O.C. Slowdown Won’t Last Long, Experts Say

The Orange County economy will slow considerably in the coming year, but lower interest rates and the region’s increasingly diversified business sector will cushion the blow, Cal State Fullerton predicted Tuesday.

“This economy is made up heavily of small firms,” said economist Anil Puri, who presented the school’s annual economic forecast. “That is where our strength is.”

The main pillars of the county’s economy--the entrepreneurial high-tech sector and the construction industry--should benefit from falling interest rates and will prop up the region as the national economy heads into a sharp decline, Puri said.

Although he does not believe a recession is imminent, the global financial crisis has yet to inflict its worst damage, he said. Locally, the pressure will be felt in the tourism and export markets, although the tourist flow is expected to rebound in later years as the Disneyland expansion now underway is completed and new attractions open.

This year the number of jobs in the county is expected to increase by 47,300, or 3.8%, about the same as in 1997, Puri said. But next year, employment growth will slow to 29,600 new jobs, a 2.3% gain.

“We’re talking only about a slowing,” he said. “The long-term trends are positive.”

Unless the financial situation in Asia deteriorates significantly, he believes annual job growth in the county will rebound to the 3.2% level from 2000 through 2003.

The same pattern is expected to hold for all of Southern California, which includes Los Angeles, Orange, Riverside, San Bernardino, Ventura and Imperial counties.

Job growth throughout the region will slow from 155,500, or 2.5%, this year to 122,100, or 1.9%, in 1999, but then will increase at least 2.2% annually the next four years, Puri said.

The weakest link will be Los Angeles County, where job growth is expected to slow to 1.5% next year and remain below 2% annually through 2003. Puri said the county’s manufacturing sector, particularly businesses that sell durable goods, will be hurt as the national economy weakens. He also said growth in the motion picture industry has stalled, creating a drag on Los Angeles’ economy.

In Orange County, the real estate market continues to be a major economic engine, but it will also begin to decelerate in the coming year. Housing prices will finish 1998 with a strong 12% rise, but annual appreciation rates will level off at about 5% for the next few years, Puri predicted.

Construction will also slacken somewhat after a blistering pace the past two years, he said. The value of residential and nonresidential building permits is expected to fall next year by about 22% and 35%, respectively, although they’ll remain at healthy levels.

Building What Market Can Absorb

The projected declines in part reflect the building industry’s reluctance to return to the excesses of the late 1980s, said Christine Diemer, chief executive of the Building Industry Assn. of Orange County.

“Everyone is in tune with going a little slower and building what the market can absorb,” she said. “In 1999, we’ll see a settling down. It’s best to have stability in the housing market, without the high highs and the low lows.”

Two other important economic barometers, personal income and taxable sales, will continue their upswing. Both measures are expected to rise by about 5% a year or more for the next several years.

Orange County draws its resiliency from its diversity, Puri said. That’s why job growth has slowed modestly the past few months and remains at a healthy annual pace, the high-3% range. By contrast, Silicon Valley, which is far more dependent on high-tech exports, has seen a sharp drop in employment growth to the mid-2% level from more than 6% a year ago, he noted.

Hal Schultz, a partner at PricewaterhouseCoopers in Newport Beach, said the forecast reflected the Orange County economy’s shift during the past decade from a heavy reliance on aerospace and defense to a more efficient, multifaceted business sector.

That’s why the county is holding its own despite the turmoil in international markets, he believes.

Troubled Trading Partners Pose Danger

“If we can come to a soft landing, that’s very positive for the economy and the welfare of people in Orange County,” he said. “The fact that we’re looking at relatively low interest rates and relatively low inflation are pluses that make it easier to manage the situation.”

Despite the anticipated slowdown, Sergio Alfonso, vice president of Eldorado Bank in Tustin, said he hasn’t yet seen any slackening in the growth of local businesses. “What I’ve seen is the economy is still going at a pretty good clip,” he said, although he believes some firms might be bracing for a “chain-reaction” effect from the softening export market.

Among the biggest dangers to Orange County are the sickly economies of its two most important Asian trading partners, Japan and South Korea, Puri said. In an accompanying report on foreign trade, Cal State Fullerton economists said county exports to Japan fell 8% in 1997, while exports to South Korea tumbled 20%, although those declines were offset by increased sales to Canada, Mexico, the European Union and South America.

Overall, growth in county exports--which account for more than 13% of the total economy and nearly one-fifth of all jobs--has slowed significantly, according to Vincent Dropsy, an associate professor of economics who prepared the report. The 5.4% increase in exports last year, to $12.8 billion, is well below the annual average growth rate of more the 17% in the previous three years, he said.

Dropsy predicted that export growth will pick up to about 12% this year and 10% in 1999. But he warned that the situation in international markets is continually changing, making forecasting trade patterns particularly difficult.

It’s possible that the Asian economies will recover more slowly than hoped for, and that export growth will be more sluggish than expected, he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Positive Picture

Long-term economic trends remain favorable for Orange County. Key indicators will continue to show improvement during the next five years although the global financial crisis may slow growth, forecasters say.

Payroll Employment

(in thousands)

(bar graph)

Per Capita Income

(bar graph)

Taxable sales

(in millions)

(bar graph)

Note: 1998 totals are estimates, 1999 and beyond forecasts; Southern California includes Los Angeles, Orange, Riverside, San Bernardino, Ventura and Imperial counties

Export Market Growth

The growth of Orange County exports slowed appreciably in 1997, but should recover in the next two years. The growth in exports to Japan, the county’s largest trade partner, will be somewhat slower. Percentage increase in value from previous year:

(bar graph)

* Forecast based on a slow recovery from Asian crisis

Source: Cal State Fullerton