California Consensus Forecast 4Q22 Presentation HdL Companies.pdf [2.92Mb]
Uploaded Thursday, 16 November 2023 by Jim Brashears

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.

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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.

Forecast Considerations

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

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.

Consumer Spending

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.

CA Unemployment

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.

Auto Prices

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.

Oil Prices

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.

Construction Factors

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.

Fulfillment Centers

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

Industry Trends

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.

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