The good news for 2013 is the housing market will continue to strengthen in Orange County and local employers will add 26,000 new jobs as the economic recovery countywide and nationally moves forward for the fourth straight year albeit slower than hoped.
Dr. Esmael Adibi (L) and Dr. James Doti
But expected federal tax hikes and budget cuts as well as the continued economic uncertainty overseas are wildcards in this fiscal forecast that could tip the nation back into a recession, according to Chapman University’s economic forecast released Wednesday.
“There is no question that the state and national economies are going to face some headwinds in the coming year,” Chapman University President James Doti told nearly 2,000 local business executives and leaders at the Segerstrom Center for the Arts. “It’s just a question of how strong those headwinds will be. A lot will depend on what happens in Washington and even in Sacramento.”
Avoiding the so-called fiscal cliff—a complex web of federal tax increases, spending cuts and deficit reduction measures—by year-end is key to any forecast next year. Doti and his longtime forecast partner, Chapman economist Esmael Adibi, based their forecast on a reduction in government spending by $200 billion assuming the two parties reach a political compromise.
The result will be growth in real gross domestic product of about 2.1 percent for 2013.
The Chapman report is prepared by the A. Gary Anderson Center for Economic Research.
The report stated that both Orange County and California enjoyed steady job growth in several sectors in 2012, most particularly the leisure & hospitality, professional & business services, and healthcare sectors, with the most development seen in the second and third quarters of the year. The rosy numbers indicate that healthy recovery is a reality, but while growth is returning, much progress is still needed; only two sectors, leisure & hospitality and education & health services, have employment levels exceeding pre-recession highs in Orange County.
One significant blow to the local workforce over the last few years came in the wallet: The total wage and salary of all employees in Orange County decreased by $8.6 billion since the beginning of the recession, in late 2007. The picture isn’t any brighter statewide as total wage and salary compensation declined by $57 billion across over the same period. Likewise, total payroll employment remains below pre-recession highs, both at the state and local levels.
The forecast predicts an increase of 1.8 percent in total payroll employment in Orange County in 2013, amounting to 26,000 jobs for the year. California is estimated to gain 234,000 jobs, a gain of 1.6 percent to its payroll employment.
A major positive development impacting the current local outlook is the rebound in construction spending. Housing permits have been steadily increasing in value since the low in 2009. The report projects an increase in total construction spending of 10 percent in 2013.
Moreover, the report anticipates Orange County home values will appreciate 4.2 percent this year followed by a 6.8 percent increase in 2013, an upward trend fueled by dwindling inventory and increased demand. However, prices are still well below pre-recession levels. Local home prices plunged 24.4 percent in 2008 alone and current prices are nowhere near the market high of four years ago.
Since the economy bottomed out in 2008-2009, it has been undergoing a slow-growth recovery, and based on the Chapman economists’ calculations, those trends are predicted to continue, moving into the fourth straight year of positive gains. However, the report is quick to point out that national economic growth is still very slow, weak and susceptible to knee-jerk reactions, such as any "sharply contractionary fiscal policy" out of Washington, D.C. The report estimates that real GDP (gross domestic product) growth for 2012 will amount to 2.3 percent, while forecasting growth in 2013 to fall to 2.1 percent.
"Barely able to generate enough job growth to reduce unemployment, the recovery appears to be locked in low gear," noted the Chapman report. "Forcing a contractionary fiscal policy on the economy now may be akin to the proverbial straw that breaks the camel’s back."
The report suggests the likelihood that Washington may pull away from the spending cuts and tax hikes that would otherwise occur automatically. It predicts that a series of measures will be enacted to curb adverse fiscal impacts.
The Chapman report predicts that:
• Payroll taxes will increase as planned, from 4.2 to 6.2 percent in 2013.
• The Bush tax cuts will be restored for at least one more year, but not for those earning more than $250,000 per year.
• Capital gains taxes will increase, and dividend income will be taxed as ordinary income.
• A portion of the fiscal cliff that calls for a reduction of $110 billion in spending will be revised downward to a cutback of $50 billion.
• Estate taxes will increase, and the AMT (alternative minimum tax exemption) will hit more taxpayers.
The report stated that, "Although our assumptions moderate the full potential negative fiscal impact, we still see reduced government spending and higher taxes cutting spending by at least $200 billion. Such a reduction in the deficit will surely have long-term benefits. But the effects will be negative in the short run, namely 2013."
The reason the short-term will be negatively impacted is that deficit reduction typically reduces pressure on capital markets and consequently lowers interest rates. But now, in the current “near liquidity trap economic environment,” interest rates are already historically low. "Hence," the report notes, "it is virtually certain that any increase in investment resulting from reducing the deficit will not be large enough to offset the drop in consumer and government spending caused by our falling off the fiscal cliff.”
The report detailed several positive trends in home sales and observed that prior Chapman forecasts identifying an early housing turnaround have proved to be correct. These trends have continued in 2012 and, the report says, are projected to continue into the new year. Home sales have picked up at the same time the unsold home inventory has declined, creating an opening for demand for new home construction. The report forecasts a 13.4 percent increase in national housing starts in 2013, building on an estimated 25.1 percent growth in 2012.
The report notes that, “In terms of its impact on real GDP, 'residential structures' – a component of gross private investment – is forecasted to increase from $377.5 billion in 2012 to $447.4 billion in 2013, an increase of $70 billion or 18.5 percent.”