THE ECONOMY
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Chapman forecast: Recovery will be weak
The downturn is over, but growth challenges remain.
By Tina BorgattaPublished: December 07, 2009 06:30 PM
Orange County will likely emerge from the recession sooner than the rest of California, but it could still turn out to be the deepest, longest economic plight the county has experienced since World War II.
And while most severe recessions are followed by a strong return to health, this 38-month odyssey – which began in May of 2007 – will undergo a weak recovery that will last until June of next year.
“Things are different now,” said Chapman University President Jim Doti who, along with Economist Esmael Adibi, delivered the school’s annual economic forecast at the Orange County Performing Arts Center on Tuesday. The presentation drew about 2,000 business professionals from across the region. “Housing starts following the 1983 recession, for example, went from 1 million units to 2 million units after six quarters. That’s an increase of 1 million units. Where we’re at now, we’re going to be going from 500,000 to 620,000 units.”
That equates to a loss of about $90 billion in residential spending, he said.
And as hard as this region has been hit by the recession, Orange County has fared better than other areas of the state. Its 9.6 percent unemployment rate in October was the second lowest among the 10 largest metropolitan areas.
But we haven’t seen the end of job cuts, according to the forecast. Employment is expected to continue to decline through the first half of next year, followed by an estimated 1,000-job gain in the final two quarters, mainly in the private education, health-care, professional services, and leisure and hospitality sectors (the weak value of the dollar makes travel from abroad more appealing).
California, on the other hand, is expected to see a loss of 73,700 jobs next year. And as a whole, personal income growth will remain flat, keeping consumer spending down.
“In our darkest day, we were losing around 750,000 jobs a month,” Doti said. “Everyone is wondering, ‘When is employment going to recover?’ We’re still losing jobs in our current economy … but we’re actually doing better than after the dot-com bust.”
As for the construction industry – once a key player in the Orange County economy – the study predicts a 13.4 percent uptick in building permits for housing. However, that increase will likely be offset – if not completely wiped out – when combined with an anticipated continued decline in the commercial sector.
“In Orange County, we have 86 million square feet of open office space,” Adibi said. “In 2008, vacancy was at 17.5 percent. Right now, it’s at 18.5 percent, and we think it will go up to 20.4 percent.”
But the excess of existing residential inventory that was created by foreclosures (the result of rising unemployment) brought home prices to an attractive level for first-time buyers and investors. At the 2006 peak of the county’s real estate market, a median-income homebuyer needed to allot roughly half – 48.4 percent – of his income for a purchase, Adibi said. Now, the same homebuyer needs 29.4 percent.
And with the inventory of existing homes on the decline, a pop in pricing should be on the horizon. The study predicts a 5 percent increase in the median price of a single family home in Orange County (a 5.8 percent jump statewide). The outlook isn’t quite as optimistic in the luxury home market, however.
“We think pricing in that market will have to go lower in order to recover,” Adibi said.
On a national level, housing starts will remain at a recessionary low, with “commercial construction in free fall,” according to the study. That lack of spending in the construction sector – a cornerstone of previous recoveries – is a key hindrance in this recovery, as it’s expected to lower real GDP growth by 2.5 percent, compared to an average of about 6 percent following the recessions of the ’70s and ’80s.
Other risk factors: the state budget deficit, an international incident and a crash of the U.S. dollar abroad. “That will cause new problems in housing because interest rates will spike, mortgages will spike,” Doti said.
But, there are several strong indicators that signal a sustained recovery rather than a “double-dip” downturn, he said.
“The recovery is weak, but the construction sector is creeping back up,” he said. “We have an inventory sell-off, and there’s still a chunk of government stimulus money that is still to be spent.”
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And while most severe recessions are followed by a strong return to health, this 38-month odyssey – which began in May of 2007 – will undergo a weak recovery that will last until June of next year. “Things are different now,” said Chapman University President Jim Doti who, along with Economist Esmael Adibi, delivered the school’s annual economic forecast at the Orange County Performing Arts Center on Tuesday. The presentation drew about 2,000 business professionals from across the region. “Housing starts following the 1983 recession, for example, went from 1 million units to 2 million units after six quarters. That’s an increase of 1 million units. Where we’re at now, we’re going to be going from 500,000 to 620,000 units.” That equates to a loss of about $90 billion in residential spending, he said. And as hard as this region has been hit by the recession, Orange County has fared better than other areas of the state. Its 9.6 percent unemployment rate in October was the second lowest among the 10 largest metropolitan areas. But we haven’t seen the end of job cuts, according to the forecast. Employment is expected to continue to decline through the first half of next year, followed by an estimated 1,000-job gain in the final two quarters, mainly in the private education, health-care, professional services, and leisure and hospitality sectors (the weak value of the dollar makes travel from abroad more appealing). California, on the other hand, is expected to see a loss of 73,700 jobs next year. And as a whole, personal income growth will remain flat, keeping consumer spending down. “In our darkest day, we were losing around 750,000 jobs a month,” Doti said. “Everyone is wondering, ‘When is employment going to recover?’ We’re still losing jobs in our current economy … but we’re actually doing better than after the dot-com bust.” As for the construction industry – once a key player in the Orange County economy – the study predicts a 13.4 percent uptick in building permits for housing. However, that increase will likely be offset – if not completely wiped out – when combined with an anticipated continued decline in the commercial sector. “In Orange County, we have 86 million square feet of open office space,” Adibi said. “In 2008, vacancy was at 17.5 percent. Right now, it’s at 18.5 percent, and we think it will go up to 20.4 percent.” But the excess of existing residential inventory that was created by foreclosures (the result of rising unemployment) brought home prices to an attractive level for first-time buyers and investors. At the 2006 peak of the county’s real estate market, a median-income homebuyer needed to allot roughly half – 48.4 percent – of his income for a purchase, Adibi said. Now, the same homebuyer needs 29.4 percent. And with the inventory of existing homes on the decline, a pop in pricing should be on the horizon. The study predicts a 5 percent increase in the median price of a single family home in Orange County (a 5.8 percent jump statewide). The outlook isn’t quite as optimistic in the luxury home market, however. “We think pricing in that market will have to go lower in order to recover,” Adibi said. On a national level, housing starts will remain at a recessionary low, with “commercial construction in free fall,” according to the study. That lack of spending in the construction sector – a cornerstone of previous recoveries – is a key hindrance in this recovery, as it’s expected to lower real GDP growth by 2.5 percent, compared to an average of about 6 percent following the recessions of the ’70s and ’80s. Other risk factors: the state budget deficit, an international incident and a crash of the U.S. dollar abroad. “That will cause new problems in housing because interest rates will spike, mortgages will spike,” Doti said. But, there are several strong indicators that signal a sustained recovery rather than a “double-dip” downturn, he said. “The recovery is weak, but the construction sector is creeping back up,” he said. “We have an inventory sell-off, and there’s still a chunk of government stimulus money that is still to be spent.” |
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