Initial claims for the week of November 7 remained largely steady in California but showed a slight easing on the national level. Total initial claims in California were essentially unchanged, with a slight drop in initial PUA claims offset by an uptick in the claims under the regular program. Nationally, both regular program and PUA claims eased to their lowest levels since the crisis began in March. Combined, total initial claims eased 7.7% on the national level, while notching up 0.3% in the state.

The combined claims in California have shown no substantial movement over the past 4 weeks, but the recent downgrading of several counties by the state are likely to see additional claims in the weeks ahead as the result of yet another round of business closures affecting both worker jobs and the continued viability of the state’s remaining small businesses. The extent to which this factor will be offset by the holiday hiring recently announced by several large retailers able to remain open through deliveries, however, remains to be seen. The other states saw the stagnant trend that essentially took hold beginning the week of August 8 finally beginning to ease, with total claims dropping 9.2% as layoffs began to drop in the rest of the country.

EDD has not yet published the updates to last week’s backlog numbers. The progress to date based on the number of unique claimants is shown in the following charts.

Steps towards economic recovery—especially for the lower wage workers that have been hit hardest by the various rounds of closures—remain guided largely by the state’s current tier system under its “Blueprint for a Safer Economy.” Compared to the week of November 2, the most recent allocations issued for November 9 show a net increase of 2 counties under each of the two most restrictive tiers. The share of the unemployed—and consequently the ability of these workers to return to a job—shifted even more strongly with 52.9% of the unemployed from September now under the Tier 1 restrictions.

The current Budget Act was passed based on an estimated $54 billion deficit. State revenues since have been running substantially ahead of estimates due to a number of factors as employers and workers have adjusted to the current pandemic conditions.

First, it is important to understand what that deficit estimate means:

• The $54 billion covers three years of revenues and expenditures, 2018-19 through 2020-21, based on estimates as of May 2020.
   
• The $54 billion shortfall comes from the Administration’s estimates. Legislative Analysts’ Office forecast a substantially lower deficit of $18 to $31 billion due to different assumptions on revenues, social program caseload, and other spending. The Budget Act essentially reflects both scenarios by accepting the Administration’s revenue numbers but also incorporating “reverse trigger cuts” largely stemming from LAO’s lower estimates.
   
• The estimated deficit is not based on what the state needs to spend. Instead, the $54 billion figure is derived based on what the governor intended to spend in the three-year period, including approved spending levels, continuation of baseline spending and growth, and proposals for new spending as largely outlined in the January Proposed Budget. To some extent, components of the deficit were enacted into being through the current Budget Act, including: (1) higher spending related to continuation of the minimum wage increase scheduled for January at a cost estimated in the Proposed Budget at $1.1 billion ($523.8 million general fund) and (2) subsequent negotiations with the state unions that shifted costs rather than produced cost savings from the current state furloughs through both compensatory leave and temporary elimination of employee contributions for their retirement health benefits.
   
• The $54 estimate covers only the general fund. As in recent years, special funds spending increased again, rising $4.2 billion (7%) in the Budget Act as previous general fund activities have been shifted over time to the special funds.

Revenues, however, have been trending substantially above the Budget Act estimates. Through September and including revenues above estimates for 2019-20, Department of Finance cash flow numbers show general fund revenues were $9.8 billion higher. The more current State Controller reports show revenues $11.0 billion higher through October. Because of timing differences in cash reports from the agencies, the Controller numbers have been running lower than the Finance numbers for the same month. Based on the trends so far, the Finance report to be issued for October is likely to show the revenues running around $12 billion higher.

Revenues are up across all the major revenue sources, but the strongest contribution is coming from personal income tax receipts, with Finance showing a 20.7% gain through September. Sales and use tax is 32.2% higher, while corporate income tax is the lowest at 5.0%.

As discussed in prior reports, the unexpected strength in personal income tax receipts stems largely from the broad and rapid shift to telecommuting by many employers, retaining a substantial portion of the higher wage jobs that are subject to the state’s steeply progressive tax rates. In the most recent report, income tax withholding from late March through the week of November 2 was tracking 3.5% above the comparable period in 2019. The business closures have been particularly damaging to lower wage workers and households. Telecommuting by the higher wage workers has produced a stronger than expected revenue base during this crisis period.

Sales and use tax is also showing substantial resilience for at least two reasons. First, the higher unemployment assistance including the prior enhanced payments, extended payments under the PEUC program, and eligibility for self employed and other groups under the PUA program has sustained many household incomes in this period. Second, a shift by some businesses to deliveries and expansion of internet sales have offset some of the losses from the closures of many businesses. The chart below showing the shift in taxable sales from comparing Q2 taxable sales in 2019 and 2020 provides an indication of which businesses have been the hardest hit from the state-ordered closures. Businesses and their workers have been the hardest hit in Accommodation; Arts, Entertainment & Recreation; Food Services & Drinking Places; Gasoline Stations; and retailers selling specific products such as clothing. Nonstore retailers such as Amazon, however, saw sales in this quarter jump 181% while many of their smaller brick-and-mortar competitors remained shuttered. Others such as Food & Beverage Stores managed to retain sales levels through a rapid shift to deliveries and pickup options.

Overall, general fund revenues have been running $2-3 billion a month higher than projected in the current Budget Act. At this rate and accounting for the higher revenues to date, the “deficit” would be $18 to $26 billion, or closer to the earlier LAO estimates and substantially below the $54 billion on which the current Budget Act is based.