Chapman College Report : Orange County Economy Expected to Grow in ’89

Orange County’s economy, led by a strengthened construction industry, should experience moderate growth in 1989 but is likely to be slowed by recession in late 1990 and early 1991, economists at Chapman College said Thursday.

One result of the predicted downturn could be a sudden steep decline in the appreciation rate for single-family homes in the county, said economist James L. Doti, Chapman’s acting president.

He said the median price of a single-family resale home in the county soared a staggering 20.4% this year but should rise only 11% in 1989. A new 5-year forecast introduced by Chapman this year predicts a further slowing of annual housing appreciation rates, to 5.6% in 1990 and 2.8% in 1991 before climbing again to 8.2% in 1992 and 9.1% in 1993.

For the coming year, employment, personal income, taxable sales and the gross county product--the value of goods and services produced here--are all expected not only to post real gains but to outperform the national norms, Doti said.

The extended forecast by Chapman’s Center of Economic Research calls for a short local recession in early 1991, followed by a year of sluggish recovery before things pick up again in 1992. The local recession will follow a national recession in late 1990, according to the forecast.

The gross county product, without adjusting for inflation, is expected to hit $65 billion next year, up 8.8% from the estimated $59.7 billion for 1988, said Doti. The gross national product, he said, is expected to increase a nominal, or unadjusted, 7.8% to $5.23 trillion from $4.86 trillion.

The college’s annual economic forecast was delivered Thursday to an audience of local business, banking and real estate executives. In an interview before the public presentation of the forecasts, Doti characterized 1989 as “a middle-of-the-road” year.

The local economy’s strongest feature, he said, will be a 3.1% annual increase in new employment--about 34,600 jobs--driven largely by strong gains in services, retail and wholesale trade, construction and some segments of manufacturing.

The employment gains should increase each quarter of the year, ending 1989 with a respectable fourth-quarter gain of 3.9%. Job growth is expected to slow dramatically in 1990, however, and tumble into an actual decline in the first quarter of 1991, marking the beginning of a mild local recession.

Definition of Recession

The federal government defines a recession as two or more consecutive quarters of real year-to-year decline in the GNP. That should occur in the last half of 1990, Chapman economist Esmael Adibi said. That national recession, Doti said, “will make itself known here in a slowdown in employment growth.”

Chapman defines a recession in Orange County as two or more consecutive quarters of actual decline in new employment.

The county’s recession will lag behind the national downturn because “the local economy is healthy and diversified,” Doti said. “But it is not resilient to the point that Orange County does not suffer in a national recession, although it probably suffers to a lesser extent than many other areas.”

For the national economy in 1989, Doti is predicting a 3.1% gain in real (inflation-adjusted) GNP, an upward tick in both short- and long-term interest rates in mid-year and a 5% inflation rate, up from 4.1% for 1988.

Chapman’s forecast--based on a computer program that uses several hundred pieces of information to produce national and local forecasts--in recent years has tended to be slightly more pessimistic than those of other economists. But the 1989 predictions for the national and local economies are in close agreement with several others, including those of First Interstate Bank.

One feature of Chapman’s annual presentation is an “eating crow” segment in which Doti explains where the previous year’s forecast was wrong and where it hit the mark.

The biggest error in the national prediction for 1988, he said, was Chapman’s call for a low, 1.6% real gain in the gross national product. Instead, real GNP now is estimated to have climbed 3.9% for the year. Doti attributed the unexpectedly strong GNP increase to an “unexpected inventory buildup” by business.

On the local level, the only significant misses were Chapman’s predictions that the value of permits issued for all types of construction would drop 5.7% from 1987 levels, to $3.28 billion, and that the median of single-family resale homes would climb 10.2%.

The current estimates, Doti said, are that housing prices soared 20.4% during the year--the highest climb in more than a decade--and that the value of all building permits will rise 8.4% to $3.7 billion this year.

Doti said that building permit valuation will continue climbing in 1989, up 6.1% to $3.9 billion.

But recessionary 1990-91 will cause the value of new construction permits to plunge to a pre-1988 level of $3.6 billion, said economist Adibi, who prepared the long-range forecast. He said annual building permit valuation will sink to $3.4 billion in 1991 before climbing back to $3.7 billion 1992 and hitting a record $4.1 billion in 1993.

The improving construction scene over the past several years has helped the construction trades post impressive annual employment gains averaging more than 15% annually since 1984. But construction hiring began falling off this year, Doti said, and will post annual gains of 3.2% this year and 3.8% in 1989.

Industries expected to generate most of the employment growth in the county over the next 5 years, Doti and Adibi said, are business and personal services, retail trades, transportation and public utilities. Much of the gain in those areas will be generated by strong local construction activity and high levels of investment in the past 2 years in facilities for commercial and industrial activities.

An area of decreasing employment will be aerospace, the economists said. Defense spending cuts are beginning to have an impact and will lead to actual declines in aerospace employment through 1991.

Doti said the value of all personal income in the county--a category that includes wages, business profits and earnings from real property--is expected to rise 9.1% to $54.3 billion in 1989 from an estimated $49.8 billion this year. That compares to a 7.5% increase from 1987 to 1988. Those increases are not adjusted for inflation.

The median family income, he said, is expected to rise 10.5% next year--5.5% when adjusted for inflation--to $49,916 from the estimated $45,176 this year.

Doti cautioned, however, that data on income is continually revamped by the federal government and subject to significant changes.

HIGHLIGHTS OF CHAPMAN COLLEGE’S FORECAST

MEASURING ORANGE COUNTY’S ECONOMY

A comparison of county nonagricultural wage and salary employment and Chapman College’s Leading Economic Indicator Series.

Percent change from a year ago.

The Chapman College leading economic indicator series was developed as a tool to forecast changes in the rate of growth in Orange County employment. The series is based on a weighted average of movements in four key economic series: U.S. real gross national product, U.S. real monetary base, a moving average of lagged real building permit valuation levels in Orange County and a quarterly average of the NYSE Common Stock Price Index.