The prospects for Orange County’s economy are dimming even more than California’s, according to Chapman University’s newest annual economic forecast.
“A very important trend is occurring right now—we’re at a nexus in California and even more so in Orange County,” renowned economist Jim Doti told an audience of 800 at the Musco Center for the Arts at the university’s campus in Orange.
OC’s 2017 payrolls are expected to grow more slowly than California’s: about 1.5% here vs. 2.1% statewide. The state’s lead over the U.S. in that metric is also narrowing, said Doti, who was president for 25 years of OC’s largest private university. An economist before he became president, Doti is a disciple of Nobel laureate Milton Friedman.
The slowing employment growth, housing appreciation and President Donald Trump’s 3% economic growth goals were discussed during Chapman’s 39th semiannual economic forecast from the A. Gary Anderson Center for Economic Research at Chapman.
The Chapman forecasts are often cited in major publications like the Wall Street Journal and Bloomberg Businessweek.
Here are the highlights of the presentation:
OC Employment
Orange County’s 1.5% job growth will be the slowest since the economic recovery began in 2009.
Orange County already has unemployment of 3.2%, indicating any future job increases unlikely from the unemployed returning to work.
“Orange County is at full, full employment,” Doti said. The slowing growth in employment “all goes back to construction.”
Construction jobs have been a major engine of growth in OC in the last five years, climbing from 72,850 in 2012 to an estimated 99,767 this year.
However, the number of residential building permits is projected to rise 3.9% this year, far below the 10.9% spike last year.
The report doesn’t see housing production increasing because of demographic trends. It pointed out that the working age population here of 15 to 64 may decline by 15,600 to 2.15 million by 2020, while 65 years and older may rise 101,000 to 536,000.
“New entrants to the labor force may add demand for housing. But that doesn’t look promising, given the projected graying of Orange County’s population,” the report said.
Housing Appreciation
OC housing prices should climb 6.2% this year, the forecast predicts. But the bubble is growing.
Doti said a key indicator of a pending crash in home prices is a rising number of days a home is on the market. He pointed out that sharp increases in the early 1990s and 2007-08 preceded a fall in home prices.
“There’s no question that housing prices are at an irrational level,” Doti said. “There will be a correction. Hopefully that correction won’t be a 30% drop in housing prices.”
Many statistics show OC housing is outpacing the ability of workers to afford them. For example, the ratio of a median home price to median family income is eight times in Orange County, compared to about six times in California and three times nationally.
Home prices in Orange County are exceeded only by Silicon Valley and parts of Massachusetts, Doti said.
The high housing prices are driving away talented employees between the ages of 25 and 40 who are seeking cheaper homes in cities like Austin, Texas, Doti said.
“We are experiencing a great brain drain,” he added.
One solution is to encourage high-paying jobs that can justify the home prices, he said.
Silicon Slowdown
From 2013 to 2016, payroll job growth in California outpaced U.S. job growth by an average of 1%. That gap is narrowing.
“We’re at a major tipping point,” Doti said. “California consumers seem to be more pessimistic.”
Two sectors explain the slowdown—construction and information services.
The report is more optimistic on construction jobs in the state, predicting a 4.4% rise in residential permits, compared to a 0.8% increase last year.
It predicts housing appreciation statewide of 6.5%., up from 5.5% last year.
The slower growth in Silicon Valley jobs will be particularly noticeable because they often pay three times the average for all employment sectors in the state.
“These job losses appear to be related to the fact that Silicon Valley housing prices are among the highest in the nation,” the report said. “Workers are relocating to other technology hubs in regions where housing is relatively more affordable.”
U.S. Economic Forecast
The U.S. economy will grow about 2.3% this year, down slightly from a 2.4% prediction made in December. The economy grew 1.6% last year.
However, the forecast says “a realistic expectation” of long-term growth in the U.S. economy is 1.6% rather than the 3% predicted by Trump.
Doti said there are two ways to boost economic growth to that magical GDP of 3%: job growth and productivity gains. U.S. job growth is constrained by low unemployment and projected declines in the working age population. Increased productivity would come from tax reform or regulatory reform.
The presentation included two video speeches by local Republican representatives Ed Royce, who said tax reform is “key” to economic growth, and Mimi Walters, who said she is “confident” about changing tax codes this year.
Doti was less optimistic, saying he couldn’t even get Democrats to present their own video at the conference.
“The Democrats will try to stonewall” in Congress, Doti said. “Because of this stonewall, it will be difficult to get legislation approved.”
He predicted inflation will remain constant at 1.7% this year and that the 90-day Treasury bill will rise 50 basis points by the end of the year. The economist added that the negative interest rate spread, also known as the inverted yield curve and a predictor of recessions, won’t occur this year.
OC Graphics: Chapman University-Anderson Center for Economic Research
Note:
Adibi Recalled
Chapman’s Economic Forecast is a fixture on the OC business calendar: 39 years old, consistently accurate—but never the same after 2016. Jim Doti’s “Major Domo,” Dr. Essie Adibi passed away last year. Here’s a look at the impact Adibi and his work had on the business community and all he encountered. — Pete Weitzner, editor.
