EXCITING NEW TIMES FOR LOS ANGELES COUNTY’S ECONOMY

There are many stories to tell about the economy of Los Angeles County. One is about an economy that is growing at a brisk pace again. Another is about continued turmoil in the business base. Still another story is about both emerging and existing industries that need to be more effectively supported. And a final story about Los Angeles County is the need to think about its economy in a strategic manner if the County is to meet the challenges it faces.

During the past year, there has been considerable attention focused on California’s vigorous economic rebound, but the stories usually carried the caveat that the economy in the southern half of the state was still lagging. And Los Angeles County’s economy had been slow to lift off, after the travails of the early 1990s. But in the second half of 1996, the County’s economy accelerated, and in 1997 is turning in a solid performance. The most comprehensive measure is nonfarm employment, and in 1997, the County is on track to add nearly 90,000 jobs compared with 1996’s increase of 55,000. And this does not include independent contractors or home-based businesses.

The County’s unemployment rate should move down a full percentage point, to 7.2 percent, while personal income should advance 5.9 percent. And inflation as measured by the Consumer Price Index should average 1.6 percent, well below the national average of 2.7 percent.

Broad-based gains

The usual jibe encountered, however, is “well–you are growing again, but all you are adding is hamburger-flipper jobs.” Not true! Growth is being driven by an array of industries, with the bias towards higher wage jobs. The drivers include motion picture production, international trade, tourism, professional business services, and apparel manufacturing. There is also an upswing in both industrial and office construction. And the “new” technology sector is also gathering momentum.

Another aspect to the County’s economy that is not generally recognized is the number of major projects that are either underway or in development. These include the new Getty Museum (opening in late 1997), the Aquarium of the Pacific and Queensway Bay project in Long Beach (opening in 1998), the expansion of the Museum of Science and Industry (also 1998), the Hollywood revitalization (including a business improvement district and the Egyptian restoration plus several exciting development proposals), the Alameda Corridor and the port expansions, and the rail mass transit projects. Downtown Los Angeles is also getting in on the action, with a business improvement district, a new sports arena, the Colburn School of Music, the Cathedral of Our Lady of the Angels, and the Disney Concert Hall.

The full impact of some of the foregoing can easily be overlooked. One example is what is happening in Hollywood, which is an international tourist icon for the Los Angeles area. The rehabilitation will increase tourists’ “dwell” time in the area and hopefully their spending. The rail transit work will soon link several of the key visitor attractions, which will make Los Angeles more user friendly especially for international tourists. As for the Alameda Corridor and port expansions, this will insure that Long Beach-Los Angeles cements its position as the dominant port complex on the U.S. West Coast.

That Old Devil Turmoil

While the overall economic news has been getting brighter, the County’s economy has also been roiled by a series of acquisitions and mergers. Great Western Bank was acquired by Washington Mutual, and this has raised fears about further consolidations in the local financial services industry. The really big news came in aerospace/high-tech with Boeing’s acquisition of Rockwell’s space business, followed by the former’s merger with McDonnell Douglas. Recently approved by the Federal Trade Commission, this will make Boeing the largest private sector employer in the Los Angeles area. Hughes Electronics is being acquired by Raytheon, and the capper was Northrop Grumman’s acquisition by Lockheed Martin. The Vons supermarket chain was acquired by Safeway, while Pacific Enterprises is in the process of merging with San Diego-based Enova.

All this has left people a tad uneasy. It’s not just the direct and indirect job losses. Some people speculate that there may be a flaw in the Los Angeles economy that has caused this loss of corporate headquarters. However, you have to have the proper perspective; that the world economy is in the midst of a major transition. The result is that many industries are in a state of “chaos” (rapidly changing technology and/or shifts in customer base), which means mergers, acquisitions and downsizings. Some firms who want to be survivors have been aggressive acquisitors, and Southern California is viewed as a good hunting ground. Los Angeles which was strong in traditional aerospace has seen many familiar names disappear, and the scenario is repeating itself in financial services..

What has to be remembered is that Los Angeles has the rather unique ability to create “new” industries, such as multi-media and toys. However, the area has never taken an active, county-wide approach to this process.

Industry Action

Spinning through some of the major industries in Los Angeles County, motion picture production should add 11,000 jobs in 1997, pushing the total to 129,700 (the Employment Department data understates actual employment by about a factor of two). There is a lot of turmoil in the industry due to recent mergers, while there is a growing debate over summer’s release pattern. Each week brings another big budget production to market, which limits the box office performance of all pictures in the market. In the meantime, the Playa Vista project is still mired in Byzantine financial dealings.

International trade activity at the Los Angeles Customs District is showing more signs of life, with an increase in two-way trade value of 6 percent now being projected for 1997. Both the ports of Long Beach and Los Angeles are opening up new terminals, while work is underway on the Alameda Corridor. However, Long Beach is still grappling with the Cosco terminal issue, and the critical expansion of Los Angeles International Airport (the World’s second or third biggest air cargo hub, depending on who is doing the ranking) is facing significant opposition.

Tourism continues in a growth mode, with a 2.6 percent increase in the number of overnight visitors forecast for 1997, to a total of 23.8 million. In terms of visitor attractions, there is a lot of product in the pipeline, headlined by the new Getty Museum. In 1998, Long Beach will chime in with the Aquarium of the Pacific and the Queensway Bay project. However, Universal Studios Hollywood expansion plan (which would create the first overnight resort destination in the County) has run into significant opposition. Moreover, no major new hotels are under development. With occupancy rates running over 73 percent and room rates up 7 percent, there is concern that the County could start to run into a shortage of rooms in the near future.

Professional business services, which includes advertising, accounting and management consulting is on track to add 23,000 new jobs in 1997. Apparel manufacturing which has been posting steady growth over the last few years (6,200 jobs in 1996) is unexpectedly running into a worker shortage, with no clear explanation as to the reason.

As noted above, the aerospace/high-technology sector is seeing mixed trends. Overall, the industry has started to add jobs, in both the “classic” sector (satellite manufacturing for example) and in new technology. Given the recent spate of mergers, employment in the County in 1997 should dip again as the acquirers integrate their new purchases. All eyes are on the Douglas Aircraft plant in Long Beach, to see what capacity-short Boeing does with this facility.

On the nonresidential construction front, new industrial activity is surging while vacancy rates plummet (down to 6.7 percent for the County as a whole). Real estate brokers point out that in terms of what the market is demanding, the “real” vacancy rate is much lower, with shortages of large blocks of space being reported. On the commercial office front, vacancy rates are at the 16.7 percent level, with some sub-markets (especially entertainment-driven) much lower. In the retail market, locations closer to the urban core are hot, but good product is hard to find.

About the only clinker in the Los Angeles economic outlook is new home-building, where new construction has been running sideways for the last few years. There are some signs that activity may be picking up, but don’t expect a boom. About 8,700 units should be permitted in 1997, up from 1996 by just 1.5 percent. In the resale housing market, unit sales activity continues to climb, while all the surveys indicate that there has been a bottoming out of prices. For 1997, a 0.5 percent increase in prices is forecast. Foreclosures have run at high levels since 1993, and actually increased in 1996 despite an improving economy. 1997 should see a modest decline.

Don’t Forget Population

While much was made of out-migration from California and Los Angeles County in the early 1990s, the population of both economies continued to increase. Between 1990 and 1997, the County is estimated to have added 543,400 residents. While there was a net out-migration, this was more than counter-balanced by the natural increase and documented immigration components. According to the most recent state data (mid-1995-1996), net migration was a minus 72,875, but the tide seems to be quickly turning.

There has also been a dramatic change in some of the County’s demographics. As of 1995, 41.6 percent of the population was Hispanic and 36.0 percent was White-Nonhispanic. Hispanic households are active buyers of “starter” homes (9 of the top 10 surnames of homebuyers in the County are Hispanic), and are busy improving them. And the hottest segment of the retail market is Hispanic-oriented.

Looking Ahead to 1998

What about the economic outlook for 1998? There is general agreement that the Nation’s economy will slow down, either on its own or with a little assistance from the Federal Reserve (they want to see more of the “Nirvana” economy). Gross product for 1997 will come in at around 3.0 to 3.5 percent in 1997, and the forecast for 1998 is a 2.0 to 2.5 percent gain. This will obviously impact the California and Los Angeles County economies, but it won’t throw them into the ditch.

The County should add 72,000 jobs, and the unemployment rate should ease down to 7.1 percent. Personal income should move up 5.6 percent, while inflation should remain under control at a 1.5 percent rate. What about new home construction? Caution is still the word, with a 2.6 percent increase in permits issued.

The Challenges Facing the Los Angeles Economy

While the economic news is getting better, there is still an array of challenges facing Los Angeles.

1.) The County is still 330,000 jobs below its previous employment peak, and given the economic scenario sketched out, it could be early 1999 before all the lost jobs are recovered.

2.) Add about 200,000 more jobs required for the people coming off of welfare, which may be a conservative number since new people will be going onto the welfare rolls. Can the right mix of jobs be provided, as well as support and training? This will be difficult given that the economy is in a period of transition, with several industries in a state of chaos as noted above.

3.) The image of Los Angeles still needs work, both externally and internally. There is still a distorted view around the nation as to what business is done in the area; for example, people are amazed when told that Los Angeles is the Nation’s second largest manufacturing center. And the image internally needs to be considered; it is counter-productive and harmful for people in one area of the County to put down other areas.

4.) Another challenge for residents of the County is “thinking big.” In other words, understanding that what happens in another area of the County could be important to its overall economic health and therefore deserves attention and support.

5.) There is also the danger that with improving economic trends that we think that we “are rich again.” The best example of this is found in the motion picture industry. In the early 1990s, there was the issue of “run-away production,” and steps were taken to solve the problem. In fact, we have been so successful that people are now complaining about all the location filming going on. Another aspect to this issue is that we don’t understand what is making us rich, with the example here being international trade. While the Los Angeles Customs District is the largest in the nation by any measure, local residents still have no clear understanding of the benefits, and in fact may think that international trade is bad because of possible job losses. On this count, the ball is clearly in the trade communities court to do a better job of explaining the benefits.

Follow the Yellow Brick Road

This is a powerful roster of challenges that Los Angeles County must face, and it is happening in a new economic and political era that will be super-competitive. However, the County has major business assets and amazing new ones are being created as you read this. But the County has never had an overall economic development strategy, a road map that would provide support to emerging and existing industries with good growth prospects.

Devising such a plan will probably be a little contentious, with some head-butting between the various sub-regions of the County. But the overall benefits will far out-weigh the pain. Despite all the bumps and bruises of the early 1990s, the County still has major economic potential. The challenge to all residents is to work together to develop it.

Jack Kyser is Chief Economist at the Economic Development Corporation of Los Angeles County.