HdL Consensus Forecast Webinar 2Q21.pdf [3.21Mb]
Uploaded Thursday, 16 November 2023 by Jim Brashears

HdL presents an up-to-date view on California’s Retail Economy based on current 2nd Quarter 2021 data. Watch the recording, download the presentation, and read the FAQ. Knowing this vital information could be essential to addressing your communities needs during these trying times.


Q. Have you conducted potential recession scenarios or analysis?


A. We've definitely been considering it. We always do in the forecast for what we know today. We don't have anything concrete that we've built in. We've really leveled off those out years past 2022 and 2023 to really be more consistent with the historical, normal growth. Each agency is going to be a little bit different, and we'll be happy to discuss that with you. The Fed has continued to talk about increasing interest rates at the start of calendar year 2022. We're keeping our eyes and ears open to really see how that might impact – whether it be long-term financing for an automobile or the home buying/home building industry – what does it do to for consumers on that end and the real estate market? But for now, without a major play or more information, especially from the federal government we haven’t built anything in for the forecast. 


Q. On your Business & Industry breakdown chart, where would fulfillment centers like Amazon be?


A. Those are in the category of fulfillment centers specifically. It moves the needle about 2% when you when you look at including business and inventory in the overall forecast versus not including in. I'm stumped on how much fulfillment centers make overall of the group. Let me look that up before we sign off today. So, hold on to that thought.


Q.  If we've included recession scenarios, what do you anticipate the impact to be? And for how long?


A. We don't have a lot of solid concrete information right now. Obviously when we reflect, we were anticipating a much, much bigger, longer lasting impact from the pandemic, which we simply haven't seen in the overall results. So, when we go back before that, as far as recessions go, we're talking about the Great Recession, right? I don't think we can consider that normal. If we were to build in a recession, it's probably going to look like a little bit of a slowdown. We were already anticipating within our forecast, before the pandemic hit, a cooling off from a 4 to 5% growth, down to a 1 to 2% growth, and that might be otherwise considered more of a recession, or a mild recession. A little bit of a slowdown in the out years is probably what we would anticipate without any other information and data to really support something bigger. Instead of seeing 3.5 to 4%, maybe that cools off a little bit to about a 1% growth in a couple of years.


Q. How does the shifting of local Bradley-Burns from pools affect Prop 172 and LTF?


A. For both Prop 172 and local transportation funding, the basis for how that gets allocated is where local Bradley Burns 1% gets allocated. How did it get allocated? For Prop 172 and the ratio that goes to each county – it's dependent on the prior calendar year Bradley Burns results. As more money shifts away from some counties that used to get it by way of the countywide use tax pool, and we see a larger increase to very specific jurisdictions within a very concentrated number of counties, those counties’ proportional rate will go up when the Prop 172 factor changes based on calendar year results. So that's how future Prop 172 allocations will start to adjust and move. Also, on the local transportation funding. This is the quarter cent portion of the base sales tax rate and that gets allocated based on where the 1% Bradley Burns goes. So again, when local 1% used to go into the county pool, the LTF used to go to that county. It’s now going to a local agency within a specific county. The more money, more LTF – the quarter cent is going to go to that county where the fulfillment centers located.




Before we jump into the 2Q results and start talking about what we saw, we just wanted to provide a reminder that over the last 18 months we've had four major stimulus packages that have really helped sustain, and in certain cases, really boost the overall economy and most certainly the spending economy here in California. So the four major ones you see listed starting back in March 2020 all the way up through ARPA, which many of you are familiar with and dealing with in a different way, but that was through March ‘21 and kind of the trickledown effect that those economic packages have had. Again, just a reminder that very tangibly, the federal government was able to get more assets and cash flow, into consumers hands, whether it be by increased unemployment benefits, direct payments, child tax credit, etc. We obviously recognize that unemployment benefits have definitely started to decrease beginning September 6th most recently. Again, we just wanted to provide the reminder, because we will be doing a lot of look back with today's presentation.


So here you'll see statewide 1% Bradley Burns. On the left is starting with fiscal year 17/18, obviously way before the pandemic and kind of what we were generating statewide there. Right about 6.9 billion sorry overall. Had a nice jump up there of about 4% to just over 7 billion with fiscal year 18/19. That was the last fiscal year before the pandemic really set in and we saw adverse effects with regards to sales tax generation. You could see the drop off that fiscal year 19/20 had going down to about 7 billion and now that we have the second quarter 2021 data, we’re able to show you (for the majority of you guys that are on an otherwise normal fiscal year (July to June fiscal year where the second quarter period wraps up the fiscal year 2021)) how much growth we've seen. Hopefully we've been communicating with you guys these last couple of quarters how blown away we've been at the results and how phenomenal this recovery really has been. In certain cases, and maybe in certain jurisdictions, you go ‘well, we never really saw a drop so what recovery? It's just been some steady growth.’ The 7.7 billion that we've masked here for fiscal year 20/21 far exceeds where we were pre-pandemic. Again, that’s why we lead in with a reminder of the stimulus packages and extra money that's been flowing down to consumers. As we then glance over (and you know part of our part presentation today is to talk about the forecast), you can see for fiscal year 21/22 there is still continued growth here in the time that we live third quarter. Overall the economy has remained strong even though unemployment benefits may have decreased at the beginning of September, we're still going to have that extra money in the third quarter. Also, we’re right now anticipating a rather solid fourth quarter with a normal holiday shopping period and that's probably going to be the majority of the enhancement that we experience in fiscal year 21/22. And then, as you glance over, just for perspective, what we're thinking right now for fiscal year 22/23. Definitely a little bit more of a leveling off. A percentage increase of around 4%, which is a little bit more of our historical norm. So, while we've seen this initial bump up definitely right now, we’re anticipating a cooling off really starting in fiscal year 22/23.


What does that look like on a regional basis? We've been talking about this because the results by region have been different and you can see in the middle column, the change for fiscal year 20/21 compared to 19/20, that pretty much everybody is up because 19/20 was the depths of the pandemic and the impacts. But as we compare the percentage change from 18/19, some have recovered almost completely, whereas there's a few specific areas that have yet to recover like the Bay Area, Central Coast, and Southern California as a whole. There are definitely certain parts of Southern California that have been doing really well, but as a whole still down compared to 18/19, so the differences here, throughout the entire state, just a little bit different by region.


Then as we look more specifically quarter by quarter and the percentage changes here at the top of the screen, you'll see these last two quarters had a fairly dramatic percentage growth over the prior year, especially because 1Q and 2Q were really the depths of the pandemic and those initial impacts, especially 2Q20, and that's why when we're talking now, a 37% overall growth in 2Q… how does it compare? So that's why we're comparing back to 18/19 and some of those pre-pandemic quarters to put it a little bit into a more tangible perspective.


What you see also on the screen for third quarter and fourth quarter upcoming is what I just mentioned, where we really see the strength for fiscal year 21/22 and all four of these quarters right here are really seeing dramatic growth at the first part of the year really cooling off towards the 2nd and then these last four quarters shift back to a little bit more historical, normal growth before any other larger economic impacts or trends change. We've continued to see really strong results leading up through the end of fiscal year 2021 and anticipate that continuing through the end of the calendar year.


Another way to break this down is by place of sale. Think your local brick and mortar stores versus the allocations that are made by way of the county wide use tax pool. Point of sale, especially because of how impacted 1Q and 2Q were with the initial shelter-in-place directive and business closures, were so impacted that now we see solid 45% growth out of 2Q21 and that exceeds and as you can see there statewide up 37%. Where did the gap come from? It’s really more out of the pools and the difference between these two lines is the pool allocations, but we still anticipate for the remainder of the calendar year solid double-digit gains and then going back to being conservative until we hear about the other trends. Now Bret and I will talk through the different categories coming up, what does it mean for the rest of the count, going through some of the headwinds and what may it mean as we as we turn the calendar year.


So at this time I'm going to turn it over to Brett to jump in with autos and start going through the major industry groups. Thank you Bobby.


In autos and transportation, receipts from auto and related sales were up significantly in the second quarter of 2021, as has been the story throughout the pandemic. Demand was stoked by a combination of low financing rates, more spending opportunities, the government stimulus payments have continued to have a positive impact, and borrowing from unexpected found equity in the rising value of real estate and financial assets. What we've seen is the inventory levels have been significantly lower and not impacting second quarter as much as what we anticipate coming up in the third quarter, just a little bit of an impact, and we have had new car sales that have continued to be very strong, and the prices have grown every quarter throughout the pandemic and the price of used cars have been even stronger than new cars at this point.


The sector overall, we had projected a 35% increase and the actual was 44.9% for the quarter. Once again, results better than forecast throughout the entire pandemic. The recent reports indicate that the inventory shortfall is now having a significant negative impact on sales. Although in the third quarter when we talk about it three months from now, there was a strong 4th of July holiday at the beginning of the quarter and that coupled with the higher vehicle pricing is going to offset the losses. Some sales are expected to slip to the fourth quarter and then more normal gains are projected going forward into calendar year 2022. So as a result, our long-term forecast is 3% annual growth all the way out to fiscal year 26/27 in this very healthy sector.


Building and construction, another sector, has done really well all the way back to the beginning of the pandemic. The projected for the second quarter of ‘21 was a 12.5% growth. The actual was 24.4%. Contractor activity jumped 23% in the second quarter and that had been relatively stable in prior periods during the pandemic. This spurred much of the additional growth compared to our original forecast within that period. Major material supply retailers are indicating that the do-it-yourself trend and projects has now given way to travel and other consumer spending preferences. The volatile price of lumber that we've been talking with you about now four quarters in a row, has helped to significantly boost the sales tax associated in this category, and that also has assisted in offsetting the drop in foot traffic that we're now seeing.


Lumber prices that were significantly higher early in the pandemic at record levels have now come down significantly, but what you are paying at the store does not yet reflect in the price drop, since the retailers inventory contains some of the pricier items. Number of permits issued, and the values associated, have continued to increase, and this surge in permit issuance means future work for contractors and expanded demand for materials; so again, continued upward pressure in this sector. The industry, as I mentioned, stabilized very early on and we are continuing to forecast ability with long-term 5% annual increase, projected all the way out to 26/27 fiscal year.

Now we’ll talk about another stable industry throughout the pandemic, food and drugs, and it's mainly been stable because of the grocery stores and drug stores and cannabis related businesses that are included in this sector. We had projected a pretty flat quarter in the second quarter with 1% growth when the actual was 4.1%.


And grocery stores were flat this quarter. They also were flat last quarter when we met with you. There were minimal declines from a year ago, but what really has continued to propel this sector has been those cannabis related businesses and strong results in this quarter from convenience stores. So the long-term forecast stability, all the way out to fiscal year 26/27, is two percent growth in food and drugs.


As for fueling service stations, we had forecast a really significant rebound in this second quarter of ’21. We projected a 75% increase, and the actual is very close to our projection with a 74% increase in the quarter.


And this industry continues to experience upward pressure on the sales tax received. Prices of gasoline at the pump are up at the highest levels very close to record level highs that were set back in October of 2012. Jet fuel prices, which are included in this sector, are back up to pre-pandemic levels and travel is picking back up and that definitely has had a positive impact on the sales tax received. So, although the Delta variant might be contributing to delay plans in some of those that were going back to the office and a slower return in commuter volume, we're not expecting a significant reduction in the demand for fuel. Oil barrel prices continue to remain in the low to mid $70 range, and that's not anticipated to drop before the end of the calendar year. Short term, we are anticipating a significant increase, 40% additional quarter through the end of the calendar year, fourth quarter ’21, and the long-term forecast is stability in this sector for a 2% annual growth all the way out to fiscal year 26/27.


The restaurants and hotels sector had a really strong second quarter as we had anticipated; we projected a 73% growth. That’s a combination again of that rebound from the second quarter of ‘20 and beginning to emerge, continuing to emerge out of COVID. The notes that we are seeing from the National Restaurant Association is the biggest challenges have included Delta variant, the ongoing labor squeeze, and menu prices continue to rise. This is the strongest annual increase that we have seen in menu prices since the Great Recession back in 2008. The Western region saw a 5.3% increase in menu price from July 2020 through July 2021.


In the hospitality and travel industry, business travel was only 12% of the passengers, but about 75% of the profits for airlines. In our statewide forecast as Bobby mentioned, we fine-tuned for your individual jurisdictions, but statewide conditions in parts of the state, such as the Bay Area, Southern California, Central Coast, heavily weigh in on the overall statewide forecast and have a significant impact. Local conditions will be adjusted and many regions were seeing are back to normal revenue levels. Our long-term forecast is 3.5% annual growth in this sector all the way out to fiscal year 26/27.


So, you may have noticed, as we talk about percentages and percentage growth, don't be surprised when we're meeting with you this quarter because of how dramatic second quarter was a year ago. It takes about a doubling of the percentage drop to get back to where we were, which as we've been talking about already, it’s kind of where the economy and the results that we're seeing is back to where we were pre-pandemic. So don't be surprised by the percentage changes here on general consumer goods. This was a great category for a rebound, further reopening of the economy, especially compared to a year ago. You could see overall general consumer goods saw almost a 75% increase in 2Q. We had projected a 62% gain, so again even stronger than what we were forecasting on the rebound there.


Overall, consumers showed great resiliency through the second quarter rebounding from the pandemic. We've seen about a 5% gain on general consumer goods over pre-pandemic levels. There is obviously, as we look outward, some headwinds and concerns for us – pent up demand, inventory and labor issues, and cost of goods and inflationary factors. While we see the rest of the calendar year for general consumer goods in your brick-and-mortar stores remaining very strong, this is a large sector that we don't anticipate this same significant rebound going forward with those with those headwinds. Then as we look at some of the particulars comparably, you could see down here at the very bottom 2Q21 compared to 2Q19, so going back two years before the pandemic. A lot of categories are exceeding where they were pre-pandemic, discount department stores, family apparel, really strong home furnishings. As Bret made mention, with the strong housing market, we've seen home furnishings sales continue to grow and while discount department stores have yet to rebound, it's hopefully just a one quarter delay. Maybe we'll see the rebound come in 3Q. 

Sporting goods continue to do really well. Thankfully, I think a lot of us have been getting healthier, so we've been seeing those results in sporting goods in bike stores. So overall 5% growth compared to two years ago for the category. Keep in mind also that especially with discount department stores, one of the additional gains here has been fuel sales. As we know, major retailers do also sell fuel. They also report it with their in-store sales, and so gains, as Brett talked about with fuel service, are also going to help the rest of the calendar year for a few large discount department retailers.


Then a topic that we've been talking about quite a bit, and we’ll continue to review it and address it, is the shift of local taxes from the county wide use tax pools to local jurisdictions. As we've made mention, these last couple of quarters, fulfillment centers specifically, and you'll see a chart coming up, we report that and show that under the business and industry sector versus traditional online sales, especially from out of state retailers by way of the county wide use tax pool. When we go back, I also have another slide to talk about the shift and the changes in the pools which is this top line here, but if we go back to 2Q20 overall net we've seen a 9% increase because these last two quarters especially have shifted. There's been more shifts over to local jurisdictions which then when you look at business and industry category has seen a 26% gain. Most notably, these last two quarters here by way of the reporting change that's happened.


So just to further touch on that topic, this slide is to make sure we're all on the same page with how sales tax works. Specifically, sales tax applies when goods are located in-state and thereby sold to consumers within the state. It's really on the use tax component where it's coming from out-of-state and being shipped into California. The majority of that is considered use tax, and as we'll see on this next slide here, it's determined by place of use. Most of the allocations come by way of the county wide use tax pool. Whereas sales tax as we know is place of sale allocated directly to the jurisdiction where the goods are located. And for an out-of-state online retailer that does not have a permanent place of business, it's where the inventory is located at the time of sale and that has a big play in the change that has happened most recently.


Another chart that that we've been showing and talking through is what does this look like for a major online retailer that has changed its allocations and it's because it previously had its fulfillment centers owned and operated by a third party (really, the ownership over the operations side was owned and operated by a third party). Now in these last two quarters, part of the sales tax that is generated gets allocated to where the California fulfillment center is located. You see that there dropping down. There is still a tremendous amount of goods that come from out-of-state by way of use tax. Those then get allocated to the county wide pool like they previously were.


So specifically on business and industry category, you can really see now on a percentage basis, these last two quarters, how that change has filter filtered its way through over to this category and really helped with an almost a 26% gain here in 2Q21. We are anticipating the change all the way through the end of the calendar year, but then as we go out, we’re getting back into more traditional, historical normal growth for the overall category once this change has fully been implemented in scene for a full four quarters. 


To put a button on the fulfillment center growth, and you can see really these last two quarters the dramatic percentage gains over prior year, keeping in mind when we talk overall fulfillment centers and also pool growth, starting in fourth quarter 2019 was when we saw the new money come in from AB147 and marketplace facilitators and out-of-state online retailers now required to collect and remit. So that's really been what was kicking up the first quarter 2020 when we had the pandemic, then set in for the remainder the 2020 calendar year. So dramatic percentage gains from fulfillment centers and now the most recent reporting changes that happened and impacted these last two quarters.


Here's the line graph on the specific industries that we've seen, again comparing to pre-pandemic quarters. Medical biotech right here at the very top, as expected with the pandemic, really taken a big jump up and then coming back down but fairly steady out of the category. It's probably going to continue as we move forward for a little while. 

The light green line here, garden and agricultural suppliers, you can see within the second quarter taking a nice big jump up compared to second quarter 2020 or even the pre-pandemic quarters. This is one category that we've had a lot of conversations with clients, especially within the farming industry and concerns about water shortages, labor, overall demand, fires in the summer period… What is the garden/agricultural category going to look like? We may anticipate a little bit of slowing down for many, but still remaining fairly strong. Just given the investment nature of the category, especially into equipment and the need, once we do get some rain to re-engage those crops. So, we could end up seeing a little bit of continued growth out of the sector.


The pools and overall performance of the pools reflecting back again, like we saw it in fulfillment centers, fourth quarter 2019 was when AB147 went into effect. We started to see that new tax revenue come in the dramatic rise with the pandemic. Then these last two quarters, getting back to the reporting change from online retailers and going more to local jurisdictions, we're seeing the percentage declines especially compared to the most recent experience for overall for the pools really kind of take effect here in Q21, and that's probably going to be what we're anticipating going forward. Obviously, here the remainder of the calendar year with the reporting change we’ll expect to see somewhere between 6-8% growth and then 8% growth going out for pools by quarter.


It really hits home of the shift back to brick-and-mortar from consumers and not needing or desiring to buy as much online, but there will still be habit changes that get factored in and are a part of the normal shopping experience for many. Plus the continued increased cost of goods that will still be generating a significant amount of sales tax. We do anticipate more of the traditional, normal growth at pools.


So just a reminder, percentage growth by fiscal year here from 3 to 5% is normal growth in California. 19/20 dropped down 2%. We've definitely seen a nice recovery here in 2021 of 10%. And we are anticipating again, mostly because of what we expect out of the remainder of the calendar year, to really support a good number for 21/22. After that, getting back into our historical, normal growth, some of the headwinds like we were talking about may end up changing, but probably won’t change our outlook or impact overall sales tax. It may not be until fiscal year 22/23 that we really see those take hold.


This is another way to look at the comparisons with prior year, more of a stacked line graph with dollars and percentages at the very bottom. The light green line here really shows the depths of the pandemic all the way through second quarter 2020. The blue line in second quarter 2021 jumped up, even exceeded fourth quarter 2020 shows continued recovery. We forecast a very strong fourth quarter 2021 with the seasonal effect and leveling off from this dramatic recovery that we've experienced.


So, some final thoughts for fiscal year 2021… Overall we saw local sales tax grow about 10 percent, 8% above pre-pandemic levels. The federal and state stimulus packages have had an impact, more on the positive side for the economy. From a sales tax perspective, giving consumers the desire and ability to spend in different categories as we've reviewed. Inland and suburban areas have done a little bit better than dense, built out metro areas, especially those that were previously heavy on tourism and travel related. We may not see those recover for about the next year or so, which I think when we talked 18 months ago, that's probably right about what we expected to maybe even a little bit longer run out, but the strength of the economy could return tourism a little bit sooner.


The shift in local Bradley Burns – just a reminder the pools to the local jurisdictions will have impacts on Prop 172 and local transportation funding LTF revenues. We'll be updating clients more specifically on those. Mostly county and transportation agencies are to see those changes, but we'll be putting together some forecasts and talking about those results and forecast coming up.


Overall, the local tax revenue remains fairly positive, especially through the end of the calendar year, despite the supply chain, pricing, labor concerns, inventory overall – the effects of those may take a little bit of time, and the increased price of goods may end up offsetting some of that, or like what we see with auto sales and the increased price of cars.


And that is our forecast for today. 

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