A recession hits California. The only question is how difficult it will be.
The July financial bulletin from Keely Bosler, director of the California Department of Finance, calculated for the personal income tax (PIT), “cash receipts for June were $3.345 billion lower than the forecast of $16.939 billions of dollars”. Actual revenue was $13.594 billion.
Receipts vary from month to month due to when people file their tax returns. It is therefore preferable to compare a particular month to the same month of the previous year. According to the July 2021 report, “cash inflows for June were also $1.783 billion above the monthly forecast of $15.312 billion.” Thus, actual revenue was $17.095 billion a year ago in June.
Put them together. Actual revenue for June 2021 was $17.095 billion and for June 2022 was $13.594 billion. That was a drop of $3.501 billion, or 20%. If this continues, the annual loss for the 2021-22 fiscal year, which began July 1, would be $42 billion.
The projected surplus of $97 billion would be only $55 billion. All that excess money that Governor Gavin Newsom and the legislature promised to spend in June is set to be cut by $42 billion.
And this recession has only just begun, its depth unknown. If IRP revenue falls another $42 billion, the surplus is reduced to $13 billion.
Do it again, and it’s a $29 billion deficit.
Fortunately, the report on the adopted budget indicates that it “includes $37.2 billion in budgetary reserves”. If a deficit of $29 billion were deducted from this, only $8.2 billion of reserves would remain.
I’ll go up there with the numbers, because we’re getting into too much speculation.
But the fact is, the state’s $97 billion surplus could evaporate faster than a 32-ounce 7-Eleven Big Gulp poured on concrete at noon in July in Needles, Calif.
This has been the spasmodic pattern for decades, especially since the state became a high-tech hub. Good years bring record profits, dividends and spending to wealthy tech titans. Bad years bring slowdowns and even bankruptcies.
Yet the state never reasonably uses surpluses as a bridge for tax reform that would even out the ups and downs.
The Washington Post headlined on July 23: “Big Tech Layoffs and Hiring Freezes Spark Recession Fears. The Story: “News of layoffs and slowing hiring has become commonplace in Silicon Valley. Startups say capital is drying up.
One of the reasons tech companies move in big cycles is that purchases of their products can be postponed. People have to eat, but the purchase of a new iPhone can be postponed and the Netflix subscription can be suspended.
The July 2022 Department of Finance bulletin also calculated that “California’s real GDP contracted 1% in the first quarter of 2022 on a seasonally adjusted annualized rate (SAAR) basis, following growth of 9.5 % in the fourth quarter of 2021 and an annual growth of 7.8% in 2021.”
A negative second quarter would indicate a recession.
June inflation hit 9.1%, the highest in four decades. Some analysts believe it will subside. But even if it drops to, say, 6%, it’s still a big problem.
There is also the question of the real inflation rate. The calculations were changed three decades ago by the Clinton administration to make themselves look better. The ShadowStats site, which calculates using the old formula, pegs the “corrected” number at 17.3%, the highest in 75 years.
If you’ve recently filled up your car or bought a hamburger, you know that the ShadowStates figure is more accurate than the official government figure.
Meanwhile, on Wednesday, July 27, the Federal Reserve Board raised interest rates again by 0.75% to a range of 2.25% to 2.50%. It’s supposed to curb inflation. If not, further rate hikes will occur.
Which will mean an even worse recession. I hope you are ready. The state of California is not.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.