The State of Orange County : 4 Views on What the New Year Holds for Local Economy
As Orange County enters the last year of the decade, it is widely regarded as one of the economically healthiest places in the United States. A place where most people have jobs, many are well-to-do and where recessions that flatten other areas pass through almost unnoticed.
But the county also has problems. They are not as grave as those that must be faced in the collapsed economies of the oil states--Texas, Oklahoma and Colorado--but they exist and should not be forgotten in the midst of the general euphoria over our economic good fortunes.
To examine what 1989 might hold for the county, good and bad, staff writer John O’Dell sought comments from four different perspectives:
- Banker Paige V. Simpson, 69, is president and chief executive of Citizens Bank in Costa Mesa. He heads one of the county’s oldest and best-performing independent banks. He has been its president since the doors opened Dec. 5, 1972. Before that, Simpson was a banking executive in San Diego. He attended college in Iowa and at the Pacific Coast Banking School, operated by the banking associations of the 11 western states.
- Ralph C. Sabin, 37, a partner and head of accounting and auditing operations at the Orange County regional office of the Ernst & Whinney accounting firm, is a specialist in issues affecting new and emerging businesses. He is a 1974 graduate of Loyola University with degrees in accounting and finance.
- James M. Peters, 53, heads one of the largest home building firms in the nation, J.M. Peters Co. of Newport Beach. He has been in the construction business since 1958, when he graduated from UCLA with a degree in business. He started Ponderosa Homes in 1968. In 1975 he sold it to Kaiser Aetna and began J.M. Peters, which he sold to Southmark Corp. of Dallas in 1985. He continues to run it under a multimillion-dollar contract that was part of the sales agreement.
- Mary Gilly, 36, is an assistant professor in the Graduate School of Management at UC Irvine. She specializes in consumer behavior and consumer services marketing issues. Gilly grew up in Dallas and holds a bachelor’s degree in economics from Trinity University, an MBA from Southern Methodist University and a doctorate in marketing from the University of Houston in 1979. She taught at Texas A&M; and Southern Methodist before coming to UCI in 1982.
PAIGE V. SIMPSON, President, Citizens Bank, Costa Mesa
Q. Economists who study the local scene tell us that 1989 is likely to be a repeat of 1988, which saw low unemployment, strong job growth, low inflation and real growth in personal incomes. What is your prediction for the coming year?
A. It is going to be pretty much the same. I think the county’s economy will be pretty robust, with interest rates ratcheting up a little over the first quarter and then coming down and ending the year lower than they are now as the Federal Reserve makes adjustments to avoid a slowdown.
I think that 1990 will be more difficult, however, more like 1982, with a few more problems and more unemployment nationally. But Orange County is a little insulated, so it shouldn’t be too bad here. The big question is what will happen in the real estate market. We have had such a run-up in real estate values here that it is difficult for small companies to locate in the county and for people to buy homes. That could lead to a significant reduction in business activity and that means more unemployment and even a decrease in real estate values like we saw in the early 1980s.
Q. One area of the local economy likely to suffer a bit in 1989 is defense-oriented manufacturing. What will that mean?
A. True, we have a sizable defense industry and there is likely to be a reduction in defense spending, which will lead to layoffs, but I would cheer a reduction in the defense budget even with all the problems it will bring.
A. It is taking too much of the gross national product to provide for armies and weapons. If we could reduce some of that spending and use the money in other areas, then the problems--like unemployment in defense, would be transitory. Other industries would develop and grow and provide jobs for former defense workers. If we can reduce defense spending, even if we spend the same amount of money in areas like health care, education and scientific research, then this part of California will benefit and will weather economic downturns better than most areas.
Q. You voiced concern about real estate values and their impact on business formation and on housing affordability. Do you see any solutions at hand?
A. A lot of business is going out to Riverside and San Diego now, just like businesses came to Orange County from Los Angeles in the late ‘50s and early ‘60s. And we will see more and more of the manufacturing businesses going there. But the high-income businesses will stay here and that will simply make this a higher cost area. The people who stay here will be able to afford the costs.
RALPH C. SABIN, Partner, Ernst & Whinney, Irvine
Q. Of an estimated 85,000 businesses here, more than 95% have fewer than 100 employees. What are the major issues local small businesses will face in 1989?
A. They probably will be the same as were faced in ’88: obtaining financing in a competitive environment and dealing with and controlling information.
I don’t think labor or overall economic trends in the United States are a problem here because the local economy is so diverse it is somewhat immune to nominal changes in the national environment. Oh, some things do affect part of the local economy. Like in the defense industry, where they are going to have to deal with cutbacks in federal spending. That could impact a certain segment of the county’s businesses, but it won’t have an overall effect.
Q. You say labor isn’t a problem, but business executives all over the county are complaining of shortages of certain kinds of trained workers. Why is this not a problem?
A. Well, the cost of housing certainly makes it hard for blue-collar workers to live here, and that will always be a problem. And the number of college graduates is on a decline nationally, so that cuts into the trained labor force, and we have a lot of trading of employees between companies. But so far, while recruiting has been a little tougher, it is not a significant problem because people are willing to make whatever concessions are needed to be able to live and work in Orange County. A labor shortage will become a significant problem here after it is significant in the rest of the U.S. But there is a lag because of the desirability of our area. So our problems, compared to other parts of the U.S., are much less.
Q. What are the information processing issues businesses must grapple with?
A It is important for companies to have a handle on information and to keep their knowledge of computerized information processing up to date. Computer systems and the software used to compile and find data keep changing and businesses must keep current. You cannot afford to be in business without adequate information to compete, and you need to know how to get that information. The days of one small guy doing well by capturing a forgotten niche in a big industry have given way to a lot of little guys all competing for the same niche. The race is won by the one who figures out first what is happening and needs to be done.
Q. What kinds of businesses have a good future in the county?
A We see businesses forming at a fairly consistent rate over the past few years. There has been a slowdown in high-technology electronics, but it is offset by an increase in medical technologies and health care services. Retail is still very healthy and I see a lot of new service-oriented companies forming.
Q. Some critics say that we don’t make anything in the county anymore, that we just sell each other services. Is that the case?
A. I don’t agree that we don’t make things here anymore. We just make things that are smaller and a lot more intelligent. We design homes and housing, we make electronic instruments and medical equipment, so in total we don’t produce less, we just produce it differently. And to support this production we have a lot of support-type businesses growing--law firms, accounting firms, consultants. I don’t believe this is bad, though. It is a misconception to say that the service industry is all fast food and minimum-wage jobs. A lot of the service industries are in highly skilled, technical, financial, consulting and legal fields.
Q. Several economists are predicting a local recession in late 1990 or early 1991. Do you see one coming?
A. People are always expecting and predicting recessions. There is always one out there. To not predict one would be folly. It’s just a matter of when. The presidential campaign focused attention on budget and trade deficits to the point they became a general public issue, so it is clear from a political standpoint that the Bush Administration is going to have to deal with it, and that could cause a slowdown--so this year there is a tangible reason for a recession.
Q. What are conditions like for small businesses in Orange County today?
A We have a strong, diverse local economy. There is tremendous technological support for most industries, with critical support in some areas, especially medical technology, which benefits from a quality educational system here. There also is a good national and international distribution network from here, and relatively good financial sources for debt and equity, and there is good information systems support. About 20% of my activities are in retailing and I can say that Orange County is a strong area for that because we have high income levels and strong employment. On the minus side, we have horrible traffic congestion and poor public transportation; the cost of housing is extremely high, and it is very competitive here, in that there are few businesses you can start that you won’t have competitors locally.
Q. Historically, as an economy matures, its small businesses begin consolidating. Are we in danger of losing the small-business base that makes our economy so diverse?
A. This is not a maturing economy. We are only in our late teen-age years, and it takes a long, long time to mature. One reason small business is exciting and strong in Orange County is that the opportunity exists here for people to get in the running for a few years and make a profit when they sell. Most people don’t get into small business for the long term. But this might change. There is a lot of criticism of businesses in the U.S. operating only for short-term profit, so if that changes, then we will see fewer, bigger businesses.
Q. And what is better for an economy?
A. Bigger businesses are more efficient, but they also are less stable. Business runs in cycles. When a big business goes down, it is a disaster for the community that has become dependent on it. With a lot of small businesses, you lose efficiency, but calamities that affect entire economies are less likely to happen.
JAMES M. PETERS, Chairman, J. M. Peters Co., Newport Beach
Q. When Orange County and housing are discussed in the same conversation, the topic invariably becomes the enormous cost of homes here. Is affordability the major issue facing the home-building industry locally?
A. It is one of them. The other big issue in Southern California is solving the transportation problem, because that affects everyone’s business. The shortcomings of the transportation system fostered a lot of slow-growth sentiment, which we saw demonstrated at the polls in June. This has got to be addressed for California’s overall betterment. Then comes housing affordability. We have seen a rapid run-up of real estate values, but incomes are not going up as fast, so things are out of whack. We think there will continue to be a strong market for homes in 1989, and that will keep prices strong, although I’d be surprised if it is as good as it has been this year, just because of that disparity between income growth and price growth.
Q. But how should the issue of housing affordability be attacked? Does government have a role?
A. We went through this cycle once before. Affordability was a major issue in the mid- to late ‘70s, but the building industry seems to have been able to produce units and satisfy demand. Nowadays, we builders have consumed a lot of the buyers of $500,000 homes, so market forces are going to address affordability. If sales of $500,000 homes drop, builders will look to homes in other price ranges. So I think we will see a greater level of affordability, probably about 3 years down the road. It’s not going to be because of any state-of-the-art breakthrough in development, however, but just because builders will be doing smaller and more efficient homes with fewer amenities.
Q. Are many builders looking to smaller units in higher-density developments as a means of cutting the retail cost of homes?
A. I don’t see any overwhelming trend toward that. There still is a great desire by buyers to have a detached home, so that is where the demand is. Orange County will have to become a lot more urban than it is now before we start putting people into real high-density developments, like 30 units to the acre. The norm today for detached is five to six units an acre.
Q. If the other big issue facing the building industry is fixing the transportation system, what are your thoughts on how it should be approached?
A. I’m not expert in that field. But a lot is being done locally to address the issue, and I hope we start seeing results soon. I think we almost need some sort of statewide control over freeways, to enable construction of them to go ahead without being blocked by local entities, as has happened in Irvine, Laguna Beach and Costa Mesa.
Q. Do you believe it is fair to charge builders fees for parks, schools and transportation improvements?
A. Ultimately, those costs are paid by the home buyer. It is probably not the most equitable system, because in many cases the improvements benefit the whole community, not just a single new development, so you end up with the new homeowner paying more than his fair share.
Q. Does the concentration of so much of Orange County’s remaining raw land in just a few hands--like the Irvine Co., Rancho Santa Margarita Co. and the Mission Viejo Co.--cause land prices to be higher than they would if ownership wasn’t so concentrated?
A. I don’t really believe so. It is the entitlement process that controls price. Landowners want to develop, so if they could get government entitlements to build any faster than they do now, they would develop faster. But the way the system works, there are entities that are not receptive to development, and that slows down the entitlement process. It is not simply a matter of the Irvine Co. sticking a “for sale” sign on a piece of land. They have to have the proper zoning to have the legal right to build on it.
Q. Will the big luxury homes continue to be an important part of the Orange County market?
A The move-up market--larger homes for people who have equity from an earlier residence--will continue to be viable. The luxury market, homes at $750,000 and up, is a very small part of the move-up market, but that too should be viable because of the desirability of Orange County as a place to live.
MARY GILLY, Assistant professor of management, UC Irvine
Q. What is the Orange County of the next few years going to be like for the consumer?
A That depends on what consumer you are talking about. If you talk about the high-income, well-educated professional, then it is going to be pretty good. But if you are talking about the lower income group, then things will be difficult. And even the well-off are going to have difficulties. For one thing, it’s going to be hard to find the lower-income service workers they desire--the people to do their cleaning, take care of their children and do their gardening and wash their cars. Even the traditional workers in fast food and retail sales jobs--those of high school and college age--are saying, ‘Why should I work here for $5 an hour when my dad can buy you 20 times over?’ The whole support structure here is going to deteriorate somewhat because of the high cost of living.
Q. That sounds grim. What does it mean for the community as a whole?
A I don’t know that we have seen enough of it over the long run to know. But my expectation is that prices will go up because wages will have to go up. The county will become a Beverly Hills/Rodeo Drive sort of environment. You can already see it because most new retailing that is coming in is geared to the upscale consumer. You wonder where the Sears and Penneys customers are coming from.
Q. Well, economists at Chapman College tell us the median family income in the county will be almost $50,000 next year. Perhaps they are coming from the two- and three-job families. Or do the medians really paint a true picture?
A. The median is just a look at the middle of the scale. But there are lots of people with incomes way below the median. You know there are people in Newport Beach making well over $1 million a year, so there have got to be a lot of people making $10,000 and $20,000 a year to pull the median down to $50,000. There is probably a good deal of opportunity in this county for marketers who go after lower-income people, but you don’t see much of that because everyone thinks of Orange County as wealthy.
Q. Are we creating a false world here?
A. As a parent, I worry about my children and other kids in Orange County getting false impressions of what life is like in most of the world. When kids feel deprived because they didn’t get a Porsche on their 16th birthday and don’t realize there are people out there who can’t make the monthly rent and even have trouble coming up with bus fare, then I think we are raising people who will be disappointed with what should be good performances as adults. I honestly think we are setting our children up to be disappointed as adults. These attitudes account for a lot of the consumer debt you see. People are not
willing to make sacrifices to get things because they didn’t see their parents making sacrifices and they don’t see the poor segment of the community. In the future, people who don’t grow up to have a mansion in Laguna Hills will feel like failures.
Q. How do we address this? We can’t force people to give up their life styles.
A I guess the best way is by stressing volunteerism. I think that as we become more materialistic we become more secular and insular, and I think that well-to-do people need to be out there in the real world to see how others live so they appreciate what they’ve got. We should all be trying to help the less fortunate. That gives us a well-adjusted outlook.
Q. One of the major factors in the high cost of living here is housing. Does your research show that housing costs are sucking up so much money in Orange County that it is depriving other parts of the economy--by cutting into other retail spending, for example?
A. I don’t have any figures, but people have got to be cutting back. In the Texas housing boom in the early ‘80s, I remember seeing pictures of people who had bought great big homes but were furnishing them with a folding chair and a TV tray. People here are working more to make house payments, so they don’t take vacations, they keep their cars a year longer. You can become a slave to your house, and other kinds of purchases are delayed or forgone. When I see newspaper reports of people lining up to pay $400,000 for a J.M. Peters house and even getting into fights over places in the line, I wonder if I’m the only one in Orange County not dealing drugs for a living.