Provost Emeritus and Woods Center Director Anil Puri and Associate Professor of Economics and Woods Center Co-Director Mira Farka examined the outlook for the Orange County, U.S. and global economies at the 24th Annual Economic Forecast, providing business leaders and academics with insight into the economy’s performance over the next three years.
Despite some turbulent times in the stock market early in 2018, the prolonged expansion from the depths of the Great Recession has continued this year. This matters greatly for American workers, as unemployment has tumbled to 3.7%, the lowest rate since 1969, and job and wage growth has continued apace.
Gross domestic product (GDP) – on both the national and local levels – has continued to expand, and the bull market that began in 2009 has now broken the record set in the 1990s to become the longest bull market in the post-World War II era. This has occurred despite such challenges as the worst political and social instability in decades and the threat of a trade war between the world’s economic superpowers.
Against this backdrop of steady and mature growth coupled with continued headwinds, Cal State Fullerton Provost Emeritus and Woods Center Director Anil Puri and Mihaylo College Associate Professor of Economics and Woods Center Co-Director Mira Farka presented their annual report on the state and future of the economy. This conference was held at the Hotel Irvine on Oct. 25, an event attended by hundreds of Orange County business and community leaders and academic minds.
A Look at the Economy, 10 Years After the Downturn
2018 marks a decade since the Great Recession, which will go down in history books as the worst economic crisis since the Great Depression. Puri and Farka examined the recovery and how it has gained steam in recent years – an unusual trend for a long-term expansion – without resulting in the feared overheating that would drive up prices and ultimately stymie growth.
“The economy is in the best shape it has been in more than 10 years. Real GDP growth was 2.2% in 2017, about the same as the average rate for the recovery, but it has ramped up dramatically this year,” they report. “More importantly, the details were even more heartening: Consumer spending is strong and will continue to remain so for the rest of the year; inventories should give an additional boost given their current low levels; business investment will expand at healthy pace.”
While growth rates are unlikely to remain in such high gear forever, Puri and Farka anticipate ramped up expansion at least for the near future. Still, in a global system that bears the scars of the financial crisis, they do highlight rising debt loads – particularly in the public sector – and the shortage of tools available to policymakers to prevent a downturn when the next crisis comes.
“Next time the crisis hits, governments across the world will be in a much weaker position, having squandered fistfuls of political goodwill in saving the banking sector (which had to be done) but being unable to affect broad-based inclusive growth in the ensuing recovery,” they say. “The rise of the populist movement across the Western world, by and large, has its genesis in the deep trauma of the financial crisis and its aftermath. Let’s hope this expansion lasts a lot longer than what most are predicting: A lot rides on just this simple fact.”
The Labor Market Enjoys the Lowest Unemployment in a Generation
“The national employment picture has been exceptionally robust,” the two report. “Job growth is expected to continue at a healthy pace in the coming six quarters, even though the pace of job formation is expected to slow a bit as the economy bumps against capacity constraints.”
Looking specifically at Southern California, unemployment rates have tumbled to 2.6% in Orange County, 3.7% in the Inland Empire and 4% in Los Angeles County due to broad-based growth in the economy. This has led many discouraged workers, who had left the labor force since the Great Recession, to step back into the labor market. Puri and Farka note that job growth in the Golden State has slowed down in recent months. But with irregularities last year in data provided by the California Economic Development Department (EDD) obscuring higher employment growth, the two economists note cause for cautious optimism that even this slowdown might not be as sharp as some fear.
Looking ahead to the next three years, Puri and Farka anticipate the jobless rate for Southern California to remain between 4.2% and 4.3%, with growth rates in personal income nearing 5%, providing a much-needed boost to households that have struggled to climb out of the mires of recession and increasing inequality.
The State of the Housing Market
The dramatic rise in home prices, both in Southern California and nationally, has continued in 2018, though not to the heightened pace of recent years. Price appreciation throughout Southern California has settled in the 5% to 10% range, including in Orange County. However, this has enabled prices, in absolute terms, to breach the records set prior to the Great Recession, soaring to averages of $800,000 for Orange County and $649,000 in Los Angeles County during this past spring. Prices in the Inland Empire remain below the records set before the housing crisis a decade ago, but have nonetheless appreciated significantly.
While a decline in price growth is understandable in light of the double-digit increases from 2012 to 2014, Puri and Farka report that a number of factors are in play putting the brakes – ever so slightly – on the market.
“Land prices and construction materials prices have jumped. Local land use regulations usually do not allow higher density developments, thus making single family homes unaffordable. Construction has slowed down as a result,” they say.
A tragic side effect of the housing market expansion has been the rise in homelessness in Southland cities, driven at least partly by the shortage in affordable housing and coupled with income growth that has failed to keep up with the rise in prices.
“During the last few years, the process of gentrification has crept in virtually everywhere in coastal areas, leading to a significant movement of less well-off households out of traditional middle-class neighborhoods,” Puri and Farka report. “In Southern California, this implies that more people are moving to the Inland Empire from the more expensive areas of Orange County, Los Angeles County and Ventura County.”
With declines in affordability, rising mortgage rates and increases in interest rates by the Fed, a decline in home price appreciation – though not a decline in actual prices – is likely on the horizon over the next few years. While construction activity has slowed in Orange County, it has continued at a healthier pace in other parts of Southern California, such as the Inland Empire, where a number of new housing and commercial developments have been implemented, and Los Angeles County, where revitalization of several downtown areas has spurred a return of investment and interest in inner-city areas. Stable growth in construction is expected over the next three years, according to the Puri and Farka report.
Key Economic Indicators from the Report
|VARIABLE||2018||2019||2020||2018-2020 Average Three-Year Change|
|U.S. Real GDP Growth Rate||3.1%||2.9%||2.4%||2.8%|
|U.S. Unemployment Rate||3.9%||3.6%||3.5%||3.7%|
|Consumer Price Index (CPI) Change||2.5%||2.7%||2.6%||2.6%|
|Personal Income Change||4.6%||4.8%||4.7%||4.7%|
|30-Year Fixed Mortgage Rate||4.65||5.30||5.50||5.15|
|Oil Prices (Dollars Per Barrel)||$73.2||$83.4||$78.4||$78.3|
The Trade War Threat
Under the Trump Administration, the U.S. has implemented tariffs on some Chinese imports, resulting in tit-for-tat duties imposed by China’s government. Fears of a trade war are particularly acute in Southern California, which is heavily impacted by East Asian trade as a port-of-entry.
Puri and Farka note that while the trade uncertainty initially sparked a downturn in stock prices, the reaction was more muted during the late spring and summer. The Mihaylo College forecasters take a middle ground between extreme viewpoints on the trade actions.
“We believe that, while the U.S. is reasonably well positioned (in an economic sense) to weather the short-term detrimental impact of potential flare-ups in the trade conflict, the length and the scope of the conflict matter tremendously. Generally speaking, the longer these trade conflicts drag on and the more countries they engulf, the worse it is for sentiment, corporate profits, overall global risk environment and economic growth,” the economists report.
Still, Puri and Farka stress that an all-out trade war between the world’s superpowers is not the baseline scenario for their outlook, instead focusing on the likelihood that such tensions remain contained.
While recognizing that the Trump administration’s approach has been disruptive to financial markets and the economy, Puri and Farka also highlight distortions in the global trade system, particularly with regard to China, that must be addressed for the trade system to survive.
“Given America’s apparent comparative advantage in services, it would seem prudent that the administration, while fighting to open more markets for American goods, also pursue aggressive trade deals that promote exports of U.S. services,” they report. “Our initial gripe with the administration’s approach to trade had less to do with the merit of its grievances (with which we agree) and more with its tactics. Escalating trade frictions on many fronts with many trading partners seems to be a strategic mistake. It would be more beneficial, for example, to first solve disputes with countries that tend to mostly play by the rules and display a unified front against those who don’t.”
In recent months, as the threat of trade confrontation with the European Union, Canada and Mexico has faded – epitomized by a new treaty to replace the NAFTA accord – Puri and Farka believe that the threat of trade conflict now focuses squarely on the U.S. relationship with China, which is likely to ramp up before settling down. The conclusion is far from preordained.
“China’s least costly strategy over time may be to make some concessions to U.S. demands, resulting in a fairer, freer and more durable lasting global order,” they say. “Whether this will happen is anyone’s guess.”
What Business Leaders Are Saying
At the heart of the Woods Center economic reporting are surveys of Orange County business leaders, providing a view of conditions on the ground in a diverse cross-section of the local economy.
The latest quarterly report revealed a value of 96.2 on the Orange County Business Expectations (OCBX) index, a measure of the overall economy in which a value of 50 or above represents growth. The value was the second-highest in the past two years.
For the fourth quarter of 2018, 96% of those surveyed anticipated business activity to improve or stay the same, while 63.5% of executives expect significant or some growth in their own industry. When queried on the greatest concerns impacting their companies, government regulations were the most significant factor, while labor costs grew as a headwind. Respondents listed political turbulence as the greatest threat to the American economy (44.2%), followed by tariff and trade negotiations (28.8%) and Federal Reserve interest rate increases (15.4%).
On the local level, high housing prices took the top spot as a hindrance to Orange County growth, as identified by 44.2% of executives, followed by a limited qualified workforce (34.6%).
For More Information
For more on the Woods Center for Economic Analysis and Forecasting or to read the center’s full economic reports, visit the center online. The center provides a midyear report and regular interim studies in addition to their annual forecast.