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Full Recovery Will Take Time

ECONOMIC OUTLOOK 2003

– The Waiting Game

Full Recovery Will Take Time

Huge state budget deficit and a host of uncertainties make life difficult for local forecasters who see slow growth

By CONOR DOUGHERTY

Staff Reporter

At best, it’s a slow road to recovery.

L.A.’s economy, for the last year or two holding up better than Northern California and the nation as a whole, is likely to take its share of hits in 2003, especially with a $35 billion state budget deficit looming and with it, the prospects of higher taxes and reduced services.

Even with the expected damage, however, local forecasters project total employment in Los Angeles County will increase just over 1 percent or around 50,000 jobs. That might not sound like much, but it’s an improvement over 2002’s decline of .7 percent, or 27,000 jobs. Statewide employment is forecast to grow just under 1 percent.

L.A. taxable sales, meanwhile, should increase 3.2 percent in 2003, to $113.5 billion, with much of that coming in the latter half of the year.

“We don’t see a double dip, which means the recovery is going to continue, but the pace is going to be extremely slow,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University. “The economy is not going to be strong enough to really create significant job formation this coming year.”

In general, the outlook is somewhat rosier for Southern California than the rest of the state, largely because a low concentration of technology firms has softened the blows from the stock market collapse and a free fall in business investment. But even that tempered optimism has faded amid concerns that consumers, who have propped up the overall economy through their purchases of cars and houses, are just about tapped out.

“Consumers who have been supporting the economy with their spending are now burdened with debt and saturated with new goods,” Christopher Thornberg, a senior economist at UCLA’s Anderson Forecast, wrote in his December forecast. “As a result they are slowing down their buying. Businesses that would normally pick up the slack in aggregate demand by increasing investment are not this time because they are continuing to suffer from continued weak profits and over-capacity in the wake of the tech bust.”

Uncertainties galore

Forecasters always reserve the right to change their opinions as the year goes on and this year, the imponderables are many. War with Iraq? Another terrorist attack? A real estate bubble? One more bearish year on Wall Street?

And now, there’s a higher-than-expected state budget deficit.

All the local economic forecasts were prepared with a deficit of $20 billion or so in mind, so some recasting is likely. Economic advisors for Gov. Gray Davis do not expect a statewide recovery until at least 2004, and as the updated numbers were being digested last week, some in the business community seemed to concur.

“We anticipate that things are going to get ugly,” said Dominic Ng, chairman and chief executive of East West Bancorp in San Marino. “There are contractors and developers all kinds of servicing industries. The government is one of the biggest spenders in California and there is a lot of business in providing services to all these different segments.”

When it comes to budget cuts, Lisa Grobar knows what to expect. A professor at California State University, Long Beach and director of the CSULB Economic Forecast Project, Grobar figures there will be a reduction in course offerings and no pay raises for the next two years.

“We’ve been advised by our chancellor that things are coming,” she said.

Grobar, who has been at the university since 1989, remembers that in the early ’90s recession there were no raises for several years, and part-time lecturers were almost completely written out of the budget. “I think we can anticipate a lot of those same trends,” she said.

Sector strength, weakness

Economists generally agree that the less new taxes the better, arguing that even if a falloff in government spending causes pain in 2003, a steep rise in taxes, particularly business taxes, could further hamper a recovery in 2004. “Obviously some have less of a negative impact than others. Sales taxes will reduce spending and corporate taxes make people think of relocation, so it all depends on what kinds of taxes you have,” Adibi said. “But in general, taxes depress the economy.”

While fiscal policy will affect all sectors, the economy itself never behaves as a monolith especially in a region as diverse as Los Angeles. Some groups will inevitably do better than others.

L.A. still draws on several core strengths. Entertainment is one.

There were 2,267 production days in Los Angeles in November according to the Entertainment Industry Development Corp., up from 51 percent for the like year-earlier period. (A shooting day is a permit issued for a particular project on a specific date).

Since July, the number of production days has been up more than 25 percent compared to year-ago levels. In his forecast report, Thornberg said that by next summer the motion picture industry should add back all the jobs lost in anticipation of 2001 strikes by actors and writers that never materialized.

While he argues that concerns about an industry-wide exodus are unfounded, long-term growth will not return to historical levels and studios will continue to seek lower-cost shooting locales. “Expect to see slow job growth once the recovery has finished, with management and administration jobs replacing production jobs as the industry moves lower skilled portions of the industry to more affordable locations to do business,” he wrote.

The ports are another core strength, especially with dockworkers and ship companies recently coming to terms on a new contract. West coast ports handled 42 percent of all U.S. waterborne trade in 2000 and nearly a third of all automobile and truck imports are shipped through the ports of Long Beach and Los Angeles. Such a juggernaut is unlikely to be hurt significantly by short-term economic woes; indeed, when Southern California struggled to recover from recession in the early ’90s, it was international trade that kept going strong.

Mixed messages

The picture, however, gets murkier on other fronts. Consumers continue to buy houses at record levels (a 22.2 percent jump in year-over-year median home prices for November), but economists keep insisting that those lofty double-digit gains cannot go on forever, even at low interest rates. Meanwhile, retailers are bracing for a disappointing holiday shopping season as shoppers stick to basic, marked-down merchandise.

Tourism, which accounts for the second-highest number of jobs in L.A. County (behind only business and professional management services) will keep struggling, as overseas traffic shows little sign of picking up in a post 9/11 world. The prospect of war with Iraq and new terrorism threats makes tourism a particularly doubtful prospect for 2003. Continued efforts will be made at attracting regional visitors.

Commercial real estate is perhaps the most instructive barometer in measuring the local economy and here, the picture remains appropriately mixed. While industrial space is at a premium (4.1 percent countywide as of the third quarter and not expected to change much in 2003), office vacancy rates are stuck in the 17 percent range much of it in the West Side, South Bay, Downtown and Hollywood.

Industrial is strong because it caters to L.A.’s strengths the warehousing and shipping of goods while office has been weak because of, among other things, continued after-effects of the technology implosion.

The good news is that because L.A. is not reliant on any one industry, such as technology, stronger sectors typically have a way of picking up the slack. But with a still-stagnant U.S. economy and an ongoing fear about the future, such a pickup might be slow going.

“The slumping economy was bound to catch up with Southern California,” said Thornberg. “It can’t grow on its own. So we’re waiting for the rest of the U.S. to pick up speed.”




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