As economic clouds darken, l.a. anxiously awaits return of sunny times
In many ways, Kenneth Staub personifies L.A.’s economic slowdown. Operating out of a hulking structure in Paramount, Staub processes and distributes gargantuan rolls of steel that his customers use to make refrigerators, stoves and countless other products.
Staub is hurting. “Our overall business is off 25 percent from last year. We’ve had to let about 40 people go since January,” he said.
Many of Staub Metals Corp.’s customers are feeling even greater pain. “We supply metal to computer cabinetmakers, and those guys’ business is off 60 or 70 percent that business is dead,” Staub said.
Make no mistake, L.A.’s economic picture is darkening not to the levels of the Bay Area and other technology hotspots, but more than enough to be noticed. Relief is very unlikely between now and the end of the year and perhaps not until the middle of 2002.
Recent data, both local and national, suggest that a full-blown recession remains unlikely. But judging from an expected downward revision in the second-quarter U.S. Gross Domestic Product, it won’t be by much. One looming scenario: sluggish growth lasting through 2002, especially in troubled sectors like technology and media.
Unlike the last serious downturn a decade ago, L.A.’s economy has several strong suits: a booming housing market, a diversified business base, cheap labor and the prospect of increased defense spending. The entertainment industry, so much a concern during labor negotiations last year, should keep rolling out movies and television shows.
But there are minuses too: deepening recessions overseas, rising commercial real estate vacancies, and steep falloffs in venture funding and merger-and-acquisition activity.
Employment outlook
All told, Los Angeles County’s job growth rate is projected to slow to 1.3 percent this year, down from 2.0 percent in 2000, according to the Anderson Center for Economic Research at Chapman University.
“Given what is going on in the national economy, 1.3 percent is a very decent job growth rate,” said Esmael Adibi, director of the Anderson Center.
Joblessness, too, is holding up fairly well. Last month, L.A. County’s unemployment rate rose to 5.6 percent, up from 5.4 percent in July 2000 and 4.5 percent on the national level. Even if local joblessness exceeds 6 percent next year, as some project, it won’t come close to the peak of 10.5 percent in February 1994.
Nevertheless, the hiring outlook for the remainder of the year is modest at best. A quarterly survey by Manpower Inc. found only 26 percent of the L.A. companies contacted plan to hire more people in the October-December period, down from 38 percent in the year-ago period. In addition, 14 percent expect to cut back, compared with 4 percent in 2000.
The slowdown is being felt in other ways. Untold numbers of L.A. paper millionaires and at least one billionaire have seen the values of their portfolios plummet.
Consider the fate of Beverly Hills financier Gary Winnick, who was ranked by the Business Journal two years ago as the richest Angeleno by virtue of his holdings in the telecom company Global Crossing Ltd. At that time, his net worth was valued at $6.2 billion, based on Global Crossing’s stock being traded in the high $50s. As of late last week, the stock was under $5, making his Global Crossing holdings worth $370 million (though he sold in excess of $1 billion worth of his stake before the meltdown).
Plummeting portfolios have had their effects on many fronts.
“Before, people were very willing to donate highly appreciated stock to charities. It wasn’t really money to them, it was funny money,” explained Rob Deutschman, managing director of Santa Monica investment bank Cappello Capital Corp., who is active in charitable circles. “Now, that giving has really dissipated. Also, people anticipate their incomes are going to be less, so they don’t need the write-offs as much.”
Local economic growth is likely to resume at a much slower pace than during the dot-com mania. And when that recovery takes hold, look for strength in professional services, construction and education. “One out of every four jobs created in L.A. last year was in education, mostly K-12 public school teachers,” said Tom Lieser, senior economist at UCLA’s Anderson Forecast. “That compares to about one in 10 jobs statewide.”
Consumer spending
The biggest imponderable is consumer spending, which accounts for two-thirds of gross domestic product and has been propping up the economy for months.
After posting double-digit gains during most of 2000, L.A. County’s taxable sales growth rate has withered to near zero in recent months. The Los Angeles County Economic Development Corp. forecasts local taxable sales growth to be an anemic 1.4 percent this year.
“With slower income growth, high household debt and a low saving rate, consumer spending is in retreat,” states Chapman University’s recent L.A. County forecast.
The picture is especially gloomy at traditional department stores, whose performance can be measured by seemingly endless storewide sales. Retail landlords likely will see vacancies climb in the months ahead. Look for national retailers to prune low-traffic L.A. locations.
Against that backdrop, a wave of major retail projects is about to debut, as cities’ hunger for sales tax revenues continues to drive land-use decisions.
The November opening of TrizecHahn’s massive Hollywood & Highland project undoubtedly will provide a short-term lift from curious locals and out-of-towners. But the center’s ability to draw sustainable crowds remains to be seen. The same can be said for the Galleria in Sherman Oaks, which also opens in November, and The Grove at Farmers Market, which opens next March.
Not helping is the weakening economic picture worldwide, which could put a crimp in international trade, one of the area’s brightest spots for much of the troubled ’90s. Of chief concern is a recession in Mexico that has been deepening since last spring. Growth rates are taking a hit throughout Asia (except China), and downturns are spreading across Europe.
The result has been a drop-off in foreign demand for U.S.-made goods, exacerbated by the persistent strength of the U.S. dollar against the euro and yen. This makes U.S.-made goods more expensive overseas. “We’re not going to see the volume of trade we saw last year. It’s something to be concerned about,” said Lieser.
Local port officials suspect that the sluggishness will be short-term. “We’ve seen slowdowns like this before, like in ’93 and ’94, and then we came back the following year with a 26 percent increase,” said Don Wylie, managing director of maritime services at the Port of Long Beach.
Perhaps. But the latest figures show combined cargo volume for the two local seaports was down 7.6 percent in July from the year-ago level. That does not bode well for the holiday shipping season, which traditionally extends from late July through early October.
Retailers are delaying holiday orders until the last minute to avoid getting stuck with a glut of unsold inventory, as they were last year. Those last-minute orders may never be placed if consumer demand doesn’t pick up.
That sets the stage for another potential headache next year: contract talks between shippers and the International Longshore and Warehouse Union. The current labor contract expires next July, and while a West Coast-wide walkout could wreak havoc on large sectors of the L.A. economy, a sluggish economy would provide dockworkers with less leverage not unlike what happened to Hollywood writers and actors this year.
Military might
One of the brightest lights for L.A., though still a long way off, is the Bush administration’s plans for a high-tech defense buildup. The picture will become clearer after Defense Secretary Donald Rumsfeld submits the Pentagon’s Quadrennial Defense Review to Congress on Sept. 30.
Rumsfeld is likely to seek to shift a major portion of the defense budget away from military personnel through deep troop cuts and into high-tech hardware. Los Angeles would be a beneficiary of such a move because it has emerged as a primary R & D; center for such advanced military systems.
Chief among the prospects: the Air Force’s long-postponed F-22 Raptor fighter jet, stepped-up development of the unmanned Global Hawk aircraft, and Boeing’s recent $25 billion contract to build surveillance satellites for the National Reconnaissance Office.
“Subcontract work on that (Boeing satellite contract) is going to kick in over the next 12 months,” said Jack Kyser, chief economist of the EDC. “And then in late September, early October, (the Defense Department) is going to make a decision on who is going to build the Joint Strike Fighter, and a lot of that subcontract work will be done in Southern California.”
