Breathe a sigh of relief, Orange County. The region’s economy has at least one more solid year in store, and maybe more.
The economic expansion in Orange County—along with that of California and the U.S. as a whole—should continue next year, albeit at a slightly slower pace, predicted Chapman University’s closely followed annual economic forecast.
“Things are slowing down, but on the plus side, you still see Orange County outperforming California and the U.S., so that means there are still many opportunities out there,” said James Doti, president emeritus at the school in Orange and one of the country’s most eminent economists.
Doti spoke on Dec. 13 before an audience of 1,000 at the Segerstrom Center for the Arts in Costa Mesa.
The U.S. economy should grow 2.9% this year, up from Chapman’s revised June forecast of 2.7%.
While the stock market’s recent cratering has some people predicting the end of the decade-long economic expansion, Chapman is forecasting the U.S. economy should grow 2.4% next year.
“Growth will slow, but it will continue, and we will avoid the recession usually marked by a weakness in residential construction and investment,” Chapman said in its annual report.
The school is one of the foremost forecasters of U.S. economic activity, often cited by major media outlets. For example, in December 2016 it predicted U.S. gross domestic product would increase 2.3% in 2017, just shy of the reported 2.2%.
Doti noted that the U.S. economic expansion, which is going on 10 years, is “long in the tooth.” He credited last December’s corporate tax reduction from 35% to 21% for giving the economy a “steroids shot.”
“It will keep the economy rolling longer than it otherwise would have. If we didn’t have that tax cut, today we’d be talking about a recession next year, not a continuing recovery.”
OC Economy
The report criticized the methodology of the state’s Employment Development Department, saying it underestimated the number of jobs created in Orange County.
“We are right, and they are wrong,” Doti told the audience.
Chapman is predicting Orange County’s job growth will be 2.2% this year, a net increase of 35,000 jobs, while the EDD as of the third quarter suggests job growth of 10,000.
“Such wide differences can’t be ignored,” Chapman said in its report. “Job growth is the most comprehensive and timely measure of overall economic activity at the local level.”
OC’s job growth will slow to 1.7% next year, Chapman predicted.
The fastest-growing jobs sector in Orange County this year was construction, which climbed an estimated 4.7%.
“Most of the growth in construction is explained not by residential but by nonresidential construction,” the report said. “That category includes larger projects such as commercial buildings, hotels, schools and hospitals.”
It said valuation of permitted nonresidential buildings jumped 72% year-over-year to $3.6 billion.
By contrast, residential permits have declined since 2016, dropping 15% last year and another 7.3% this year. They should fall another 7.3% next year, hurt by potential homeowners leery of housing appreciation and rising interest rates.
The report therefore predicts OC construction jobs will fall 1.5% in 2019.
The biggest growth sectors here next year will be education and health, up 4.2%, followed by leisure and hospitality, up 3.1%. Both sectors are lower-paying jobs that won’t give a big boost to the local economy, he said. The report notes that jobs in the professional and business services sector should climb 3.1% next year.
Home appreciation is climbing an estimated 5.6% this year. However, the average days on the market it takes to sell a home in Orange County has more than doubled. That portends a slowing of appreciation to 2.9% next year.
“There’s still income to be made in residential real estate investments,” Doti said.
California’s Economy
California continued to generate more jobs than the rest of the country, 2% versus 1.5% for the U.S. this year.
California’s job growth should slow to 1.5% in 2019, the Chapman report predicts.
The state’s growth will hinge on major trends, such as the construction industry’s well-being.
A slowdown in residential construction statewide should be offset by major projects, such as freeway infrastructure.
More people are clearly leaving the state than entering it; a chart released as part of the report shows a negative net domestic migration from 2011 to 2016.
A net 163,000 left the state in 2016, up from 104,000 net in 2015 and 41,000 in 2016.
California’s expensive housing compared to the rest of the U.S. “is a major reason for the net immigration outflow from California to other states, one that has increased sharply in the most recent reporting years,” it said.
Arizona, Texas and Oregon are receiving the most Californians.
Current projections show an average decline of 1.8% per year through 2025 for the primary working-age population of 25 to 54.
The state’s biggest job growth percentagewise next year will be in education and health, up 3.1%, leisure and hospitality, up 2.8%, and professional and business services, up 2.6%, the report predicts.
US Recession?
A year ago, President Donald Trump forecast annual growth topping 4%.
Some prominent national forecasts predict a recession by 2020, a year Chapman hasn’t yet weighed in on.
Doti, who’s also on the board of directors of Whittier Trust Co., which has $13 billion assets under management and recently moved into a Newport Beach office, said the stock market isn’t overpriced, nor is it ripe for a major correction.
Issues like Brexit, Italy and China trade “are noise” that won’t affect the economy as much, Doti said.
Doti told the audience that the prior record for economic expansion, 40 quarters from 1991 to 2001, ended because of a drop in business investments and an inversion of the yield curve.
He sees the yield curve narrowing but not inverting and predicts investments in commercial projects will offset the drop in housing starts.
Doti, who prides himself on predicting 10-year Treasury bond yields, accurately forecast last year that it would rise about 60 basis points to 3%.
He sees the rate increasing another 40 to 50 basis points next year.
“These interest rate trends buttress our call for another year of expansion in our current recovery, making it the longest on record,” the report said.
