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Thursday, Jul 18, 2024

OC Executives Turn Up Optimism

Since California State University-Fullerton’s Orange County Business Expectations Survey reached an all-time high of 98.1 in the third quarter of 2018, local executives began adopting a less sanguine view of their own futures and the overall economy.

Faced with the prospects of continuing higher interest rates and political and trade uncertainty, they shaved about 10 percentage points over the course of the past year in the OCBX index.

Optimistic, but not as much, as any index reading above 50 is positive, signaling an expectation of growth.

A bit more optimism returned the past quarter.

Respondents pushed the index back to 90.9 for the upcoming fourth quarter, up from 87.1 in the third quarter.

“OC executives don’t share the national mood,” which isn’t as positive, Survey Director Dr. Anil Puri said.

“They’re looking at internal demands and bookings. They expect higher sales and profitability.”

The CSUF quarterly review measures plans for hiring, expectations for sales, profit, capital and inventory investment and an overall gauge of the economy—California and nationally.

This survey was based on responses in this month from 55 local executives. About 39% of their companies employ more than 100 while 35% have from 20 to 100 employees and the remainder employ fewer than 20.

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.

Higher Sales Expected

Most fourth-quarter measures came up higher, most notably their predictions for sales and overall growth in their industries.

In this latest forecast, 56% see sales growing at their operation, a significant bump up from 42% in the third quarter.

About 55% see growth in their respective industry, versus 49% in the prior quarter.

“Executives here are continuing to be optimistic about their own businesses despite the fact that the national data coming in is rather weak,” Puri said. “But that doesn’t deter from their own businesses.”

Local executives continue to believe that a national recession won’t occur in the next 15 months.

When asked to predict the likelihood of a recession by the end of 2020, more than 60% of the respondents believe that there is a 20% or less chance (see chart 1).

“That figure was about 30% nationally just recently,” Puri noted. “Then the Fed took action, and the national number improved a bit, but the uncertainty in growth and Europe are still a concern.”

In June, about 67% of the respondents said they didn’t see a recession by the end of this year. Only 9% said they thought the chance was greater than 50%, similar to the 9.1% who said so about a recession this year.

Thus far, Orange County isn’t showing signs of a slowdown. Its unadjusted unemployment rate fell to 3% in August from a revised 3.2 % in July and below the year-ago estimate of 3.1%, according to the state Employment Development Department in a Sept. 20 report.

About 38% of the respondents said they planned to increase headcount, similar to the third quarter.

However, 9.1% said they expect to cut jobs, double the 4.4% anticipating headcount reductions three months ago.

Trouble Ahead?

A couple of troubling signs came last week when the Conference Board’s consumer confidence index fell to 125.1 in September from 134.2 in August and confidence readings in Europe and China have been touching 10-year lows.

U.S. manufacturing is barely expansionary, Puri noted. The IHS U.S. Purchasing Managers’ Index (PMI) in September reached 51.0, the highest figure since April and up from 50.3 in August. Readings above 50 show growth in the manufacturing sector. Last year, the PMI topped 56 in some months.

“One or two numbers by themselves don’t say recession,” Puri said. “But it is an early signal that consumers are nervous about what’s happening in the economy and politics. PMI has been falling but it’s still above 50%.”

Puri’s cautious comments are similar to another noted local economist.

Chapman University’s Jim Doti, one of the nation’s most accurate forecasters, in June reiterated a forecast for 2.4% GDP growth this year. However, earlier this month, Doti pointed to national year-over-year job growth slipping from 1.91% in January to 1.39% in August.

“Since 1967, every recession began when job growth dropped to 1%,” Doti wrote for the Business Journal. “While it may be too early to make a recessionary forecast, it’s getting close. Given the storm clouds that are forming, I think it’s time to batten down the hatches.”

On and On

The U.S. economy is now riding into its 11th year of a record expansion.

At his spring forecast in April, Puri pointed out the amazing run of the Australian economy, entering its 28th straight year of growth. He credited the island continent’s relatively bi-partisan style of tackling economic and political turmoil.

Back home, once again “political turbulence” emerged as the biggest concern in the CSUF survey’s other special question, with 39% citing the discord in Washington, D.C. as the biggest threat to the U.S. economy.

Of note, those responses came just before the U.S. House of Representatives and Speaker of the House Nancy Pelosi announced last Tuesday that they will pursue an impeachment inquiry of President Donald Trump.

The financial markets shrugged off the news in the first few days of trading and Puri allowed that it’s “still unclear which way it [the impeachment inquiry] will unfold or bend to predict an economic impact.”

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