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Economic ‘cracks’ will widen to mild recession in late 2024, CSUF economists say

October 20, 2023

With the war on inflation far from over and continued economic weakness, a recession is likely to hit Southern California and the rest of the nation in the second half of 2024, Cal State Fullerton economists predicted Thursday, Oct. 19.

But it will be a “normal” or “garden variety” recession, not a Great Recession like the one that devastated the global economy in 2008-12, university economists said in their fall forecast.

Also see: Fed chair: Slower growth may be needed to conquer high inflation

And although government spending is masking the effect of “the fastest (Federal Funds) rate hike cycle in the past 40 years,” a soft landing for the economy is unlikely, they said.

“Like the Energizer Bunny, (the economy) keeps going,” Anil Puri, director of the Woods Center for Economic Analysis and Forecasting, told Orange County business leaders at the Disneyland Hotel.

Also see: Household balance sheets strong but high rates could add strain

But, he added, inflation remains well above the Federal Reserve’s 2% target, leading to at least one or two more interest rate hikes in the months ahead. At the same time, employment growth is slowing, bank deposits are falling and consumer defaults are on the rise.

“We are at a turning point,” Puri said. “Things are starting to shift, and we have made our prediction of a mild recession sometime next year.”

Orange County’s economy appears to be faring far better than the nation as a whole, particularly when it comes to job growth, the forecast said. Although Orange County’s job growth has slowed this year — and has been hindered by the county’s high housing costs — it’s still more than twice its 20-year average.

Housing woes: Mortgage applications hit 28-year low as rates keep rising

High interest rates “don’t seem to be affecting Orange County as much as the rest of the country,” Puri said.

U.S. economic growth — as measured by the Real Gross Domestic Product — is projected to hit 2.2% this year but drop to 0.6% in 2024 before rebounding to 1.6% in 2025, the forecast said.

“Cracks are already starting to appear underneath all the good headline numbers,” Woods Center Co-Director Mira Farka said during Thursday’s 81-minute presentation.

Credit card delinquencies are edging up. Auto loan defaults are at their highest level since the Great Recession. If corporate bankruptcies continue at their current pace for the rest of the year, they will hit a high not seen since 2010.

Other key economic indicators, like lower long-term bond rates and negative Conference Board Leading Index numbers “have been ringing alarm bells that a recession is around the corner,” the forecast said.

Southern California is expected to follow national economic trends, although Orange County job growth has outperformed regional, state and national levels, Puri said.

Since the Federal Reserve began raising interest rates in March 2022, Orange County employment increased 3.7%, compared with a U.S. rate of 3.6% and a California rate of 3.2%. In Los Angeles County, employment is up 2.8%, while the number of jobs is up a mere 0.5% in the Inland Empire.

“Look at Orange County,” Puri said. “Since the Fed started raising interest rates in March of last year, Orange County has done quite well. In fact, better than the rest of the region.”

Other forecast highlights include:

— The Woods Center index of Orange County business sentiment — based on a quarterly survey of Orange County executives — shows business confidence improving over the past 15 months.

“In general Orange County Business people have been feeling pretty good in the last year or so,” Puri said.

Survey responses show Orange County businesses expect sales to remain steady and don’t plan any layoffs.

— However, the Cal State Fullerton forecast for Orange County is “very similar” to the national forecast.

“We expect Orange County payroll job growth to decline,” Puri said, dropping from 5.3% in 2022 to 1.9% this year and 0.3% next year.

Employment levels are forecast to decline 0.1% in Los Angeles County next year and to fall 1.5% next year in the Inland Empire.

— Southern California home prices show no signs of weakening in the year ahead. That’s good news for homeowners, where home equity (or value after deducting mortgage debt) for a typical Orange County home increased by an “unprecedented” $430,000 since the month before the pandemic began.

— On the other hand, home affordability fell to the lowest level on record, with just 20% of Orange County households able to afford to buy a home.

“It’s a very difficult situation for people who don’t own their home,” Puri said.

— That high cost of housing is sapping the workforce in Orange County and throughout the region, driving workers to Texas, Arizona and Nevada in search of cheaper homes.

Orange County had a net population loss of 4.7%, compared with a loss of 11.5% in L.A. County and 3.7% in San Bernardino County, Puri said. Riverside County had a net population gain of 2.8%.

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Orange County Register

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Economic ‘cracks’ will widen to mild recession in late 2024, CSUF economists say

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