California Economy Slowing as Expected
Several recent reports on the California economy appear to confirm that the state’s economy is indeed slowing as many economists have predicted. A report by the Department of Finance (DOF) indicates that, while General Fund revenues for the month of June were just slightly off target (down $59 million or just 0.6% from the forecast), the slowdown in the housing sector is fully evident. Similarly, reports by the Employment Development Department (EDD) show that payroll employment over the last four months grew by an anemic 2,025 jobs per month on average.
In its July Finance Bulletin, the DOF reported that annual 2005-06 General Fund revenues reached $93,628 million, or $56 million above the Department’s projection for the year. More revealing than these final revenue figures, however, is the report’s focus on the state’s housing sector. The Bulletin notes that a slowdown in the housing sector “is taking hold.” For the month of May, home construction permitting was down 21% from May 2005, and home sales for the first four months of 2006 were down 19% from the same period in 2005. The greatest slowdown was evident in the state’s central coast region, with Santa Barbara County sales off 34% from year-ago levels and Monterey County off 32%. In Sacramento County, sales fell 33%. In contrast, Los Angeles County saw sales fall 11.6%.
Despite this decrease in home sales volume, home prices have remained generally unchanged. The median price of an existing single-family home sold in May was $564,400, which places it in the range of $540,000 to $570,000 for home sales since June 2005. This data lends support to the view that the housing bubble will not burst, but rather that home prices will stagnate until incomes catch up to allow more buyers into the market.
The EDD report notes that the state’s unemployment rate was 4.9% for June, down from 5.4% for June 2005. In addition, the state added 11,000 jobs in June, bringing total payroll employment to 14,975,200. However, this increase, when coupled with the changes in payroll employment since March 2006, brings the four-month average gain to only 2,025, well below the level needed to accommodate new entrants into the job market.
While many other factors will influence the path of the California economy, this data seems to suggest that a slowdown is underway. While a gradual decline in economic activity would not derail the state’s recently adopted Budget, a more abrupt downturn could significantly erode General Fund revenues and make crafting next year’s spending plan very challenging, especially given the state’s unresolved structural Budget problem.
