O.C. Growth: Thank the Military and Housing

James L. Doti is president of Chapman University in Orange and Donald Bren Distinguished Chair in Business and Economics

While bad news about the state of the national and California economies continues to surface, the Orange County economy keeps rolling along. Recently, the median home price in the county hit a record $300,000.

The Chapman University update forecast issued by the A. Gary Anderson Center for Economic Research also points to continued economic growth, albeit at a slightly slower pace. What accounts for the continuing strength of an economy that just five years ago was still reeling from the effects of the most severe recession in its history?

The recent Chapman update forecast helps illuminate the strength of the local economy. It also reveals several of the underlying forces that explain this strength and resilience.

In fact, the precipitous drop in the high-tech industry is hitting Orange County hard. This should not be surprising, since we have a higher percentage of manufacturing workers in the high-tech sector than the rest of the nation. The county will be under greater downward pressure from the sharp drop in new orders for information technology products.

But unlike other high-tech centers, O.C. still has a vibrant defense sector. So although Chapman's purchasing managers index points to declining job growth in the manufacturing sector, sharply rising orders for military goods point to growth in the aircraft and parts industry. This is especially significant given that military spending is one of the county's major engines of economic growth.

Although Orange County does not have a Boeing or Lockheed, we have many subcontractors that will be churning out a lot of product for the 339 F-22 Raptors to be built over the next decade. Current local orders for the Raptors, led by Parker Aerospace, already exceed $1 billion. An even bigger military project, the B-2 joint strike fighter, will be another shot in the arm for our economy.

The negative impact from lower stock prices will be greater in Orange County than in the nation, since higher income and wealth levels lead to greater exposure to stock market prices. But just as higher military spending is helping offset the high-tech crash, higher housing prices will offset most of the $400-million drop in spending that we estimate will result from lower stock prices.

A 40% average increase in electricity cost suggests that our residents and businesses will pay about $500 million more for electricity yearly. But even here, there will be a balancing act. We estimate that the retroactive federal tax cut will soon add $520 million to the local economy.

As for international trade growth, weakness in Japan and other Asian nations is cutting into the county's export growth. But unlike the Silicon Valley, where trade is highly concentrated on Asia, our strongest trade partner is Mexico, whose economy has remained relatively strong.

Construction activity this year and next is forecast to remain near record levels. Unlike prior business downturns in which the building industry was the first to go kaput, our forecasts call for building permit valuation of $4 billion this year and a record $4.4 billion next year.

Housing sales are negatively affected by prices being out of the reach of many buyers. Median family income in the county is about 10% lower than the amount required to buy a median-priced home. This is in sharp contrast to the nation, where median family income is 40% greater than that required to buy a median-priced home.

In spite of this affordability disparity, job growth in the county is 50% higher than the rest of the nation, and the inventory of unsold homes is much lower. Hence, housing construction will remain at high levels.

On the nonresidential side, the office vacancy rate jumped from 9.5% in the fourth quarter of 2000 to 11.2% in the first quarter of this year. But almost all of this increase was in south Orange County, where the concentration of the information technology sector is highest. In other areas, leasing activity remains strong, particularly for industrial and research and development space.

The diversified character of Orange County is the major factor contributing to its resilience. So while the county's job growth is forecast to slow from 3.4% growth last year to 2.4% this year and 2.8% next year, it will be far greater than job growth in the nation, which is projected to be less than 1% this year.

It wasn't long ago that we looked at Silicon Valley as a model for economic growth and prosperity. Now it's time for Silicon Valley folk to begin looking south for a new and improved economic growth model.

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