After outperforming its neighbors in 2003, Orange County will lag the rest of Southern California in job growth in 2004, according to a new economic forecast, as rising interest rates slow activity in the county's critical finance sector.

In an otherwise upbeat forecast for Orange, San Bernardino, Riverside, Los Angeles and Ventura counties, researchers at California State University, Long Beach say Orange County will see fewer jobs created this year than it did in 2003.

Job growth in the county will slow to 1 percent in 2004, according to CSULB, down from 1.6 percent last year.

The five-county region, by comparison, is expected to see payrolls grow 1.2 percent in 2004, and some parts, such as Riverside and San Bernardino, are forecast to see job growth rates exceeding 3 percent.

"That's really attributable to one main factor," Lisa Grobar, one of the forecast's authors, says of the O.C. slowdown. "Almost half of the job growth in Orange County last year was in the financial services sector, and we think that tremendous growth is not going to happen this year as higher interest rates kick in."

In a plus for the county, CSULB predicts local manufacturers will see a pickup in the coming years, thanks to a continued decline in the dollar's value, which will boost exports, as well as strong military orders and a rebound in the airline industry.

"We're not looking for manufacturing to be a big growth engine," Grobar says. "But it's going to stop being a big drag."

In a prediction that will warm the hearts of homeowners but discourage those who feel priced out of the local house market, CSULB predicts house prices will appreciate at double-digit rates in 2004 and 2005. But Grobar has a warning.

"I think Orange County's housing market is overheated right now," she says. "The rate of appreciation is going to have to slow substantially. We're forecasting that will happen in 2006. But in the kind of market we have now, Greenspan's phrase about 'irrational exuberance' could apply. This can't persist."

Among the risk factors CSULB says could make a hash of its forecast: any rapid decline in the U.S. dollar or signs of rampant inflation, which would force the Federal Reserve to raise rates faster than anticipated; and anything - such as terror attacks on U.S. soil - that batters consumer confidence and hurts spending.

"Our forecast is that rates will rise slowly," Grobar says. "But if the Fed has to raise more rapidly, that would impact the economy."