Recession

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If the rest of the world is heading into recession, Los Angeles may not be a bad place to be.

Ironically, the very factors born out of L.A.’s economic pain and scorn are now proving to be its ballast.

The fact that L.A. has ever-fewer Fortune 500 companies, that it has become an economy of largely small- to medium-sized businesses, that it has potent technology and manufacturing sectors, and that it is tremendously diverse all these elements provide more insulation than almost any other region in the nation, including New York, Seattle and the Bay Area.

Los Angeles is actually being regarded as a potential safe haven, especially among foreign investors looking to bail out from their own economically troubled countries.

“We are in a much better position to deal with the type of recession some people are expecting than the one we had in the early 1990s,” said Joe Magaddino, director of the department of economics at Cal State Long Beach. “We are less dependent on government contracts. And we don’t have the kind of inflationary bubbles we used to have.”

To be sure, there still are plenty of vulnerabilities. Two of the area’s largest industries tourism and entertainment are already feeling some ill effects. Most of that drop-off can be traced to Asia, where people have less discretionary income to pay for such luxuries as movies and U.S. vacations.

In addition, roughly 12 percent of the Los Angeles economy is based on international trade the bulk of that with Asia. And several local industries, such as banking and real estate, have major Asian influences.

One other worry: If the national economy finally succumbs to the global troubles, there might not be any safe port, even L.A.

At this point, the wild card appears to be Latin America, and Mexico in particular. Between 1993 and 1996, trade between L.A. and Mexico shot up 52 percent an important salve to the uncertainties with Asia.

“If the troubles seen in Latin America spread to Mexico, it could really put our economy in jeopardy,” said Ross DeVol, an economist at the Milken Institute in Santa Monica.

At this point, however, many economists downplay the prospect of U.S. recession fed by global unrest.

The latest Blue Chip Economic Indicator, a consensus estimate by some 50 top U.S. economists, concluded that the U.S. economy, while slowing, will see growth continue through the end of 1999.

In its latest report, released Aug. 10, gross domestic product growth was projected to grow by 3.4 percent in 1998 and 2.3 percent in 1999.

“There is no recession scare in the U.S.,” said Nancy Woodall, an economist with BankAmerica Corp. in San Francisco. “There are signs of a manufacturing slowdown, but there are no indications that the whole economy is going into a recession.”

Nonetheless, the last few weeks of skyrocketing markets and political turmoil have given the experts pause and raised the inevitable speculation about which cities are best prepared to shoulder a possible downturn.

They certainly don’t include San Jose, which does not have a diverse economy and which depends heavily on exports to Asia. In fact, Asian exports are tied to around 25 percent of personal income in that city, according to a study conducted by the Milken Institute. By contrast, the figure is only 5.6 percent in Los Angeles.

“The linkages with the international market are pervasive,” said DeVol. “But today, (L.A.) has a much more diverse economy than many other cities.”

That diversity stems, in large measure, from an extended and painful restructuring in the early ’90s that came about after Southern California’s aerospace industry collapsed when the Cold War ended and industry consolidation ensued.

Similarly, L.A. lost most of its major financial institutions during that industry’s consolidation. These events and others caused Los Angeles to fall much harder than virtually any other area of the country and to emerge much later from the national recession.

The initial fallout wounded civic pride, as prominent corporate headquarters pulled up stakes, leaving hundreds of thousands of unemployed workers. Concern became widespread that Los Angeles would deteriorate into a business backwater.

But the transition that ultimately occurred has left the L.A. economy more diverse and flexible. And those are the ingredients making it a relatively safe harbor, at least for the moment.

The area’s technology sector, for example, has been maturing, both in terms of operations and management talent. Venture capitalists, who for years focused almost exclusively on Silicon Valley, are taking note increasing their presence here. Some even speculate that small, privately held L.A. technology firms could benefit from the Wall Street downturn as investors take their money out of stocks and put it into private venture capital investment funds that are increasingly targeting Southern California.

Some local industries could actually benefit from a recession overseas. Anyone making a living off the increased flow of imports moving through the ports of Los Angeles and Long Beach has kept very busy. Trucks are in heavy demand (see related story, page 7), and warehouse space in industrial sectors of the city is in short supply.

Then there are the local attorneys and investment bankers who are involved in the buying and selling of depressed Asian assets.

For all the positives, however, there are significant negatives.

Hollywood depends on overseas sales for almost 50 percent of its revenues, and Asia had been considered its most promising growth market. But now, in addition to steep drops in Asian box-office revenues, video rentals in some parts of Asia are down 20 percent to 40 percent, said Richard Rosecrance, director of the Center for International Relations at UCLA.

“If people in a large number of countries around the world can’t afford to go out and see films, it is going to have a big impact on the Los Angeles economy,” he said.

The drop-off in overseas ticket sales is being exacerbated by foreign currency devaluations the same devaluations that are helping L.A. importers.

Foreign distributors, which pay a set fee in U.S. dollars for the right to distribute Hollywood movies, are seeing their profits squeezed.

“I’ve heard that distributors in Australia are pushing to renegotiate their contracts because of the currency devaluation. I’m sure other countries will follow,” said Martha Henderson, head of the entertainment division at City National Bank in Beverly Hills.

Other L.A. exporters are being hurt by foreign currency devaluations, which have made U.S. products much more expensive on global markets. Just as foreigners can no longer afford to buy as many movie tickets and overseas vacations, they also can no longer afford as many U.S. imports, especially when those imports are much more expensive.

Tourism also has taken some hits.

Visitor arrivals from South Korea are off more than 50 percent from a year ago, according to the Los Angeles Convention and Visitors Bureau. And those tourists who are coming have been spending less. Beverly Hills retailers, along with tourist attractions like Universal Studios, report a decline in sales and attendance due to the arrival of fewer Asian visitors.

Much of the slack has so far been made up by increased arrivals from Latin America and from other parts of the United States. That could change, however, if the Latin American economies turn sour.

Faced with the uncertainties of the emerging markets, an increasing number of L.A. firms are looking toward the more stable markets of Europe.

Burbank-based Iwerks Entertainment, for example, used to generate about 45 percent of its revenues from Asia. That figure is now between 30 percent and 40 percent, said Jack Shishido, senior vice president for worldwide marketing and sales.

“The Far East has been a sobering experience for a lot of companies, and Iwerks is no exception,” he said. Last month, the company announced that it was opening attractions in Scotland and Italy.

Of course, there is no guarantee that Europe can remain unaffected by the economic contagion not with Russia slipping into financial and political turmoil. Which is why Los Angeles, even with its diverse, flexible economy, cannot remain a safe harbor if the global crisis worsens.

If (the United States) loses the stimulus of growth of Europe, we lose a growth engine,” DeVol said. “We will then be the odd man out, and I don’t think (the U.S.) can pull along the world economy by ourselves.”

If that happens, all bets are off in L.A. and everywhere else.

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