Economic Outlook 2002: Taking Their Toll

Recessions have eroded L.A.'s core industry over the years that may be a good thing.

By LAURENCE DARMIENTO
Staff Reporter

It's been a few years, but L.A. is no stranger to recessions. There have been six national recessions since 1960 downturns that offer a few clues on how soon the region might come back from the current slump.

They range from a mild recession at the tail end of the Eisenhower Administration one that was barely felt in L.A. to a national downturn in 1990 that triggered what was the area's worst post-World War II recession.

Amid them all, the region's fate was often determined, for good or bad, by its heavy reliance on defense industries a reliance that was diluted by the deep cuts in the late 1980s and early 90s.

"It turns out diversity does count," said David Friedman, a fellow at the New America Foundation think tank. "Along comes a recession in which there is not some giant military overlay, and suddenly we are doing better than just about any other metropolitan area."

1960 Recession

Nationally, it was a mild recession, largely prompted by a 116-day steel strike that ended in November 1959. In L.A., it barely registered.

While the Los Angeles-Long Beach region saw annual unemployment rise to 6.7 percent in 1961 from 5.5 percent the previous year, total employment grew from a little under 2.5 million jobs in 1960 to a little over 2.5 million jobs in 1961. Joblessness was up only because a slowing economy couldn't absorb the enormous immigration the region was experiencing.

Los Angeles, in fact, was the nation's growth leader, drawing countless residents from the East and Midwest who needed housing, clothes and other products. That growth was supported by a defense-based economy buoyed by a Cold War buildup that was not close to letting up.

"L.A. was still in its postwar boom," said Ross DeVol, a regional economist with the Milken Institute. "The underlying growth here was so strong that you would not see a recession other than a slowdown of that growth."

1970 Recession

Ten years later, Los Angeles would endure the flip side of its reliance on the defense industry. While the region's economy had greatly expanded during the previous decade, much of it was due to continued Cold War spending and the Vietnam buildup.

So when President Richard Nixon took office and started to pull back the nation's war footing, Los Angeles suffered more than the nation as a whole.

"We were in a war economy until the fall of the Berlin Wall," said Larry Kimbell, a retired UCLA economics professor and former head of the school's Anderson Forecast.

And the nation did suffer, even though the recession that started in the first quarter of 1970 lasted four quarters and reduced total GNP by just 0.1 percent.

In mid-1971, unemployment reached a 10-year peak of 6 percent, while inflation galloped out of control, prompting wage and price controls.

While the national began its recovery in 1972, it took another year to be felt in the Los Angeles region, where employment finally began growing again in 1973 supported by an underlying base of continued Cold War military spending.

Even so, it wasn't until 1978 that the Los Angeles-Long Beach region reached its 1969 total employment figures of 3.2 million. Of course, part of that had to do with the 1974 recession.

1974 Recession

The early 1970s were a cruel time for Americans. Not only was the pullout from Vietnam a national embarrassment, but there was 1974's Arab oil embargo, which quadrupled oil prices and helped spur double-digit inflation.

The media dubbed the unlikely and unappealing mixture of inflation and recession "stagflation," something that President Gerald Ford grappled with through the end of his term in 1976 (and which, many believe, led to Jimmy Carter's close election victory).

In L.A., the 1974 recession made the 1970 slowdown seem like a dry run. Once again, Southern California suffered more than most of the nation, since it had not yet recovered from the post Vietnam decline in defense spending. Plus, the area was a big oil customer.

Nationally, the recession began in the first quarter of 1974, and lasted into the first quarter of the following year, leaving behind a 3.4 percent reduction in total GNP.

Los Angeles, meanwhile, saw employment fall from 1974 to 1975, as the region came out of the recession slower than the rest of the nation. But by 1976 the recovery accelerated to the point where L.A. had faster employment growth than the nation as a whole.

This time, a boom in aerospace and commercial aircraft production lifted the economy. "L.A. did get hit hard but there were other areas hit worse," DeVol said.

1980 Recessions

Technically there were two recessions in the early 1980s, though most people probably wouldn't know it.

The first started in the second quarter of 1980 and lasted just two quarters, producing a 2.2 percent loss in total GNP. The second started less than a year later in the fourth quarter of 1981 and lasted for five quarters, with a 2.8 percent total loss in GNP.

Economists blame the recessions on the second run-up in oil prices, helped along by the decision of Federal Reserve Board Chairman Paul Volcker to hold down inflation by raising interest rates.

Tom Lieser, executive director of the Anderson Forecast, remembers the prime rate rising to 21.5 percent on two different occasions, leading to widespread credit problems. "If you were buying a house in that period you might have gotten a mortgage rate of 15 percent," he recalled.

By 1980 the nation was in the deepest recession of the post-war period, with the L.A. region particularly suffering from a downturn in defense spending under Carter.

But in the spring of 1981, soon after Ronald Reagan was sworn in, Congress approved a 25 percent cut in income taxes, a cut in federal spending and a greatly accelerated jump in defense spending aimed at burying the Soviet Union.

L.A. came out of the recession more slowly than the nation as a whole. In 1983 unemployment reached nearly 9.7 percent in the county, but then the effects of the military buildup began to be felt and by 1986 local growth was outpacing the nation thanks again to the military. By 1990, employment grew to 4.1 million in Los Angeles County.

1990 Recession

Then, reality hit hard.

First, President George Bush led U.S. allies in 1990 into the Persian Gulf War. Though it was successful and short, it still prompted a national recession that started in the fourth quarter of that year.

Second, the Soviet Union collapsed in 1991 faster than anyone imagined, leading to a radical cut in defense spending that took the Los Angeles economy by surprise.

The national recession lasted only three quarters, producing a 1.5 percent drop in total GNP (though it was enough to lead President Bill Clinton to victory). But the Los Angeles region suffered from a massive loss in defense jobs as contractors closed shop, consolidated or moved away.

"It was so severe in Southern California that it was probably the most severe regional recession in the United States in the last 50 years," Lieser said.

Total employment fell in Los Angeles County from 4.1 million in 1990 to 3.7 million in 1994. Along the way, a real estate bubble burst, with median home sale prices collapsing from $219,000 in 1991 to $173,000 in 1996.

The defense jobs never came back. In 1985, there were 402,000 workers employed in aerospace and high tech jobs in the five-county metro region. That dropped by 2000 to 278,000, even with the Internet boom.

L.A. came out of the 1990 recession in the fourth quarter of 1994 as it gradually restructured its economy, with a huge growth in jobs related to international trade, motion pictures, manufacturing and the Internet.

The result is that today, even with the dot-com collapse, L.A. has a more diverse economy something that should help it weather the current recession better. At the same time, ironically, that may perhaps slow any recovery, DeVol said.

L.A.'s remaining defense base should benefit from an expected build up prompted by the Sept. 11 attack, but that base is no longer the dominant regional force it once was.

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