Economic Outlook

The National Bureau of Economic Research reported in July 2021 that the pandemic driven recession that began in February 2020 ended in April 2020, lasting just two months. This was the shortest recorded recession, while also being the worst recession since the Great Depression.

While it is encouraging to see that many segments of the economy have returned to their pre-pandemic levels, there are concerns that the recovery in the last year is in now in jeopardy. Nationally, inflation and consumer confidence are trending in concerning directions. Across our county, the reduced labor force and escalating housing prices create the potential for increased unemployment impacting employers and consumer spending.

County of Santa Cruz Budget

Our General Fund Outlook shows continued future budget gaps ending at $9.7 million in FY 2025-26 before factoring in the risk of continued failures in the County’s aging facilities and impacts from the higher likelihood of entering a recession during FY 2022-23.

The County of Santa Cruz is in a unique position across the State as it is systematically underfunded when contrasting the extraordinary size of the population served to the systems that allocate funding to the County. The County serves three times the population than our county peers and serves more than the statewide county average. The nearly five decades of property tax regulations has resulted in the County receiving nearly one-tenth of Property Tax revenue per resident. The County receives only half of the sales tax per resident as compared to County peers, which will worsen after factoring in recent State administrative decisions to send more local sales tax to regions where online warehouses are located.

Chart A: The General Fund provides for community services including public benefits, behavioral health, public safety, and community development and infrastructure.
Click here to see full size

Other General Fund head winds that could widen our funding gap include Federal Emergency Management Agency (FEMA) Public Assistance reimbursement from COVID-19 and CZU Lighting Complex Fires claims. As reported to the Board on April 26, 2022, since the beginning of the COVID-19 pandemic through June 30, 2022, the County of Santa Cruz is expected to incur $130,094,356 in community response and recovery for COVID-19 pandemic programs. FEMA representatives have signaled that certain COVID-19 pandemic response costs may be recommended as not eligible for reimbursement, leaving the County General Fund potential at risk for $17 million to $19 million.

To help sustain current General Fund operations and priorities, staff will monitor the outcome of the June 7, 2022, ballot measures to increase the existing Transient Occupancy Tax, paid by tourists and others staying overnight at lodging facilities in unincorporated areas, and to have 12.5 cents of Santa Cruz County’s existing single-use cup charge be collected as a tax

Our General Fund forecast will be updated and provided to the Board on June 7, 2022, following the State of California’s release of the May Revise budget and updated revenue trend analysis from the first quarter and again when the budget is adopted in September 2022. Staff expect that out-year gaps will remain and will have impacts on our ability to sustain services levels included in the 2022-23 Proposed Budget.

National Recovery

Nationally, inflationary pressures and geopolitical conflicts are contributing to greater uncertainty and risk slowing economic recovery and growth. Due to continued global supply chain issues, reduced inventories, and sustained levels of consumer demands, recent price increases appear likely to remain. Higher prices will erode national and local consumer purchasing, likely pushing down discretionary spending, that could lead locally to reduce travel.

To control inflation, the Federal Reserve plans to raise interest rates multiple times throughout the year, with the same likely outcome of reducing consumer purchasing power from higher interest rates.

Consumer Confidence

Consumer confidence indexes indicate that consumers have maintained their optimism that, in the short-term, the economy is healthy. Since March 2021, the index has stayed above 100 indicating consumers remain optimistic. But the strength of consumer optimism has declined from the July 2021 peak of 129.1 down to 107.2 in March 2022. While the index is lower, consumers appear to retain their optimism in spite of Russia's invasion of Ukraine, increasing COVID-19 infection trends across the world, and expectations that high inflation including high gas prices will remain. These headwinds are not expected to change and could result in the index slipping below 100 and into a pessimistic consumer outlook. With consumer spending likely to exceed 70% of GDP by 2025, any slowdown in consumer spending creates higher risk of an economic slowdown.

Inflation

Producer Price Index. The Producer Price Index (PPI) increased to a historic 11.2% increase over the last 12 months ending March 2022. The PPI has never reached this level of an increase since the index was created in November 2010. Since inception, the index has averaged an annual growth rate of 2.2%. PPI offers another measure to gauge inflation, focused on change in costs for sellers that produce goods, resulting in higher consumer prices. PPI can be a leading indicator of future consumer price increases.

Consumer Price Index. Prices in the San Francisco area, as measured by the Consumer Price Index for All Urban Consumers (CPI), rose 5.2 percent over the last 12 months ending in February 2022. This is the highest rate since June 2021 when the annual rate reached 6.6%. The CPI components with the largest increases over the last year were used cars & trucks (39.7%), motor fuel (35.5%), utilities (13.1%), food (9.0%), and recreation (8.9%). CPI is the most commonly used form to track inflation as it relates to normal costs of living and is often used as a data point for increases normal costs of living.

Recession indicator

On March 31, 2022, the 2-year and 10-year Treasury yields inverted for the first time since 2019. Since World War II every yield curve inversion has been followed by a recession in the following 6-18 months.

The inverted yield curve occurs when the traditionally higher 10yr interest rate drops below the shorter-term rate. This is triggered by investors shifting demand to buying longer term bonds in anticipation of a near term slowdown, driving down long-term interest rates.

Regional View

County employment

Countywide Labor Force. Since March 2020, the labor force across Santa Cruz County has declined 4.4%, from 139,057 to 132,921. More concerning is that the county wide labor force is 8.3% lower than the peak of June 2019 as compared to November 2021 (or a decline of 11,983 in labor force). Labor force is defined as those who are actively searching for employment or waiting to be recalled from a temporary layoff. Those who are not in the labor force may be discouraged workers, marginally attached workers, or those who are part-time for economic reasons. Data is from DataShare Santa Cruz County.

Countywide Unemployment. Since April 2020, the unemployment rate across Santa Cruz County had declined from a high of 17.0% to 5.0% in November 2021. This level is close to the pre-pandemic 2019 rate of 4.8%. However, despite the rate effectively returning to our pre-pandemic levels, it is concerning that the size of the county wide labor force has declined by 11,983 from the peak in June 2019. Data is from DataShare Santa Cruz County.

County Household Income

Median household income across Santa Cruz County has increased by $22,730 (33.8%) since the 2011-2015 survey period and has increased by 5.9%, 5.4% and 9.4% in the last three years to reach $89,986. However, despite this increase, recent inflation and the steep trend of home price increases will counteract some of these gains. Data is provided by the American Community Survey within DataShare Santa Cruz County.

County Housing

Housing prices across Santa Cruz County have outpaced increases in household income. Since the quarter ended October of 2011 through the quarter ended October 2021, home prices have increased by 200.6% as measured by the U.S. Federal Housing Finance Agency Housing Price Index and 17.6% in the last 12-month period ended October 2021. The Housing Price Index measures average price changes in repeat sales or refinancings on the same properties. Data is based on repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac since January 1975.