What a difference a year makes, even a quarter.
This time last year was when Orange County executives turned up their optimism. They drove California State University-Fullerton’s Orange County Business Expectations Survey—the OCBX—up seven points in the first quarter of last year to 95.2 from 88.2 in the fourth quarter of 2017, close to an all-time high. It hovered there into the fall.
Suddenly, they’ve drilled the index back down—almost seven points from 96.2 three months ago to 89.5 for this year’s first quarter.
“It is a big drop,” said Survey Director Anil Puri of the reading’s largest quarterly decline in more than two years.
“And you have to consider that the survey was taken in mid-December before the federal government closed and before the biggest part of the stock market selloff.”
The good news is that the index still stands about where it was at the end of 2017.
The quarterly gauge measures hiring, sales, purchasing, capital investment and profit forecasts of local business owners, along with their view of the regional economy.
Puri and the Woods Center for Economic Analysis and Forecasting at CSUF’s Mihaylo College of Business and Economics have been querying business leaders here every quarter since 2000.
Any reading of the OCBX above 50 is positive, an expectation of future growth. The last ballot result of 89.5 portends steady growth and 50 remains a long way south.
Puri said executives cited two major concerns, both emanating from Washington, D.C.—political dysfunction and mixed signals now being sent by the Federal Reserve.
“They [the Federal Reserve] were going to do three raises next year, now it’s only two and that has business owners concerned,” Puri said.
The latter is sort of a darned if you do, darned if you don’t proposition for the central bank.
More tightening means higher interest rates, which raises borrowing costs and slows down the economy. The Fed’s decision to ease up on rate increases in 2019 didn’t bring cheers, though, but rather raised concerns about why—central bankers appear to see that the economy is slowing down.
“The Fed can’t win here,” Puri said.
Indeed, Federal Reserve Chairman Jerome Powell elicited criticism from President Donald Trump and Wall Street after the latest hike on Dec. 19, bringing short-term borrowing rates to a range of 2.25% to 2.5%.
It was the fourth increase of the year and Powell’s fairly rosy comments on jobs, inflation and economic growth, were followed by a steepening of the selloff on Wall Street.
U.S. equities ended 2018 posting their worst performance in 10 years.
“No one likes ambiguity, especially the markets,” said Rick Hoegler, the second-generation president of Tustin-based property manager Pan American Properties Inc., which manages more than 3,200 apartment units.
“Hopefully, the politicians [and policy makers] will figure it out.”
Consumers, with their spending composing two thirds of the U.S. economy, aren’t fond of uncertainty either, particularly on the direction of mortgage rates.
“There is softening in the real estate market, especially housing,” said Wayne Pinell, managing partner at Irvine-based accounting firm Haskell & White LLP.
“These things suggest we are due for a correction in the economic trend. Therefore, we and some of our clientele look to the future with cautious optimism, but we are formulating backup plans should the economy soften.”
“People ask me for instance, ‘Should I buy a home right now?’ and quite honestly I say I would wait 30 to 45 days,” Puri said.
“See what happens with the federal government shutdown and some other big things—the Fed’s meeting again in January—before I would commit to a big purchase.”
Across the Board
In their predictions for the first quarter, local executives slowed down their growth forecasts in all aspects of business, including investment.
As an example, three months ago about 45% of respondents expected a boost in purchases of inventory and investment in equipment and facilities. That total fell to 36% in the latest survey.
“Property owners are more cautious as to how money is being spent on renovations,” said Pan American’s Hoegler. “Rent growth has all but halted over the last couple of months. Owners want full buildings, lower expenses and maximization of cash flow.”
Pan American, which also manages industrial, office and retail properties, now does about $7.5 million in business and employs about 145. Both are records for the 35-year-old company. So Hoegler keeps some perspective on the most recent events.
“Occupancy is still at an all-time high,” Hoegler said, but he added that there’s “renter fatigue,” as wage growth hasn’t kept up with the annual rent increases.
A healthy 65% of executives still expect their own sales to grow this quarter, albeit down from 73% in the fourth quarter. Some 38% expect to boost hiring, which is down from 45%. And 9% expect to cut jobs, up from only 2% expected to trim payrolls three months ago.
Orange County’s unemployment rate stood at 2.8% as of November while the U.S. was at 3.7%, a 49-year low. The jobs figures are trailing indicators, reflecting November’s labor picture.
The biggest drop was in profit expectations, with 47% of respondents now seeing a fatter bottom line compared with 64% three months ago.
Certain About Uncertainty
The CSUF survey always ends with a “special question” for local execs. They were asked to prioritize six potential threats to the U.S. economy, and they didn’t waver from prior surveys: Political uncertainty remained the No. 1 concern, 42% compared to 44% previously, followed by tariffs and trade negotiations, 28% compared to 29%. Federal Reserve interest rate increases were third but notably higher, 21% compared to 15% previously.
“Regionally, expectations are still pretty good,” Puri said. “They’ve slowed down on hiring and of course the real estate market slowed down, but the concerns are more national and global. For instance, what’s going [to] happen with China on trade.”
“If we can get some situations politically to settle, we’ll get back to business as usual,” said Hoegler.
The survey was based on responses of 58 executives in OC. Thirty-five percent of responding companies employ more than 100, 33% 20 to 100, and 32% 20 or fewer. The survey was taken from Dec. 10 to 19.
