EDVARD PETTERSSON
Staff Reporter
Good times pervaded Los Angeles during the first half of 1999, and while the national picture may be getting a little murky, the local outlook for the rest of the year is expected to keep getting better.
Chief among the factors likely to drive local growth are nascent signs of recovery in Asia and an acceleration of new capital flowing into L.A.-area start-ups. In addition, local unemployment has fallen to its lowest level in years and inflation is seemingly under control.
“There’s no question that this is a good time to be in Los Angeles,” said Joseph Magaddino, chairman of the economics department at Cal State Long Beach. “In the near term, we will grow faster than the rest of the country.”
And much of that growth, as is the case nationwide, has been driven by consumer spending.
“If you look at the monthly sales reports, consumer confidence, low unemployment and interest rates, you’ve got to be upbeat about the next six months,” said Richard Giss, partner in the retail services group at Deloitte & Touche LLP. “You couldn’t ask for a better business environment.”
Forecasting the economy, of course, has been a frequent source of frustration, what with the national expansion now in its eighth year the second longest since the end of World War II. L.A.’s economy began expanding several years later (one reason why many analysts believe that the area will keep doing well even after other regions of the country peak out). Quarter after quarter, economic forecasts projecting a downturn or at least a slowdown have been quietly revised upward.
All of which is resulting in significant attitudinal changes among consumers, investors and business people alike. It’s not just that the good times are here; it’s that, to many, the good times will never end.
With the stock market showing little sign of slowing down, with technology playing an increasing role in worker productivity, and with globalization helping reshape how companies do business, some even suggest that the traditional business cycle expansion followed by recession is a thing of the past. Most economists discount that notion, although in the face of such robust activity, it’s hard to quarrel with success.
Here’s how the local economic indicators look and what they suggest for the months ahead.
? Unemployment. Falling to 5.5 percent in May, joblessness in the L.A. area is at its lowest point in nine years and down a full percentage point from January.
“You can’t take one number as the gospel, but we’re seeing a significant reduction in unemployment statewide, and the drop in L.A. County is big news,” said Tom Lieser, executive director with the UCLA Anderson Forecast. “We’re not doing that badly for a major metropolitan area, and I expect that we’ll see further drops in unemployment this year.”
? Labor Force. Since January, the local economy has added 73,900 non-farm jobs, a 1.9 percent increase, according to the state Employment Development Department. The only sector to suffer a significant decrease in 1999 has been aerospace manufacturing, which lost 3,000 jobs, a 4.7 percent decline.
While aerospace jobs tend to pay high wages, some of those losses are being offset by new high-paying tech jobs.
“The business services sector includes software developers,” said Jack Kyser, chief economist with the Economic Development Corp. of Los Angeles County. “Although the number of software developers is not broken out, anecdotal evidence suggests that this is where there is a lot of growth.”
Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University, agreed that much of L.A.’s job growth has been in technology. “Businesses are increasingly depending on technology and there will be a need for technology-related business services as a result,” he said.
? Inflation. Fears about renewed inflation were rampant on Wall Street after the Consumer Price Index shot up by an unexpected 0.7 percent for April. In the Los Angeles region, the index soared by 0.8 percent, largely due to higher gasoline prices resulting from a series of outages at West Coast refineries. Those fears subsided somewhat last week, as the May figures showed prices stable nationwide and declining by 0.1 percent in Los Angeles.
The numbers also affirmed what some economists have been suggesting: that despite conventional wisdom, rapid growth and low unemployment are not necessarily recipes for inflation.
“Increased productivity will hold down inflation, and it would surprise me if inflation were to take off in the near future, barring any unforeseen factors such as a rise in oil prices,” said Douglas Joines, associate professor at USC’s Marshall School of Business.
? Retail. L.A.’s shopping spree is reaching near-frenzy proportions. Taxable retail sales in the county are forecast to reach $60.6 billion this year, up from $58.1 billion last year, according to the EDC. And they’re projected to jump to $63.5 billion next year.
“Retail sales have been strong for some time, with low unemployment and interest rates, and high consumer confidence,” Giss said. “Consumers have a general feeling of wealth and are willing to spend, but they are looking for value, either in terms of price or in terms of quality. That has benefited, in particular, discount and high-end retailers.”
While consumer spending has been a key driving force of economic growth, Adibi expects Angelenos to curtail their ways somewhat during the second half. Consumer debt has grown to such a level, he said, that it will begin acting as a deterrent to further spending, which in turn will slow local economic growth a bit.
? Labor Costs. Although Giss and others are quick to dismiss the probability that inflation might heat up, not everybody is quite as confident.
Linda Griego, co-owner of Engine Co. No. 28 restaurant in downtown and a Los Angeles director of the Federal Reserve Bank in San Francisco, observes that there’s more pressure now on retailers to raise prices.
“The labor market is very tight right now,” said Griego. “It takes time to find a replacement when someone leaves. For a long time people worked without raises, but now wages are again creeping up. Also, health care premiums are going up as much as 15 percent this year, which is something we haven’t seen since 1990-91.”
Griego acknowledges that retailers have been very reluctant to pass on any increase in their costs to customers, but that might soon change, as costs continue to rise.
? Housing. In addition to labor costs, increased housing costs could become a key factor in regional inflation.
Home values in L.A. County were up 14.9 percent in the first quarter of 1999 compared with a year earlier, according First American RES. That was the biggest jump in the nation, with the U.S. average standing at 7.2 percent.
“With the current low inventory of homes in the region and the continuing strong demand, I expect that prices will go up at the same rate,” said Leslie Appleton-Young, chief economist with the California Association of Realtors.
? Investment. Another key factor likely to keep propelling the local economy is availability of capital.
“We are involved in more transactions in the Los Angeles basin, by a large factor, than we have been in quite some time,” said Tom Weinberger, president of investment banking firm Sutro & Co.
“There is a groundswell of new, local companies, and I expect that this trend will continue in the foreseeable future because, for the first time, institutional funding for entrepreneurial companies is available here on a more permanent basis,” he said.
Weinberger said a combination of local venture capital firms, large national firms and so-called angel investors (wealthy individuals) are funding local start-up companies on an unprecedented level.
“The angel market has become much more evident in Los Angeles over the last 12 months and is now becoming a permanent source of capital for local entrepreneurs,” he said.
? Manufacturing. The decline in aerospace jobs during the first half of 1999 came from the winding down of Northrop Grumman Corp.’s B-2 program in Pico Rivera, as well as the phasing out of Boeing Co.’s MD-80 and MD-90 airplanes in Long Beach. “This trend will continue through the rest of the year as these programs are further phased out,” said Kyser. “This will mean a further loss of high-skilled and highly paid jobs.”
Magaddino concurred that manufacturing employment will contract a bit more in the second half of the year, but he expects the sector to rebound next year.
