Economists Say O.C. Boom Now a Recession : Forecast: Downturn to last through mid-1991 but should be mild, Chapman College forecaster says.

Orange County’s economy has dipped into recession in the past three months, economists at Chapman College said Thursday, bringing to a whimpering end one of the biggest and most sustained economic booms here.

No improvement is expected until at least mid-1991, but the recession should be “extremely mild” compared to past downturns, said economist James Doti in presenting the private college’s annual economic forecast. The recovery, however, is expected to be slow.

The county’s overall employment growth--the prime measure of the county’s economic health--is expected to fall in the first half of 1991 before again trending slowly upward. The recovery in the second half will restrain inflation and interest rates, he said.

The county’s woes are linked to the faltering national economy, which is either in recession or soon will be. A recession is loosely defined as a broad slump in economic activity and technically, for the county, as a loss in total jobs for two consecutive quarters.

“Orange County is not immune from the mild national recession. . . ,” the forecast said. “In fact the county is more vulnerable than most other areas to cyclical downturns.”

That is because of the county’s large share of construction and manufacturing jobs, two areas that have been hurt by the recent slowdown. In addition, the decline in defense spending has hurt Orange County more than the state or nation.

The area’s already-suffering construction and defense electronics industries--ravaged by layoffs, cutbacks and bankruptcies this year--will continue to be battered through much of 1991, Doti predicted.

The Chapman forecast, presented to about 1,000 local business executives at the college’s 13th annual economic outlook conference, is considered the most comprehensive and accurate look at the county’s economy.

The report predicts a recession spanning the first two quarters of 1991, but Doti said earlier this week that the recession began early in the fourth quarter. “We think that we are already in a recession pretty deeply and are about to start coming back out by the middle of next year,” he said in an interview. There is no unanimity on the state of the local or national economies. However, a majority of economists in several national surveys have said recently that that a recession has already begun or will hit in the first quarter of 1991.

Doti, who works at Chapman’s Center for Economic Research, said that his prediction of a mild recession is considered optimistic by many local executives whose companies are bracing for a more severe downturn.

He said that many of the center’s advisory board members--consisting of about 50 local executives--say privately that “this recession will be worse than the 1981-82 recession and that things have just started getting bad.”

Much of that pessimism is based on the very visible slumps in the construction and defense industries.

The construction industry--suffering from a slowdown in residential and commercial building--has lost about 2,750 jobs in the past year and is expected to put about 6,600 more workers on the streets in 1991, according to Chapman’s forecast.

A big chunk of the defense electronics industry is also mired in a much deeper recession than the rest of the manufacturing industry, with about 9,000 jobs trimmed from various high-tech payrolls in the county since 1987 and about 2,200 more layoffs expected next year.

“Certainly, you cannot minimize the hardship felt by those who have lost jobs or businesses,” Doti said. “Those two industry groups are in a deep recession.”

But he also said that the severity of the problems is not being felt in other sectors of the local economy. For that reason, he said, the recession is likely to be short-lived and mild.

In the last three major recessions--1970-71, 1974-75 and 1981-82--employment growth in the county turned into steep employment declines that lasted up to six quarters. This time, Doti said, employment declines should be last only two quarters.

The county should actually post a 0.1% employment growth rate for 1991, with a net gain of about 1,500 jobs for a year-end total 1.22 million, according to the forecast.

While that pales when compared even to the sluggish 1.5% growth rate for 1990, in which 20,500 jobs were added to county payrolls, it shines when held up to the 1981-82 recession, when 45,000 jobs were lost as employment in the county shrunk by nearly 2%.

The county’s construction crunch--fueled by consumer uncertainty, resistance to high prices and tight financing for builders in the wake of the collapse of the S&L; industry--is exerting the greatest downward pull on the local economy, Doti said.

The value of building permits issued in the county in the past year has plunged nearly 30% to an estimated $2.6 billion this year from $3.7 billion in 1989. The decline is expected to continue next year with an additional drop of 11.5% to $2.3 billion.

The federal government’s defense cutbacks have created another major drag on the county’s economy. The value of prime contracts issued to Orange County companies plunged 15.6% to $2.7 billion last year from $3.2 billion in 1987.

The defense cuts have hit harder here than elsewhere. Nationally, prime contract awards dropped 10% nationwide and 5.7% in California from 1987 through 1989, according to Chapman’s figures.

Most of the defense cuts locally have been in the electronics and instruments sector, Doti said, and most of that--resulting in the loss of 7,600 jobs since the beginning of 1988--has been in defense-related search and navigation equipment development and manufacturing.

Anticipated growth in export trade will offset some of the impact of the defense cuts. But Doti said “a continuing decline in prime contract awards in Orange County virtually insures that high-tech employment will decline in 1991.”

The Chapman forecast calls for a loss of about 2,200 high-tech jobs in the county in 1991--almost 2.5% of the total.

In other predictions for 1991, the Chapman forecast calls for a 4.7% inflation rate that will eat up nominal gains in taxable retail sales and housing prices and almost erase hikes in median-family income and the gross county product.

Before adjusting for inflation, the forecast says, the county’s gross product--the value of all goods and services produced--will increase 6.4% to $76.4 billion in 1991 from $71.8 billion this year. Inflation turns that into a 1.7% hike.

The same thing will happen with the county’s median-family income, the forecast says. The median income will still be among the highest in the country, at an estimated $56,380 next year, up from $53,000 this year. But that 6.4% increase is reduced to a relatively flat 1.7% gain when adjusted for inflation.

Housing prices are forecast to appreciate a mere 2.8% next year; that translates into a drop in value of 1.9% after inflation.

And taxable sales are expected to rise 4.8% to $30.5 billion from $29.1 billion this year--a real increase of just 0.1% after inflation adjustments are made.