The Economy: Is it Real or is it Virtual?
Back in the days before CDs, Memorex used to run ads showing Ella Fitzgerald singing and then asking viewers, "Is it live or is it Memorex?"
Today, a similar question could be asked of the American economy is it real, or is it virtual?
On the one hand, consumption, employment and the stock market remain at or near historic peaks. On the other hand, many critical industries high-tech electronics, agriculture and engineering services are beginning to reel from the Asia crisis and its global impacts. So which one is real, and which is pointing the way to the near-term future?
On Wall Street, analysts, often sounding less like serious scholars of markets than barkers at a virtual circus, eagerly hawk stocks in the face of almost any contradictory information. Riding a tsunami of hype, Internet issues rise to levels that would have taken traditional firms decades to reach; Yahoo! is now worth more than The New York Times. When all fails, mega-mergers, usually involving the exchange of nose-bleed stocks denominated in sky-high dollars, drive the market upward.
For the last several years, the media have been largely a willing handmaiden to this virtual construct. Magazines like Wired have seen the long expansion as the harbinger of a "Thirty Year Boom" that will solve many of mankind's long-term problems. Mortimer Zuckerman, no doubt gladdened by soaring property prices in New York and Boston, has already declared the 21st will be, like the 20th, an "American Century" and banished professional pessimist James Fallows from his magazine empire.
But one does not have to be a brooder to see the uglier realities of the Asian meltdown. Even as the Asian fallout has pumped billions of Chinese and Japanese dollars into New York's stock and bond market, for industrial America those transfers reflecting weakening Asian currencies and consumer demand also mean diminishing exports and reductions in sales, profits and, ultimately, employment.
The Asian downturn hits Southern California right where it lives. As economist Steve Levy points out, L.A.'s surprising at least to most analysts mid-1990s turnaround was largely fueled by foreign purchases of our aircraft parts, movies, high-tech machinery, farm products and engineering services. The most robust growth markets were found in countries like Korea, where purchases of California products grew 45 percent during the first half of the 1990s, as well as smaller developing nations in Southeast Asia. Today, Korean imports have largely evaporated, as well as those in once ebullient Malaysia, Indonesia and Thailand. Since May of last year, exports to Pacific Rim countries are down better than 20 percent.
Over the next few months, virtually every key growth sector of L.A.'s economy possibly excluding the resurgent construction industry is likely to feel the brunt of these changes. Cutbacks in plane orders from Asia, combined with very aggressive pricing from Airbus, are forcing Boeing to scale back its production plans, perhaps devastating a long-term revival at the former McDonnell Douglas facilities in Long Beach. The spillover, according to David Goodreau, president of the 900-member Small Manufacturers of California, is also being felt by L.A.'s network of highly specialized aerospace parts companies.
"You see aircraft and equipment orders being canceled. New orders are way down," observes Goodreau, also president of Burbank's Newman Machine Co., which like many L.A.-area machine shops has enjoyed a brisk resurgence in the mid-1990s. "The Asian component of the business has slowed everything down."
Similarly, Asia's decline has scaled down orders on mega-projects, such as new airports, theme parks and energy plants, another key component of our economy. The employment impacts may be felt soon.
Bill Gilmer, the economist at the Federal Reserve Bank in Houston, reports that earlier this year, Texas-based oil service firms and builders of petrochemical plants were so short of employees that they were forced to airlift machinists from Great Britain. Now they are considering layoffs of their own U.S.-based workforces.
The impact is beginning to be felt even in Hollywood, which once counted on Asia as its key growth market. High-technology firms are also suffering. In Silicon Valley there have already been several large layoffs and hiring freezes at key technology companies such as Hewlett-Packard, Applied Materials and Lam Research. Even that area's red-hot real estate market is showing signs of cooling. A few months ago, reports San Francisco economist Lynn Sedway, it was impossible to find more than 100,000 square feet for clients in either the city or Silicon Valley; now, suddenly, she find dozens of Bay Area locales with such abundant space.
Nor are there any likely rich foreign candidates to pick up for Asia. Resource-dependent Canada seems headed for a dramatic slowdown; British Columbia, the most Asia-dependent of the provinces, is already in recession. Europe's economy outside of the stock market continues to meander, with aging demographics, a growing socialist/green political tilt and dramatically slower growth in its formerly standout economy, the United Kingdom. The deepening economic and political crisis in Russia threatens to undermine not only that country, but Germany's major banks, which are heavily leveraged there.
Without East Asia, the rest of the developing world is critically short on export opportunities. Even as trade has expanded, the developing world is becoming relatively poorer. Among the 108 developing countries, the number with average per-capita incomes one-fifth or less that of the richer, developed nations has grown from 52 to 88. That's why East Asia, which was growing a vast middle class, remains so much more important than Latin America and Mexico, whose consuming masses remain relatively impoverished. This is especially true of South Asia, the Middle East and Africa; Nigeria's per-capita GDP is roughly one-fifth of its 1980 level.
Ultimately these realities will impact even the most sheltered parts of the virtual economy. The financial community's media machinations centered on controlling the "expectation game" will eventually wear thin as investors tire of real declines in year-to-year earnings. "They keep lowering expectations and then say 'See, we met expectations,' " jokes the Houston Fed's Gilmer. "They can't keep doing that forever."
Looking at history, it's likely some air will have to be let out of the financial bubble, even if it doesn't burst. For Los Angeles, the key question is positioning for the downturn. As one of the nation's least inflated urban economies, dominated by private companies, we may be better able to weather a serious asset-depreciation than finance-dominated New York or San Francisco. But that could prove only slight consolation; the Asian meltdown presents Los Angeles with its greatest economic challenge since the disasters of the early 1990s.
Joel Kotkin is a senior fellow with the Pepperdine Institute for Public Policy and a research fellow in urban studies at the Reason Public Policy Institute.
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