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HdL presents an update on California’s retail economy based on current 2nd Quarter 2023 data. Download the presentation deck to follow along with the recording.
This report provides a breakdown of your agency's...
- Quarterly Sales Tax broken out by major business groups
- Top 25 Producers
- Statewide Results
- Sales Tax Rate Breakdown
- Top Non-Confidential Business Types
This is one of many reports that HdL Companies' clients have access to in their client portal and receive updates quarterly.
HdL presents an update on California’s retail economy based on current 1st Quarter 2023 data. Download the presentation deck to follow along with the recording.
Overview of Q1 2023 Results
In the first quarter of 2023, the data showed a 1.1% decline in sales on an adjusted basis. This decline was influenced by factors such as weather impacts, particularly in the building and construction industry, which saw a significant drop of 9.7%. Fuel and service stations also experienced an over 8% decline statewide. The overall trend indicated a decrease in sales tax dollars going into the pool.
The Bay Area was the only region that saw a 1.2% increase in sales, while other regions in the state showed a slight pullback. The discussion surrounding the results focused on topics such as inflation and pricing. Unlike the previous 18 months when sales tax increased alongside rising inflation and prices, the current decline in sales was attributed to pricing not increasing as much due to inflation. The impact of interest rates and consumer spending, particularly with the resumption of student loan payments, were also considered.
Savings and disposable income showed a gradual recovery from the pandemic-induced decline, with personal savings rates stabilizing. The forecast indicated a cooling off in durable goods sales compared to the dynamic growth experienced earlier. The Federal Reserve's decision to raise interest rates was seen as an effort to control inflation, but it was expected to have a dampening effect on dynamic growth.
Looking ahead, the second quarter was anticipated to continue the decline, with an expected total decrease of around 2.5%. The fiscal year 2022-2023 was predicted to remain positive but with a slight decline. The following calendar year was projected to see quarterly declines before recovering to a more normal growth rate of 2-3% in fiscal year 2023-2024.
The presentation also discussed the breakdown of sales between local places of sale and pool allocations, with the former experiencing significant growth during periods of inflation but now facing a slowdown. The pools had already begun to show a slowdown, and further details on them would be provided by Tracy in the upcoming discussion. Overall, the outlook suggested a period of cooling off and then a return to positive growth in the future.
The Major Industry Groups
The auto industry has experienced various challenges recently, leading to a complex market. Despite a 10% decrease in actual auto sales in California, sales tax receipts for the category increased by 8%. This discrepancy can be attributed to high pricing pressures. Manufacturers focused on producing expensive cars, including luxury and electric vehicles, due to limited inventory caused by the pandemic. Consequently, there are fewer affordable options available, and consumers have been paying over the manufacturer's suggested retail price (MSRP).
Although the current inventory levels are historically low, there has been a slight increase compared to the previous year. Certain brands such as Toyota, Honda, Lexus, and Kia remain hard to find due to ongoing shortages of electronic components. However, other brands have seen inventory pile up, like the 2023GP Renegade, which reportedly has a two-year glut.
New car pricing has continued to rise, albeit at a decelerating rate, while used car prices have fallen by 12.1% over the past year. Dealerships are now becoming more competitive in pricing, which is beneficial for car buyers. This trend is expected to continue throughout the year. Notably, Tesla has significantly reduced prices for models like the Model 3 and Model Y, making them more price competitive with federal tax incentives.
Consumers are now paying below sticker price and MSRP, marking a shift from the past two years when they had to pay significantly higher prices. However, rising interest rates and financing costs pose challenges, considering the already high cost of cars. Despite these obstacles, the average age of cars on the road has increased for the sixth consecutive year, reaching 12.5 years. Eventually, consumers will need to purchase new cars, driven by the aging fleet and pent-up demand.
In terms of tax receipts, the forecast for auto dealers anticipated a turn to negative growth in 2023, but this decline occurred earlier than expected. The expectation of lower car prices is projected to continue for the next few quarters, impacting tax receipts. However, beyond 2023 and 2024, an increase in sales is expected due to the aging fleet and accumulated demand.
Fuel & Service Stations
The fuel and service stations industry has experienced significant changes in California. Fuel prices have seen a notable increase in the past year, but currently, prices are down by approximately 20%. California, known for its high gasoline prices, has been surpassed by Washington state in terms of cost. Despite OPEC's production cuts, fuel pricing has not been significantly impacted, indicating that market concerns revolve more around potential economic slowdown and rising interest rates rather than supply.
The forecast for the industry reflects the current 20% decrease in gasoline prices compared to the previous year. Actual results for the first quarter of 2023 showed a slightly higher decrease of around 8.6% compared to the projected 5% decrease. The expectation is for prices to continue declining throughout the year and then stabilize.
Building & Construction
The building and construction industry experienced a significant decrease in the first quarter, falling nearly 10%. The unusually wet winter played a role in this decline, but comparing it to historical data from a similarly rainy period in 1998 showed that building and construction receipts remained positive back then. The current market conditions, such as increased material prices, particularly lumber, also contributed to the decline.
Lumber prices experienced a significant spike during the pandemic but have since decreased by approximately 64% compared to a year ago. These material prices greatly influence the overall results of building and construction. The forecast anticipates that the worst of the lumber price declines has been seen, and there may be pent-up demand after the rainy first quarter. However, consumers are pulling back on home improvement projects, as there has been a shift in consumer spending habits.
Factors such as rising interest rates and increased uncertainty have also slowed the residential housing market. Although more infrastructure projects are expected, they won't fully compensate for the decreases in building materials and home improvement spending. The forecast predicts a modest dip in the category until the fourth quarter of 2023, after which growth is expected. Long-term prospects for the industry remain strong due to the significant housing shortage and pent-up demand for infrastructure projects.
Food & Drugs
The food and drugs category had a relatively flat performance in the quarter, with a modest gain of about 0.3%, falling short of the projected 2% growth. Grocery stores, which mainly include taxable consumables like paper towels and alcoholic beverages, showed solid positive growth of 5.5%.
However, the Food and Drug category was dragged down by the decline in cannabis sales for the fifth consecutive quarter on a year-over-year basis. The decline in cannabis sales can be attributed to factors such as oversupply in the California market and other states. Further details on the causes of this decline can be found in a linked paper provided later in the presentation.
Although the declines in cannabis sales have persisted for over a year, it is anticipated that the situation will improve as the market stabilizes. The expectation is for the growth rates to normalize and reach the more typical 2% growth in the future.
General Consumer Goods
In the first quarter, the general consumer goods category experienced a contraction of about 1.9%. Discount department stores, which make up a significant portion of this category, were down by nearly 1%. However, there were a couple of bright spots, including family apparel stores with a growth of 2.3% and specialty stores driven by the beauty and pet sectors with a 4% growth.
The decline in general consumer goods was evident across various categories such as home furnishings, jewelry stores, and women's apparel, suggesting that higher earners are spending less on designer brands. Instead, consumers are seeking better deals and allocating more of their spending towards experiences rather than material possessions.
The slide also indicates that consumers are trading down in certain categories like food and grocery, household consumables, and apparel, opting for store brands and better value for their money. However, the beauty industry continues to thrive as consumers are willing to trade up and spend more on beauty products.
Looking ahead, the general consumer goods category, excluding discount department stores, is expected to continue its decline in the near term, remaining flat with low to no growth over the next year and a half. Economic uncertainty, interest rates, and changing consumer spending habits contribute to this projection.
State and County Pools
The pools, which are part of the Bradley Burns sales tax, play an important role in local sales tax revenue. They receive indirect allocations based on the percentage of Bradley Burns growth for each quarter in a county. The implementation of AB 147, the marketplace facilitator law, led to a significant increase in local tax revenue for the pools. General consumer goods make up the largest tax group within the pools, and there was a massive growth in this category during the pandemic, fueled by online purchases and the influx of out-of-state sales tax dollars.
However, there has been a shift in the allocation of pool revenue. Many general consumer goods dollars are now being directly allocated to agencies instead of going through the pools. This shift is primarily due to fulfillment centers being considered places of sale, resulting in direct allocations to agencies with fulfillment centers. As a result, the allocation for general consumer goods in the pools has declined, while other pool categories have seen around 3% growth.
Direct allocations have been increasing compared to indirect allocations, with more money coming out of the pools and going into the business and industry group, where fulfillment centers are categorized. The business and industry group has shown a 4% increase in pool revenue, while general consumer goods experienced a 7.1% decline. Building and construction also saw a slight increase of about 3.5% in pool revenues.
In terms of the pools forecast, a contraction was expected as revenues shift to direct allocations. The pool revenue in the first quarter of 2023 was down by 1.1% but was projected to be positive by 1% in line with the previous quarter. The contraction happened sooner than anticipated, and a reduction in pool revenue is expected through the end of the current calendar year, with limited growth projected for the following year.
The shift of revenues out of the pools into direct allocation is largely driven by fulfillment centers, and this trend is likely to continue in the foreseeable future.
Business & Industry
The business and industry category is receiving a significant amount of money from tax revenue. The largest group within this category is fulfillment centers, which accounts for about 27% of the revenue. Fulfillment centers have experienced significant growth, especially since the implementation of AB 147, the marketplace facilitator law. The shift of revenues from the general pools to fulfillment centers has been ongoing, with additional fulfillment centers being treated as places of sale.
Apart from fulfillment centers, the business and industry category encompasses 21 different business types, ranging from agricultural equipment to motion pictures. The top 10 business types include medical biotechnology and garden and agricultural supplies. However, these sectors have seen contractions in spending, with a 7% contraction in medical biotech and a 19% drop in garden and agricultural supplies compared to the previous year. This indicates a pullback in spending in these areas.
Fulfillment centers are expected to continue growing as online sales companies adjust their business models to improve product delivery. This will lead to more orders being filled from local stores and direct allocations to the agencies with fulfillment centers. The Institute for Supply Management Manufacturing Index, which is studied for the industrial part of the business and industry category, has shown a 7-month consecutive contraction in the first quarter, with a 16.4% decrease compared to the previous year. This decline is attributed to dropping new orders and backlogs, higher borrowing costs, and difficulties in acquiring capital for investment.
The forecast for business and industry remains positive, with an anticipated 2% growth each quarter in the upcoming fiscal periods. This category is not experiencing the same negative trends seen in other groups.
Restaurants & Hotels
In the first quarter of 2023, spending on restaurants and hotels increased by 9%, despite a decline in lunch visits likely due to hybrid work-from-home models. Fast food chains offering value meals have seen an increase in sales tax revenue as people look for deals. The leisure and entertainment industry is also seeing a resurgence, with more spending on experiences and a rebound in the hospitality sector due to tourism. The forecast for restaurants and hotels predicts continued growth of about 4% for the rest of the calendar year and 3% thereafter.
Looking at cash receipts in the food services and drinking places category, there has been a 6.36% growth in April and May, indicating a positive trend for the restaurant industry. Although there has been a slight pullback compared to the previous quarter, overall growth for 2023 is estimated to be 2.2%. The forecast for the fiscal year 2023-2024 shows a slight decline of about half a percent, but it is still within a range of plus or minus 1%, suggesting a cooling off period rather than a recessionary pullback by consumers.
The economy is considered stable with signs of a positive outlook, and while future fiscal years' growth cannot be predicted with certainty, it is expected to return to the historical range of 2-3%.
Quarterly, HdL reviews a custom report and forecast with our partnered agencies to review sales tax performance and projections in their jurisdiction. Get yours today!
Hosted by Institute for Local Government
Is your local government agency engaging in your annual budgeting process? ILG and HdL Companies know this process is often heavily based on sales tax projections, a vital revenue source that continues to be impacted by economic uncertainty. We are here to help you weigh opportunities and balance the needs of your communities. This webinar presented current sales tax trends and two solutions to maximize tax revenues and achieve long-term fiscal health: 1) business license administration and 2) increasing opportunities for economic development. The City of Pacific Grove shared how these solutions helped their business community endure the pandemic and thrive in the aftermath of ever-changing guidelines and protocols. Watch the recording below and download the presentation deck to follow along.
- Ben Harvey, City Manager, City of Pacific Grove
Moderated by Melissa Kuehne, Senior Program Manager, Institute for Local Government
Tax & Fee Administration
HdL presents an update on California’s retail economy based on current 4th Quarter 2022 data. Watch the recording and follow along with the presentation deck and transcript.
I’m Bobby Young, Client Services Director here at HdL. Along with me are Bret and Tracy, both fellow Principals on the Sales Tax team. We meet with clients every quarter to provide what the results are locally and also to talk about statewide and some of the bigger trends.
4Q22 Statewide Results
This quarter we were up 4.7%. We are talking about 4Q22 sales results today. That’s the October, November, December time period, normally the holiday shopping period. But it is in the span of an entire calendar year.
It's when sales tax revenues flow the most. While we were up 4.7%, 3 categories took us by surprise. Some of this we were expecting, but it is what helped the bottom line. At the top, Autos & Transportation were up 5.6%. Holiday shopping and the buying of cars, especially higher-end cars, helped the most. Gas prices were still high here in 4Q and we saw a 10% increase in Sales Tax Revenues. Restaurants and hotels were up 8.7%. Business and industry are also up 7.4%. General Consumer Goods during a normal holiday shopping period are only up 1.9% compared to a year ago. The pools were only up .3%. They are not growing as strong as they've been recently. That pulled back these other categories that had seen growth.
The Bay Area and Southern California saw the most dynamic growth in 4Q. The return to workplace environments, normal spending habits, changes from post pandemic. These areas have continued to grow the most and thereby support the overall bottom line.
County Trends: Local Tax
Over the last three calendar years you can see 2020 on the left, 2021 in the middle, and then 2022 on the right. During the pandemic, you could see a lot of growth of the green areas outside of the more heavily populated areas, especially Southern California and the Bay Area. North grew quite a bit, and Central California also saw that that same strong growth. In CY21 we saw a lot more of the fulfillment centers and online money where that was coming in.
Here you can see outside the Bay Area. Sacramento, Foothills, saw dynamic growth. Central Coast continued to expand, returning down to Southern California. For all of CY22, spending up in the Bay Area and then heavy on Southern California and Southern California coast. The far north did not see much fall during the pandemic, and as such is not growing as much.
Online vs Brick & Mortar: Allocation
Data that we have been tracking for quite a while now, is online vs brick & mortar. Large box retailers especially have always trended online. That component ran low through the early part of the 2000s. It then took a big jump back when AB 147 was adopted and implemented. Remember that are out of state online retailers, and their requirement to collect and remit. Then we had the pandemic in CY20, which shot up.
These 2 lines will not cross again as the pandemic has ended.
Consumers are not going to buy in bulk online as they do in stores. This has returned to a normal trend since the pandemic. Good results there.
Some of the key points that are on our minds. Interest Rates. The Fed treasury has been working to calm down inflation and thereby calm down some consumer spending, We’ve talked about how inflation relates to Sales Tax, but now it starts to trickle over into what consumers are going to be doing. The savings trends, household savings, what has been going on there?
Supply chain issues are not nearly what they were post-pandemic, but it still is affecting a few sectors. Mortgage Rates are less concerning, except for the fact that that takes up disposable income for households that will be making changes to their mortgages or looking to get into new properties.
Interest rates since March of last year are up 475 basis points. Just yesterday the Feds tapped interest rates again up 25 basis points. A lot of good information is coming out of the Fed treasury right now with where they are overall for the rest of the Calendar Year. They might touch it again, but they are only anticipating now just one more bump. They are being mindful, they do not wish to push the economy into what might otherwise be considered a recession or an extreme pullback. The Fed treasury is trying to keep its finger on the pulse of our economy.
Savings & Disposable Income
We can all acknowledge the amount of money that came out of the Feds ended up immediately spiking personal savings rates. That’s been tapped into as we've seen so much dynamic growth, especially on the Sales Tax side here in California, people spending that money. Folks have been tapping into that savings, but now we've buoyed around this 3%-4%. Over the last decade, it has usually been somewhere between 5%-10%. A slight uptick from where we were just a couple of quarters ago.
Month over month changes are shown here. The months themselves are shown in different colors and range from September all the way to February. This is total credit and debit card spending per household, with percentages here noted on the left. We've got the total down below and December spending down a little bit. Month over month, October became little bit more positive, but it did trend down. January and February have returned to a positive category.
This growth that we see in February shows more spending on services again. A sign of what is to come.
Unemployment has been the underpinning for the economy and why we haven't pulled into a full-fledged recession, as the Fed treasury spiked interest rates to calm inflation. You see historically low unemployment is likely to continue for quite some time as we talk about CY23. Throughout the entire state, unemployment remains fairly low, with the exception of a couple of hot spots, in areas that may be a little bit more heavily dependent on certain types of industries. These might be pulling back different from our more populated and dense county areas.
HdL Statewide Trend Quarterly Outlook
Overall statewide is up 4.7%. You can see when our team believes that we are going to squeak out a little bit more positive growth out of Q1, the January, February, and March time period.
As we go through the rest of CY23, the statewide growth from Sales Tax levels off. This has a lot to do with the continued effort of the Feds, raising interest rates to calm inflation, consumers having to readjust overall, and household spending. We are not in a recession, we are in a continued slowdown.
You can see a little bit of a trickle over into the remainder of what will be FY23-24 for most of you. A little bit more ticking up, getting back into new spending or new growth.
Local Place of Sale (POS)
You can see we have gotten the total year-over-year sales tax generated up top. Breaking apart the local place of sale and noting that the difference between these two is the growth out of the pools. Most importantly for what local businesses may be experiencing, as we go longer in CY23 we’re expecting a negative dip. It is the pools that may still grow a little bit to keep us flat overall.
The first chart that we have here is about the prices. The increase in prices in this sector has pushed the associated Sales Tax up significantly over four or five quarters now. This chart shows that it is still increasing, but it is slowing down. Looking back at 2Q22 we had a little more than 13% growth and 3Q a little bit less than 10%. Now we're all the way to 3.7%, which is slowing down significantly.
Autos: 4Q22 Trends
In terms of trends in 4Q, we are continuing to see an increase in registrations. That's slowing a little bit as well, but it is expected to grow in 2023. Supply is expected to catch up with demand, and that's going to have a downward pressure on both the prices of vehicles and the sales tax associated.
Affordability is continuing to weaken and it's not getting better. Inflation combined with an increase in interest rates and falling trade-in values, means affordability is not there.
Autos & Transportation Forecast
In terms of the overall forecast, we had estimated 5% and the actual results were 5.6%. We have got one more quarter, 1Q23, that is projected to be up. We still have continued solid demand for vehicles in this quarter. In terms of affordability, the prices of vehicles are continuing to go up, especially luxury vehicles.
Auto dealers, with their inventory dropping, are taking advantage and selling the vehicles that they can to increase their bottom line. We are seeing an uptick, a continued uptick in luxury vehicles, which is interesting. We have seen that pattern over four quarters now.
We are going to see a reduction coming up. As you can see in the four quarters coming up, we've got negatives in 3Q23,4Q23, 1Q-2Q24. All of FY23-24 we are projecting a 3.3% drop in this sector. Barring any major recession, when we get to those out years, 24-25 through 27-28, we are projecting more comparable levels of annual increases, ranging from 3-3.5% as we go out into the future. We want to get past 23-24 and get back out to normalcy in those out years.
Let's talk about the Fuel and Service Stations sector. Pricing is a factor in driving the Sales Tax in this sector, just like in Autos amd Transportation. This particular chart is intended to show a reduction anticipated in both the West TX intermediate and the WTI oil barrel prices, a key factor in determining and helping to benchmark the prices at the pump.
We are showing a downward trend in WTI prices anticipated in 23-24. On the right side, we are looking at actual prices at the pump. You can see in 23-24 we're anticipating continued reduction of prices. That is going to be downward pressure and the opposite of what we've been experiencing, where we've had upward pressure on prices, oil barrel prices have been up, demand and consumption has been up. It is starting to come back down, and is anticipated to be down in 23-24, more than 6% overall. When we get to the out years we will be back to normalcy.
CA Retail Gas Price Per Gallon – Quarterly Average
Here we see the prices again, looking at the downward trend. Pump prices peaked back in 2Q22 and now, the quarter that we're living in, the average 1Q prices are 9% below where they were one year ago. With prices continuing to fall, this will have a downward impact on the sales tax associated consistent with our forecast.
Fuel & Service Stations Forecast
We ended 4Q22 with positive results. 10.2% was very consistent with our forecast at 10%. Then the negatives start. The quarter we're living in downward pressure and -5% , -10%, all the way out through 23-24 we have negatives. That is what consists of that 6.4% overall reduction.
In 1Q some refinery breakdowns and maintenance have been pushing the prices up a little bit. We are anticipating them to come back down and demand and consumption of fuel reducing. Overall, when we get to the out years, we've got one flat year in FY24-25 projected at 0% and then back to 2% annual increases in FY25-26 through FY27-28.
We are going to talk about Building and Construction. Overall, the trends are showing a flattening out. The nonresidential projects are offsetting single family residential activity. Interest rates are having an impact and slowing down new housing projects.
We are continuing to project home improvements with people staying home and not purchasing as many new homes. We are anticipating that the activity in the building construction will offset the reduction happening from new homes. Statement statewide permit values are slowing, and weather is going to be an offsetting initial boost to spending. A combination of factors that are offsetting each other.
Building & Construction Forecast
4Q22 was very solid. We had forecast 8% with the actual results coming in at 5.4%, flattening out when we start in the quarter we're in now. .3% all the way out flat through FY23-24. There is stability in this sector. We need to get past FY23-24 once again, and we will anticipate normal levels of increase, ranging from 4%-5% when we get to those out years.
Food & Drugs
Food and drugs this sector continue to be very consistent. It is still the smallest sector on average throughout the state. This quarter was a little bit better than anticipated. Showing 3% positive results and anticipating an ongoing stability in this sector, with 2% growth all the way out. Modest improvement in Sales Tax for this current Fiscal Year and next Fiscal Year.
General Consumer Goods: 4Q22
Particularly for 4Q22, General Consumer Goods is a big one. This is the retail sector of Sales Tax. It is up 1.9% for the quarter. However, looking at some of these key sectors like home furnishings, department stores, jewelry stores, even women's apparel, we are seeing a slowdown in spending even during the busy shopping period.
So why is it up 1.9%? Discount department stores are up 7.7% and they comprise over 33% of this group. One of the primary reasons that discount department stores are so positive is many of these have fuel pumps located at their locations. The gasoline revenue gets reported alongside the retail revenue, so they all fall into this General Consumer Goods category. Gas prices are supporting the General Consumer Goods group for 4Q returns. From a holiday quarter perspective, we're seeing a decline in spending for 4Q22 compared to 4Q21, possibly in part because a year ago it was it was inflated.
General Consumer Goods: Growth Trends
When looking at the growth trends for this group this graph pulls out the discount department store group. All of the other categories, department stores, electronics, home furnishings etc., a big spike for 2Q21. A lot of pandemic spending leading to a general decline in retail spending in 4Q22.
General Consumer Goods Forecast
We had anticipated the slowdown. We projected 1.5% growth, and it came in at just under 2%, again supported by that discount department store/gasoline Sales Tax revenues.
Anticipate a slowdown in the upcoming quarters. Very flat personal consumption, contracting nationwide. We are seeing retail sales slowing down in California as well. These are not big declines. These are coming off of big inclines in these prior periods. People spent through the pandemic last calendar year, slowing down a bit in 2023, and growing again in the beginning of 2024. Going into the subsequent Fiscal Year, you will see some growth of about 2%-3% year over year.
County Pools: Trends
This is a key group. The countywide pools are a big part of your local sales tax and continue to be. On this graph the green represents the General Consumer Goods group. In the General Consumer Goods group, retail sales, largely ecommerce that are indirectly allocated, are a large part of the pools through 4Q-1Q21.
This is a big representation of the pandemic ecommerce spending. All other groups in the pools are represented in the blue trend line. General Consumer Goods dominated the pools all the way up to about 1Q21. Then we had a big shift. As you'll recall, there was a change in some of the structures statewide and revenues that were previously reported in the pools are now being shifted to direct allocation. The impact started in 1Q21 and continued to today.
The result of that is now General Consumer Goods are no longer the dominating factor here in the pools. It is all the other groups. Business & Industry is a big part of what is driving some of this growth in the other sectors in the pools.
County Pools: GCG Dominates Holiday Quarter
Looking at the pools, General Consumer Goods still dominated the holiday quarter. We saw some growth. Even despite an 8% decline, General Consumer Goods in the pools, was the largest segment. it pulled back, we lost 8% compared to a year ago, In this ecommerce retail component of the pools. You can see Business & Industry is starting to grow compared to a year ago. A bit of a shift in what the largest contributors are to the pools.
County Pools: Major Categories
County pools looking at the major categories, these are the top 10 business types in the pools. Contractors in the pools are growing, with general merchandise declining. This is that ecommerce retail story within the pools contracting. We saw a contraction in the pools with used auto dealers and biomedical had a slowdown. General merchandise and electronics had a big contraction during 4Q and those are two key areas. All the increases are related to the Business & Industry group.
County Pools Forecast
We do anticipate ecommerce to stay here. Even though we are seeing some inventory changes here in California, with relation to whether these revenues remain in the pools. Indirect allocations versus direct allocations continues to shift in the pools with the Business and Industry group.
We do expect ecommerce to continue looking at 4Q22. For the pools we came in at .3%. This is a dramatic reduction from what we thought we were going to see when we did our projections last quarter, we had projected 7%. We missed in part due to a number of new fulfillment centers coming online and direct allocation then being attributed to those centers instead of indirect into the pools. That continued shift of revenues had an impact in 4Q.
Looking forward we anticipate growth. The rest of this calendar year will be a little slow at 1% growth. Then going into CY24 and beyond into the future fiscal years, we’re looking at 3%-4% growth in the pools pretty consistently. This is effectively establishing a new baseline in the pool revenues.
These are those big warehouses that are truly fulfilling orders, often with robotics, and across the state of California. They are the largest component of the Business & Industry group. There are over 30% now, used to be about 20%. This has been growing consistently each quarter as more fulfillment centers come online. Sales out of those fulfillment centers are considered places of sale, then becoming direct allocations. Those revenues come into Business & Industry as a group and come out of the pools.
Dramatic growth in fulfillment centers, starting in 4Q19 -4Q20. This again is AB 147. It is pandemic spending. It is just ecommerce continuing that upward trend. Then in 1Q21 we saw everything coming down because it all came into fulfillment centers.
We see a big boost all through CY21. Now we're at a new baseline starting with 1Q22 into 4Q22, the quarter we're talking about today. This is reasonable growth. This is 11.5% growth for fulfillment centers. This is anticipated to continue and then level off at 3%-4% growth in the out years.
Business & Industry: Top BT’s
Looking at Business & Industry and the top business types that drive this group, I'm pulling out fulfillment centers, Look at these other sectors within the Business & Industry group, medical, biotech, light, heavy industry, electrical equipment often associated with big solar projects are big battery storage projects, business services, warehouse construction equipment, and then office equipment.
These top 10 business types average growth of about 5.1% in the quarter. Seeing a lot of growth in this sector. As a reminder, there's 21 very diverse business types in this group and it's going to be very unique depending on your agency and your tax base. It is going to vary agency by agency
In the industrial sector, we're looking at a bit of a contraction in the ISM manufacturing index for the 4th consecutive month, so a little bit of a slowdown. Inventories are growing, prices are high, demand has come down a little bit. All that being said, even in 4Q, we still saw increases in sales tax results, and we anticipate that output in the second half of this year will continue to be relatively strong.
Business & Industry Forecast
Looking at the forecast we projected 6% growth came in at 7.4%. We will still see growth through the rest of this calendar year. Fairly strong numbers first, second and third quarter. Again, these are statewide forecasts, not individual agencies. Slowing down a little bit as we get into CY24, only a 2%-4% year over year growth average.
Restaurants: Industry Trends
Restaurants came in slightly under forecast in the 4Q at 8.7%. Still significant growth is going on in restaurants. What drives some of these trends? Working from home is impacting the restaurant industry. As our schedules have changed, so has how we eat food. We're eating a little bit more at home, a little bit less in the restaurants.
Operators are challenged with labor shortfall and the ability to have solid service. Foot traffic is starting to slow down a little bit. We’re shifting more to buying less stuff and looking to do more fun stuff. Leisure and entertainment are still in demand. Hotels daily rates are almost 14% above the pandemic levels and we expect that to continue to increase. Travel is increased surpassing 2019 levels this year.
Restaurants – CDTFA Cash Receipts
Looking at the CDTFA website, we can see that January and February results are very strong. 13% year over year results for February or January and then 7% for February.
Restaurants & Hotels Forecast
Restaurants and hotels are still going to be strong going into 1Q. As I mentioned, we are up just under 9% for 4Q results. Looking at the balance of CY23, it is fairly strong going forward all the way into the outgoing fiscal years 3%-4% growth. We will continue to be visiting restaurants and looking for experiences and fun and travel, anticipating that those revenues will continue to be strong.
HdL Statewide Trend – Annual Outlook (FY)
Especially for General Consumer Goods in that pool, we have seen dynamic growth over the last 2 years. Is the growth over? Yes. As we start to look at the upcoming fiscal years, we're not expecting to see that continue. It would be unreasonable to think it would. Higher price of goods which caused inflation is built in there.
For the rest of this fiscal year statewide 3.7%. Then cooling off to just .5% in FY23-24. A year ago when we were here presenting our 4Q results, we were only expecting about 2.4% growth out of FY22-23 and 1.8% out of FY23-24.
For about the last year or so, we've been anticipating this slowdown. At the back end of FY24-25, expect to start seeing normal historical growth return. This is that trend that we're expecting as a one year slowdown, then return to 3.5% growth that that we've normally been experiencing before.
Last quarter when we met with our clients, we provided a Sales Tax update. We will be doing that again by default. So as we meet with clients through the end of this month, all throughout April, and the beginning of May, as you finalize your forecast, we'll be updating our numbers and building on these trends.
I know for many of us the dynamic growth there of the last couple of fiscal years caught us by surprise and a very welcome surprise at that. But now we hope we are seeing things as they're happening.
The banking industry... it sounds like the Feds are on top of really making sure that they're doesn't become a kind of mass hysteria around the banking. Our forecast at this point also considers that.
I think we've talked about this a lot in the past with us as consumers and when we're talking about things like general consumer goods, is that element of demand spending versus discretionary spending? And I think that's really as we go into a slowdown, it's the discretionary part that comes off 1st and most notably there as a part of FY23-24. But the demand spending and that which we buy day-to-day whether it be fuel or just General Consumer Goods from big box stores, we do expect that to continue.
A lot of that we do expect to continue. It's a reminder of what the pandemic caused especially there at fiscal year at the end of FY19-20 and the dips that we saw, what we've experienced most recently all the way up through the current Fiscal Year is kind of that rebound and a return. We are right there back on board with where we were before.
If we have a recession, what does that mean? What does that look like? Does it feel like we are going back to the Great Recession type of revenue? The sales tax world and the sales tax revenue generated is at a different point. And so even if we do get into a recession it may not even go back into where we were at FY19-20 from a total number perspective.
Q. Any trend information regarding Business Travel?
A. Yes, the hotel and hospitality industry are expecting a return of business travel. A lot of hotels are anticipating both business travel and recreational travel this summer. The trends there are expected to help the overall industry. We are expecting the business travel component to increase this calendar year.
Q. Any impact seen from Russia, Ukraine and impacts anticipated for same reason?
A. I think we have seen it all. My expectations would be the immediate increase in crude oil prices globally, which definitely spiked our local gas prices. That's going to probably be about it. Everything else should be built in now. Nothing with regards to California sales tax on that end.
Q. How might weather impact CA Sales Tax?
A. The impact is felt, most notably by folks staying in and not getting out. Snow seasons are going to be extended all the way into the summer because of the amount of snow that that they all have, which will likely help generate more Sales Tax as folks get out and spend on “services”. But the ancillary spending is on restaurants.
The other is in the Building & Construction sector as we see it with weather impacts. Where the rains and flooding cause damage. As a result of the damage, there's going to be repairs that need to be made and then Building & Construction goods and supplies that will need to be purchased to help fix the damage. So, while impactful we're probably going to just see more continued spending.
Q. Do your charts reflect percentage change?
A. Our monthly projections whether it on the sales tax side when we provide all of our clients like a cache projection monthly, there is still some variations. It's very difficult for us right now as we've talked about it with clients and the CDTFA uses a an advanced methodology.
The new component is with its most with the cross reporting system it has allowed CDTFA to also allocate in any given month revenues from prior periods. That's the piece that really throws off our forecasts on a monthly basis, because we don't know exactly how much CDTFA might be allocating given a prior period. If we roll back before the cross system they used to do it at the end of the quarter.
Q. Any impacts to technology with semiconductor shortage?
A. Yes, but also difficult to identify exactly where we would see those sales tax impacts. Different supply chain issues where the auto industry is still impacted. We're not going to see it in the dollar amounts from sales tax directly related to those shortages. So I'd say the same over on the semiconductor side.
It might be a temporary impact of businesses not being able to buy certain pieces of equipment. Eventually, there will be semiconductors available and thereby they will be able to make the purchase. So it might just end up kind of skipping or delaying the inevitable sales tax that we see.
Q. Had we considered the impact of the Supplemental Nutrition Assistance Program ending in March, the SNAP program?
A. Yes, though I don't have metrics related specifically to that program, our forecast definitely accounts for all of the funding that got poured into the economy over the last year. That is a big part of the spending pullback and definitely considered as we're forecasting forward. Snap is part of that is part of you know that supplemental income that was kind of pumped into the economy, all the stimulus funding. We are anticipating that to now pretty much be gone and that is part of our projection.
This guide will assist you in determining which construction projects may qualify for a direct allocation of local 1% tax. A temporary allocation of local use tax associated with construction projects can provide an agency with a much-needed boost in local tax revenue. Learn the different rates that make up the total statewide base sales and use tax rate, who is and is not eligible for a jobsite sub-permit, how to apply for a jobsite sub-permit, contract wording, and more.
A CSMFO Educational Series
The Fundamentals of Municipal Revenue series presented the basics of key revenue sources.
- Module I provided an overview of California local government revenues and in-depth coverage of property tax.
- Module II focused on sales tax including discussion on tax rate components and allocations, and how sales tax revenues are administered. In addition, the course covered revenue trends, how remote (online) sales taxes work, as well as tools for forecasting and maximizing sales tax revenue.
- Module III covered other taxes and fees that are important revenue sources for public agencies such as documentary transfer and property transfer taxes, hotel occupancy taxes, utility users taxes, franchises, royalties, rents, and licenses.
Determining which construction projects may qualify for a direct allocation of local 1% tax is complex. A temporary allocation of local use tax associated with construction projects can provide an agency with a much-needed boost in local tax revenue. If a contractor or subcontractor does not elect to obtain a jobsite sub-permit however, local tax will be allocated to the countywide pool based on the jobsite location, and the agency would only receive their proportional share of the countywide pool allocation for that project, a mere fraction of the 1% local tax.
Throughout the construction of the City of Inglewood's SoFi Stadium, HdL worked with the general contractor to determine qualified contracts and ensure proper registration and tracking of the local 1% sales tax revenue.
Ensure the City of Inglewood received the maximum amount of local sales and use tax revenue from the SoFi Stadium's construction materials and retail, food, and beverage sales.
Stan Kroenke, owner of the NFL's St. Louis Rams, planned to move the team back to Los Angeles (the team’s former home from 1946-1994). The City of Inglewood, with its rich history as a sports and entertainment mecca, was the logical choice for the next state-of-the-art venue.
In 2014, Kroenke purchased a 60-acre parcel of land adjacent to the old Hollywood Park Racetrack. The acreage, however, proved not large enough for a stadium and parking. In 2015, the Inglewood City Council scrapped plans to convert the old track into a large office/retail/residential project, and instead, approved a plan to incorporate the land into a 70,000-seat football stadium.
The SoFi Stadium would be unique in that it would be built using 100% private funds, requiring zero taxpayer dollars. It would guarantee countless jobs – both during construction and upon opening.
The City of Inglewood, already a HdL sales tax and property tax client, turned to HdL for additional support in capturing all local tax dollars associated with the project.
HdL met with project developers, contractors, and City staff to determine the best methods of tracking the new revenue stream and ensuring the City would receive the maximum amount of local tax revenue. Tax for construction contracts can be complex; oftentimes, contractors are both consumers and sellers of taxable goods for the same project.
When contractors are merely consumers of materials, they pay the sales tax to the supplier of the materials which is allocated to the jurisdiction where the supplier’s sales office is located. If, for whatever reason, the contractor has not paid sales tax on the materials or is both the seller and consumer of the material, they are required to consider the jobsite as the place of use. As the jobsite is not a permanent place of business, the tax revenue is allocated via the county pools.
A contractor who enters into a construction contract equal to or greater than $5,000,000 may elect to obtain a sub-permit for the jobsite of the qualifying contract enabling the contractor to make a direct allocation of tax to the local jurisdiction in which the jobsite is located rather than through the countywide pool. The qualifying contract price applies to each contract or subcontract for work performed at the jobsite, not the total value of the prime contract.
HdL is well-versed in maximizing local tax revenue for construction projects and always encourages contractors and subcontractors to participate in use tax programs. We worked closely with the stadium’s general contractor, Turner-AECOM Hunt, to create a system that…
- identified 50+ unique contractors or subcontractors,
- determined if each contract was eligible for direct allocation of local tax,
- and guided qualified contractors or subcontractors through proper registration and tracking of the local 1% sales tax revenue.
As with a project of this size, we were actively involved throughout the four-year construction timeline. We created specialized geographical area reports to capture all the local tax allocated to the project. We shared this data with Turner-AECOM Hunt quarterly (sometimes onsite donning hard hats!) to ensure nothing slipped through the cracks and with City staff to keep them apprised of the project’s progress, as well as current sales tax revenue to date.
“It has been a great privilege to work with HdL on the SoFi Stadium. They are very knowledgeable and answered all of our teams and subcontractors’ questions. We could not have done it without HdL’s support on this mega job!” said Juanita Diaz, Turner-AECOM Hunt representative.
HdL continues to provide geographical reports to track SoFi’s ongoing revenue and insight on sales tax projections. “HdL has been a vital strategic partner and instrumental in assisting the City with expert analysis and innovative data collection services. They assisted Inglewood in evaluating the effectiveness of various contractual agreements,” said Christopher Jackson, Sr., Director of Economic and Community Development for the City of Inglewood.
These agreements include the SoFi Stadium - home of the Los Angeles Chargers and 2022 Champion Los Angeles Rams - and the Intuit Dome - the soon-to-be home of the Los Angeles Clippers – which will open in 2024. HdL assisted the City in its effort to make prudent financial and fiscal decisions which ultimately helped maintain their title as the “City of Champions.”
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.
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.