Despite signs of an economic recovery, the state of California remains in a deep fiscal mess and recession. The state has been a particularly good proxy of the overall state of the economy due to their high leverage to the real estate market – the crux of our issues. According to the State Controller the economy continued to deteriorate in September, but is showing some signs of stability. The recent report said:

The State’s General Fund continued to deteriorate in September. Year to date, both corporate and personal income tax revenues were down by double-digit percentages over last year (13% and 16%, respectively). Additionally, the numbers indicate that Californians are still feeling the pinch of this recession in a very real way. For example, withholdings on personal income are down by 7.1% this year. Estimated tax payments for both personal income and corporations are down even more sharply, falling by 34.9% and 11.0%, respectively, compared to last year.

Californians have lost nearly 1 million jobs and the Franchise Tax Board now says that tax delinquencies are up 28% over the last 2 years. Nonetheless, the state is beginning to see some signs of stability:

Still, the fact that some indicators are stabilizing provides some reasons to be positive about the State’s economy. Compared to 2008, sales and use taxes are up for the second

month in a row. Although these are small gains, they signal that the consumer spending is reaching for a bottom. In addition, residential building permits have leveled off in recent months, and home prices, though still below last year, stabilized in June and July. This should decelerate the losses in the State’s construction employment, which has been especially hard hit. There also are indications that the nation’s gross domestic product will grow modestly in the third quarter of 2009. An important question for California is how the expiration of the federal income tax cut and temporary payroll tax cuts will impact the State’s economy in 2010.

Of course, if the real estate market in Southern CA is any proxy then the state budget office could be counting their tax revenues sooner than we think. The bubble is back!



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