Orange County executives aren’t planning on a U.S. recession this year, according to the latest quarterly survey from California State University-Fullerton.
When asked about the probability of a national recession, only 9% of executives surveyed believe there is a 50% or more chance that the economy would contract before the end of the year. About 67% said the likelihood is less than one in 10 while another 12% estimated the likelihood at less than one in five.
“They don’t think recession is around the corner,” Survey Director Anil Puri said. “The stock market is good but the fight with China has a huge impact.”
‘Significant’ Drop, Still Positive
In June, Chapman economists also discounted a recession this year, reiterating its forecast for 2.4% GDP growth this year.
Still, the CSUF index showed a downward tick in optimism about their view of the overall economy and their own fortunes for the third quarter and beyond.
The Q3 Orange County Business Expectations Survey—the OCBX—dropped about four points to 87.1 from 91.3 in the second quarter.
“Significant. Not huge. Significant also because it’s three out four quarters the index has dropped,” Puri said.
“Also, because the sales forecast dropped the most.”
The index is below the levels of the past two years, when it largely hovered in the 90s. Nonetheless, any reading of the OCBX above 50 is positive, an expectation of future growth.
Positive Territory
The CSUF quarterly review measures plans for hiring, expectations for sales, profit, capital and inventory investment and an overall assessment of the economy— California and nationally.
Most of the third quarter gauges were just fractionally lower from the last reading.
A notable change was predictions of sales growth. While 54% predicted top line increase three months ago, only 42% expect a revenue bump in the third quarter; and nearly double now see revenues falling, 16% versus 9%.
“Tariffs and European slowdown,” Puri said, adding, “Also incomes here are going up but not in a huge way.”
Puri cited the wealth effect, the record-touching rise in equity prices and steadying of home values as a strong reason the index remains so solidly in the black.
In a bullish sign, only 4% expect to cut jobs versus 9% in the second quarter. About 95% expect to boost inventories and capital spending or keeping investment levels the same.
As to why the wealth effect may be impacting their views, beyond their companies’ operations, consider that July began with the S&P 500 and other major indices trading at or near their all-time highs. The S&P 500 is up about 19% year-to-date.
A recovering stock market has coupled with a rebounding local real estate market.
The fuel is cheaper money; the average rate on a 30-year fixed mortgage almost touched 5% last November. At midweek, rates were averaging 3.88% according to Wells Fargo & Co., down more than a full percentage point from late 2018.
Al W. Hensling has been in the mortgage business for 35 years.
“Rates have dropped to their lowest levels in nearly three years,” said Hensling, president of United American Mortgage in Costa Mesa.
“The recent drop has increased the refinance activity, as well as providing a boost to the purchase market.”
Hensling’s firm has seen a nearly 30% rise in purchase applications, and a nearly 50% boost in refinance activity compared to last year.
Caution Flags
The cost of doing business in California remains a worry to respondents.
The minimum wage jumped from $11 to $12 per hour on Jan. 1, and will reach $15 per hour in 2022. Los Angeles County hiked its minimum to $13.25, and the city of Los Angeles tacked on another $1 to $14.25. These wages apply to “large companies,” which are defined as 26 employees or more. Small companies also saw their starter-wage costs rise, for example $12 to $13.25 in the city of Los Angeles.
In Anaheim, the Disneyland Resort pre-empted a $15 per wage ordinance aimed specifically at the theme park operator by collectively bargaining with its union to raise its starting wage to $15 per hour, effective last January.
One company not sticking around: Mitsubishi Motors of North America Inc. said in June it’s leaving Cypress, its U.S. headquarters of 31 years, for Franklin, Tenn.—the latest Southland carmaker to head south for warmer business climes.
Its press release citied “cost efficiencies” among the reasons. Tennessee Governor Bill Lee welcomed the “200 high-paying jobs” that start arriving in August.
In Rod McDermott’s world, minimum wages and relocations are just among a myriad of issues facing clients. The McDermott & Bull co-founder and chief executive finds managers and C-suiters for companies across the country, in aviation and aerospace, construction, banking and technology—but the Irvine-based company does a good deal of searching for Southland businesses.
Here, he has wrestled with a shortage of qualified applicants. In Orange County, labor force participation is near an all-time low of 51% per CSUF’s Spring Economic Forecast, well below the 20-year national low of 63%, per the U.S. Department of Labor.
“Very complex issue why people here are staying out of the labor force,” Puri said. Factors include demographics, underreporting the labor force and the gig economy.
McDermott said he sees “some [clients] exercising caution on hiring due to uncertainty related to the trade war.”
He cited strength in sectors like software development but sees employers in certain sectors hesitating, such as aviation, due largely to the Boeing Co.’s problems with the 737 Max.
On balance he sees the careful trend continuing in the second half.
“Q2 seemed firmer than Q1 as companies moved forward with decisions on new initiatives,” McDermott said.
Still Going?
Beyond the international trade spats and spiking taxes and rules for doing business in California, angst among respondents centered on an economy they fear must run out of steam soon, at least by next year.
The National Bureau of Economic Research said the U.S. recovery entered its record 121st month of expansion this April.
Just as worries over an inverted yield curve between short and long-term rates create fears of a recession, the expansion looks to continue for the time being.
At the school’s spring forecast, Puri cited the curious case of Australia, where the economy has entered its 28th straight year of growth. He allowed that the U.S. could also approach such longevity.
“The trick is stability,” Puri said. “When they see a problem over there [they] take care of it quickly.”
Puri noted that such a tack is challenging in highly partisan Washington, especially approaching a presidential election year.
A question about the biggest threat to the U.S. economy resulted in a dead heat with 42% citing “political turbulence” in Washington, D.C., and the same number pointing to “tariffs and trade” disputes.
As for the politics of US-China trade talks, Puri reminded that “Prime Minister Li can wait. He doesn’t have to worry about elections.”
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 local business leaders every quarter since 2000. The survey was based on responses in late June from 43 local executives, a response rate of roughly 7%.
About 12% of their companies employ more than 1,000, 22% have 100 to 1,000 employees, 33% employ 20 to100, 33% employ 20 or fewer.
