Orange County’s expansive economy is expected to slow considerably in 1989 but will escape a mild national recession and should pick up in 1990, First Interstate Bank predicts in its annual economic forecast.
The local downturn, like the national recession, will be driven by declining defense-related employment and a steep drop in consumer spending, said Phillip E. Vincent, a vice president and senior economist with the Los Angeles bank.
The medium- and long-term outlook for the county “continues to be optimistic,” Vincent said in an interview Wednesday, and the slowdown won’t qualify as recessionary because the economy will continue to grow, however slightly. California, likewise, will avoid a recession.
Vincent prepares First Interstate’s California economic predictions as well as forecasts for each metropolitan area in the state.
Other national or statewide factors that will affect the county’s economy in the next 2 years, said Vincent, include a round of inflation, a drop in personal income growth and a decline in construction.
In Orange County, he said, residential permits are expected to be down 15% this year from 1987 levels and will decline an additional 15.6% next year before picking up in 1990.
The 1989 decline “will be caused both by the general slowing of the economy and by a possible rise in mortgage rates,” he said.
“I also think that housing prices in the county might be down a little bit next year after rising so fast in that past year,” Vincent said. And that tends to put a damper on building.
“But of all the things in the forecast, the housing area is the hardest to predict,” he said, because of the huge home demand in Orange County.
Judging from vacancy rates, Vincent predicts that the value of commercial and industrial construction in the county will drop by 9.8% next year, to a level of about $1.2 billion, and will decline an additional 7.3% to $1.1 billion in 1990.
Construction should pick up once the vacant space is absorbed, but that will take a couple of years, according to the forecast, because the number of new jobs being created in the county is dropping.
The growth rate for employment is expected to match the statewide rate of 1.9% next year but sink to 1.6% in 1990, compared to the statewide rate of 2.1%. The average annual employment growth rate in Orange County over the past 5 years has been about 5%.
The county is “second only to Santa Clara County in its dependence on manufacturing for its economic base, and a significant share of its manufacturing is defense-related,” Vincent said.
He said defense spending has flattened out “and might even drop by a real 1% to 2%" over the next few years.
A decline in defense spending will have a ripple effect that will restrict job creation in other areas of the economy, Vincent said.
At the same time, housing prices in the county will continue to remain among the highest in the nation, which will discourage the unemployed from living here and keep the jobless rate well below the state and national norms, Vincent said.
Vincent predicted a statewide jobless rate of 5.5% for 1989 and 5.6% for 1990. But the anticipated rates in Orange County, he said, are 3.4% for next year and 3.5% for 1990. Economists generally consider anything below 4% to represent full employment.
“And a low unemployment rate puts pressure on wages, which in turn affects inflation,” said Vincent.
While the inflation rate in the Los Angeles region has remained below 5% for the past 2 years, Vincent said he anticipates a sharp increase to as much as 5.8% in 1989.
That, in turn, will result in a drop in retail spending: he estimates that taxable sales in the county will increase by only 3.1% in 1989, compared to a 6.8% growth rate this year.
“But compared with other parts of the state, the Orange County economy still is doing well and should keep doing well,” Vincent said.
AND THE LONG-TERM OUTLOOK 1988-2001: Where the New Jobs Will Be Category: Number of new jobs Construction: 8,488 Manufacturing: 6,673 Transportation and utilities: 10,835 Trade: 180,671 Finance, insurance and real estate: 96,666 Services: 218,680 Government: 19,831 Annual Growth in Employment, Population
Period Employment Population 1968-77 6.8% 3.5% 1978-87 4.0% 2.1% 1988-2001 ** 3.1% 1.7%
Source: State Board of Equalization
Source: Chapman College Center for Economic Research