Orange County needs to create more high-paying jobs in the tech and innovation sectors to keep up with San Diego County and other areas in California, says Chapman University President Emeritus Jim Doti.
Doti spoke to the Business Journal on June 23, just hours before presenting his team’s 2022 Economic Forecast Update.
The midyear event, held at the Musco Center for the Arts at the Orange-based school’s campus, predicted a 12% drop in local house prices over the next 12 months, and the forecast predicts the U.S. may fall into recession as early as the end of this year.
While underscoring OC as a “tech center,” Doti said the most concerning factor for the local economy is “the slow growth in the advanced industries.”
“Why should Orange County, for example, be so much slower than San Diego, a comparable county?” Doti said. “You can’t blame housing prices. You can’t blame state and local taxes.”
The economists’ figures show OC job growth in advanced industries rising 10% from the first half of 2015 to the first half of 2021, while the comparable number for San Diego was 23%.
OC’s national ranking among the nation’s top innovation hubs fell to 12 at the start of 2021 from 10 in 2005. San Diego-Carlsbad was steady in the sixth slot.
In addition to trailing San Diego, Orange County lags behind other California markets like Los Angeles, San Francisco-Oakland, and San Jose in the creation of these high-paying jobs, the economists said.
The average annual wage paid in “advanced innovation industries” is $125,000, compared with an average of $66,300 for all other jobs in Orange County.
Advanced innovation jobs include a broad range of technology, software development, aerospace, scientific research, medical products and pharmaceutical development.
The most valuable local-based public company that falls in that sphere, Irvine medtech firm Edwards Lifesciences Corp. (NYSE: EW), is valued around $60 billion and employs some 5,000 people in OC.
San Diego County’s largest public co. is $142 billion-valued chipmaking giant Qualcomm Inc. (Nasdaq: QCOM), which employs about 13,000 at its headquarters.
While growth in high-tech and innovation jobs in OC may be lagging, Doti said a bright spot is the “fact that job growth is as high as it is,” with 188,000 jobs added in the county from the second quarter of 2020 to the first quarter of 2021.
“A lot of those jobs—almost half of them, 42%—are in low-paying leisure and hospitability jobs,” he said. “We’re getting closer to where we were before the pandemic, but many other counties are already there.”
OC’s unemployment rate stood at 2.4% as of May, according to state figures. It was 2.8% in February 2020, the month before the pandemic hit full-on.
“If you don’t have jobs in those (advanced innovation) areas, they’re going to go elsewhere and that leads to a brain drain” said Doti, who is also a Chapman economics professor. “It’s important to sustain high income growth, particularly in an area where costs are high.”
Those high costs, especially in housing, have been pushing people toward Riverside and the Inland Empire for years, as the median house price climbed over $1 million in OC in the past year, hitting a new high.
The median home price in the county is forecasted to start declining on a quarter-to-quarter basis from the present period. On a year-to-year basis, the Chapman forecast calls for a 12% decline in the median home price from $1,012,000 in mid-2022 to $891,000 by mid-2023.
Any benefits seen in price decreases for potential home buyers will be more than offset by higher interest rates, the economists note. The higher rates should reduce sales of existing homes in OC by about 20% this year, to 30,700.
Local companies have been turning to technology, and job perks, to keep things moving forward amid a changing labor market and other economic challenges.
“Despite continually rising sales, we have been able to maintain a steady state of staff by using improved technology to reduce the need for added labor,” said Don DiCostanzo, the CEO of Fountain Valley-based electric bike company Pedego.
Pedego has “an extremely low attrition rate because our staff is treated well, we offer an excellent range of benefits, and pay bonuses quarterly,” DiCostanzo told the Business Journal two days after the Chapman report was issued.
For more on what companies are doing to keep and retain employees, see this week’s Best Places to Work Special Report, starting on page 15.
Strong Track Record
The Chapman University economist team accurately predicted that U.S. economic expansion in 2021 would hit 5.7%. The researchers said it was the most accurate forecast for GDP growth among 50 so-called Blue Chip forecasts last year.
GDP growth will slow to 2.8% this year, they predict, with a recession likely in early 2023 or possibly late this year.
The recession—typically defined as a fall in GDP in two successive quarters—would push down OC job growth, spending and home prices, while a drop in taxable sales would mean trouble for municipalities needing to meet budgets. Construction would also slow down.
The other two leaders of the Chapman Economic Update team are Fadel Lawandy, director of the C. Larry Hoag Center for Real Estate and Finance, and Raymond Sfeir, director of the Anderson Center for Economic Research.
Auto Execs on Recession Planning
Damon Shelly, founder of the Shelly Automotive Group of luxury car dealers in Irvine, said last month that because “we’re starting to hear so much conversation about an upcoming recession, we’re looking at ways we can stay as efficient as possible, so we can weather that storm.”
Local auto fintech executive Andy Hinrichs said that while he neither predicts nor hopes for a recession, there may be at least one benefit from its effect on innovation.
“Tougher economic times tend to be good for innovation, because that’s when it’s needed to overcome the crisis,” said Hinrichs, the CEO of Digital Motors, whose Irvine firm was just acquired by Santa Monica’s TrueCar Inc. (Nasdaq: TRUE).
Hinrichs, a winner of a Business Journal Excellence in Entrepreneurship Award in 2018, noted that “innovation, in a certain way, is counter-cyclical.”
Rather than headwinds, current issues with inflation and the supply chain represent the importance of platforms such as Digital Motors, which offer broader choice to consumers, according to Hinrichs.
“We’re not driven by fear, we’re driven by the desire to innovate,” he said.
Economic Forecast Highlights
• On an annual basis, average job growth in Orange County in 2022 is forecasted to be 5.1% versus 5.5% in California.
• Of the total jobs increase of 188,000 in Orange County from the second quarter of 2020 to the first quarter of last year, 79,000 jobs were in leisure and hospitality.
• Orange County is lagging in the high-value-added Advanced Industry job sector over the 2015-21 period.
• Higher mortgage rates are forecasted to lead to a sharp decline in the County’s housing affordability.
• On a year-to-year basis, the Chapman University forecast calls for a 12% decline in the median home price from $1,012,000 in mid-2022 to $891,000 by mid-2023.
• Orange County has lost about 5,000 to 10,000 in population annually over the 2019-2021 period. The U.S. Census Bureau estimated at the OC population at 3.17 million as of July 2021.