Tough week to deliver a rosy economic forecast. The global equities markets were pounded by more than 10%, and earnings season here disappointed (see Q3 bank story, this page).
Anil Puri and Mira Farka didn’t let the drumbeat of lower share prices and rising interest rates drown out their call for at least 12 months and more likely 24 of national and regional prosperity.
During California State University-Fullerton’s annual economic forecast on Oct. 25 at Hotel Irvine, Farka rattled off the positives for the national economy, sprinkling the numbers and trends with pop culture references.
“It’s the economy’s Spartacus moment,” Farka noted. “Virtually every sector is on fire.”
Some examples:
• From 2010 to 2017, the U.S. economy grew at an annual rate of 2.2%. So far this year that rate is 3.2% as measured by real GDP.
• Annual wage growth over that same period went from 2.1% to 3%, “and the rate of income growth has been highest among lower-income individuals … this matters, shows the expansion is more broadly based,” Farka said.
• The new tax law is seen by the economists—directors of CSUF’s Woods Center for Economic Analysis and Forecasting at Mihaylo—as adding 0.8% to U.S. GDP over the next two years.
• And the U.S. has also found religion on cutting regulations, whose costs for businesses are ranked fourth highest globally.
“This administration has shown a passionate zeal for dismantling the Deep Regulatory State,” Farka said.
Of course there are the potential negatives, such as inflation, which could rise on higher interest rates and full employment. The U.S. unemployment rate in September was 3.7%, the lowest since December 1969.
Puri and Farka say there’s still some slack in the labor market, folks still in search of full-time work or just now rejoining the labor force.
They see inflation moving higher as measured by CPI, but only from 2.1% presently to 2.4% in 2020.
“That’s far from overheating. It’s better than it sounds,” Farka said.
She noted that corporate balance sheets are weakening, pointing to about $1.3 trillion in debt graded junk or below. She said to carefully watch the ever- scuffling Eurozone.
“All I can say is pray for Europe. It could snuff the life out of the expansion” in the U.S., Farka said.
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Puri painted a slightly less rosy but still optimistic picture of the economy in Orange County.
He noted that California’s Employment Development Department revised its jobs figure for Orange County up by 23,000 in 2017. That revision meant the county had 2% job growth last year when it added 33,000 jobs. It’s not as large as prior years, but neither is it indicative of an expansion running on fumes.
“The key factor for Orange County has always been economic diversity,” Puri said. “Construction has finally caught up, and business services, our largest sector, is doing even better, creating some 26% of the new jobs since the end of the Great Recession.”
Puri sees job growth slowing to 1.6% this year, 1.4% next year and even further to 1% in 2020. The county’s peak in job growth was 2015 (see graph at left). With unemployment currently at 2.8%, there’s not that slack in the local labor force as there may be elsewhere in the U.S.
Ric Franzi, a consultant to middle-market business owners, said many of his clients are feeling the pinch of the tight labor market due to housing.
“Talent is getting forced out of the county,” Franzi said. “The reasons, we all know too well, start with the high cost of housing.”
In fact, “many households have re-leveraged,” Puri said. “For us, the biggest concerns are high housing prices and a limited available work force.” Perhaps most worrisome is a prediction that the value of residential building permits will fall 25% this year, 14% next year, and another 4% in 2020.
Homebuilders may be cutting back as buyers see fewer benefits to home ownership after the restrictions on itemized deductions in the Tax Cuts and Jobs Act of 2017.
In Puri’s recent quarterly survey of local executives, the CSUF Business Expectations Index came in at 96.2, one of the highest readings in the 20-year history of the survey. Still, that is trending down from 98.1 in the third quarter—reinforcing what the jobs and housing-starts forecasts predict: Our best years in this record expansion are likely behind us.
So back to the movie and pop culture references for some finishing perspective, and why not some Kirk Douglas, who after all played Spartacus in the 1960 film.
“The expansion will meet its maker one day,” Farka said, “but not in the next two years. For now, let’s enjoy the sun.”
