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Searching for Growth in an Inflationary World: CSUF Economists Look at the Future of the Global, U.S. and Orange County Economies at Forecast Co-Presented by OCBC

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By Daniel Coats ’15, ’18

When 2023 began, a full 70% of economists in the Bloomberg Survey anticipated the U.S. economy to fall into recession sometime during the year. The dour mood was shared by the Conference Board, IMF, World Bank and Federal Reserve.

The negative sentiment was further reinforced by a slate of bank failures in March, with many fearing the onset of a banking panic. Thankfully, the situation seems to have stabilized as of late.

Cal State Fullerton economists Anil Puri and Mira Farka presented their annual economic forecast to Orange County business professionals, policymakers and academics at the Disneyland Hotel on Oct. 19.

The annual event is co-presented by the Orange County Business Council, a longtime partner of Cal State Fullerton’s business college and a resource organization for the county’s multi-industry business community.

“Mercifully, so far, a repeat of the horrors of the Great Recession has failed to materialize, in part because of the swift and extraordinary measures put in place by the Fed and the Treasury,” explains the economists.

Puri and Farka note that over the past 18 months, the U.S. economy has weathered a number of near misses with economic calamity, including the highest inflation in 40 years and attendant rapid rise in interest rates, the worst war in Europe since World War II, and a banking crisis.

“This perfectly delicate balance – the slaying of inflation without bloodletting in labor markets – defines the very essence of the enduring and, increasingly, incessant debate between the soft-landing/hard-landing hard liners,” they report.

“The economy has shown strength and resilience, but that was not entirely unexpected given the distortions unleashed by the pandemic and lavish fiscal support. A recession was not imminent last year, nor was it unavoidable this year. Our view is that while the Fed may soft-land the economy for a bit, it will be unable to stick the landing for long. As such, our outlook calls for a “normal recession” likely in mid-2024.”

That means a downturn similar to that observed in the early 1990s or 2001. Serious, but not nearly as catastrophic as the Great Recession.

The Global View

Globally, all major economies are experiencing softer growth and rising risks, with the outlook in many ways more challenging than in the U.S.

Fears of an energy crisis-induced recession in Europe last winter were allayed when government subsidies and a warm winter reduced the impact of the Russia-Ukraine war. But inflation remains high on the continent – currently 5.7% – with stagflation worries. The German economy has been in decline for three quarters, the first major country to fall into a shallow recession.

In China, deflation – rather than inflation – is the concern as consumer prices fall in the wake of weak demand. And youth unemployment above 20% has prompted the National Bureau of Statistics to stop releasing data.

And this October, the Arab-Israeli conflict has broken out into an all-out war for the first time in 50 years, with the second-worst terrorist attack in modern history and Israeli reprisals in Gaza. The economic impacts remain to be seen, but many economists are concerned about inflation (due to an increase in oil prices) or recession (due to market uncertainty as potential consequences), especially if the war spreads or if there are terrorist attacks elsewhere in the world.


Real GDP Change 0.6%
CPI (Inflation Rate) 2.5%
Unemployment Rate 4.1%
30-Year Mortgage Rate 6.26%
Average Oil Price $75.6/barrel

Where Is the Inflation Battle Heading? And the Issues Surrounding It.

Two years ago, optimists maintained that post-COVID inflation was transitory. Now, it’s becoming clearer that inflation won’t be as easy to slay as was hoped.

“Even a small amount of sticky inflation may be hard to dislodge,” say Puri and Farka, noting that service inflation, which has fallen to 5.4%, is still nearly double its historical average.

“Some of this reflects shelter costs, which are expected to come down as rent appreciation cools off. The problem is that rent figures appear in inflation statistics with substantial lags of roughly one year, which means that recent large decelerations will only show up in mid-2024. The process may not even be as smooth as hoped, in part, because home prices are on the mend again, adding additional strains to inflationary measures.”

And inflation concerns are mounting again. The headline consumer price index (CPI) is back up to 3.7% in August, from a low of 3.1% in June. A rise in oil prices and a plateauing of the goods prices deflation – a major reason behind moderating inflation – are some manifestations.

“All this means that high interest rates are here for the long haul, a realization that is only now starting to sink in with financial markets,” say Puri and Farka. “Higher for longer is the new mantra zealously embraced by policymakers at the Fed. While rates don’t have to rise as high, they will need to remain at an elevated plateau for an extended period.”

All this is occurring amidst the backdrop of declining growth and continued worries in the banking sector. In August, Moody’s and S&P Global downgraded the outlook for 15 U.S. regional banks, citing growing financial risks and erosion of profitability.

And the credit market is freezing up.

“The number of banks that have tightened lending standards has remained at recession levels for three straight quarters,” Puri and Farka report. “Credit costs have skyrocketed. Loan demand has declined to values last seen during the financial crisis of 2007-2009, for all types of business loans: commercial, industrial, and real estate.”

Puri and Farka don’t foresee a repeat of the Global Financial Crisis of 15 years ago. Commercial real estate is the weakest sector of the economy right now, and that is a far smaller part of the economy than mortgage markets were 15 years ago. But they do expect a slow-motion but still concerning credit crunch that will make credit less available to businesses and consumers.

“This means that unlike the heart-stopping crisis of 2008, this will resemble more to a slow-moving credit squeeze, which will play out over many months and years. A long slog rather than a dramatic seizing up of liquidity, which is likely to worsen as the economy slows and the credit cycle turns,” they say. “Signs of a credit squeeze are everywhere: a full 50% of banks have tightened standards for commercial and industrial loans to firms large and small with nearly 70% doing so for CRE loans. This is the highest number recorded outside of a recession, and only a hair below the Great Recession.”

With what we have seen so far in 2023, it has become obvious that inflation has come to dominate and define personal finances so far this decade.

“The cost of owning things is so sky-high, that even if things don’t truly own you, they have blown a sizable hole in your standards of living,” they say. “By some estimates, it now costs a family earning the median income an additional $750 per month to purchase the same base of goods and services as two years ago.”

Mira Farka and Anil Puri answer questions from the audience after the Economic Forecast Conference. Photo Credit: Orange County Business Council

The Orange County View

Looking at Southern California, Puri and Farka see many of the trends reflected in the national economy on a local level.

Employment has increased this year throughout the Los Angeles metro area. The top sectors driving Orange County’s employment growth are leisure and hospitality, health care and social assistance, professional and business services, educational services, and construction.

The Southern California economies have fully regained all jobs lost during the pandemic. However, with very little growth in population, new issues have appeared.

Orange County’s labor force is 1.2% below its 2019 level and Los Angeles County is down 2.8%. On the other hand, the Inland Empire has seen a 3.6% increase in the labor force over the same period.

The all-important housing market has suffered both a downswing and an upswing in the course of a year. After skyrocketing at double-digit rates every month from August 2020 to July 2022, home prices began moderating in mid-2022, but rose again this year.

“Pent-up housing demand following the pandemic is only part of the story for a blistering housing market,” say Puri and Farka. “As people began working from home, their need for more space drove the initial rise. Low interest rates during the past several years and excess cash generated by pandemic-induced government support further fueled an already white-hot market. But this is only part of the story. The other part, and perhaps the most important one in the current market has to do with the supply-side. Simply put: the housing market in the region is severely constrained. Existing homeowners, with low mortgage rates, are reluctant to forego that financial advantage and would rather stay put than move up.”

Even increasing mortgage rates – now at the highest level since 2000 – have had no effect on cooling the housing market, suggesting this is more a supply-shortage issue than a demand-side story.

Still, Puri and Farka anticipate a 10% decline in median home prices in Southern California over the next two years.

“Affordable housing, or more precisely lack thereof, is cited as one of the most important issues for people leaving California and for the difficult homelessness problem,” say Puri and Farka.

To qualify for a home purchase, a potential buyer would have to make $183,500 in Orange County, $134,400 in Los Angeles County and even $90,300 in the Inland Empire, far above average family incomes, much less the lower middle class or working class.

The Orange County Business Expectations (OCBX) survey, conducted by the CSUF Woods Center for Economic Analysis and Forecasting each quarter as a poll of Orange County business leaders, is at 73.1 in the present quarter. A value over 50 indicates expectations of continued growth. The index, while rising sharply since the pandemic, is still below average values, indicating that Orange County business executives remain more cautious about the outlook than normal.

For More on the Woods Center

The Woods Center for Economic Analysis and Forecasting is the economic forecasting lifeline of Orange County and Southern California, advising business leaders, policymakers and the academic community about trends in the local, national and global economies.

In addition to economic forecast conferences each October and April, the center conducts periodic interim reports, polls, and academic research.

For more information or to read the full 2023 Economic Forecast report, visit the center online. Or read more of our articles on CSUF economic forecasting.

Daniel Coats