Economists See O.C. Economy Slowing Down

Despite a stellar performance so far this year, Orange County’s sprinting economy will slow considerably in the coming months because of Asia’s financial crisis, Chapman University economists said Thursday.

“We started out with a bang,’ said Esmael Adibi, director of Chapman’s Anderson Center for Economic Research. “But it’s going to lose its steam in practically every area of the economy.”

Employment growth will average a still-strong 3.7% for the year, down just slightly from 1997’s 3.8% increase. And an equal number of jobs--45,000--are expected to be added to county payrolls.

But Chapman said the annual figure will be skewed higher because of the extraordinary 4.9% year-to-year gain in employment registered in the first quarter.

For the remainder of the year, the university predicts that payroll growth will retreat to about 3.3%, and the county’s expansion will likely cool even more next year.

“The first quarter may have been a peak,” said Chapman President James L. Doti, also an economist. In 1997, “all the engines of economic growth were pointing up,” he said. “Now they’re all pointing down.”

The predictions were part of Chapman’s midyear update of its closely watched annual economic forecast last December. Although the projections have changed little, Chapman economists said that earlier expectations about the severity of Asia’s troubles are now being confirmed--particularly in the past few weeks with the announcement that Japan is officially in a recession.

Japan has now fallen from its perch as the county’s top export market, as the value of goods shipped there fell 9.3% from the first quarter of 1996, to $348 million in last year’s fourth quarter, Chapman found. In the same period, exports to South Korea fell 25.4%, to $106 million, while exports to Singapore dropped 9.6%, to $85 million.

As a result of Asia’s troubles, the county won’t add about 6,000 new jobs that it otherwise would have gained this year--possibly more, because that forecast does not take into account the recent worsening of Japan’s economy, the Chapman economists said.

Responding to the forecast, Gary Liebl, chairman of QLogic Corp., a Costa Mesa-based maker of semiconductor products, said he was “surprised and a little bit sobered by a number of the trends” in the county’s economy. “I feel the high level of confidence and enthusiasm we’ve seen over the last 12 months [is] going to be tempered by realism.”

William L. Healey, chief executive of Smartflex Systems Inc. in Tustin, said, “We’ve seen a lot of softness” in demand from Asia. His company, which manufactures data-storage products for firms that export to the region, restructured last year when the Asian crisis first hit. Its customers “have been burning off inventories and adjusting their own cash structures” to accommodate the drop in exports, he said.

County exports still will increase this year, but only by 8% compared with a 13.3% gain in 1997, as the problems in Asia are at least partially offset by growth in trade with other countries, Chapman said.

Mexico is now the county’s No. 1 export market, with the value of goods shipped there soaring 66.4% from early 1996, to $446 million in the fourth quarter of last year. Exports to Canada have also risen, by 15.3%, to $332 million in the final three months of 1997.

The county’s economic growth also will be stifled by a slowing national economy, Chapman said. Growth in the nation’s gross domestic product--the value of all goods and services produced--is expected to fall from a strong 4.2% rate in the first quarter to an anemic 1.5% in the fourth quarter.

Construction, despite an El Nino-related dip in the first quarter, will be the only major economic force in the county that will continue to fare well, Chapman said. Construction spending is projected to show strong gains, and prices of existing houses are expected to rise by an average of 7.3% this year.

But even the real estate market isn’t problem-free. The level of building permits being issued suggests that builders aren’t meeting the demand for new housing as quickly as they have in the past, Doti said. They’ve been constrained by a lack of available parcels that are ready for building, because developers who were burned in the last recession have been slow to ramp up again.

Art Svendsen, chairman of Costa Mesa-based home builder Standard Pacific Corp., agreed that demand for housing is strong, particularly in the city of Orange and in South County. But “finding new sites to build on is very difficult right now. It will continue to be that way for the foreseeable future,” he said. His company plans to build about 700 new homes next year, up from 500 this year, all in the price range of about $500,000.

Chapman forecasted that tourism, one of the county’s major industries with $5 billion in annual revenue, will remain flat this year as the positive effects of new rides and attractions are offset by El Nino’s dampening impact and a drop in Asian visitors.

Doti altered his forecast for interest rates from last December, when he predicted the Federal Reserve Board would cut rates. Noting a buildup of inflationary pressures, including low unemployment, he now believes the Fed will keep short-term interest rates stable. However, long-term bond rates, which the Fed does not control, are expected to edge up by year-end.

The Chapman economists noted that despite the gloomier outlook, Orange County’s economy remains strong.

The county’s taxable sales are expected to increase 6.9% this year, to $37.1 billion. “That’s tremendous growth, and the reason is Orange County income is growing faster,” Adibi said.

What’s more, the local economy will suffer far less from Asia’s troubles than Silicon Valley, which is much more dependent on exports to that region, he said.

This year, the number of new jobs in Orange, Los Angeles, Riverside and San Bernardino counties is projected to total 185,000, and will for the first time account for more than half the job growth statewide, Adibi said.

Southern California benefits from its “safety valve” of being a major distribution point for goods entering the country, he said. So if imports climb, there will be some offsetting effect to the slowdown in export growth as the region’s wholesalers, transportation suppliers and financial-service firms experience strong demand.

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Cooling Off

The U.S. and local economies are losing steam as a result of the Asian economic crisis. Quarter-to-quarter percent change in growth of national real gross domestic product and Orange County payroll employment:

U.S. Gross Domestic Product

(chart)

1998, 4th qtr.*: 1.5%

* Projection

Leading Export Markets Trend

Orange County exports to Asian countries fell as a result of the economic crisis. Value of goods shipped to leading Orange County export markets, in millions:

(chart)

Orange County Impact

Quarterly payroll employment growth, percentage change from previous year:

(chart)

1998

4th qtr.*: 3.3%

* Projection

Source: Anderson Center for Economic Research, Chapman University