Chapman University’s Raymond Sfeir and I presented our 41st Economic and Business Review Update on June 19. People are always asking questions. So I summarized them here along with answers.
Although current inflation rates of around 1.5% seem mild, will recent wage increases of around 3% push inflation up and spook the Fed?
No. The fact that labor productivity is now increasing at around 1.5% means that actual wage increases are around 1.5%—right in line with current rates of inflation.
If the trade war with China is not resolved, what does that mean for the U.S. economy?
Our model points to a $40 billion decrease in real GDP as a result of the trade war. That would represent a drop of around 0.2% in real GDP this year. If the trade war is not resolved, the impact will be roughly double that next year. The tariffs will also increase inflation, but at this point it’s unclear how much.
How many jobs will be lost in California because of the trade war?
We estimate a loss of 43,000 jobs in California or about 0.2% of the state’s workforce.
That’s just this year. The job losses will mount next year as lower exports and imports cut into a wide swath of job sectors like transportation and warehousing, wholesale trade, financial activities and professional and business activities.
Does California really need to produce 500,000 housing units per year through 2025 as argued by Governor Newsom and others?
The call for 500,000 housing units per year is preposterous.
It’s based on a McKinsey & Company report that assumed California’s population per housing unit should equal the U.S. average.
A more realistic assumption is that the population per housing unit will remain the same through 2025. That points to a need of about 130,000 housing units per year—nowhere near Governor Newsom’s 500,000 pipe dream.
Is the Employment Development Department continuing to undercount Orange County’s job growth?
We believe so. We are projecting job growth of 1.6% in the fourth quarter of 2018 and 1.4% in the first quarter of 2019. Those percentages compare to lower EDD estimates of 1.3% and 0.9%, respectively. But even though our projections are about a half percent higher than EDD’s, both Chapman and EDD point to a downward trend in the county’s job growth.
Will lower mortgage rates lead to a housing recovery in the county?
We believe recent trends already point to a housing recovery from the sharp drop that occurred late last year and early this year. Assuming that mortgage rates remain at around 4% through year-end, our forecast calls for year-over-year increases in home sales and permit valuation during the second half of the year that will largely offset the sharp drop that occurred in the first half of the year.
Is there really a severe housing shortage in Orange County?
No. To keep the number of people per housing unit in the county at around 2.9, we will need to build about 10,000 residential units per year, not far off from current production levels.
Will the county’s job growth keep up with California this year?
No. Our forecast calls for job growth in the county of 1.3% versus growth of 1.5% in the state. A major reason for that is the fact that information-related jobs in the Silicon Valley are increasing at an 8% rate as compared to virtually no growth in such jobs in Orange County.
Are Orange County’s home prices ready for a sharp downward correction?
No. Although home prices are always subject to periodic corrections, our research suggests that the wide disparity in the county’s 2016 median home price of $733,000 versus $322,000 in the U.S. is fully explained by the following factors: the county’s higher median family income, the county’s relatively high amenities score and the fact that the county is located on the Pacific Coast.
Is California losing its mojo?
Yes. High rates of state and local taxation are leading to an out flight of California residents to other states.
The construction sector, which had been a major source of growth in the state, is slowing as population growth slows.
Perhaps most worrisome is the fact that outside of Silicon Valley, there has been virtually no growth in adding high-valued information service jobs.
Editor’s Note: James L. Doti, president emeritus of Chapman University, is one of the nation’s most accurate economic forecasters. Raymond Sfeir is director of Chapman’s A. Gary Anderson Center for Economic Research.
