War Stills Expansion Plans
Economy at a Crossroads

By CONOR DOUGHERTY
Staff Reporter

The economy is on hold.

Whatever positive momentum might have been developing in recent weeks has been effectively checked as the United States draws closer to war with Iraq.

Evidence of such a slowdown, still largely anecdotal, has been surfacing everywhere from the Dow Jones Industrial Average, which is off more than 4 percent since the beginning of the year to rising gasoline prices to a reassessment of advertising plans in the event that war breaks out.

"Clearly, the uncertainty of war is having an effect on the economy," said Chris Thornberg, a senior economist at UCLA's Anderson Forecast.

In L.A., several industries could be affected in particular. International tourism, still suffering from the aftereffects of Sept. 11, 2001, is bound to dip if hostilities break out with Iraq and reports of terrorist retaliation pick up. On the plus side, defense companies, led locally by Northrop Grumman Corp., should be fueled by increases in the Pentagon budget. And if oil prices stay high, the locally based energy companies are likely to see an increase in earnings.

But overall, a sense of anxiety is in the air made worse by the state's $35 billion budget deficit, a 6.6 percent statewide unemployment rate for December, and the continued resistance of companies to expand their operations. Paradoxically, the gloom comes in spite of some decent economic news, including improvement in the service-related sector, often a leading indicator of future growth.

'Wait and see'

For Steve Koffler, president of Los Angeles investment-banking firm Koffler & Co., the problem with doing business in the current climate is that nobody wants to make a decision.

"I'm hearing a lot of 'wait and see,' 'let's see what happens,' 'I'll call you in a month or two,' 'I don't want to do that right now,'" he said. "It is almost like 9/11, where everybody stopped for a few weeks until the picture was a little bit clearer."

However troublesome, Koffler said, a decision to go to war "would remove a lot of the indecision." But he added that, "if it's long and protracted, that's not going to be a good scene."

All of which makes the dicey business of economic forecasts even more perilous. In fact, many local economists are already revising their 2003 forecasts just one month into the new year.

Adrian Fleissig, a professor of economics at California State University, Fullerton, sees little sign of a regional turnaround over the next three to six months, according to his Southern California economic indicator. Fleissig also cautioned last week that a war or significant cutbacks in state spending would further drag down the indicator.

A short war, said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University, would likely result in a short-term hunkering down by businesses and consumers, followed by a quick pickup in investment and spending when the conflict subsides. A longer war, he said, could force the national and local economies into recession.

As usual, there are a host of imponderables.

In the travel and tourism sector, for example, it's conceded that Asian tourists would be especially concerned about traveling to the United States amid concerns about war and terrorism as they were after 9/11. Less clear would be the effect on visitors from Europe, given the rising tide of anti-American sentiment in France and Germany.

Michael Collins, an executive vice president at LA Inc., the convention and visitors bureau, dismissed such concerns, noting that European travelers historically have been more sensitive to economic woes than political leanings. "People make a big distinction between government policy and visiting Universal Studios," he said.

L.A.'s exposure

Also uncertain is the effect of rising gasoline prices now approaching $2 a gallon on visitors from other parts of California and nearby states. More than half of all visitors come to L.A. by car and in the wake of the 2001 terrorism attacks, local hotels and tourist destinations relied heavily on that traffic.

"We have to turn to that market when the other windows are shutting down," Collins said.

Los Angeles escaped the worst of the 2001 recession because of its diverse economy, minimal exposure to the tech bust and strong consumer spending, especially in housing sales. One sign of that solid performance was L.A. County's December unemployment rate of 6.2 percent, significantly lower than the state's 6.6 percent level.

"The L.A. economy is not expanding, but it's not in recession," said Steve Cochrane, director of regional economics at the consulting firm Economy.com Inc.

He warned, however, that both state and county joblessness is likely to increase over the next six months because the economy "still isn't growing fast enough to accommodate those looking for work."

Should the war lead to another national recession still considered fairly unlikely L.A. could have a tougher time because consumer spending would likely slow. "If consumers get pessimistic, that will impact a wide range of industries that defense cannot offset," Adibi said.

A further threat to consumer spending is county employment, which has become increasingly dependent on state and local governments for jobs.

At the end of the year, there were 556,900 state and local government jobs, according to the Los Angeles County Economic Development Corp., accounting for 13.6 percent of total non-farm employment. That's up from 1997, when 483,700 state and local government jobs accounted for 12.4 percent of the county's employment.

"Lots and lots of government jobs are being threatened by the budget," Thornberg said.

Another variable is business investment, which has remained weak in part because of the stock market but also because it is difficult for owners to budget for the coming months.

There is some indication of defense money filtering in, however. "I've seen an uptick in aerospace jobs and that's a very good sign," said Cochrane. "Production, test and development work is on the rise. All of the prime contractors will be expanding."

For reprint and licensing requests for this article, CLICK HERE.