O.C. Economy Seen Headed for Rosy 2000 After '99 Lull

By PATRICE APODACA

Dec. 4, 1998 12 AM PT

TIMES STAFF WRITER

With all major indicators heading south and the Asian financial crisis continuing to drag down exports, Orange County’s economy will slow significantly next year, Chapman University said Thursday.

But a recession is not imminent, and more robust growth in the county should resume by late 1999, Chapman said.

“If you look at each one of the major engines of economic growth, they’re all turning negative,” Chapman President James L. Doti said. “The impact of Asia is obviously a major factor in that.”

He expects the Federal Reserve Board to cut interest rates again early next year, and that should spur a rebound in the new millennium. “2000, we believe, will be a very rosy picture,” said Esmael Adibi, director of Chapman’s Anderson Center for Economic Research, who co-wrote the forecast with Doti.

The biggest factor contributing to a weaker local economy will be a sharp decline in growth in the nation as a whole, from 3.6% this year to 1.9% in 1999, the economists said.

After nearly seven years of economic expansion, the global turmoil is taking a toll on trade. So far, consumers and investors have carried the day, as their spending has helped offset declining demand for U.S. exports. Next year, however, the declining export market will put downward pressure on consumer spending and business investment, they believe.

In Orange County, the slowdown will translate to lackluster job growth of 1.9% next year, or 25,000 new jobs, down from 1998’s projected 3.8%, or 45,000, rise in employment, and the smallest annual increase since 1994.

Housing appreciation also will cool next year, Chapman economists said. They predict values will rise 4.6% on average, compared with this year’s 11% jump.

The effect of the Asian crisis on the local economy is already evident, Chapman said. From 1993 to 1997, Orange County’s exports surged 54% to $8.8 billion, the 12th-biggest increase in the nation. Now, however, the county’s export growth rate has plunged to 182nd out of 253 metropolitan areas. Since 1996, county exports have fallen by 22.1% to Japan, 48.6% to South Korea and 25.5% to Singapore.

Helping to offset some of the damage were exports to Mexico, which ballooned 57.1% during the same period.

The building trade, which has added 20,000 jobs in the past five years, will continue to be one of the major forces driving the local economy next year. An expected 8.1% increase in the number of construction jobs will be the biggest gain of any major sector.

But even that industry will see slower growth, Chapman said. Construction spending, after peaking at a 25% growth rate this year, will rise just 11.1% in 1999.

Export-sensitive high-tech employment is predicted to actually decline next year, falling by 1%, or about 600 jobs. And that forecast does not even include any possible fallout from Boeing’s announced cutbacks on local subcontractors of the giant aircraft maker.

Chapman presented its forecast before an audience of about 900 at its Orange campus. The annual report, which began 20 years ago, has a good track record of predicting the local economy. But it has had some misses. One year ago it predicted job growth of just 2.8% for this year. That’s a full percentage point below the current projection, although Doti expects the employment data for 1998 to be revised downward--closer to his orginal estimate--when the state revisits the data early next year.

The biggest mistake in last year’s forecast was Chapman’s guess that housing would appreciate by 4%; instead values spurted 11% on average this year. Doti attributed the spike in prices to a short supply of new housing.

Chapman’s report follows another major forecast of the Orange County economy presented by Cal State Fullerton in October.

That forecast also predicted slower growth next year, but was somewhat more optimistic, putting the increase in payroll employment at 2.3%, or 29,600 new jobs, in 1999.

Despite Chapman’s somewhat somber forecast, Orange County’s job growth is still far higher than the nation’s estimated 2.5% increase this year. In 1999, the number of jobs nationwide is expected to rise just 0.8%, half the growth rate forecast for the county.

Though Chapman expects stronger growth to resume by late 1999 or early 2000, it issued a warning: The price of that growth will likely be renewed inflation.

The Federal Reserve Board’s lowering of interest rates means more money will be pumped into the economy, and the increased liquidity will lead to a pickup in inflation, the economists said. That, in turn, will prompt the Fed to tighten the spigots, leading to slower growth again by 2002.

The good news is that, as the Asian nations resolve their problems, exports should again expand rapidly. In Orange County, an expected surge in exports will help push employment growth back up to 2.7% in 2000 and 3.0% in 2001. That will lead to strong demand for housing, fueling a continuing rise in home prices.

Many local businesspeople said they remain upbeat about the county’s prospects.

Bob Brant, executive vice president at City National Bank, said the bank is so bullish on Orange County that it is opening a new division in the Irvine Spectrum in the spring that will cater exclusively to high-tech companies.

“We’re not watching out for doom and gloom or anything dark on the horizon,” he said. “Our clients are growing, and we’re growing right along with them.”

Peter Ganahl, president of the Anaheim-based building supplies chain Ganahl Lumber Co., said the healthy construction market has been a “rising tide that’s lifting all boats upward.” Any slowing in the building trade hasn’t shown up in his business yet, but even if it does he expects the remodeling and repair market will offset some of the decline.

Many executives said they’re also keeping a close eye on potential trouble spots.

Robert Bunyan, vice president of residential and business land sales at Shea Homes/Mission Viejo Co., said he’s expecting some deceleration from the “explosive growth” of this year but he’s waiting to see how much. “There’s a certain amount of demand that will always be there” for new housing, he said. “But if the Asian crisis effects the economy such that jobs are lost, if people can’t afford to buy housing . . . those are major concerns.”

Andrew Bailard, senior vice president at First American Trust Co. in Anaheim, said he’s acutely interested in the direction of the economy because everything from corporate earnings to interest rates affects how he manages his clients’ trusts. After a rocky ride with the stock market last summer, Bailard said he is looking for one word on the economy: stability.

At Weber Aircraft, a Fullerton maker of airplane galleys, senior buyer Tom Cole said Boeing’s troubles haven’t hurt his company yet because customers are still ordering planes. But he also worries that if the Asian crisis drags on, it will have a negative effect on business. He hopes to counter any decline in new plane deliveries by focusing more on the market for refurbishing older aircraft.

Yet Adibi raised another potential long-term problem for the county. Over the next five years, he said, another 165,000 jobs will likely be created by local employers. “Where are these 165,000 going to come from?” he said. “Who are these people?”

Unemployment is extremely low, and even if a higher percentage of the population goes to work and more people move into the county, a worker shortage is still likely. Adibi believes this will increasingly turn the spotlight on issues involving affordable housing and transportation.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Cooling Off

Economists forecast lackluster growth for the Orange County economy in 1999 because of a national slowdown and the ongoing Asian crisis. Impact on major indicators:

Housing Appreciation

Year: % chg.

1994: -5.2%

1998*: 11.0%

1999**: 4.6%

Job Growth

Year: % chg.

1994: 1.0%

1998*: 3.8%

1999**: 1.9%

Personal Income

Year: % chg.