Chapman University forecasters painted a mixed picture of local and national economies next year, with robust job and economic growth, but also with high inflation and rising mortgage rates likely to derail years of steady home price gains and a recession possible in just over a year.
"The US economy next year will be strong," economics professor Jim Doti, Chapman's former president and chief forecaster, said Tuesday, Dec. 14. "We're looking at growth of 4.4%, which is roughly double pre-COVID years."
But, he added, "the real problem is longer-run trends. ... I see an increasing likelihood of recession — possibly at the end of 2022 or even the start of 2023."
Speaking for two hours with fellow Chapman economists Raymond Sfeir and Fadel Lawandy, Doti mocked the idea that the surge in inflation rates over the past six months is temporary.
Citing past economic data, the forecast projects the nation's inflation rate will remain above 6% for at least half of 2022, dropping to 5.9% by the end of the year.
"Our empirical findings show that inflation is a rather stubborn beast and tends to be sticky on the way down," the Chapman forecast said.
Chapman expects the Federal Reserve will react to inflation by raising interest rates twice in the year ahead. That, in turn, will raise the risk of a recession down the road. History shows downturns have followed past efforts to control rising prices by raising interest rates, the forecast said.
"Once they jack up (the Federal Funds) rates, they have never ever been able to fine-tune it to miss a recession," Doti said during a presentation at the Musco Center for the Arts that was live-streamed online. "Why would this time be different?"
Home price drops
Numerous economists have forecast a slowdown for home price gains next year as mortgage rates go up. Chapman actually forecasts home prices will drop.
For example, the National Association of Realtors predicted the average US house price will be up just 2.8% next year from 2021 levels, following a 15% year-over-year gain this year. Irvine-based data firm CoreLogic foresees an annual house price gain of 7% next year.
But Chapman's forecast is more detailed, with quarterly projections as well as an annual forecast. By the fourth quarter of 2022, the forecast shows, the US house price will have dropped 3% from the fourth quarter of this year.
In Orange County, prices are projected to drop even more. Chapman predicted a drop of 3.3% to $1.06 million, down from $1.09 million this year.
Blame rising mortgage rates. Chapman predicted the average rate for a 30-year fixed mortgage will rise to 3.9% in the fourth quarter of next year, up from an average of 3.1% this quarter so far.
"The handwriting is on the wall," Doti said. "We're very much dependent on mortgage rates."
Chapman also forecast a decline in home construction next year, a prediction that conflicts with the Realtor outlook.
Speaking last week at a real estate journalism conference in Miami, NAR Chief Economist Lawrence Yun said homebuilders are working through supply chain problems that disrupted construction this year.
But those problems "will dissipate, and then homebuilders will really ramp up production," Yun said.
The Chapman forecast said, however, US housing starts will decline 5.7% next year to just over 1.5 million units.
In California, homebuilders are projected to build 111,470 new homes next year, or nearly 3,700 fewer than in 2021 and well below the state housing department's goal of 180,000 units a year.
Orange County building permits are projected to drop by 250 units to 7,151 new homes next year, the forecast said.
State and local job gains
The California and Orange County economies will see greater improvement than the nation as a whole after receiving a battering during the pandemic.
California's job growth in 2022 is forecast at 4.2% compared with 3.5% nationwide, the forecast said. The state's economy suffered more during the pandemic because its anti-COVID-19 mandates were more stringent. The economy is recovering as measures to protect against the coronavirus are more in line with other states.
Strong trade growth is fueling sharply higher job growth in transportation, warehousing, and other sectors moving goods through the Los Angeles and Long Beach ports. Imports from China increased 19% to $360 billion through September 2021, according to the forecast.
California's total employment by the end of next year will still be about 300,000 jobs below the pre-recession level of 17.7 million jobs.
Job growth in Orange County is expected to hit 5% next year. Economic losses from Orange County's tourism-related sectors are offset by the strength of its higher-paying, high-tech "innovation" sector, the forecast said.
While Orange County employment remains 6.2% below pre-pandemic levels, that compares favorably with Los Angeles County's 8.5% decrease and San Francisco's 8.9% drop.
Of the 50 innovation hubs tracked across the nation, Orange County most recently ranked 12th highest.