Orange County executives stared at a considerable wall of worry to start 2019.
A hawkish Federal Reserve raised interest rates again, the stock market fell almost 20% to close the calendar year and the Federal Government was just beginning what turned out to be a month-long shutdown.
Local business leaders’ nerves were reflected in their responses to California State University-Fullerton’s Orange County Business Expectations Survey—the OCBX—in January with a seven-point drop in first-quarter sentiment to 89.5, down from 96.2 in the fourth quarter of 2018.
Three months later, the worry has eased, but just slightly.
The just-released second-quarter reading climbed to 91.3, the first quarterly increase since July.
Any OCBX reading above 50 is positive, an expectation of future growth.
“We got past the closure of the government and the stock market selloff,” Survey Director Dr. Anil Puri said of the uptick in optimism.
“Businesses are relieved and the stock market has recovered.”
As of early April, the S&P 500 and other major indices are trading at year-to-date highs, the S&P having climbed back to about 2,880 as of press time, within 50 points of its all-time high.
While the business media has discussed whether there will be a recession in the next year or two, OC executives don’t plan on it.
Fully 100% are boosting inventories and capital spending or maintaining investment levels. Not one of the 46 execs who answered the survey is cutting back.
Puri points to the recovering stock market and a newly dovish central bank—interest rate hikes seem off the table for the year—for the improving outlook which still lags behind each reading in 2018.
“74% of executives say there’s a less than 20% chance of recession this year,” Puri noted, a healthy pop from 64% just three months ago.
Only 4% of OC executives see a better-than-even-money chance of recession in 2019.
“It appears that compared to the last quarter in the executives’ view there is now less of a chance of a recession this year. They are more bullish about the state of the economy during the rest of this year,” Puri said.
The CSUF quarterly review measures sales forecasts; purchasing, hiring and capital investment plans; and profit expectations of local business owners; along with their view of the regional and national economies.
Puri and the Woods Center for Economic Analysis and Forecasting at CSUF’s Mihaylo College of Business and Economics have been gauging the outlook of business leaders here every quarter since 2000.
Tax Cut Benefits
The latest OCBX ballot result of 91.3 portends steady growth. Consider that only 4% are trimming payrolls this quarter while 96% expect to hold the line or add workers.
The 2017 Tax Cuts and Jobs Act has goosed investment with its accelerated depreciation features, among other benefits.
Local ownerships’ more sanguine take mirrors U.S. consumers who in February pushed the Conference Board’s Consumer Confidence Index up 10 points to 131. The all-time high of 138 was set last October. Consumers make up 70% of U.S. GDP.
OC-based carmakers for example reaped some of that optimism in February, with Mazda North America and Kia Motors America of Irvine along with Cypress-based Mitsubishi Motors North America posting double-digit sales gains versus one year ago.
The Executive Survey’s results also reflect a record 105-month economic expansion that some observers fear has lost steam. The OCBX hung around record levels of 97-98 for most of 2017 and 2018.
“Not a whole lot of room for improvement,” Puri said, noting the executives on balance moved their sales and profit forecasts down.
“In the professional property management arena, we don’t see any slowdown or pullback,” said Rick Hoegler, president of Tustin-based property manager Pan American Properties Inc., which invests in and manages over 3,200 apartment units, along with industrial, office and rental properties.
While Hoegler sees trouble ahead in California on the regulatory front, Puri’s concerns are national or international, where trade tariffs, especially between the U.S. and China, remain in place.
“Lack of activity on tariffs and trade is on their [executives’] minds … an agreement with China is still not at hand,” Puri said.
And most respondents don’t expect Democrats and Republicans in Washington to provide any more than gridlock and “political turbulence” over the coming months.
The Special Question
The survey always ends with a “special question” for local execs—what is the biggest threat to the U.S. economy?
Politics topped the list with 44%, followed by tariffs and trade negotiations at 28%. Federal Reserve interest rate increases were third but lower, fretting 17% compared to 21% a quarter ago.
Federal debt payments, along with the languid economies of China and the EU were not a concern.
Government regulation became the No. 2 statewide concern in the second quarter, just behind the overall economy.
California voters in November thrashed rent-control measure Proposition 10 by 30 points. A similar rent-control measure failed to make the ballot in Long Beach.
But property owner and manager Hoegler sees politicians in Sacramento and some local pols going rogue.
“The state legislature talking rent control statewide after it was voted down, is concerning,” Hoegler said.
“This will create more legal maneuvering and costs for owners to renovate and be encouraged to continue to improve buildings that will be offset by increased cashflow.”
Survey Says
Puri said asking executives about the flattening yield curve “is perhaps a good special question for next quarter.”
In March, the curve briefly inverted, with yields on 3-month Treasury bills topping yields on 10-year Treasury notes. Such a peculiar inversion has presaged U.S. recessions going back decades. But not every economist is a believer.
“I’m not worried,” OC bond executive and Laguna Beach resident Mohamed El-Erian told the Financial Times last month. “The yield curve’s signal is not what it used to be,” El-Erian added.
The former Pacific Investment Management Co. boss is today chief economic adviser at Allianz SE.
Treasury spreads did spring back to normal the last few weeks with the aforementioned improved readings on the economy.
The CSUF OC survey was based on responses in late March from 46 local executives. About 15% of their companies employ more than 1000 people; 28% have 100-1,000 employees; 33% employ 20-100; and 24% employ 20 or fewer.
