HomeMy WebLinkAboutMarch 2021 California ForecastCALIFORNIA FORECAST
SALES TAX TRENDS
AND ECONOMIC DRIVERS
MARCH 2021
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Delivering Revenue, Insight and Efficiency to Local Government Since 1983
HdL provides relevant information and analyses on the economic forces affecting California’s
local government agencies. In addition, HdL’s Revenue Enhancement and Economic Development
Services help clients to maximize revenues.
Temecula, CA
HDL CONSENSUS FORECAST – MARCH2021STATEWIDESALESTAXTRENDS
Autos/Transportation 6.2% | 3.0%
The autos/transportation sector continues to
recover as consumers treat themselves to more
expensive vehicles at a time when other spending
opportunities have been curtailed by the COVID-19
pandemic. The average price of a new car increased
6% compared to last year as attractive financing
rates sustained demand while production stoppages
early in the crisis limited supply. Sales are expected
to continue to grow as the economy recovers,
with automotive executives hopeful the industry
will return closer to normal this year. Recreational
vehicle (RV) purchases continue to be a bright spot
as many feel they offer a safer way to travel. Receipts
for this category were up 27% in the most recent
quarter; the RV Industry Association is projecting
industry volume may grow by as much as another
20% in 2021, boosted by millennial buyers newly
introduced to the lifestyle during lockdowns.
Building/Construction 6.8% | 1.7%
Issued construction permit values continued
to decline since the end of 2019, however,
household projects filled the gap in spending for
the construction industry. Through January, traffic
at home improvement stores increased as stimulus
recipients spent up to 28% of those payments
on renovation products. As the State pulls back
restrictions on business openings, consumer
spending will shift to other goods and services.
Contractors are active, addressing the backlog of
projects created by the pandemic slowdown. Lumber
prices, up 170% in the last 10 months, should push
up taxes. 2021 is expected to see an extension
of growth in warehousing; recent permit activity
indicated office space is still in demand. Across
California, new home construction is showing no
signs of slowing down, supported by the persistent
affordability of mortgages. All areas of the state will
see at least modest growth in the coming year.
Business/Industry -0.4% | 6.5%
As the economy reopens, some sectors in the
category are slowly rebounding – with improvement
extending into FY 2021/22. Despite challenges
brought on by the virus, agriculture and farming
reported a strong 4Q20. Medical/biotech also
surged last year, with purchases of medical
equipment, pharmaceuticals and the return of
elective and non-emergency medical procedures.
Conversely, business closures plagued areas such as
food service equipment, office supplies/furniture,
business services, and the entertainment industry.
Fulfillment center’s revenue boomed with the
massive shift to online sales. Recognizing much of
this buying preference shift is permanent, HdL’s
forecast indicates moderate growth. Pandemic
challenges such as absenteeism, qualified worker
shortages, sanitization protocols in the Golden State
are lagging compared to prior periods – even with
the national manufacturing sector gaining strength.
Overall, tax revenues are projected to achieve pre-
pandemic levels next fiscal year. However, given
its unique mix, each local jurisdiction’s experience
will differ according to the size and character of its
specific business/industrial base.
Food/Drugs 4.4% | 2.5%
Overlapping issues with other groups listed herein
affected cash registers as taxable receipts at
grocery, convenience and liquor stores climbed
throughout 2020. The continued expansion of
cannabis also provided fuel to this segment. The
outlook for grocery stores is bright and focuses on
broadening merchandise, retaining customer loyalty
and deepening online efficiency deployment –
approaches all aimed at keeping up with a steady
expansion of more companies battling in a highly
competitive marketplace. As cannabis outlets
multiply, saturation levels may impact expected
returns. Overall, growth is moderate as pent-
up demand to eat out while spending stimulus
checks and savings accounts is redirected to other
household preferences.
2020/21 | 2021/22
HdL Companies | hdlcompanies.com
TOTAL 4.1% | 7.2%
2020/21 | 2021/22
2020/21 | 2021/22
Fuel/Service Stations -7.6% | 15.5%
While the pandemic significantly hammered
this industry during the past year, most signs
are pointing toward upward pressure on prices,
consumption, and demand for fuel. Recently, the
average cost of gas rose to the highest level since
last February and is expected to exceed $4 per
gallon by mid-summer 2021. Temporary shutdown
of a refinery in Texas and conflict in the Middle
East have restricted supplies of oil. Oil barrel prices
are estimated to move into the low $70 range in
the summer. Jet fuel rates are the highest since
January 2020. We anticipate COVID vaccines will
begin to stabilize the virus, which in turn stimulates
consumer confidence and the desire to travel.
Based on these factors, HdL is projecting sales
taxes associated with fuel and service stations to
increase beginning in late first quarter 2021.
General Consumer Goods 3.7% | 6.8%
Retail has long been an evolving segment
spurred by technology advancements, changing
expectations, and generational behavioral shifts.
Many establishments were not prepared to
adapt as these trends were expedited by the
global pandemic throughout 2020. Despite this
turbulence, customer spending shifted from
services to more taxable goods lifting local
tax receipts higher than early estimates. With
additional federal stimulus, a gradual return of foot
traffic, and consumer resilience lifted by a wide
deployment of vaccines, this group is expected
to post strong results in 2021. Most COVID-19
induced changes to shopping behavior should be
permanent. Anticipate store concepts focused
on convenience and experience plus sustained
upticks from big box retailers. Total receipts are not
expected to reach their pre-pandemic peak until
fiscal year 2022-23.
HDL CONSENSUS FORECAST – MARCH2021STATEWIDESALESTAXTRENDS
TOTAL 4.1% | 7.2%
2020/21 | 2021/22
HdL Companies | hdlcompanies.com
2020/21 | 2021/22
Proposition 172 projections vary from statewide Bradley-Burns calculations due
to the state’s utilization of differing collection periods in its allocation to counties.
HdL forecasts a statewide increase of 4.5% for Fiscal Year 20/21 and 7.7% for
2021/2022.
Restaurants/Hotels -13.2% | 23.9%
The long road to recovery continues with a small set
back from the December/January shelter-in-place
order. The recovery in this sector is complicated;
it is geographically uneven, with variations across
restaurant types. There have been shifts to digital
and alternative formats that accommodate social
distancing and rising labor costs. These challenges
result in restaurants increasing menu prices. The
industry anxiously awaits the boom from pent up
demand and anticipates summer 2021 to deliver
multitudes of diners. Hotels are expected to gain
more overnight stays; recovery in this sector
depends upon vacation destination upticks.
Expect slow recovery to progress over several
years. Another glimmer of hope is provided as
sporting events and amusement parks begin to
reopen in April.
State and County Pools 21.6% | 4.2%
A unique convergence of bigger ecommerce
spending (further accelerated due to COVID-19
related store closures) and new taxpayers coming
from Wayfair’s AB147 implementation produced
statewide growth of 32% for 2020. Forward
thinking businesses are evolving customer
experiences as procuring goods via warehouses
and delivery trucks has become a trend that is
here to stay. HdL’s forecast expects healthier
use tax collections, but at a more measured pace
given the spectacular outcomes from the prior
calendar year. Future allocations to local agencies
might vary as some regions experience in-state
fulfillment center expansion. Additionally, use tax
allocations could adjust up or down as company
business structures are altered to address intense
demand for online sales.
2020/21 | 2021/22
NATIONAL ANDSTATEWIDEECONOMICDRIVERS
Beacon Economics | BeaconEcon.com
U.S. Real GDP Growth 15.1% | 4.6%
A year ago, the US economy began to contract at a pace
never experienced before. In comparison to the slow
declines seen at the start of the Great Recession, it might
be natural to leap to the worst possible conclusion – that
the U.S. was going to suffer from massive recession. But
as noted in past reports, the last recession was completely
different than this one, hence one cannot draw such
conclusions. By the end of 2020 the economy had regained
70% of the activity lost in the first two months – the first
part of the “V”. The enormous surge in new Coronavirus
cases at the end of 2020 only caused the recovery to slow
modestly, thus there was no “W”, no “L” and clearly no “U”.
One reason for the sharp rebound was because the supply
shock reallocated demand within the economy, rather the
general malaise across most of the economy seen post-
Great Recession. Frustrated consumers who were denied an
opportunity to eat at a favorite restaurant or fly to Disney
World spent unused dollars in other parts of the economy
such as buying homes, campers and other goods.
U.S. Unemployment Rate 7.0% | 4.1%
The weakest part of the economy remains aggregate
employment, with 9 million fewer payroll jobs in the
economy than pre-pandemic. A more in-depth look reveals
this number is not as scary as it appears to be. For example,
the unemployment rate in February of this year was
already down to just 6.2%. Recall the unemployment rate
was above 6% for six years in the aftermath of the Great
Recession. A quarter of these people are still on temporary
layoff (not looking for a new job) and a far higher share are
receiving unemployment benefits than in the last downturn.
In addition, outside the sectors directly impacted by the
epidemic, labor markets were fairly tight and should gather
momentum in the spring as the worst effects of COVID-19
are behind us.
CA Total Nonfarm
Employment Growth -3.1% | 7.9%
Since the record drop in employment in April 2020,
California’s labor market has underperformed compared
to the U.S. labor market. The number of jobs decreased by
6.2% nationally since February 2020 while in California the
number of jobs fell by 9.4%, and only 39% of the jobs lost by
April have been recovered in the state. As of February 2021,
there were 1.67 million fewer workers employed in the state
than there were in February 2021. One key feature of the
recovery of the labor market has been the extent to which
job losses have disproportionately impacted low-income
workers. Because the recovery in California has lagged the
national economy to this point, this should mean that, once
a vaccine is widely distributed and some normality resumes
in 2021, employment growth in California will outpace the
growth in the national economy. Thiswas evident in the job
figures from February, with California accounting for 37%
of the jobs created in the nation.
CA Unemployment Rate 8.8% | 4.6%
California’s unemployment rate fell to 8.5% in February 2021
down from 9.0% in the previous month and a peak of 16.0%
in April 2020 – but remains elevated relative to the 6.2% rate
in the U.S. overall. This decline is a positive sign but is as much
due to a contracting labor force as it is to employment gains.
In February 2021, there were 488,500 fewer people looking
for work in the state compared to February 2020. Under
normal circumstances, the state’s labor force would have
expanded over this period. Our outlook remains positive,
with cases remaining and restrictions being eased, there will
be upward pressure on job creation in the coming months. In
addition, as the vaccine rollout picks up speed in the spring,
we should see the unemployment rate fall significantly as the
year progresses.
CA Median Existing
Home Price $585,710 | $616,288
The state’s housing market has been by far the brightest
spot of the 2020 economy. Single family home prices have
surged compared to last year, growing by 15% percent from
Q4 2019 to Q4 2020. In 2020, existing homes were around
8,500 units lower compared to 2019, with sales surging in
the third and fourth quarters. This is an extraordinary feat
given the performance of the state’s labor market this year.
The strong performance of the state’s housing market is likely
driven by three factors. First, typical homebuyers (higher
income earners) have been less affected by the labor market
fallout. Second, mortgage rates are at historically low levels,
spurring purchasing activity. Third, inventories are near
historic lows in many parts of the state. That said, the growth
in home prices this year is unsustainable, and we should
expect interest rates to tick up at some point in 2021.
CA Residential
Building Permits 116,635 | 114,475
The increase in home prices this year have once again brought
California’s housing shortage to the forefront. Until the
supply of housing picks up considerably, there will be upward
pressure on home prices in the state. For 2020, around 4,570
fewer permits were issued in the state compared to 2019.
This will do little to help the state’s chronic housing shortage,
but the expectation is that housing permits will rebound in
2021 as the economy continues to recover.
2020/21 | 2021/22 2020/21 | 2021/22
Beacon Economics LLC
5777 West Century Boulevard, Suite 895
Los Angeles, CA 90045
Telephone: 310.571.3399
Fax: 424.646.4660
Beacon Economics has proven to be one of the most thorough
and accurate economic research/analytical forecasting firms
in the country. Their evaluation of the key drivers impacting
local economies and tax revenues provides additional
perspective to HdL’s quarterly consensus updates. The
collaboration and sharing of information between Beacon
and HdL helps both companies enhance the accuracy of the
work that they perform for their respective clients.
HdL Companies
120 S. State College Blvd., Suite 200
Brea, CA 92821
Telephone: 714.879.5000 • 888.861.0220
Fax: 909.861.7726
California’s allocation data trails actual sales activity by three
to six months. HdL compensates for the lack of current
information by reviewing the latest reports, statistics and
perspectives from fifty or more economists, analysts and
trade associations to reach a consensus on probable trends
for coming quarters. The forecast is used to help project
revenues based on statewide formulas and for reference
in tailoring sales tax estimates appropriate to each client’s
specific demographics, tax base and regional trends.
714.879.5000 | hdlcompanies.com