Orange County’s housing market is already in recovery mode and the area’s overall economy will soon follow, after the region suffered “a devastating loss in jobs” during the COVID-19 recession, according to a Chapman University forecast led by President Emeritus Jim Doti.
Doti’s team of economists, including Professor Raymond Sfeir, said the U.S. will see a sharp upturn in the three-month period starting July 1, after the pandemic “decimated” the U.S. economy.
Employment will rebound in the second half of 2020, but the researchers still project the U.S. economy will shrink 5.3% this year, according to the measure of real gross domestic product (GDP).
The forecasters said OC’s economic diversity will aid the local recovery, while construction is “well positioned to weather the storm.”
They presented their forecast update—typically an in-person presentation with a large audience—virtually on June 23 due to the coronavirus pandemic.
Chapman’s team is widely respected for the accuracy of its forecasts. They tied for the No. 1 spot with UCLA in the Blue Chip Economic Indicators survey for accuracy in real GDP forecasting from 2004 to 2018.
In December, before the pandemic struck the U.S., the university’s economic team predicted 2020 GDP growth of 1.9%.
Housing Predictions
Doti predicts that the local housing recovery “will gain in intensity as the year progresses,” aided by an increase in affordability along with lower mortgage rates.
“That’s not to say that construction will be an engine of economic growth this year. On the contrary, it will take its share of lumps,” they said. “The cumulative loss in construction employment is forecasted to recover from a decline of 16.5% in the second quarter to a decline of 6.2% by year-end.”
The Chapman team said that by year-end in Orange County “our forecast calls for existing home sales to almost match that of 2019,” while residential building permits will also pick up.
Employment Drop
The Chapman report said payroll employment in OC plunged from 1.67 million jobs in the first three months of the year to just over 1.37 million in the recession-ravaged quarter ending June 30. During the same period, California lost about 3 million jobs.
OC jobs should rise back up to almost 1.6 million by the end of the year, according to the forecast for payroll employment. That could translate into a jobless rate around 6.7% in the final quarter of the year.
The hardest-hit jobs area by far in Orange County is leisure and hospitality, exemplified by the huge losses caused by the temporary closing of Disneyland in Anaheim. The Chapman economists said the sector lost 79,000 jobs in the current three-month period that ends June 30, when measured on a year-to-year basis.
Orange County’s unadjusted unemployment rate rose to 14.5% in May from a revised 13.8% in April as the coronavirus continued to have an effect, according to the state’s Employment Development Department. That included the addition of 5,800 jobs in the construction sector.
At the beginning of March, OC’s unemployment rate stood at 3.6%.
Could Be Worse
The economic downturn will be short but intense, while in OC it “pales in comparison to the huge losses suffered during the Great Recession” of 2008-2009, the forecast said.
The current recession is “largely in Orange County a leisure and hospitality led recession, whereas the Great Recession was a construction job-loss-led recession,” according to Doti.
The Chapman researchers’ prediction of 5.3% contraction in U.S. real gross domestic product this year contrasts with a 2.3% expansion last year.
More Optimistic
“Probably in comparison to other forecasts we’re more optimistic,” Doti said during the online presentation, one of two notable local economic forecasts announced last week (see California State University-Fullerton OCBX story, page 1).
Resorting to alphabet-based descriptions, Chapman’s team are forecasting a “V-shaped” recovery, indicating a fairly sharp rise back toward previous levels based on quarter-on-quarter annualized measurements. However, year-on-year comparisons yield a less dramatic U-shaped recovery.
The positive views about the GDP and a recession possibly limited to the first half of this year assumes there is no rebound in COVID-19 cases, and that is far from certain given recent reports from California, Texas, Florida and other parts of the country (see story, page 1).
Another potential danger on the horizon: there’s a “good chance of renewed inflation by mid-2021.”
Pension Dangers
Doti and his team reiterated prior warnings—last covered in the May 4 print edition of the Business Journal—about public pension liabilities possibly causing municipal bankruptcies.
One room for some modest optimism: the economists said that the “the V-shaped recovery we are forecasting will limit the carnage on public sector budgets.”
The Chapman forecast update team also includes Fadel Lawandy, director of Chapman’s Hoag Center for Real Estate and Finance.
