Charting Ahead Toward Recovery

L.A.’s sprawling manufacturing sector is likely to be among the first places where local economic growth will reassert itself.

By MICHAEL STREMFEL

Staff Reporter

Economists look at recessions through government data and computer modeling.

Bill Sornborger has a simpler measurement his “set-up” men.

At Custom Roll Forming Co. in Gardena, set-up men reconfigure massive metal-shaping machines to churn out towel racks and various other products.

Problem is, not enough new jobs are coming into Custom Roll to keep those set-up men busy. So the company has had to lay off 10 of its lower-skilled workers, and transition its set-up men into lower-wage jobs as machine operators.

“We’re only running eight of our 23 machines right now, whereas normally we’d be running more than half of them and setting up the other ones for new jobs,” said Sornborger, the company’s chairman.

L.A. feels his pain as well as that of countless other widget makers that comprise an increasingly important part of the local economy. They are the ones who are quietly feeling the effects of the current recession and they are the ones who likely will lead the way out sometime next year.

Not a typical recession

Setting a precise time and circumstance for the rebound is risky business. The current recession is especially difficult to predict because its evolution runs counter to the usual pattern, where consumer spending slows first often fueled by inflation followed by cuts in business spending. Then the Federal Reserve eases up the money supply by cutting interest rates and by that time, there’s enough pent-up demand among consumers to generate sales. That leads to business expansion.

This time, it was business spending that slowed down first followed only much later by consumers (with Sept. 11 playing a pivotal role). Inflation has had zero impact, and despite a year’s worth of intervention by the Federal Reserve, interest rate cuts are only having a limited effect.

So if not lower interest rates or pent-up consumer demand, what will turn things around this time? A confluence of incremental steps, say economists, including restructuring debt and reducing capacity to be brought in line with today’s lower demand.

That’s why companies are laying off workers and liquidating inventories at sharply reduced prices. Hardly any of them are looking to borrow.

“The whole country is a big discount store right now, where everybody has learned not to pay retail for anything,” said Tom Lieser, senior economist at the UCLA Anderson Forecast. “It will take some time to work off these (overcapacity) problems, and it won’t happen all at once. But eventually you’ll have more companies moving back into profitability than slipping further into the red.”

When that happens, Los Angeles is likely to be well positioned, at least in the short-term, because its diversified economy is not dependent on any one segment, be it aerospace, technology or financial services.

“L.A. makes the more simple consumer goods. And that’s where you’ll see demand pick back up first,” said Steven Cochrane, senior economist at Economy.com.

As with most everything in economics, however, there is a flip side. If Los Angeles relies too much on low-tech products made by low-income workers, it will miss out on the benefits of job growth in higher-paid fields a dilemma that began playing out in the late 1980s when thousands of local aerospace workers were either laid off or forced to relocate.

Wimpy contraction

For now, the local recession is shaping up to be fairly wimpy.

A total of 17,900 Angelenos have lost their jobs since the downturn took hold last April. Some analysts were especially surprised by November’s state unemployment numbers, which saw L.A. County’s jobless rate actually fall to 6 percent, from 6.1 percent the month before even as the overall state rate hit 6 percent.

“The word ‘recession’ doesn’t convey the real meaning of what we are experiencing,” said Edward Leamer, director of the UCLA Anderson Forecast.

Cochrane concurred. “Until Sept. 11, I thought L.A. would avoid recession altogether,” he said. “We don’t have cutbacks in defense spending. In fact we have an uptick. The housing market is not overbuilt, and we have low interest rates.”

Even so, things are likely to get worse before they get better. Looking at previous post-World War II recessions, the area traditionally has lagged the nation as a whole most noticeably in the last recession that started a decade ago and left Los Angeles reeling until 1995. Economy.com still expects another 40,400 L.A. County workers to get the ax by the time the recovery begins.

This time, too, expect the national economy to rebound first perhaps as early as the first quarter of 2002, say some economists. Employers reluctant to hire new workers until they’re sure the recovery is for real will initially ask L.A.’s 600,000 or so manufacturing workers to put in overtime.

As such, a key statistic will be the average weekly hours put in by L.A. manufacturing workers. So far this year, the figure has flitted between 41 and 42 hours. For November, it was 42.0 hours, its highest level since February. Once the figure ticks up toward 45 and holds for a couple months or more, the area is on its way. The figure won’t stay that high for long, however, because employers will start hiring more workers.

Already, there is evidence of movement.

Cascade Pump Co. in Santa Fe Springs is seeing increased demand for its pumps from U.S. amusement parks, which are installing new water-oriented attractions in anticipation of increased demand this summer.

“It’s getting to where every town of relatively good size is getting an amusement park,” said Tom Summerfield, a co-owner of Cascade Pump. The company also is seeing increased demand from oil refineries, airports and water treatment plants, which are using the economic lull as a time to upgrade their systems.

Fuel from overseas

Any economic revival ultimately involves trade, so an important indicator will be an increase in imports, as foreign-made goods surge through local seaports and airports.

One encouraging sign: Imports through the ports of Los Angeles and Long Beach rose 3.8 percent last month from the like period a year ago. Exports for the month fell 4.6 percent. One month is hardly a trend, and the import jump is likely due to Chinese companies sending shipments out early so they can shut down during Chinese New Year in mid-February. Still, trade was a critical driver in L.A.’s rebound from the last recession, so this will be an important area to watch.

Federal funding also is likely to help. Some of it already is trickling into Los Angeles for defense-related research and development, much of it related to aircraft programs. The biggest impact is expected to come from the Joint Strike Fighter, but other programs are also seeing new momentum.

“The amazing thing about the war in Afghanistan has been that we were able to do so much with aircraft, unlike in Vietnam,” said Edward Leamer, director of the UCLA Anderson Forecast. “The big story has been how helpful these unmanned reconnaissance planes have been.”

The primary such plane is the Global Hawk, which is produced in Palmdale. The first four fully operational Global Hawks have been flying missions in Afghanistan, with great success. Look for major federal dollars to flow into that program, possibly as soon as the second half of 2002.

Lagging industries

Hollywood will come after that, although no earlier than the second half of 2002. Movie and television producers have been in a drastic cost-cutting mode in recent months some of it related to the severe slowdown in advertising revenue and some of it due to stockpiling that occurred in anticipation of strikes by writers and actors that never happened. Entertainment industry employment in November hit its lowest point since April 1997.

“You will get a turnaround in Hollywood employment, but not until the middle of next year,” said Jack Kyser, chief economist of the L.A. Economic Development Corp.

Also late to the party will be L.A.’s non-defense-related technology sector mostly because there remains overcapacity after corporate America’s buying spree of computers and telecommunications equipment in the late ’90s. But unlike tech-reliant regions like the Bay Area and Seattle, the impact in L.A. is more diffuse. The dot-com crash has hit certain pockets like Santa Monica, but L.A. also is home to the booming video-game industry that has defied economic hard times.

That leaves the fate of L.A.’s economy at the same place it was before the recession: squarely on the shoulders of those mostly anonymous, lower-tech widget operators. Short-term, that’s turning out to be a good thing. Longer term is another matter.

From a recent peak of 630,000 jobs in mid-2000, L.A.’s manufacturing base now has 609,000 workers, translating to a loss of 21,000 local jobs. Some of those are likely gone for good, due to structural changes in the global economy. This is especially true for certain types of apparel jobs, which can be done for a fraction of the cost overseas.

The stunning economic growth of China, for example, is causing accelerated job losses, and those jobs are not likely to ever return.

“A lot of the fabric houses and dye houses have gone out of business, so we’re shifting our sourcing overseas,” said Teresa DeRogatis, a partner at Hot Cotton by Marc Ware, an L.A.-based women’s wear manufacturer.

And those lost jobs aren’t being replaced by the high-paying positions that communities covet.

A soon-to-be-released study by McKinsey & Co. found that economic activity in the five-county L.A. metro area lags that of seven “peer cities” New York, Washington, Chicago, San Francisco Bay Area, Seattle, Philadelphia and San Diego. Specifically, L.A. is behind in income per capita by 22 percent, productivity per capita by 12.7 percent, and labor force participation by 10.3 percent.

The researchers attributed this to L.A.’s product mix, its larger average household size (with more nonworking children and stay-at-home parents), and its slightly higher unemployment rate.

“We are producing less-valuable goods here, like household electrical components, whereas the Bay Area is making semiconductors, which are much more valuable,” explained Svetlana Lyapina, a McKinsey associate who participated in the study.

Added Tony Miller, a partner in McKinsey’s L.A. office: “Part of L.A.’s future health will be our ability to convert to higher-value goods and services, especially by fostering the growth of industries that lend themselves to technology commercialization.

“We have a unique set of resources in Southern California strong academic programs, research dollars, a base of intellectual capital that is not being fully leveraged,” Miller said.