Light seen on fiscal horizon

Chapman University President and economist James Doti spent the first 10 minutes of his popular annual economic forecast jokingly wallowing in self-satisfaction for having the foresight to predict a recession and a precipitous drop in housing prices when many economists were more optimistic.

In fact, when Edward Leamer — who does a similar annual forecast at UCLA — was saying, “Be calm, my friends. Be calm,” Doti recalls telling people, “Jump out the window, my friends. Jump out the window.”

But, despite all the bragging about being the most pessimistic forecasters around, Doti and fellow Chapman economist Esmael Adibi had some good news to go along with plenty of bad Tuesday at a gathering of more than a thousand at the Orange County Performing Arts Center in Costa Mesa.

After about a 7% decline in average house prices in Orange County next year, for instance, the market will finally hit rock bottom, they predict.

But as home builders continue not to build new homes and the demand for housing grows, an equilibrium will be reached and housing prices will rise again.

As a caveat, because high-end home prices haven’t reacted to the market declines as much as less expensive ones, Adibi said they still might have a long way to drop.

Also, the worst of the massive job losses — which have been particularly harsh in Orange County because of its involvement in the real estate industry — are over, according to Adibi.

“Most of the layoffs are behind us,” Adibi said.

He also praised President-elect Barack Obama’s proposed economic stimulus plan that could infuse hundreds of millions of dollars into local governments for infrastructure improvements, which he thinks will jump-start the construction industry and, therefore, help lift Orange County out of the recession.

Because Orange County actually entered the recession months before the rest of the nation, according to Adibi, it will probably be one of the first areas to come out. The national recession started about a year ago, according to the National Bureau of Economic Research.

“We see some light at the end of the tunnel, especially for Orange County and California,” Adibi said.

That’s about the extent of the good news, though.

At the forefront of the bad news, the gross domestic product will drop 4.1% in the fourth quarter of 2008, and the culprit will be a huge decline in consumer spending.

Consumer spending is responsible for two-thirds of the GDP and as people lose their jobs and their investments lose money, they aren’t going to have disposable income to spend.

Consumer spending is the “big gorilla in the room” when it comes to the health of the economy, and the recession is going to stick around until it increases again, according to Doti.

“While consumption got us into the recession, we’re going to have to count on consumer spending to get us out,” he said.

At the end of his presentation, Doti coined his own theory on presidential elections and their impact on the economy: Doti’s Law. He noticed that since Franklin Delano Roosevelt was elected president in 1932, every time a Democrat takes over the presidency from a Republican, the stock market shoots up in the following year. Conversely, every time a Republican takes over for a Democrat, the stock market tanks.

It has been true every time the office of the presidency has changed political parties for the last 75 years.

So does that mean Doti will vote Democrat in the next election?

No.

Next time he’ll vote Republican, bet on stocks going down and reap all of the benefits, he said.

ALAN BLANK may be reached at (714) 966-4623 or at [email protected].