Introduction
A. Gary Anderson Center for Economic Research released the results of their 32nd annual economic forecast for the U.S., California and Orange County. This paper provides a summary of these results, highlighting the main aspects of the economic forecast for 2010, on both the national scale and California and Orange County area.
The United States
The first highlight for the release is related to the distinction of the recent recession among other recessions. Such distinction was outlined specifically to outline that the forecasted recovery is not expected to be as strong as other post-recessions recoveries experienced in ’71, ’75, and ’83. In that regard, the GDP growth in 2010 is forecasted to be 2.4 percent, unlike the average 5.8 percent experience in the aforementioned deep recessions.
It can be stated that the recovery process after the recent recession will be more corresponding to the recoveries that followed the recessions of 1990-91 and 2001. The forecast of real GDP growth within the range of 2 and 3 percent is based on several considered factors, which include:
- the recovery of the construction sector
- the end of inventory sell-off, with expectation of growth in inventory rebuilding
- the increased priority on replacing outdated equipment and plants
- the increase in consumers’ spending
- narrowing trade deficit with the US dollar decline
- and the continuous governmental support through the stimulus package.
In terms of forecasted growth in the residential construction sector, the forecast indicates 85,000 new housing units, which will start in the year and a half following the end of the recession.
The housing sector is expected to recover in 2010, as the prices already reached their bottom limit at the first quarter in 2009, after three consecutive years of decline. In the light of such factor, a slow, but a recovery, is expected to occur in the next year. The latter is supported by the fact that the credit market is already improving, and the decrease in the unsold homes inventory.
The Center for Economic Research forecast for home prices calls for about 5 percent increase, with the increase in the median resale single-family home price of about 11 percent, going from as low as $167,000 in 2009, to expect $186,000 in the last quarter in 2010. However, despite the expected slow recovery, a psychological, rather than economic factor might be still in effect, where many buyers still affected by the burst of the housing bubble will assumingly act wary in that period. Nevertheless, an increase in housing starts of 10.7 percent is expected in 2010, increasing the number of units from 567,000 in 2009 to 627,500 units in 2010.
In terms of employment the general forecast for US is not very encouraging job losses continuing and the rate of unemployment growing. Nevertheless, as evidenced by past recessions, it can be stated that such indicators correspond to the economy being in recovery. In that regard, the press release outlined that the unemployment rate will continue to grow, with expected decrease of 0.2 percent by the end of 2010, when a positive job creation will start to occur.
The inflation will be less of a factor during the recovery next year, where the inflation is expected to be around 2 percent. On the other hand, with less pressure from inflation, the interest rates are accordingly will stay unaffected, where the rates are expected to remain the same until the middle of 2010.
By that time, short term rates such as federal funds rate will start to slightly increase, by a mere 0.7 percent. Long term rates, on the other hand, such as 10-year Treasury bond is expected to increase by 4.1 percent, which constitutes about 70 basis points. Additionally, the 30-year mortgage rate is expected to reach 5.5 percent in 2010, up from 5.1 in 2009.
California and Orange County
One of the most important indicators related to the Anderson Center for Economic Research forecast on California and Orange County is concerned with employment. Such fact can be explained that the rate of unemployment started to grow before the recession began at the national level, with California losing in August 2007 about 976,300 payroll jobs.
In that regard, the percentage of job losses is higher than any other region, specifically in construction activity, retail sales and mortgage industry, i.e. the sectors on which California high has high disproportionate dependency. The areas that were affected the most include Inland Empire, Fresno, Sacramento, and Los Angeles, with unemployment percentages of 14.6, 15.8, 12.3 and 12.6 respectively.
These are the indicators of 2009, with average change of 7.5 percent from the same period in 2007. The least affect regions include Orange County and San Francisco, which as of October 2009 have an unemployment rate of 9.6 and 9.3, which also can be considered as a high, despite the fact that the percentage of San Francisco is the second lowest among the ten largest metropolitan areas in the state.
With California and Orange County being heavily dependent on the construction sector, it is stated that the economic growth and employment in this area is largely connected to the local construction spending, in addition to the total spending on the national level and the export market.
In that regard, real exports and percentage changes in real GDP are expected to turn positive by the first quarter of 2010, while the spending in the construction sector will lag, where on the one hand, residential construction is stabilizing, and on the other hand nonresidential construction activity is expected to decline throughout 2010. With such collective trend being correlated together, it is forecasted that the unemployment rates will remain negative in the first half of 2010, turning positive in the 3rd quarter of the year.
If specifying the differentiation in employment correlations during the next, it is expected that Orange County will have 0.1 percent employment increase, which constitutes 1,000 payroll jobs Orange County is expected to gain. In California the situation is the opposite in a much negative way, where unemployment will increase by 0.5 percent, which constitutes a projected loss of 73,700 job positions.
The new jobs are expected in the service sector, specifically in the education and health, and professional and business sectors. A weak growth is also forecasted in the leisure and hospitality sector and high-tech manufacturing sectors. These jobs are likely to occur in the second half of 2010.
The weak job and the high unemployment rate is one negative factor influencing another one, which is low personal income growth. Although the total p[personal income is forecasted to increase in 2010, by 2 percent in California and 2.5 percent in Orange Country, such increase will be negated after adjusting to inflation, which will lead to that real personal income will be flat. In that regard, 2010 will be the third consecutive year, in which the purchasing power is not improving. Thus, the two main negative factors in California and Orange County are stated to be employment and personal income.
In turn, both aforementioned factors are negatively influential on the demand for housing in the area. Nevertheless, the housing affordability index is sharply picking up, which is positively influencing demand in California and Orange County area. Similarly, as in other areas in the US, the psychological factors can be seen as an obstacle, where homebuilders are simply frightened to respond to an increase demand, building homes and adding them to their unsold inventories. Accordingly, the increase in demand with a fixed supply positively influences the housing prices. In that regard, with the sales picking up, the inventory of unsold homes for media and below median housing units considerably declined over 2009.
Conclusion
Finally, the forecast for the median single-family detached home price, after weighing the supply and demand together, indicates an increase in Orange County and California, with 5 and 5.8 percent respectively.