A Vision of the Future : Newport Beach Executive Helps Interpret Trends
The first of the season’s economic forecasts for Orange County was delivered Friday at Cal State Fullerton. This, the third such report by the university’s Institute for Economic and Environmental Studies, was pessimistic about Orange County’s economic recovery. On a statewide level, signals are mixed.
State employment officials said they underestimated job growth in California and that there may have been 200,000 more jobs than originally thought to have been created between March, 1993, and March, 1994. Here in Orange County, recent announcements of layoffs at Hughes Aircraft Co. in Fullerton and at AST Research Inc.’s manufacturing plant in Fountain Valley continue to have businesses worried that a local recovery may be lagging.
Michael Meyer, managing partner of the Newport Beach office of accounting and consulting firm Kenneth Leventhal & Co., says the lingering recession in California has made businesses anxious to want to understand what is happening in the local economy.
Given the increased interest and the numerous signals sent by the various economic reports, analyzing the forecasts made by Cal State Fullerton, UCLA, UC Irvine and Chapman University has become an even more important part of the work Kenneth Leventhal’s consultants do.
In an interview, Meyer discusses the growing importance of these economic forecasts and how his consulting group uses them to advise clients on doing business in Orange County.
Question: Why have these regional economic forecasts become so important?
Answer: Every one of our clients, more than in any time in history, is interested in what is going on in the economy because we have seen three or four years of a severe recession. Businesses in California had always felt that when there were downturns it was temporary, and now they are very concerned about trying to understand what will be happening. And it is our job to have a good knowledge base and have good advice to give.
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Q: Which of the economic forecasts about the local economy do you use?
A: We look at all of them, including the Chapman, UCLA, UCI and Cal State Fullerton studies. Chapman has been doing its economic study and projection of the Orange County economy longer than Cal State Fullerton and has a reasonably good track record at predicting, so we tend to rely on the Chapman study for Orange County.
The UCLA forecast is important even though it has no specific Orange County data. But it has a 40-year track record, so it also is a reliable source and it is well-respected. And whenever we try to find historical trends to predict the future we start with the national and state economy, both of which have an impact on the Orange County economy.
In UCLA’s last report, what I found most interesting was the fact that it was studying the revised employment data from the Employment Development Department and therefore revising its own analysis, which basically concluded that California had come out of the recession 18 months ago.
And to me that type of data and that understanding of the cycles, where (it appears) we had been forming a foundation for the past 18 months of future growth, then that helps to evaluate something like a Fullerton analysis, which says jobs are growing at a much slower rate than the EDD says.
I am skeptical of that type of an analysis (by Fullerton) because of what I read in the UCLA analysis.
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Q: Which indicators do you think are the most important?
A: The most important is job creation or loss. We are more focused on jobs than anything else. Job loss and job creation. A good deal of our client base is in real estate and there has been a fairly direct correlation between space occupied in offices, industrial buildings and in-house purchases and with job loss or creation.
All indicators are relevant. We are always concerned with consumer confidence--that impacts home sales. It also impacts the health of all the businesses that are retail or that are creating consumer products. We are interested in personal and household income levels and household size. We are also very interested in population growth figures. There is not just one figure that is meaningful.
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Q: You mentioned consumer confidence. Do you look at the UCI consumer confidence survey? And do you find it to be accurate?
A: Yes. That gives a close reading of attitudes in our back yard. And we think it is very meaningful and generally accurate. For example, in home purchases, consumer psychology is an extremely important element. For people to buy homes, they have to feel confident in their jobs and confident that the economy will be strong, so housing prices will be moving up. They tend to buy more homes.
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Q: Which indicators are the least helpful to you and least important to your clients?
A: National Industrial Production may not be a real high one for us. I am sure there are a lot that are less relevant. We tend to look at the overall package and use the information to get ideas about the big trends and signs.
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Q: What do your clients care most about, state or local projections?
A: They are more interested in the local information. And then they are interested in more microeconomic analysis. For example, if they are thinking of investing in a retail center they will be more interested in knowing the trends of the population and income and demographics within a five- or 10-mile radius. If they are interested in land development, they’ll want to know about the supply and demand of land in the area.
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Q: Is there something that is missing in these forecasts that would be useful?
A: If any of them were broken out for the regions of the county, that would be beneficial. South County’s economy is very different from North County. The (proposed) commercial, industrial development, occupancy and rental rates (for commercial properties) in different parts of the county are not reported on by the universities.
It is very important to anybody in property ownership; every employer is occupying space and the more that is occupied is an indication of growth and employment--and that means consumer purchases.
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Q: How do use the information in your own business?
A: We use the forecasts to create our own forecast, and we spend a great deal of time and money on that. Walter Hahn, who is a Ph.D. (in economics), heads up that effort and we have a staff of analysts to comb through all the data. We forecast Orange County and the Inland areas. We also compile an overall economic report for the Urban Land Institute.
We never accept the data at face value. We analyze it and look at the genesis of the data. Compare it with other sources. Do our own market surveys. Fullerton had been reporting job losses in Orange County. Our judgment is that the area from the 55 Freeway south has been experiencing job gains and we feel it is probably true for the entire county.
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Q: Have you ever used the university forecasts to make decisions about your own business?
A: Well, for example, our firm has expanded significantly into health care in Orange County and that is because we see that the health care business is one of the biggest expanding businesses in the country and here in Orange County as well. That is just one example of how a business uses these surveys to make a decision to move into a market or to expand.
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Q: What kind of advice do you give your clients based on the forecasts?
A: We advise lenders and the people that are looking to restructure existing debt. Take for example, a retail center. We can predict how retail sales will be in the future, so it will know how strong its tenants will be, so it knows how much to invest.
And also we use this economic data for portfolio sales when banks or insurance companies are selling off large portfolios of properties and mortgages, and we evaluate the derived investment value by projecting into the future and projecting future rents.
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Q: What can the average business get out of such economic forecasts?
A: The average business person gets confused because they get these things from so many different sources. My best advice is to look at trends over a one-year period and to look at information, such as the gross domestic product on the national level.
But the information they need is more localized than just the county data. They need information on the neighborhood where they have their business or at least the part of the county. Unfortunately, there are not good statistics on neighborhoods or parts of the county available to the local business person to study.
So I think their best bet is to join the local Chamber of Commerce, go to local meetings where people exchange information about how local businesses are doing.
