California Recession Incoming

July 29, 2022 Updated: August 11, 2022

Commentary

A recession is hitting California. The only question is how hard it will be.

The July Finance Bulletin by Keely Bosler, director of the California Department of Finance, calculated that for personal income tax (PIT), “Cash receipts for June were $3.345 billion below the forecast of $16.939 billion.” The actual receipts were $13.594 billion.

Receipts vary month to month because of when people file their tax reports. So it’s best to compare a particular month to the same month in the previous year.

According to the July 2021 report, “Cash receipts for June were also $1.783 billion above the month’s forecast of $15.312 billion.”

So the actual receipts were $17.095 billion a year ago in June.

Put them together. June 2021 actual receipts were $17.095 billion and for June 2022, they were $13.594 billion. That’s a drop of $3.501 billion, or 20 percent. If that continues, the yearly loss for fiscal year 2021–22, which began on July 1, would be $42 billion.

The expected $97 billion surplus would be only $55 billion. All that surplus money Gov. Gavin Newsom and the legislature promised to spend in June would have to be cut by $42 billion.

And this recession is only starting, its depth unknown. If the PIT receipts drop by another $42 billion, the surplus is slashed to $13 billion.

Do it again, and it’s a deficit of $29 billion.

Fortunately, the Enacted Budget report states that it “includes $37.2 billion in budgetary reserves.” If a $29 billion deficit were deducted from that, only $8.2 billion in reserves would be left.

I’ll haul up there with the numbers because we’re getting into too much speculation.

But the point is that the state’s $97 billion surplus could evaporate faster than a 7-Eleven 32-ounce Big Gulp poured on the concrete at noon in July in Needles, California.

This has been the spastic pattern for decades, especially since the state became a high-tech center. Good years bring record profits, dividends, and spending by the wealthy tech titans. Bad years bring slowdowns and even bankruptcies.

Yet the state never uses the surpluses sensibly as a bridge for tax reform that would even out the ups and downs.

The Washington Post headlined an article on July 23: “Big Tech Layoffs and Hiring Freezes Prompt Recession Fears.”

“News of layoffs and hiring slowdowns have become commonplace across Silicon Valley,” the article reads. “Start-ups are saying capital is drying up.”

One reason the tech companies go in big cycles is that purchases of their products can be postponed. People have to eat, but the new iPhone purchase can be postponed, and the Netflix subscription can be suspended.

The July 2022 Department of Finance Bulletin also calculated that “California real GDP [gross domestic product] contracted by 1 percent in the first quarter of 2022 on a seasonally adjusted annualized rate (SAAR) basis, following 9.5-percent growth in the fourth quarter of 2021 and annual growth of 7.8 percent in 2021.”

A negative second quarter would indicate a recession.

June inflation hit 9.1 percent, the highest in four decades. Some analysts think it will subside. But even if it goes down to, say, 6 percent, that’s still a big problem.

There’s also the question of the real inflation rate. The calculations were changed three decades ago by the Clinton administration in order to make itself look better. The site ShadowStats, which calculates using the old formula, pegs the “corrected” number at 17.3 percent, the highest in 75 years.

If you’ve filled up your car lately or bought hamburger, you know the ShadowStates figure is more accurate than the official government number.

Meanwhile, on July 27, the Federal Reserve Board raised interest rates again by 0.75 percent to a range of 2.25 percent to 2.50 percent. It’s supposed to dampen inflation. If it doesn’t, then more rate hikes will be coming down the pike.

That’ll mean an even worse recession. I hope you’re ready. The state of California is not.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

John Seiler
John Seiler is a veteran California opinion writer. He has written editorials for The Orange County Register for almost 30 years. He is a U.S. Army veteran and former press secretary for California state Sen. John Moorlach. He blogs at JohnSeiler.Substack.com