Recession is on the horizon, warns Chapman

A recession likely will hit soon, either later this year or early next year. That's the glum prediction from Chapman University's 2022 Update Forecast, given Thursday by Jim Doti, economist and the school's president emeritus, at the school's Musco Center

He noted the school’s previous forecast of 5.7% national economic growth for 2021 was the only one among 50 Blue Chip forecasts that was precisely correct. And their forecast also accurately predicted the high inflation now devouring family budgets.

For all of 2022, Chapman forecasts 2.8% growth; but that includes the first half of the year, the tail end of the growth period that saw inflation soar to 8.6% in May. The recent increases in interest rates by the Federal Reserve Board to wring that inflation out of the economy already are constricting growth, reducing consumer spending and leading to a sharp drop in the stock market.

Fed Chairman Jerome Powell recently said the possibility of the economy avoiding a recession with a “soft landing” would be “very challenging.” When we asked about that, Doti replied, “That’s the understatement of the year. The only real way to reduce inflation is to reduce spending. Duh … that’s a recession.”

For California, Gov. Gavin Newsom has been boasting our state has the country’s fastest economic growth. Doti brought some reality to that. The state’s 17.7 million jobs still are below the 17.2 million of the fourth quarter of 2019, right before the pandemic began. By contrast, Florida’s jobs total now is 2.6% higher.

And the Golden State’s troublesome exodus of people continues, losing 200,000 in 2021.

The causes of the exodus are what we long have warned about: high taxes and regulations.

That decline will mean a loosening of the housing market, as the demand for housing drops with fewer people. In the short term, housing demand also will decline from home mortgage rates forecasted to rise to 6.5%in the fourth quarter of 2022 from 2.7% in the second quarter of 2021.

For Orange County, where Chapman is located, jobs growth has been strong during the waning recovery, but less than the rest of the state, at 7.2% compared to 9.9% in San Diego and 10.7% in San Jose (Silicon Valley). Doti blamed this on a lack of new jobs in what he called advanced innovation industries, where jobs pay twice as much as in other industries.

Homeowners closely watch the number for housing appreciation, with average values recently rising above $1 million in Orange County and other areas of Coastal California.

Doti expects a pause in that, with values dropping 6% in the first quarter of 2023 and 12% in the second quarter. That’s still less than the one-third drop during the 2007-09 slump.

Once again, faulty government policies to pump up the economy in the short term end up hurting in the long run. President Biden’s excessive spending with his $1.9 trillion American Rescue Plan in 2021 flooded too much money into the economy, goosing prices, for which we now must pay the price.

California’s inability to advance tax and regulatory reform, even during a year of a $97.5 billion surplus, is going to make getting through the recession even harder for normal folks.

The harms of bad policies can be papered over during times of prosperity. Not during a recession.