October 26, 2007

Editorial: An economic downshift is coming
Prominent O.C. economists vary more about the magnitude of the slowdown than its arrival
An Orange County Register editorial

Two of Orange County's best-known economists have issued cautionary warnings in recent days about the economic climate going forward.

Esmael Adibi, whose Chapman University forecast will come out in December, voiced recession fears on reports of constrained job growth. Anil Puri, who worked on the CSU Fullerton forecast that came out Monday, stopped short of using the "r" word, but characterized the situation in news reports as one of "very slow growth."

The pair, in separate discussions with an editorial writer, pretty much agree on the general economic climate: We are in the midst of a national and local economic slowdown, brought on by crises afflicting what Mr. Adibi called "the two major engines of growth": construction and financial services. It is more than just a housing correction (though Mr. Puri and his colleague Mira Farka note we have yet to feel the economic effects of a drop in housing prices, the median of which they predict to decrease by 5 percent in 2008) and the drag on both the local and national economy will be considerable, pulling job growth figures below those of the past two years.

Mr. Puri and Ms. Farka are more sanguine than Mr. Adibi, however, about the ability of Orange County's diverse economy – primarily professional and business services, education and health care and leisure and hospitality – to pick up the slack. Mr. Puri and Ms. Farka believe these other sectors will lead the economy to grow jobs by 1 percent in 2007, and 1.1 percent in 2008. Mr. Adibi, on the other hand, told us he believes this compensating growth "will not be quantifiably comparable" to the losses multiplying through finance and construction. Not only will the imminent drop in housing prices depress retail and wholesale spending, the prospects are ominous for the currently booming nonresidential construction sector. "I believe that's the next shoe to fall," he told us. The upshot mayeven be a net lossin jobs (his emphasis).

Significant though it may be, the difference between our economists' predictions seems, as Mr. Adibi told us, "a question mostly of magnitude rather than direction." What's most worrisome, to us and Mr. Adibi, is that the state seems to be getting the forecast wrong entirely, relying on disappearing tax revenue even as Gov. Schwarzenegger presses to pass bonds and rack up still more debt. The economic near-recession, Mr. Adibi told us, will mean "the gap [between state revenue and spending]is going to be even more than what the Department of Finance has in its budget estimate."

The economic outlook is uncertain, with a chance of recession and the impact of the fires not yet quantified. A silver lining, despite the state's assumptions, is far from guaranteed. Panic is unjustified, but prudence is advised.