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FORECAST : THE CHAPMAN COLLEGE ECONOMIC REPORT : Economists See '88 as a Lackluster Year

December 11, 1987|JOHN O'DELL | Times Staff Writer

Economists at Chapman College handed Orange County a Christmas present it probably would prefer not to have: a forecast for a flat local economy in 1988.

For businesses, consumers and wage earners, that means purchasing power will erode during the coming year, while the pace at which new jobs are created slows dramatically and housing costs rise.

The bright spot in the otherwise-dim outlook is that, as slow as the county's economy will move next year, it will not slump into a recession.

And county residents and businesses can take some heart in the prediction that no matter how grim the scene appears locally, it looks even worse everywhere else. For the 10th consecutive year, the private college's Center for Economic Research is forecasting that the county's economy will outperform the national average.

But that performance and the avoidance of a recession is primarily dependant on federal monetary policy, rather than any real health in the private sector, said James Doti, dean of the college's school of business and progenitor of the annual economic forecast.

Doti, who worked with graduate students and faculty members to design a complex computer program using 211 separate bits of economic data to produce a forecast of national and local economic conditions, said all signs were pointing toward a recession by mid-1988 until the Federal Reserve Board changed policy and decided to increase the nation's basic monetary supply in reaction to the Oct. 19 stock market crash.

And even with that infusion of cash into the economy--a 15% increase in the money supply in the two weeks following the crash--the nation and the county will still end 1988 poised to plunge into a recession, Doti said in an interview before releasing the forecast Thursday at a seminar attended by about 1,000 area banking, real estate and business executives.

Doti, whose 1988 predictions are slightly more pessimistic than those of other economists, said he expects the gross national product--the total value of all goods and services produced in the year--to post an inflation-adjusted increase of just 1.6% in 1988, to $4.7 billion from $4.5 billion this year.

Most of that growth, he said, will come from increased consumer spending. And that, in turn, will be spurred by the escalation in the money supply and by a slight boost in disposable income that comes from the lower personal income tax rates taking effect under the Tax Reform Act of 1986.

Employment nationally will grow by only about 1%, according to the Chapman forecast, while inflation is expected to remain relatively low at 4% or slightly less.

Chapman's look at the national economy also predicted a significant improvement in the balance of trade, largely because the weak U.S. dollar will increase exports and foreign investment here.

For the county, the year ahead holds only a slightly upbeat replay of the national scene.

The Chapman forecast said the rate of employment growth, the single most important factor in the county economy, will fall to 2.5%, or 27,500 new jobs, from 3.6% estimated for this year.

While this is a significant decline in performance, Doti said, it does not herald a local recession, because most of the drop is expected to occur in the first quarter, after which things will level out. Chapman's economic theorists maintained that two quarterly year-to-year declines in employment are necessary before a local recession can be declared.

The forecast also called for increased consumer spending locally in 1988, with taxable sales up 6.4%, to $24.9 billion from $23.4 billion.

However, tourism-related spending is projected to decline slowly all year, despite the influx of foreign visitors that the weak dollar is expected to bring to the county.

On the job front, service-related employment is expected to grow 3.9%, but goods-related employment should shrink 0.7%, continuing a longstanding movement in the county away from a manufacturing-based economy.

But the double impact of a 4% inflation rate, and a mere 2.5% increase in new jobs will flatten out most hikes in income and spending, Doti said, turning the nominal increases shown in the forecast into "real" zeroes, or even into negative numbers.

For instance, the forecast says personal income in the county will rise 6.6%, to $44.7 billion from $42 billion. But inflation and the job situation--fewer new jobs depress income and spending--reduces that to a real increase of only about 0.1%.

And median family income, which the Chapman forecast said will increase just 4.8% for the year, to $45,176 from $43,112, actually rolls back nearly 2% in real dollars and buying power.

Similarly, the projected 6.4% increase in gross county product--to $53.2 billion from $50 billion this year--becomes a decline of 0.1% when inflation and jobs are factored in.

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