Orange County is maintaining a sound economic recovery, according to Chapman University’s 2012 Midyear Economic Forecast. Presented this morning at the Hilton Orange County in Costa Mesa, the forecast details the current economic climate in the nation, state and county, and projects the coming trends through 2013.
Chapman forecast report presenters
Dr. Esmael Adibi (left) and Dr. Jim Doti
Dr. Jim Doti, Donald Bren Distinguished Chair of Business and Economics and president of Chapman University; and Dr. Esmael Adibi, director of the A. Gary Anderson Center for Economic Research and the Anderson Chair of Economic Analysis at Chapman, presented the report. It is produced by the A. Gary Anderson Center for Economic Research, a part of the George L. Argyros School of Business & Economics at Chapman.
The key message of the report: Orange County is continuing its recovery during a difficult economic time while leading the state and nation in terms of job growth and a lower-than-average unemployment rate.
California and Orange County have, in general, performed better than the country. Throughout the state, education and health services was the only sector to gain jobs through the recession and recovery periods, designated as the fourth quarter of 2007 to the first quarter of 2012. During the recovery period –the second quarter of 2010 to the first quarter of 2012 – the leisure and hospitality, information, and professional and business services sectors have shown the most secure job growth.
“Speaking of Orange County, we’re seeing a little bit of a rebound of construction, in residential development,” said Adibi. “Other areas that are seeing growth are leisure and hospitality, healthcare, and private education.”
Adibi pointed out that in California, recession and recovery periods have been correlated to the state’s region.
“When you look at 2011, coastal counties in the state have done much better than the inland areas: San Francisco, Silicon Valley, Los Angeles, Orange County and San Diego all did much better than San Bernardino, Riverside and Modesto,” Adibi said. “The reason for it is the coastal counties have much more diversified economies, whereas the inland economies … are much more single-engine economies, and that economy is [based largely on] construction.”
The economic forecast doesn’t say, however, that Orange County is well on its way to booming economic growth. The current job growth rate for 2012 is about 1.8 percent, and Chapman projects a 2 percent rate for 2013. Adibi cautions against labeling the current environment as a rosy picture. “That would be 3 percent,” he said.
“Orange County needs to generate about 15,000 new jobs just to keep unemployment in check,” he said. “We always have an increasing labor force, with new graduates entering the workforce; about 15,000 jobs are needed to just absorb those people. New growth in 2013 suggests that we’ll see a gradual decline in our [local] unemployment rate.”
Residential housing construction is finally picking up, contributing significant weight to the recovery. The three years of historically low levels of housing construction during a critical time is accounted for by the surplus of housing-bubble-created inventory. But several meaningful indications that change is ahead have been noted in the housing industry.
Homeowner and rental vacancy rates are beginning to approach their historical long-term averages. At the same time, housing affordability has been steadily rising and currently sits at an all-time high. With increasing housing prices comes rising household net worth, which in turn fuels consumer spending.
This last sector is by no means a stable one. Chapman officials characterize consumer spending as having “an ax over its head,” which, should it fall, would divert or curtail the growth.
“The ‘ax’ in question is the looming prospect that the Bush tax cuts of 2001 and 2003 will be allowed to expire. A ‘sunset clause’ would have led to their expiration in 2010, but Congress finally reached a compromise in December 2010 to extend the Bush tax cuts through December 2012,” noted the Chapman report. “After a lot more political posturing, we believe Congress will kick the can again and extend the cuts through December 2013. The economic recovery is just too weak, and job growth too low to do otherwise.”
At the national level, the most significant nondomestic factor impacting future outlook is, predictably, the Eurozone crisis across the Atlantic. Specifically, this relates to the question of Greece’s position within the Eurozone, whether the country may leave the group, and the possibility that other countries may follow.
Chapman officials assert that although Europe is experiencing its own recession, there is currently no danger of a full economic meltdown. In a standoff between German austerity and Greek improvidence, Germany is likely to give ground first, simply because it has much more to lose.
“A Greek exit would increase the likelihood of Spain, Portugal and Italy exiting as well,” the Chapman report states. The resulting billions of euros in loan losses would eliminate most of the capital in German banks. Even worse for Germany, a Eurozone breakup would decimate German exports as a euro unhinged from creditor nations would soar in value.”
It remains to be seen, the economic forecast says, whether the new Greek government will back the austerity measures demanded by Germany, but the rapidly deteriorating Greek economy continues to create political instability in that country.
While the forecast highlights a number of positive economic trends, none are strong enough to boost the economy toward a track of sustained growth. However, the forecast’s projections indicate no further narrowing of the interest-rate spread, a positive sign that recovery will continue. (The interest-rate spread – the difference between long- and short-term interest rates – is among the most accurate indicators of economic health and determining recessionary conditions.) Chapman officials project that interest rates will stay low throughout the rest of the year and pick up toward the end of 2013.