Q20, that is really attributed to the marketplace facilitators as they're reporting very similar to the trend we just saw in the pools. These two kinds of mirror each other that way.
Then up here, starting with 1Q21, we see an additional ramp up of revenue and that is that new infusion of revenue coming out of the pools, into fulfillment centers to direct allocations. So, due to some reporting changes from some retailers, those indirect revenues are now considered direct allocations and that is going into this business type within the business and industry group. So, you just see this really big growth here. When we look at 1Q22 results, it's a 1% growth, which is about what we had anticipated really normalizing where the revenues are year over year. We do anticipate a moderate growth and fulfillment center revenues going forward and 1 to 3%. But we do anticipate it to remain at this higher level now that you know we've made that shift in some of those revenues out of the pools into direct allocation.
---Business and Industry: Top BT’s---
Looking at the group as a whole, this is a motley group. It has general consumer goods, although these are a little bit more disparate. There are 21 business types, and they range from heavy light industry, manufacturing and equipment, farm and agriculture, electrical equipment, all the way to wineries and motion pictures. Really diverse and of course, very different for every agency. For each one of you. The top 10 business types are depicted in this slide, with the exclusion of fulfillment centers. We've pulled that one out. We’ve just spent a lot of time talking about those guys.
These top ten led by the medical biotech industry, then we have heavy and light industry in here electrical equipment. These are some of the bigger business types within this group. These top ten averaged 13% growth in the 1Q22. So pretty sizable growth in this group. Again, a lot of the infusion of capital for a lot of equipment purchases.
---Business and Industry Forecast---
For the group as a whole, we have projected Q122 growth of five percent, 5% came in at 10%. So, we were a little bit little bit low there. Looking at moderate growth going forward and averaging around 4 to 5% quarter over quarter. And 3 to 5% in subsequent fiscal years looking to slow down just a little bit with some of the supply and demand challenges that the industrial sector is facing. I know that Bret talked about that a little bit with regard to both the Auto Industry and Fuel. We definitely see it in the business and industry section too although, there's still a lot of demand as just supply that's been slow to respond. And so given that still anticipating some reasonable growth in the outyears.
---What’s Going on with Restaurants?---
Alright, let's shift gears entirely and talk about food, which is my favorite topic. So, what's going on in restaurants? A lot, a lot is going on in restaurants and it’s not all great. This is an industry that has been one the hardest hit during the pandemic, really struggling to come back again. You can see in the in the summary here, labor is one of the biggest headwinds that restaurants are facing.
Labor Shortages. CNN indicates that 70% of restaurants are understaffed. It's a huge percentage, similar with hotels. There are also feeling that labor squeeze as folks have exited this industry, the service sector, and they're just not quite back again yet. Food delivery is another area that is impacting restaurant revenues. I mentioned this when we were talking about the pools. So, let's highlight it here again. Because food delivery now through marketplace facilitators, these third-party delivery companies, those revenues are going into the pools, they're not going directly into restaurant direct allocation. So, we're seeing a little bit of erosion there. Food delivery is here to stay. We're liking that.
We like our food delivered to our house, and so we’re getting our food delivered to our home and the California Restaurant Association, recently got wine and beer permanently allowed to be delivered. And they're working on cocktails. So pretty soon you're going to get your Margarita delivered to your house too. And that really is just changing a lot of what's going on with restaurants. Less of us going into the restaurants now since we can get more of the good stuff delivered to our homes. Menu prices continue to rise but are not keeping up with the wholesale price of food, so that is definitely a headwind.
All this stuff is just squeezing a restaurant. We're seeing closures. We're seeing reduced hours, definitely seeing service kind of erode a little bit, which is unfortunate. The industry as a whole is estimated to have lost $47 billion since the 1Q20, two years ago.
---Restaurant and Hotels Forecast---
Looking at the forecast for restaurants. We had projected growth of 45% for the quarter. But it came in at about 40%. So fairly close, still growing of compared to a year ago, but starting to feel the pinch of some of the headwinds that I just mentioned. Menu prices are contributing to sales tax growth because we're paying more when we go. But later labor shortages are reducing service capacity hotels are lagging in recovery. It is an industry that's really feeling the squeeze, couple of things that restaurants have done to help boost and move them through this period, implementing technology in the restaurant. So many restaurants we’re paying on our own and using the self-serving kiosks to make payment that that is reducing the need for some labor. Menu options have been reduced. It’s a cost savings measure, less food that needs to be purchased. Streamlines operations in the restaurant kitchen. Personally, I appreciate the reduced menu and when I'm hungry and I go to a restaurant, I get decision paralysis if there's too much on the menu.
But overall, the industry is just really feeling that the constraints related to labor, the cost of food. Definitely some headwinds, very moderate growth going forward. We've rebounded mostly from the lows and the pandemic and are looking at fairly moderate growth going forward for restaurants. And with that, I am going to turn it back to Bobby to just kind of tie it all up fast.
---HdL Statewide Trend – Annual Outlook (FY)---
Wonderful. Thank you, Tracy. Appreciate that. Restaurants category, definitely a resilient bunch. They were able to weather the storm of the of the pandemic and post. Right now, really seeing those dramatic gains. It'll be an industry that will make the changes necessary to keep thriving. And that I think is what we can all appreciate, especially out of our beloved restaurants. So, tying up a lot of what you heard me at the beginning, Brett, and Tracy. You can see here middle of the screen, where we anticipate Fiscal Year 21-22 to finish up. Strong statewide about 15% and to be honest, and I know a lot of you guys are in that same boat with us, sometimes we can be too conservative, or a bit on the conservative side, if it comes in higher, we may not even be surprised. Given the strength of the economy still even with some of those other pressures or potential headwinds, which I'll talk about next slide.
Then looking forward to 22-23, you can see us slowing down our forecast. No longer can double-digit gain keep running at that. It is going to be later this calendar year when the Fed funds rate interest rate hikes start to really take hold.
The prolonged summer period of higher gas prices while generating more sales tax, could inevitably lead to consumers starting again that pullback. How much are consumers buying relative to high prices and everything? If they start to buy less, then we start to see sales tax growth pull off. Then as we look forward, you can really see here in the Fiscal Year 23-24 what might feel a little delayed there, you see us really slowing down into that 1% range and again reminding of what I mentioned earlier is when we're only growing sales tax statewide at 1%, but we know expenditures are likely to continue to grow at any pace, this will feel more like a recessionary period or slowdown that everybody's going to have to readjust their balance sheets or their budgets too.
So, strength through 22-23 cooling off in 23-24. Once we look outward, we're getting back to more of the historical normal growth range. Because we anticipate the feds will then temper the Fed funds rate as they see the economy cruising along and as consumers, we all start to then readjust to what otherwise might be prices at that time. I'll refrain from the comment that I think we all hate regarding the norm.
So that's where we're at with our longer-term forecasts. As Bret may have mentioned during the presentation, any time that we update your local forecast, we're always taking in these bigger picture statewide type of trends and thoughts and breaking it back down to you, the local agency and what sales tax demographic you have or you have you on autos, heavy on business and industry, more reliant on restaurants. We'll consider all of that to really customize your forecast.
Going back, this will probably be the last time we really reference Fiscal Year 2021. Post pandemic, we grew 11%, many of us sat around forecasting 21-22 going, “Can it get any better?” Absolutely 100%! To date we're up 17% from over a year ago. That trend then continuing into the second quarter finishing off the fiscal year. The headwinds we will all acknowledge. Inflation remains high, gas prices, you heard Bret talk about that, we know there's upward pressure there. Translating over to consumer spending and dramatically rising interest rates playing a part.
What does it mean, then? Consumers have been saving less, drawing from their accumulated savings post pandemic. Credit usage is starting to go up. So overall household debt is there, but property values and thereby being able to tap into equity, is still available even within a higher interest rate environment. So, there's access there, allowing the consumer sentiment to not go drastically lower. Much like what we experienced back during the great recessionary period. So that's where we think most of the overall economy will remain strong, especially business and industry. As Tracy mentioned, the changeover that we've all been experiencing from overall pool, back into local direct allocations for fulfillment centers and others, would be modest growth for the next two years. Are we building in a recession? It's more related to just moderate growth, even in a cooling off from what we've been experiencing.
Q: Regarding the Federal government's plea to a "Gas Tax Holiday" is California going to "pause" the proposed 7/1 increase? Is there any pending legislation affecting HUTA and SB1/RMRA funding? Slide 17/18 seems to have a positive forecast.
A: California's Budget passed June 15. The gas tax rate increase for the year under SB1 went into effect as scheduled on July 1. There is no sign of any pause in the California rates. Keep in mind there is no guarantee that oil companies would pass on the savings of a lower tax rate - same with the federal proposal. In any case, under constitutional protections, local allocations of streets subvention revenue (HUTA, RMRA) from the state would be backfilled. How is it going to affect sales tax? Yes, a federal pause on the excise tax portion will cause gas prices to go down. That's likely to leave more money in the pockets of consumers and however they choose to use that, whether it be kind of reestablishing savings or going out to eat at a restaurant, especially if it hits during the summer period and summer travel. We've got a lot of people expected to hit the road, even with higher gas prices. If that gets cheaper, it gives them more money to spend wherever they might be going, and that goes back to restaurants and local tourism for a lot of our coastal communities where the beaches are always a draw. So, it could end up could end up helping sales tax receipts even though we feel this pressure, we know what it means when people feel like they can spend more. So, keep a watch out there, it'll only be a good thing for our economy as we see it.
Q: As it relates to the Cannabis Tax decline, is the decline related to the Excise Tax or actual sales tax? Also, does HdL have anyone that I can contact directly who specializes in Cannabis Sales and Excise taxes?
An Institute for Local Government - hosted webinar
California cities, counties, and special districts are embarking on annual budgeting activities. These budgets are based on projections around sales tax, property tax, hotel tax, and business license fees many of which have been impacted by continued uncertainty from the pandemic and the ever-changing guidelines and protocols. This webinar shared economic and fiscal trends, and how local governments are using this data to inform budgeting and long-term planning.
- Ken Brown, HdL Companies, Principal
- Nichole Cone, HdL Coren & Cone, Vice President
- Eric Myers, HdL Companies, Senior Operations Manager
- Sheila Poisson, Finance Director, City of Torrance
- Lydia Romero, City Manager, City of Lemon Grove
- Melissa Kuehne, Senior Program Manager, Institute for Local Government
HdL presents an up-to-date view on California’s Retail Economy based on current 4th Quarter 2021 data. Watch the recording, download the presentation, and follow along with the transcript and Q&A.
HdL Companies & Beacon Economics California Forecast Report
Click HERE for our 4Q21 report on statewide sales tax trends and Beacon's national economic drivers.
Q: Does HdL foresee a reduction in sales tax receipts due to the pause in CPI on the Gas Tax per the Governor's announcement three months ago and most recently the Gas Tax Rebate? Will this affect SB1/RMRA and HUTA? How will the CDTFA make local agencies whole?
A: For the fuel sector, we're projecting solid growth through third quarter of 22 and then it's due to a combination of factors. It's a projected drop in the WTI crude oil prices, the prices at the pump very closely correlated with the oil barrel prices and then a gradual slowdown in the consumption and demand for fuel. There is the governor's proposal for the $400 rebate I think to potentially continue to stimulate the local economy but I also think that those that have the discretionary income will probably be counting on that stock market as we head into the summer months in terms of continuing spending, hopefully.
So we talked a little bit about the Governor's proposal to suspend the CPI adjustment. We are going to continue see sales tax grow because we're expecting higher gas prices. It won't be a surprise if I say we are expecting $5 a gallon, pretty much statewide average through the summer months all the way likely through Labor Day. So, get ready for it, but is it going to be $6 where it is now? Not likely. Probably sometime next maybe late April early May will expect to see crude oil come back down. We will still expect higher gas prices, which will mean greater sales tax growth.
Q: Is growth within hotels sales tax close to the same trend of restaurants, or is that locals eating out is really pulling up the increase in Restaurant and Hotel?
A: Yes, the casual dining – sit-down restaurants, fast casual, and the quick service fast food restaurants – have definitely recovered more quickly than the other business types that are within that sector. And specifically with the hotels, that industry itself is recovering, but it's definitely lagging behind the overall growth of restaurants. So, we do have a couple of business types that are within the restaurant/hotel sector, leisure and entertainment, and we have those types of businesses that are also recovering and we had projected toward the end of the calendar year 21 full recovery and those business types as well. There's also restaurants with hotels and those are doing better and growing as well within the that overall 47% growth in the sector.
On that restaurant/hotel front, we still have yet to see the return of foreign travel. And so, I think hotels and whether it be restaurants at hotels that generate the sales tax or for you locally, it's the TOT tax, there is still more likely to come, as they return foreign travel to have per night stays at hotels is a real thing and inflation is a part of that, right? So yeah, there's some positive still to come I think overall in the category. What we've seen to date is mostly the indoor dining.
Q: How are the online sales comparing with in-store sales?
A: We talked about the growth, especially the brick-and-mortar in general consumer goods, 18% really strong growth again in this quarter following last quarter and the quarter before. And now the pool dollars beginning to flatten out. So that gap is going back up right now in terms of brick-and-mortar retail compared to the online sales through the pools. Yes, we've seen online continue to grow, but we've also seen a stronger rebound in from brick-and-mortar sales. So, they’re both experiencing continued growth, but the rebound is really strong for brick-and-mortar.
Q: Do you think there will be a drop off in vehicle sales due to fleet purchases? Are rental car companies driving this demand? (Having to restore their inventory that they liquidated during Covid.)
A: Yes, I think there is going to be really, really tight inventory on cars and I think overall, our forecast on autos, we're still remaining fairly positive because buyers are likely going to be there. We are car country, California, so no real getting around that that. As prices continue to increase, fairly dramatically, even if the prices hold true, they're still elevated from where they were a year ago. Lower inventory means tighter demand and could even push those prices up a little bit more. But we're still going to see sales tax generated. That's a general statement.
For your local sales tax, it's going to be highly dependent on your local dealer. How tight are they with corporate to be able to get the inventory needed to sell? Or are they getting kind of beat up and not able to maintain or withhold good inventory to where they're sales tax is going to go down because they're just not making the same volume sales? We think it's going to happen statewide, but at the local level, we've seen it very dependent on how a dealership is with getting inventory. So, it's a consideration most certainly.
Q: How does electric vehicle purchases play into the overall auto perspective?
A: We had a great discussion as you can imagine about not just looking at very specific merchants, like Tesla or even other major car manufacturers, there are a slew of new entrants into the market now with new electronic vehicles that are starting to pop up and really show themselves. The inflated gas prices during the summer is most certainly going to have some people shifting around. And so, if people do start transitioning over to available electronic vehicles, it's going to mean new money to the market, right? And they're going to sell their vehicle. And as they sell it to a local dealer, they're going to likely resell it because overall, demand is going to be tight for availability. So, we are anticipating the auto market right now to terrain for at least fairly steady because of all these different components.
Q: How do the returns of online purchases get reflected?
A: For most online purchases, especially from out-of-state online retailers, we’ll be looking for those all in the pool, but with the consolidation or with some of the changes reporting to the local agencies now, it's now reflected both B and I and the pools when we look through the details.
Q: Is there a five-year forecast by region on your site or statewide?
A: No five-year forecast. We do a longer term forecast for the state, but then once we get down into the region, we rely on the forecast we provide our clients individually where we choose not to even look at it at like a county wide or region basis because there's so many in particulars that we then just take it right down to the local level and hopefully that's a great benefit in a service that we provide to our clients directly is to not leave up to question that you've got to use a regional forecast for your results because we try to put the nail right on the head for you at the local level and what the outcome is.
Q: What is the outlook for the housing market and how does it impact sales tax/consumer spending?
A: I believe that, you know, the housing market should remain strong even with increased interest rates. It likely just means people won't be moving as much. There won't be a great demand. We had seen that impact back with the pandemic, right? Folks staying home, upgrading their properties. We saw that spike and building and construction results during the pandemic.
Right through the pandemic, post pandemic. we saw double digit gains from the industry. Lot of people taking equity out, keeping contractors busy. That is still the case right now. If anybody is trying to get some work done at their house, don't be surprised if you hear a six-month waiting time as contractors are very busy. For us looking at sales tax, that means that sales tax generated as likely to be delayed a little bit, which then still gives us hope for 1Q. 2Q is going to be tough because of how strong 2Q was a year ago, but even flat, with post pandemic, means that the housing market has helped sustain sales tax. One - here on building construction growth, but then two - is for consumers knowing that they have equity in their homes gives confidence to still work through the increased prices on gas and inflation that. Yep. OK. I'm not losing on both sides. The weight of overall equity should help consumer confidence remain steady.
Welcome, everyone. So glad you're able to join us for HdL's latest California Sales Tax Trends and Forecast Webinar. For a quick introduction myself, I'm Bobby Young, Director of Client Services here at HdL and I'm joined by fellow Principal, Bret Plumlee. We both work on the sales tax team meetings with clients each quarter to review and analyze the sales tax which your local communities receive.
HdL has been serving communities for well over 37 years now. We currently represent over 500 agencies throughout the state, many of which are here, in California. These 500 agencies include cities, counties and special districts, and most notably, we are blessed to maintain a 99% client retention rate.
Let's jump right into fourth quarter 2021 results, most notably the October, November, December time period. It is the holiday sales period. As you see bottom line, there was no delay in the response with over 15% growth. Fourth quarter 2021 was by all accounts a phenomenal quarter for the economy and the individual results.
As you can see, we can start to break down and look at some of the subsections of the economy and where that 15% plus growth came from. Right at the very top, which we've been talking a lot about this the last few quarters is Autos and Transportation, which shows a 15% gain during that holiday period. That growth really caught us by surprise, if anybody remembers the forecast just last quarter, we weren't quite that optimistic because there were some headwinds at the time when we were considering. But lo and behold, the economy really showed up, especially on autos. We will have a lot to talk about with individual clients this quarter, especially those that are heavy on autos.
As you scroll down the list a little bit, you'll see Fuel and Service Stations plus 55%, not completely unexpected for us as we all started to see gas prices rise during that period, especially as consumption regained. We will talk more about that coming up here in the first quarter with conflicts in Russia and Ukraine really driving prices. But here, for the fourth quarter, gas stations were a huge part.
If you look at the next two lines, we’ll focus a lot on General Consumer Goods. There was an extremely solid 18% rebound for brick-and-mortar locations. Restaurants too, caught us by surprise. We had seen a very strong summer both 2Q and 3Q from restaurants. This industry group had another 47% increase statewide with a great show all the way around. As you can imagine though, it came at the expense of somewhere and that place can be seen at the bottom line with the pools taking a little bit of a step backwards.
We did have a continuation of a large retailer changing their allocations. We've spoken about this for the last three quarters now here. This is the fourth quarter for that. Plus, it has a lot to do with that 18% gain out of General Consumer Goods that you see given the return of brick-and-mortar stores. That activity locally stole a little bit from pools wasn't again completely expected by us but here it is, as far as actual results.
What you might hear when we come out and meet with you, growth took place across the state. Regionally, Southern California had a strong 17% growth. The Bay Area saw a nice 13% increase over fourth quarter a year ago. Even as you look at the far North and Sierras, for the most part it has have remained fairly stable through this and remained stable through the pandemic. The rebound hasn't been quite as strong as what we've seen in some of the other more major metropolitan areas, but still positive all the way around the state.
For Forecast consideration, there is a lot to unpack here. Most notably, when HdL discussed the fourth quarter results, all our conversations touched on the Russia and Ukraine crisis being right at the forefront of driving gas prices and thinking about what it is going to do inevitably to consumers availability to spend in the upcoming periods. Supply chain disruptions and delays - what did it mean overall for prices of goods? Interest rates, inflation and prices all play a role, and I am going to talk about some of that in the next couple of slides.
As we think about all of that and some of the potential headwinds, I think our instincts are to go a little bit more conservative, but let's take into account some other considerations like most Recent Performance. There was a very strong summer and now very strong fourth quarter winter results.
Labor Conditions - even though the labor market is tightening overall, wages are going up and we should be thinking about that with regards to the likelihood of a positive effect on sales tax.
Current Conditions. You can see how the wheels are connected here, but as we considered strong demand for consumer goods having upward pressure on pricing and assuming overall consumption stays the same, we end up with upward pressure on spending and sales tax dollars. It could have an eventual positive effect on sales tax, even supply chain and labor shortages, which may have downward pressure on supply and availability, but then, the impact there ends up having upward pressure on prices and then likely the same impact of upward pressure on spending and sales tax dollars generated.
This is a bit of an oversimplification, but as we think about sales tax, even with inflation, even with higher interest rates on the rise and higher gas prices, we’re still likely to see growth out of sales tax.
And it has a lot to do with the fact that most of our spending in California is demand spending, the day-to-day items that we need to live, versus discretionary. And when we talk about discretionary income, a lot of consumers are into the stock market. It took its bumps throughout January and February then turned upwards again. This morning it was around 34,000 and that is still relatively in proximity to the 35-36,000 all-time-high that we experienced back during the fourth quarter which we are talking about today. So, there is a lot to take into consideration with our forecast.
For results overall statewide – just for perspective and historical comparisons, this has really been helping us as we look back on 1Q and 2Q20, the depths of the pandemic which was very short lived with regards to negative impacts there.
Then, we see the dramatic rebound that we've seen throughout the entire calendar year 2021, especially 2Q and that has only continued. And then you get a glimpse at what our outlook looks like for the remainder of the fiscal year. For most agencies, the 3Q-2Q period will define your fiscal year 21-22 and you can see in the first quarter, we are still expecting about an 11% jump statewide. If you look back to last year, first quarter, we saw 11% and so the most recent performance really does lean in for us what first quarter results will look like.
2Q, and even as you glance at fiscal year 22-23, we are thinking that growth will start to taper off. This is where some of those headwinds and some of the overall depth and how much more can people spend in terms of dollar amounts may take hold and we may start to see a flattening or a deceleration of growth. Not a decline overall, just a deceleration of growth.
So, we're softening up starting in 22-23. I think this was also what we were looking at last quarter for the forecast given that we've wanted to make sure that we're not overly optimistic, but I think given most recent performance, there's not yet a need to be more pessimistic to think about a pullback.
Here, going in a little bit more, down to the nitty gritty and talking about local place of sale, think all kind of brick-and-mortar locals versus our pool impacts and most notably pools, as we talked about for quite a period of time now, online shopping especially by consumers. So, what you see is local place of sale, the POS line here, really damaged by the pandemic into the negative category had seen very strong rebounds, especially from those dramatic negatives, but here in 4Q20, a solid 20% plus for local place of sale. Then as you glance up, you see while overall statewide was much less, and that's the net effect of the for the pools, we had seen dramatic pool growth that helped sustain us back during the end of calendar year 2020 to offset the negatives. As we look outward, we do anticipate a local place of sale to remain strong and steady.
Autos and transportation grew significantly in the fourth quarter of 21. The local tax receipts increased 15.3% and that largely outperformed expectations. We have a few graphs that we've included this time to date to show the dynamics that are playing out in the auto sector. In terms of this particular chart, the total vehicle sales, you can see a big drop that took place in the volumes of vehicles.
Early during the pandemic, they recovered very quickly and then as stores and businesses reopened, supply chains increased and that included a shortage of chips that we've been talking about. We talked about during the pandemic and have been talking about three or four quarters now – the chips needed to manufacture the vehicles and the dealers just couldn't possibly keep up with the demand.
Then a big part of the story and we talked about this last quarter and again in the fourth quarter of 21, the prices definitely are playing a major factor in the overall increase in this sector. As supply became an issue and dealers were running low on inventory, the prices began to explode. We've talked about average price of new and used motor vehicles and that they have been at the peak levels highest level in the history and continue to grow every single quarter. Prior to the pandemic, the prices were very stable. They now appear to have started a plateau but are expected to remain elevated for quite some time. The industry experts are anticipating that supply will not meet demand until late 2023, early 2024 and that's going to keep the prices elevated. Consistent with upward pressure on pricing, the inflationary factor is playing a part in almost every major industry group.
On the chart talking about the inventory and sales ratio dealers have almost no inventory on hand. That also began falling in 2021, and this suggests that dealers are selling vehicles very quickly – another upward pressure on overall prices and the story here inventory is low and that was the story last quarter as well. As we start to drill into the fourth quarter 21 results, what we can see is the biggest portion by far in terms of this sector in autos and transportation 64% is generated by the new motor vehicle dealers and once again that business type and within this sector doing really well, up 16% for the quarter. So, in spite of the lower volume units, increased prices are keeping the dollars at the peak levels and that is a big part of the story.
Overall, we had projected actually 5% and the results came in much better again in this quarter at 15.3%. The long-term forecast keeps the growth about 24-28% above the pre-pandemic level of fiscal year 2018-19, and we're 24-28% above that. And again, the main factor pushing the sales tax upward is the ongoing increase in the prices of vehicle and combining that with strong demand, not only in autos and transportation, but almost every sector.
Moving on to Building and Construction, this industry group has done really well. It stabilized very early on during the pandemic and continued to have a very solid quarter in the fourth quarter of 21. The actual results, 5% growth compared to the 8% projection. The lumber prices rose to three times the pre-pandemic prices, and that's definitely had a big impact on the sales tax generated because of that business type in building and materials within building and construction. The permit values in this quarter rose a modest 2% in the final months of 2021.
The rising mortgage interest rates that we're seeing now start to grow as the Fed is ratcheting up the increase of federal interest rates – that's not yet dampened in the fourth quarter and even on into the first quarter that we're living in right now, not yet dampening the demand for new homes. The plumbing and electrical materials, which is a business type in this sector, will increase by 15% in the first quarter of 22, which is on the heels of three straight quarters of double-digit price jumps. The forecast is in keeping with the same as last forecast, so the same prior estimates and we're anticipating that material prices will decline and that's going to offset any gains in the construction activity. As a result, we're projecting flat forecast as you can see starting in second quarter 22 all the way through the first quarter of 23 and then modest increases ranging from 2% to 5% all the way out to 2026-27 fiscal year.
Food and Drugs is the smallest sector of the seven major industry groups and moves the needle the least statewide. It does have a significant impact on those cities that have especially a significant percentage of their sales tax generated by cannabis-related businesses. The three different business types primarily that are in this category are grocery stores, and drug stores, and cannabis-related activity. Grocery store prices and e-commerce sales are up several quarters in a row now, including fourth quarter, and that has contributed to a flattening out of the sales tax that's generated.
The drug stores that were hit hard in the calendar year 2020, have recovered in the later months of calendar year 2021. The cannabis-related activity was very strong during all four quarters of the pandemic in 2020 and now have plateaued. We saw that happening last quarter and that is flattening out the sales tax that's generated by these types of businesses. For those of you that do have a significant percentage of the cannabis type, business is definitely starting to flatten out and that's flattening out the overall growth in the sector. Long term, we're continuing to project stability with an annual forecast 2% all the way out to 26/27.
One of the key movers in the quarter and especially right now that's taking place with the Russian Ukraine crisis, is retail gasoline. Comparing the crude oil prices to the prices at the pump there definitely is a direct correlation.
The crude oil is expected to reach levels that haven't been seen since fiscal year 2013/14, and it literally fluctuates not only weekly, but daily, and often by the hour. At the time of this slide, cost is $114 per barrel. Right before the presentation started, it was at $113. So, it really moves a lot and it really has significantly been moving the needle in terms of the prices at the pump which is causing another upward pressure on the sales tax generated.
The overall sector fuel and service stations is expected to have strong growth in this quarter of 50%. The actual was even a little bit better than that at 55%, but now because of the crisis that's taking place and the upward pressure, strong demand is causing a spike in the short term in the sales tax collection caused by an increase in consumption and demand for fuel. We're ratcheting it up even more over the next couple of quarters. That industry completely recovered in the later part of 2021 and early into 2022. Consumers have been paying, as you know, record prices at the pump increasing almost daily for regular and diesel gas. Combine that with higher jet fuel costs that are linked to a surge in air travel, especially in the quarter that we're talking about. It started last quarter and has continued on into the fourth quarter of 21 with upward pressure on sales tax. The crisis has restricted the global supplies of fuel that has pushed the WTI crude oil barrel prices up significantly. That started in early March. So, when you combine all these factors, the estimated revenue boost over the next three quarters is very solid last quarter. Fiscal year 21/22, aka the rebound fiscal year, and post 21/22, were definitely starting to talk about a slowdown in the growth - not a recession - but a slowdown in the growth. So, in this sector we are projecting a slowdown starting in the fourth quarter of 22 and all the way through the end of fiscal year 22/23.
When we talk about those macro factors, it is impacting not only the fuel and service stations, but most of the other sectors. So, we see the increasing fuel prices and that will mean higher prices in other areas such as delivery of online products, other products, and the cost of food which is going to impact the grocery stores. It's also going to impact restaurants and hotels and that the cost of food is being passed along from the farmers. And in terms of the fuel, the increase in the cost of the fuel is impacting products that are made out of plastic.
Airline fees are affected as well, so what we definitely are seeing right now is the overall positive inflationary factor because of the demand. We are aware and we have built that into the forecast. The slowing down of growth, and a big contributor right now, is this increase in fuel. Long term forecast is consistent with most of the other major industry groups as mentioned about the traditional normal annualized cost. In this sector, we're projecting 2% growth all the way out to fiscal year 26/27.
In restaurants and hotels, we've had three quarters before fourth quarter of 21, very solid, and once again you can see 47% growth in the quarter where we had projected 40%. So, we had a big forecast out there and it did even better than anticipated which is continuing to help many of your cities and agencies grow in the second quarter of your fiscal year. The pandemic created stored up demand for food service and leisure experiences and Omicron did not detour the restaurant customers whatsoever. For the past two quarters, the sales for on-site, sit-down dining establishments have now surpassed the fourth quarter of 2019 and are projected to outpace the quick service fast food restaurants as the consumers continue, at least in this quarter and the one we’re currently living in, customers are focusing in on the experience of eating out and they're happy that they can do it once again.
And comparable to the story we're seeing with inflationary pressure, the rising menu prices in this sector, it's going to mean right now further gains in the sales tax that's associated, but the growth in this major industry group could be curved if the consumers start to react negatively to the volatile fuel prices. So once again, fuel is generating a kind of ongoing impact on all the other sectors as well. But overall, definitely a positive environment and almost in every sector this quarter.
Shifting gears to General Consumer Goods… Holiday sales in fourth quarter 2020 is the green line. The largest category within the general consumer goods sector is discount department stores such as Costco, Walmart, Target, Sam's Club and the like. They definitely had an exceptional holiday period. Plus we started to see gas prices go up and those major retailers that do also sell gas, they report it here under general consumer goods. They don't separate out the two. So that too helps really boost up with the numbers and what it looks like even when you compare back to fourth quarter 2019 there in the blue.
The sub sectors that you know don't have maybe that that fuel component to possibly skew the results, Family Apparel, TJ Maxx, Ross, Marshalls, DDS, and the like, have been doing exceptional all the way through the pandemic as folks steer their attention away a little bit from down the list department stores and maybe into a lower cost option to still get their needs. But Family Apparel had a very nice fourth quarter, as well as specialty stores and then the traditional department stores, Nordstroms, Macy's, Bloomingdale's, and others not yet back to where they were pre-pandemic, but a very nice rebound from where they were just one year ago, fourth quarter. So great showing for department stores when many of us had been questioning “Are malls dead? Are people going to go back to in-store shopping now that they've had the online experience?” and the results that we see here at a holiday sales do kind of solidify that consumers like to be in person. They like the in-store experience and it's not going to go away.
As we see right here on our most recent graph, major retailers and major mall locations need to continue to reinvent themselves in the experience, leading in obviously to restaurants within those. But you know a very nice diverse presentation of merchants that they're providing to potential customers. Here is a chart that we've been tracking for an extended period of time. We've been watching this dynamic of brick-and-mortar versus online. As a client you'll be receiving this graph. It's a statewide look at it, but we don't have the ability to really dissect down to the local level because of all the dynamics that happen with the online component… think county pools and how that gets allocated. But keeping it a bigger picture statewide, we saw this dramatic drop in 2020 because of the pandemic.
And there by the exceptional continued growth out of online, now we see the return of brick-and-mortar in the in-store experience and what it looks like compared to any time prior before. We’re well in excess. And so, it's a good mark there for brick-and-mortar. The online jumps – we leave in little reminders here – the AB 155 (the initial regulations on out-of-state sellers) and AB 147 (most recently online out-of-state marketplace facilitator) – all those components going in definitely had the major jump up in the tax rate growth here in calendar year 21. Probably as we go outward, we will expect even this trend to eventually start to level off or become more normalized with people able to buy online but then also for especially volume shopping needing to go in store, and so the green line here is also expected to level off as we go forward.
Fourth quarter 2021 sees 18% growth out of general consumer goods overall. You can see the great results throughout calendar year 21. And what does that mean? When you look at this current result compared to fourth quarter 2019… just different ways to look at it visually, definitely a higher peak. Most will probably hear as we come out with results this quarter, if you are heavy on general consumer goods, I wouldn't be surprised to see a lot of your categories or for a lot of you, the general consumer goods category, in excess of where we were fourth quarter 2019. And then as we turn our attention to fiscal year 22/23 and even looking forward, it is a category that we do anticipate will level off fairly quickly, a little bit more than others.
Then, as we talk about the next couple of categories, both Business and Industry and the Pools, we know that they have been both impacted by the same change and shift in the local tax, which was previously coming by way of the pools, now coming by way of local tax distributions from a major retailer. So that's along with AB 147 and that's kind of the where the two paths cross. AB 147 new online collections from out-of-state retailers that had this dramatic jump, but then the local shift really poses the 21% gain out of B and I.
Let’s spend a little bit of time talking about fulfillment centers, because that's where this biggest shift had occurred back in the first quarter of 21. So the jump here is from fourth quarter 20 to this 162% growth and 1Q21 had a lot to do with the change in reporting by a large retailer that continued throughout the calendar year.
Moving on to calendar year 22 – when we look back, (so not when we meet with you this quarter, but going past this), we’ll expect to see a little bit more normalized activity or level of activity comparing to the prior year because we're no longer talking about the reporting change. Thank goodness. I think we beat on it a lot. So now we get past that, but most evident here, you could see fourth quarter 2021 with an 80% growth over the last year from the fulfillment center side.
And to put things into perspective, because business and industry is such a diverse category overall, you could see how much fulfillment centers specifically move the needle here on the category. Medical biotech, which as a result of the pandemic have been doing great, is starting to taper off. Then I think we would all take a nice sigh of relief knowing that numbers have changed statewide, as a lot less mask mandates of the fear of the pandemic definitely decreasing now and even at the fourth quarter and so some of this medical and biotech money is starting to dissipate compared to the high point of a year ago. And then other categories - small growth just kind of depends on the timing and seasonality effect when we think about a garden/agricultural and warehouse/farm/construction equipment. Sometimes they rise and fall depending on the time of year.
Going out further overall on a statewide best basis, just returning to normal historical growth of about 3% and it has a lot to do with the cost of goods getting more expensive. But remember business and industry as a lot of business-to-business transactions, little less impacted by consumers sediment with regards to purchasing. So, if demand is there for consumers than the business-to-business transactions will likely continue at a steady pace with the cost helping benefit sales tax at the end.
Then Pool performance, as the offset when we talked about that lead up to fourth quarter 2020 – that show of AB 147 having its impact here, then the change of allocations really pulling it down. And we did see the pools dropped 2% this quarter. While some aspects of the pool were up, especially during the holiday season, we saw some online retailers where we have good comparison data to a year ago they were up, but other functions and other pieces were down just a little bit.
How are the pools made up? You can see the general consumer goods and online shopping does contribute a heavy mark. But B and I and those business-to-business transactions that do funnel money back through the pools, they do make up a considerable amount of the overall pool category. And you can see fourth quarter 20, the green bar is up a little bit higher than a year ago.
We have seen strong double-digit gains taper off. As we go forward, they should normalize. The cost of goods and inflation, as we've talked a lot about, will inevitably, have a continued positive effect on the overall growth of the pools.
Statewide – how does it all come into play? Just with the Governor's announcement yesterday on a new package to help drivers and residents of California with higher gas prices, it has a lot to do with the results that we're seeing here and much of what we heard out of the state and their results overall. We really hadn't been negatively impacted on a sales tax base. You can see here it definitely was down 2%, only 2%, during the depths of the pandemic. But then in a very strong 11% growth with all of this considered in now for fiscal year 21/22, you can see we're expecting another 12% growth and that just continues to give us an overall dollar amount that's in excess of any time prior to. So not completely out of the question that we are, we've not just hit our marks from pre-pandemic, but now continuing up above and as we had talked about that deceleration of growth really softening up over the next coming two years, 2022/23 and 23/24 really around the 2.5 to 2% mark to take into account consumers adjusting to higher prices.
Inflation hopefully will be starting to taper off at some point. But that balancing act will likely take about two fiscal years from our perspective. For some of you it may feel like a slowdown or a recession you might experience or even flat growth at the local level, or a decrease depending on the local makeup of your sales tax base, but overall while we experienced only a 2% drop during the pandemic where we shut down the economy, it wasn't nearly as bad as what we experienced during the Great Recession. As we go forward and if everything holds true, we experienced this slow down. It's going to feel like a recession. But on paper, we are anticipating it still to be slight positive growth overall. Once we go out further, a longer-term forecast, would then just be a return to normal historical growth somewhere around 3% overall statewide.
So final thoughts, 2021 tax receipts grew 11%. Year to date is up 17%. So, as you're adjusting for midyear and hopefully for clients that we prepared budgets for last quarter, you've already had a look at it and this really may not be a surprise, because we were anticipating overall a really strong 21/22 year. 22/23, we are looking at everything, especially the headwinds.
Take them into consideration, but then also understand the dynamic impact that it's going to have back to consumers. As you may have heard me mention, as a part of the Governor’s plan is also a rebate of $400 per registered vehicle back to consumers, I think then we have to consider that's more money into people's pockets. Most consumers are fairly healthy with strong savings, with equity in their homes, and no fear that home prices are going to completely drop, even with higher interest rates. People may stay in their homes, there's just not an incentive to move as much. Those that remain keep some equity in their pockets. And the stock market – as we talked about, yes, it's taken a hit the last couple of months and the crisis in Ukraine is definitely having its impact day-to-day with the fluctuations in the market, but overall, I continue to watch to see as soon as we get back solidly for maybe a week to two week period of time (back up to DOW being 35,000 or even in excess) really then leads us to believing Wall Street and investors have now taken into account the impacts and it may end up leading us to a solid summer period with the stock market. Then as we come back, when we think about discretionary spending at the local level, it could likely, as we've already built into the forecast, stay steady during the summer months, even with higher gas prices expected.
HdL presents an up-to-date view on California’s Retail Economy based on current 3rd Quarter 2021 data. Watch the recording, follow along with the transcript, download the presentation, and read the FAQ.
Q. How is the pool calculation calculated and distributed?
A. It's based on point of sale cash, as a percentage of the total point of sale cash, within your county, and that's done each quarter. So, it's 1/4 at a time. You always want to look at how well your cash is doing in comparison to the cash within the county.
Q. In the long-term forecast, when you look at the out years, why is there an increase in 24/25 all the way through 26/27? A little bit higher than fiscal year 23/24.
A. There's three industry groups that have a slightly higher projection in those out years: building and construction, restaurants and hotels, and food and service. We have slightly higher growth in those out years. Those last three fiscal years and that's what is attributable for that slight difference between 23/24 and then all the way out. And Bobby mentioned, you know there's a number of factors that go into our overall statewide forecast.
Q. What are the projections for California population loss or growth? How does that impact sales tax projections?
A. That's more of a macro factor. We do definitely take into account significant long-term changes that we may be anticipating. I would say in terms of population growth, our forecast at this point, it's just really steady ongoing typical growth that we've seen in the past. We don't have any anomalies that we've factored into long-term in terms of the projections related to sales tax and population loss or growth.
It's a tough one for us to even try to quantify as well. Even if we see population numbers decrease, but the cost of goods increases, we’re still going to see either the same or an increased amount of sales tax overall generated. So, we haven't had experience with past analyzation of data to really say, “Oh, here's how sales tax ebbs and flows with population.”
Now, obviously over the last 70 plus years here in California, we've only seen population increase, but I think most recently I think there's other dynamics that play into that will help offset any changes in population. One is, I don't believe that we're going to have a dramatic drop in our population overall. However, locally in certain communities as businesses come and go, that may be the case. But we'll take your local sales tax projection and will customize it for it to include that that dynamic.
However, we still live in a beautiful state with beautiful weather and especially during the winter months. If anybody got a chance to watch the Rose Parade, the San Gabriel Hills down here in Southern California, we're just showing off, tempting everybody to come back to California.
But what we've seen out of not just the increase in prices, but more especially the increase in the stock market and the effect that it has, especially on our maybe our 1% communities, our very high-end earners, or high-end spenders, that the increases in the stock market actually have a more tangible effect than, say, population back on sales tax. And it that's pretty fascinating for us to watch. So, I would say there’s the likelihood of mitigating factors with the question of a reduction or you know, decrease in population overall.
Q. What is the projected CPI increase factored into the overall project?
A. So, for us, CPI, while we include it into our thinking, it's not so one to one. We do analyze for the expected increase in cost of goods, but we also mitigate it. CPI most recently got reported and I believe it was at 7 or 8% somewhere around there. So, then we go, “Okay, we can't just expect sales tax go up by that amount and so we do mitigate that a little bit by expecting consumers will peel back a little bit if the cost of goods goes up.
That, I think, is where you'll see us still have a positive outlook and this question was asked earlier. You know, seeing such positive expectations for even 22/23. Still 3.6% growth…is that cost of goods is going to go up. At some point, we anticipate that consumers will peel back a little bit as much as they buy. I think that has a lot to do with say a variant or a little bit of more of slowing in 23/24. Eventually, that all catches up, but more specifically we don't have CPI tide back into our sales tax amounts generated because we do consider other things in that in that picture for the forecast.
Welcome everybody, so glad you're able to join us for HdL’s latest California Sales Tax Trends and Forecast webinar. Before we get started, just to let everyone know, the presentation will be recorded and available alongside the slide deck on our website, hdlcompanies.com very soon. All registered participants will receive an email once it gets posted.
We'll have a Q&A session at the end of the presentation.
By way of formal introduction, I am Bobby Young, Director of Client Services here at HdL Sales Tax and I'm joined today along with Brett Plumlee. We both work on the Sales Tax team and enjoy meeting with clients and going through the sales tax analysis with you all, the revenue that comes into your local agencies, especially at this vital time through the pandemic and being able to navigate it. But as we come out, what's to come? It's going to be very important and we're really looking forward to meeting with all this next quarter especially.
Just a reminder for anybody that may not be as familiar with HdL, we are proud to have been serving local communities for over 37 years. We are 100% employee owned which we take a lot of pride in. We really try to focus heavily on superior service that allows us to increase revenues for our clients and local communities while efficiently decreasing costs. We are thankful to have over 500 clients that we serve right now, and we are blessed to have a 99% overall client retention rate, which we value heavily and appreciate you as clients.
Let's go ahead and jump right in. We do have the third quarter 2021 statewide results here. You'll see at the very bottom here, there is an overall positive 18%. This is phenomenal news for the third quarter. Think the calendar year third quarter, July, August and September time period. At the end of the summer months the economy was roaring, along with the stock market going up and we saw all these expected results.
These have been positive results that we had been forecasting. There's going to be a couple of categories that exceeded our expectations. We had forecasted about a 15.5% positive increase or growth over last year for the third quarter and what we saw was 18%. Specifically, there's three categories as we go through our meetings with you this quarter that we're really going to be focused on pretty heavily – autos/transportation which is right at the very top with positive 16%. It's been phenomenal to see consumers and their interest in autos. Bret is going to be talking about that more specifically here in the webinar.
As you as you look down a little bit, you'll see fuel and service stations at 54% increase. We also saw more people back on the road and increased gas prices helping there. The one that's caught us by surprise and was so welcomed for many of our communities and even us as consumers was to be able to go and dine out. We saw restaurants and hotels with a phenomenal 48% recovery. This was a category that had been expecting a very long recovery timeline, so we saw some good results this quarter. The other thing that we've been doing is focusing on different regions in California. There are some regions that were not as heavily impacted by the pandemic, and certainly those that were much more so.
What we saw this quarter was very, very balanced. Whether it's Southern California, the Bay Area at about 15% in line with both the San Joaquin and Sacramento regions here, all the way out to the Sierras. As you can see, great results statewide which were again so very welcome and a continuation of what we had been seeing through reopening and the reemergence of consumers back into the marketplace and especially brick and mortar locations.
Breaking that down a little bit, right in the middle of the screen, at the very top is where you'll see third quarter 2021 positive 18%. The complexities within this slide are really to give some perspective historically, where we've been coming from on a percentage basis. You'll see really the depths of the pandemic, 2Q20 down almost 16% statewide. This is when everything was closed. A lot of us were sheltered in place and buying things mainly online. Come third quarter-fourth quarter, we saw what ended up being a very welcomed response as we just saw flat results.
Then as we turn the calendar page back at the beginning of 2021, we started to see the positive gains in recovery and so that has continued here in the third quarter. Then as we looked here to just past, these are our forecasted quarters that we have coming up. It really starts to tell the story of what we've been reading, taking in, and then trying to apply back to sales tax.
We are anticipating a very solid fourth quarter period. So, that would be the October, November, December time period we just lived through with holiday sales. Even though you'll hear us talk throughout about supply chain issues and overall consumer increase in prices, we are still anticipating on many fronts to see positive results. You'll hear that through the webinar. But about almost a 15% forecasted for 4Q21. Then, as we turn the calendar is where you'll start to see us be a little bit more cautiously optimistic about the future. Obviously, there are some headwinds which we’ll touch on those again at the very end of what we're forecasting.
Overall, for what many of you are looking at for fiscal year 21-22, which is right in front of us on the screen, right in the middle. These first two quarters may end up solidifying the overall results for the fiscal year. Where even 1Q, 2Q might start to really slow down and pull back a little bit compared to recent activity. But these first two quarters are probably going to set the tone for the overall fiscal year. The line below here, is just to give us a historical frame of reference where we were before the pandemic and how we trenched through that and the depths that we had. And now, where we're at and where we believe we're heading. And as you can see, these outer quarters, getting a little bit flatter, and I think we could all kind of feel comfortable in that in that area.
So, that was the statewide overall with everything included. Here, we really focused on local place of sale. When we're thinking local place of sale, think brick and mortar stores on the general consumer side. Think restaurants, gas stations, those types of things that really took a hit through the pandemic. I've kind of highlighted it over here on the red for local place of sale of how much they decreased and even that part of it continued.
Statewide we saw results that were fairly flat which has a lot to do with pools. Think online sales activity that we've spoken so much about in helping out the state. But now here, we are really focused on the calendar year 2021 and you can see all of the positive results that we've been experiencing and what we're forecasting for the fourth quarter 2021 period. So again, hopefully this just gives some frame of reference or some perspective on how we break down and look at different pieces of the sales tax revenue. I am going to turn it over to Brett and he'll be talking about a couple of categories. More specifically autos, building, and I believe fuel.
We're going to start, as Bobby mentioned, going through all the major industry groups starting with autos and transportation.
Here is what is happening in the 3Q21 with autos and transportation in this particular sector. This story is volume is down, while sales tax is up. The national prices continue to grow to record levels. New car prices are up 10% and used car prices are up 26%. We've been talking about this throughout the pandemic. They actually set record levels in terms of increases in the middle of the pandemic last year and are continuing to grow. We are seeing continued strong demand for luxury purchases and we've talked about for some time now that in past quarters supply has been constrained, especially with the chip shortages. But it now appears to be slowing in terms of the data that we've analyzed, at least in the first month of 4Q21.
It's going to take some time to get back to normal levels and we may never see the previous levels of inventory. Dealers are now shifting, or at least potentially shifting their business model to allow consumers to pre-order the vehicle and pick it up later. So, that's going to likely allow less need for inventory on the lots.
In terms of National Auto sales, what we can see here in the chart, is that the volumes were constant until the pandemic hit in that 1Q20, then they dropped dramatically. That was then followed by a quick recovery, and the volume started picking back up. Then the industry experienced shortages in terms of the supply of chips and that coincided with demand which was slowing which as well pushed the volumes back down in the middle of 2021. But why are these headwinds not being reflected in our sales tax data?
The real story is in the prices. Nationally, prices have increased more than 17% in the third quarter and look to remain high for some period. From this data, the prices are increasing very significantly and that is having much more of an impact than the decline in the consumption. Keep in mind that while the prices are high, the dealer incentives are pretty much nonexistent at this point in time. The dealers just don't have the budget or negotiate on prices, and that goes for both new motor vehicles and used motor vehicles. They can sell it at whatever price they are listing at this point in time.
In terms of overall growth, we had projected flat in this quarter at 2% growth and the actual results were much better than anticipated at 15.6%. That mostly is due to the price increase that I'm talking about here. When you look at this particular sector, the autos and transportation auto sales and leases make up 78% of the total and the tax receipts have trended similar pre-pandemic levels fairly flat. Supply constraints are now being overshadowed by these dramatic price increases and continued strong demand for inventory that's available.mWe are expecting the tax receipts to remain elevated while supply chain issues and demands keep prices high all the way through 2022.
Bobby had talked about fiscal year 21-22. That's the fiscal year that you're most interested in right now as you're preparing your mid-year reviews. And for autos and transportation, 7.7% growth for 21-22 and then a gradual, slower growth rate after that. We are projecting long term growth to flatten out closer to pre-pandemic levels at 3% annual growth all the way out to fiscal year 26/27.
Now, building and construction. This particular sector has continued to do well. We talked about it during the pandemic. It actually recovered much more quickly than all of the other industry groups of that, along with food and drugs, which I'll talk about in a moment, and the projection was 15% increase in this quarter. It finished a little bit lower than that at 8.2%. That percentage is mainly attributable to lumber prices slumped pretty significantly the first two months of this particular quarter, 3Q21. Then they shot up again in September, mainly due to commodity availability issues.
Following the second quarter sharp rise that we have been talking about in terms of permit values, the third quarter reported a flattening out or a significant drop. But when we look year to year, we're still seeing comparable to 3Q20 in terms of flattening overall permit values.
Housing starts have been postponed until material prices dropped substantially and when that happens, the volume is going to then start to increase and that will replace the high prices of homes. An interesting observation that we're seeing is office space development is starting to grow again. That's been a surprise since during the pandemic there was a halt in the demand for this particular space. Overall, what we're projecting in forecast for 21-22 is 5.4% growth and then closer to pre-pandemic levels. 5% growth annually all the way out to fiscal year 2627.
Food and drugs. I mentioned this is another sector that has been very stable, and that sector includes grocery stores and drug stores and cannabis related businesses. All which have done really well during the pandemic. We see very steady growth. We projected 2% growth in this quarter and the actual results were fairly flat at just under 1%, .8% for the quarter. Cannabis receipts have now plateaued at the rate of $12 to $14 million a quarter which is really after years of substantial growth.
We are projecting continued ongoing steady growth in this sector, then starting to slow because people, as Bobby mentioned, are eating out again and they want to be out at sit down restaurants. That's having an impact on grocery stores which we're starting to see flattening out and dropping, and so 2% annual growth has continued to be projected all the way out to fiscal year 2627.
Now fuel and service stations. As we anticipated, we had another really solid quarter. Bobby talked about good news which was really all throughout the economy and all the major industry groups that we're talking about today. This is one of the ones that he highlighted at the beginning of his presentation. We had almost 75% growth in the second quarter, and that was followed by 54% in this quarter, which was better than our actual projection of 40%. All signs in the sector are pointing to upward pressure on the sales tax received.
The demand for fuel is much higher than it was a year ago. The average price of a gallon of gas has now exceeded the record level that was set back in October 2012 at the $4.75 a gallon, which is pretty incredible and really, it's continuing to ratchet up a little bit since that $4.75. Diesel and jet fuel prices and airline travel are all up and more people are hitting the road in terms of going to the office, shopping, taking their kids to school, taking vacations, and you see that increased congestion. It is really back to pre-pandemic levels on the road at this point. All factors are pointed to upward pressure in the next three quarters as well.
So, in 4Q21 Bobby said we're going to have a really positive quarter which is very likely because we're comparing to 4Q20 and the economy is going to continue to go full steam ahead. We have 50% projected growth in 4Q21 followed by 20% and 7% in the first two quarters of 22 in this particular sector. Then long term increases back to pre-pandemic levels of approximately 2% annually all the way out to fiscal year 26/27.
The other industry group that Bobby highlighted at the beginning was restaurants and hotels. We expected positive performance, and that's what we saw statewide with the actual results at 47.6%, a little bit better than our projection of 42%. And what we're seeing is continued pent up demand for restaurants and leisure activity. Casual and quick service business types included in this sector have recovered and those are the two biggest categories statewide, so that is good news for the overall industry. We're expecting fine dining and entertainment to post strong recovery for the next four quarters.
We're continuing to see very high spending. Consumer capacity and people are out there and continue to have discretionary income and they want to be out shopping and going to the restaurants. And there are fewer capacity constraints compared to one year ago. Another factor here in this sector, we are seeing it and you're experiencing it, is rising menu prices both at fast food restaurants and sit-down restaurants. Also, labor shortages have caused employers to increase the pay to try to attract workers. It's been very difficult to fill workers, especially in the fast food restaurants. 68% of the restaurants have reduced their hours due to lack of staff, so the demand is out there. But the restaurant owners are really having difficulty filling that demand.
There are spending upticks in business travel. The airline industry strongly believes that business travel will fully recover by 2024. The statewide results in this sector in the 3Q21 are actually, now half a percent higher than the pre-pandemic 3Q19. So, we're fully recovered in terms of this industry group and continuing to grow. Overall, fiscal year 2122, we are projecting 33% or 32.9% growth in the entire fiscal year, and that's followed by a gradual slowing of growth back to the pre-pandemic levels. 3% annual growth starting fiscal year 23/24 and all the way through 26/27
We're going to jump into a couple of the bigger and sensitive categories that we've been talking about most recently through the pandemic.
Just a reminder, at this point in the in the webinar, when we meet with you guys and we prepare forecasts for our clients, while we use a lot of what we look at statewide and the trends that are going on, we customize our forecast for you specifically. We bring it back to your business. If how your businesses are performing may be consistent with the statewide or maybe a little bit different, better or worse. And then we will home in that forecast for your community and what we're seeing locally.
As you heard Bret talk about, auto dealerships and even restaurants, we’ve seen phenomenal results statewide. It may actually come down to inventory locally or the availability of both indoor and outdoor dining on the restaurant front. It will continue as we talk about general consumer goods or even the pools throughout. When we put together your forecast, we really do customize it to make sure that we're getting as close to possible for your community as we can.
Let's jump in now into general consumer goods and what has been moving the category. You can see, this is a line, specifically related to discount department stores. Think big box retailers, Costco, Walmart, Sam's Club, Target all the like within discount department stores. The trend overall, it’ll always peeks at the fourth quarter, and that's kind of what we're expecting in the next set of data we will get which is the normal holiday shopping period. You can see 4Q2020 just last year, as a result of the start and reopening from the pandemic period.
What we've been experiencing more recently and what we're anticipating of discount department stores is to continue to go up. Some of the larger big box retailers do also include fuel sales with their in-store sales tax which helps move the category along, as you heard Bret talk about how much gas prices have gone up most recently. We are anticipating discount department stores to be doing really, really well.
Those that were hit the hardest at a general consumer goods. This is a big category, so we're going to break it down just a little bit. You can see the depths of the pandemic, most notably for the apparel companies, but what I want you to look at, much like restaurants as we saw, is the rebound and where we've come most recently. And then what we're expecting. There is almost a full recovery for many of the categories. For example, blue here is department stores.
From Online, the lose out to family apparel stores and discount department stores, traditional department stores may take a longer timeline to recover or just kind of flattened into their new normal, but pretty much everything else is expected to continue to rebound and recover from the pandemic period here on the apparel side.
This category has been the specific businesses that have done really, really well. Probably no surprise to many, but as you can see, jewelry stores or most recently, sporting goods stores. As the pandemic and the shutdown happened, everybody was getting out. That's the green line right up top here. You can see how much they've jumped up and maintain. Then also variety stores. Lower costs came as price-minded consumers really kind of found another way or another place to buy goods. These categories most recently have done really, really well. For the jewelry stores, while it dropped off and you know think mall locations that were closed during the pandemic, you could see that in depth here.
The gains out of the stock market, which I think could apply more generally, have given folks the ability to invest in other places as well. This goes in line with jewelry, whether it be diamond or gold, it appears as though consumers are really pushing to invest, make purchases and have an opportunity to buy goods that maybe they couldn't buy before. The overall increase in flood of federal money and availability of funds, much like autos, have allowed consumers to kind of tweak and jump into things maybe they couldn't afford before. This has been pretty fascinating to watch because it may have a shorter run. You can kind of see our long-term forecast, for jewelry, it will always kick up on the fourth quarter, but it may end up peeling off just a little bit from the place where we've been. Then the stores that usually also kind of hold the line, whether it be electronic appliance stores, home furnishing or specialty stores and some of the other more specific retailers, we dump into the specialty stores. You can see obviously they also took a hit during the pandemic and have since recovered. Specifically, with the electronic appliance stores. That's the green line that you may see here, hasn't yet recovered.
A couple of large retailers, as you can imagine, just aren't quite back to where they were, or consumers have found another way in which to buy the goods. This process may end up impacting them and lead them into not quite recovering to the levels that we've seen in the past. So, we are kind of cautious with some of these. We're watching them very closely. Home furnishings being the yellow line here, has taken a nice rebound, especially with the increased property values, especially home values. Some consumers feel like” hey, maybe it's time to reinvest it back into our property by some new furniture.” And we've seen the yellow line recover, but how long is a question there.
Overall, for the for the general consumer category again, you see great results, 22% increase here in 3Q21. We are still anticipating a strong fourth quarter overall holiday shopping period. 1Q and this 8%, for us we're looking back at the 1Q21 period and realizing maybe there's still a little bit of growth to happen there, but you can see pretty quickly once we hit the summer months, for general consumer goods, we’re going back to more historical normal growth or a move back to maybe consumers get a little bit cost conscious, not feeling like they're going to spend like they have most recently. So, we do anticipate general consumer gross to slow down.
Here's a line graph just to kind of reiterate what we've been talking about the last couple of quarters. As we've seen a reporting change in deporting, it has shifted away for a couple of major online retailers away from the countywide use tax pools, which is the green line here. Reporting to local jurisdictions where they have the fulfillment centers, we see an increase or an uptick on the light green line, which is business and industry. Within that major industry group is where it will show fulfillment centers. We've got a slide to here in a bit to reiterate that.
From the pandemic periods, which is the second quarter through the fourth quarter 2020, you could see how much online spending had increased. There was probably really no way that we expected that to continue at that level. You can see here, throughout the calendar year 2021, we've seen it tail off from where it was, but still remain rather strong. From third quarter 2020 on average to third quarter 2021 only a 2% growth out of the pools again. There was no way we could really keep up that pace, but because of that reporting shift we had seen business and industry jump up 18%.
Then some of the trends overall. Obviously, as we've talked a lot about the return of consumers back into stores, now that that's available there would be a decrease overall in terms of growth for the pools and fulfillment centers. But an uptick for brick-and-mortar stores. For many of you, you can also appreciate this welcomed recovery where your local brick and mortar stores are getting the full 1% Bradley Burns rate versus just a percentage of the pool. Many cases it's much, much less such as somewhere between 5 and 10% of that 1% versus the full 1% value. This just kind of restates what our expectations are with consumers coming back in brick-and-mortar.
Let's start with business and industry because we've seen that dramatic growth. This gray period which goes back to 4Q2019 and all the way up through the pandemic where you could see we're almost there. So 3/4 into the reporting change, that started back in 1Q21, and you’ll see a 23% gain on the business and industry side which had a lot to do with the change from new reporting to fulfillment centers. We've seen a consistent dramatic gain.
We are anticipating once the initial fourth quarter period is done, future gains will start to level off back to their normal historical growth. There is not too much more to go when it comes to business and industry and our future outlook is definitely leveling off.
Here, we are more specific on fulfillment centers through the first growth that you see, starting in fourth quarter 4Q2019. We've got a couple of notes over here to the right. Just a reminder, we had AB 147 and new tax revenue that began in fourth quarter 2019. We then had the pandemic that helped both second quarter, third quarter, and fourth quarter dramatically grow for those that reported locally. Then starting here in 1Q21 to now, 3Q21, through the shifts and reporting, we've seen the gains really jump overall for fulfillment centers specifically.
Business and industry is also a very large category overall. There are a lot of different pieces to this puzzle. As you can see, this is just a quick line graph of some of the other categories here. Medical Biotech, as you can imagine with the pandemic, really took off through 2020 and has most certainly begun to level off as far as sales tax generated there. Light and heavy industrial businesses, now post pandemic, have remained steady and we do anticipate that trend to continue along.
The seasonal effects are shown through the light green line here. For garden agricultural, you could see really that second quarter has set a tone and even with in earlier 2021. With water shortages and others, garden agricultural suppliers actually had a nice second quarter. Now being able to see that and really frame it tells us a little bit about what happened during those summer months. There are just a couple of others here which we won't highlight too much.
County pools are shifting away from business and industry in the fulfillment centers is now goods really coming in from out of state or from online retailers that are out of state. This tax is being allocated by way of the countywide use tax pool and you could see how much. Especially once we hit AB 147 and the new reporting requirement, you can see how much they jumped up. But with the change in reporting from the pools and back to the fulfillment centers, you can see how dramatically here in 2021 the growth has dropped considerably.
This is a lead in for what we do anticipate out of the pools going forward. We will expect them to really not have as dramatic growth with seeing more over there on the fulfillment center side. These are just some notes as reminders of where we've been when it comes to pools performance.
I won't talk too specifically because every county pool is a little bit different, but in general the county pools are made up largely of general consumer goods. Think online retailers here, of about 40%. Then with business and industry and kind of everything that's included there, whether it be medical, cultural, or electrical come into here on business and industry side with 30% plus. But again, every county is going to be a little bit different.
So, our forecast on the pools… as we kind of talked about the shift and this dramatic growth that we had seen previously, has most certainly tailed off in these most recent quarters. We're anticipating that to continue through the end of this fiscal year at least, 5 to 6% growth. When we look outward, we see a more consistent 8 or 6% by quarter growth. This growth probably has more to do with the increased cost of goods or inflation as we think about it which has to do with the driving up of the taxable portion of the goods or increasing the tax generated. So, pools should remain fairly steady, just not nearly the dramatic growth that we've seen previously.
We will now bring it all together in the statewide trend and looking at it on a fiscal year basis. You could see how overall statewide we trended through the pandemic with really 19/20 being the depths with 2Q2020 having such a dramatic impact coming down to decrease 2%.
Then we had a nice recovery in fiscal year 2021 of 11% so 2Q2021 already ended. We've seen now the start of the 21/22 fiscal year, and we're anticipating right now, about 11% growth for the current fiscal year. It has a lot to do with the third quarter results that we just talked about.We are anticipating a very solid fourth quarter period to come. Overall, the economy hasn't really been hindered too much.
We can talk about some of the headwinds. As you look outward of the fiscal year, what we're seeing with the most recent variant, omicron, numbers are going up. But it does not appear as though some of the other factors or statistics, such as hospitalizations, are nearly quite the same as what we experienced through the first COVID-19 pandemic.
That's giving us a lot of hope that while numbers may go up over the next, maybe month or so, by the time we hit February or March, we probably won't continue to see the sales tax impacts really hurting like the levels that we saw previously. With that, third quarter or fourth quarter should keep the current fiscal year really strong.
I know the variants and some of the headwinds are first and foremost on people’s minds. As we go out though, you can see us returning back to more of a 3% growth right now. We are not anticipating such growth like what we just experienced but also not expecting a dramatic drop off or a regular recessionary period. There are a few things that we believe have mitigated that to the benefit of the overall economy. It feels like some of those headwinds are starting to be already factored into everybody's expectations.
Just a few reminders and talking points as you go. Many of you will be doing a midyear budget or financial update for your councils and communities. So, this is just a quick recap of all of the different federal packages that help support our economy through the pandemic and even through calendar year 2021.
The are trillions of dollars that they've pumped into the economy and there's still a few out on the horizon that will do the same. We believe that to be a positive that we're waiting on. Obviously, the question is what will happen once people have to go back to work, pay their mortgages, or pay their rent. It's not so much at the front of our radar right now, because we've seen such great results to date.
With the inflation, interest rates, and federal government starting to increase interest rates to offset inflationary factors, we have seen the cost of goods go up. We're really watching and listening. It appears there will be multiple interest rate hikes, but later in the calendar year 2022, which is actually the start of the fiscal year 22/23.
So again, as we think about mid-year and what's in front of us for the current fiscal year there will probably not be as many lasting impacts. I would say that’s the majority of why we’ve started to level off those future growth expectations, it comes from the consideration of higher interest rates and what it will do for home value. Further, how it will affect consumers’ confidence to continue spending at an increased rate.
Here, you can see what we anticipate with what fell off between both goods and services during the pandemic and obviously goods have rebounded much stronger than services. We know that services are to come, and again, probably as we reach into 2022 with folks getting back to traveling again, spending on non-tangibles or experiences, there will start to be an increase which will steal some of the money that would otherwise be spent on goods. So, we know this is to come. We feel like we've factored that into our forecast that there will still be a good amount of spending on goods, but it'll be mitigated compared to what we've just been experiencing.
Online sales, we are always watching to see what the trends are. Mainly, on the black line where you see 2020 by quarter period and the peak that we experienced right there at the pandemic… there is no way that we expect to keep pace with that. So, we're watching to see what just happened in the fourth quarter with online sales. We do anticipate a bump up from prior periods. Is it going to equal or exceed what happened a year ago? Which again, just really help support fiscal year 2122 numbers.
This is just another way that we look at data overall statewide and how we've been trending. The normal fourth quarter holiday shopping period really boosted up there.
So, just for some final takeaways as we get towards the end of the webinar…
What we've seen overall, FY2020-21, local tax revenue grew in excess of 10% statewide, nearly 8% above the pre-pandemic levels. So, it was a great rebound there.
The economy and spending appear to have remained strong through the fourth quarter 2021, which would be the middle of the 21-22 fiscal year. So, we are still anticipating and forecasting about 11.5% for the current fiscal year. But it's really starting in 2022 calendar year, where price and inflation is becoming a bigger concern for consumers.
Federal interest rates being on the horizon again but probably out another full fiscal year.
But as Bret really talked about, and we know that even though the ports are being offloaded as quickly as possible, the whole overall supply chain could still be a concern for consumers and restrict some spending that might otherwise happen.
So, for a short-term forecast, we are anticipating having more slower growth, beginning 22/23 and we'll kind of hold that line overall until we hear more about possibly a next recession or another factor that could thereby boost up our expectations for the future.
Hopefully this has all been helpful for you and your local communities as you are starting to put the pieces together for the current fiscal year and start your planning for next fiscal year. We do look forward to meeting with all of you as clients over the coming months to really walk through what we customized for you.