O.C.’s Economy Hurt by Loss in Manufacturing
The continuing movement of manufacturers out of Orange County is having a more negative impact on the local economy than the loss of defense-related jobs from federal budget cuts, a Chapman College economist said Friday.
“This manufacturing flight, generally unrelated to the defense cutbacks, has occurred largely as a result of high labor costs and the difficulty of meeting costly and ill-defined environmental standards,” said economist James Doti in a midyear update of Chapman’s annual Orange County economic outlook.
The exodus of manufacturers is already having an impact on real estate--slowing housing construction and price rises, according to the study by the private college’s Center for Economic Research. The projections are produced from various data fed into a computerized econometric model.
Presented to an audience of about 180 executives, the study--considered the most comprehensive and accurate look at the county’s economy available--projected employment growth in the county to remain low but to increase by 2%, or 24,000 jobs, this year rather than the 1.5%, or 18,000 jobs, predicted in December.
The jobs-creation estimate “still calls for a continuation of the downward trend that began in 1988,” Doti said in an interview. One result, he said, is that for the first time since 1982, the county’s employment-growth rate will be mirroring the state and national rates rather than outpacing them.
The local economic picture was drawn on the backdrop of a “near recession-like national economy with low productivity levels and a core rate of inflation that remains stubbornly high.”
While it is widely feared that massive defense cuts will cripple the Orange County economy, the study projects that the impact will be less severe than in past downturns because the local economy is more diversified today.
Doti said that in a worse-case scenario--a 4% drop in national defense spending this year, a 10% decline next year and an 11.5% cutback in 1991--the area would lose only 6,000 jobs, or 0.5% of current wage and salary employment levels, by 1992.
That is much less than 20 years ago with the defense cutbacks that accompanied the end of the Vietnam War. From 1967 to 1971, the county lost nearly 22,500 defense jobs, or about 5.2% of total wage and salary employment, he said.
“A broader perspective suggests that the Orange County economy will be much more resilent to defense purchase shocks than it was in earlier periods,” Doti said, noting, however, that there will be indirect negative impacts caused by any job losses.
A bigger problem than defense cutbacks is the shrinkage of the county’s manufacturing base. In an interview, Doti said that those leaving the county are no longer limited to dirty, labor-intensive plants but now include even newer, high-technology operations.
The drain is rooted in the increasing cost of doing business in Orange County, including high wages and expenses related to meeting stringent state and federal pollution standards. Several firms--furniture makers, paint manufacturers and lock makers--have announced plans to move in the last year because of environmental regulations, high land values and labor costs.
“These costs make it difficult for a manufacturing concern to survive in an increasingly competitive global marketplace,” Doti said.
The loss of manufacturers also makes it more difficult for other parts of the county’s economy to function well.
“While manufacturing accounts for only 21% of total employment, it should be noted that many jobs in the construction and service-related sectors of the local economy are dependant on a healthy local manufacturing base,” the study said.
Doti said that he and other economists at Chapman are beginning to see evidence that “we may be moving beyond the state where manufacturing firms stayed here and just did their expansions elsewhere. We may begin seeing a lot more manufacturers pulling up stakes and moving out completely.”
One result of the manufacturing flight, Doti said, has been to lower the demand for local housing. The study predicts a 9.1% drop in total new building valuation in the county this year and Doti said almost all of the decline “is coming out of the hide of residential valuation.”
He expects builders to take out permits for only 14,850 dwelling units this year, the lowest annual total since 1983 and down from 24,900 at the peak of the building boom in 1986.
Part of the reason for the drop in demand, Doti said, is that the higher-paid manufacturing workers are being replaced by lower-paid, service-sector employees.
The fall in housing demand has already affected appreciation in local prices. The Chapman study projects a slight increase in prices this year--about 3% to 4%, which is below the projected 4.5% inflation rate for 1990. That represents a steep plunge from the 24% rise in housing prices in 1989.
FEWER JOBS, MORE HOUSES
The increasing cost of doing business in Orange County is driving manufacturers elsewhere, pushing down demand for housing and dampening appreciation rates. The County’s Changing Employment Base The number of jobs is expected to continue shrinking this year in the high technology sector, which includes most defense-related industries, and durable-goods manufacturing. An accompanying decline in construction is predicted, as well. High Tech.: -2.3% Construction: -1.0% Other Durable: -0.7% Federal Civilian Govt.: -0.5 Finance, Insurance and Real Estate: 0.8% Retail Trade: 2.5% Non-Durable: 2.7% Transportation & Utilities: 2.8% State & Local Government: 3.1% Services: 3.5% Wholesale Trade: 5.8% Note: Employment levels represent the percentage change between 1989 and 1990.
Source: Chapman College Economic & Business Review
