By HOWARD FINE
Staff Reporter
After an exceptional 1997, L.A.’s economy in the the new year is expected to be slower but still strong.
Certainly, there are reasons for some concern, including the financial turmoil in Asia, increased volatility on Wall Street and a possible slowdown in the U.S. economy.
All of which could result in slower job growth, export activity and tourist dollars all key components to the local economy. Indeed, economists were busy last week revising downward their forecasts.
But the consensus is that these trends will merely decelerate the recovery, not plunge the region back into recession.
The economy’s main drivers, small to mid-sized entrepreneurial businesses, should continue unimpeded.
“There will be a couple of drags on the L.A. economy: a slower national economy and the Asia crisis,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange.
“In large part, 1998 will be a good year, but probably not as good as 1997,” Adibi said.
Just how much of an impact the Asia crisis will have remains to be seen. That, coupled with uncertainty over Wall Street’s direction, has local business observers a little skittish.
“If 1997 was nirvana for the Los Angeles economy, the word for 1998 is ‘nervous,’ ” said Jack Kyser, chief economist with the Economic Development Corp. of Los Angeles County.
Taking into account the external threats, Kyser predicts countywide job growth will slow about two-tenths of a percent from what he projects will be 2.3 percent job growth for 1997.
That translates to roughly 81,000 new jobs in Los Angeles County.
“Things look good overall for next year, but people have to keep their eyes on the radar screen to see what happens,” he said.
UCLA economists say much the same thing.
“I don’t think Los Angeles County will grow as fast as it did this year,” said Tom Lieser, associate director of the UCLA Anderson Business Forecasting Project. UCLA’s most recent quarterly report projects 1997 employment growth of 1.9 percent; the report does not make a projection for 1998.
That puts Los Angeles about on par with 1997 growth rates in New York and Chicago, but significantly below this year’s growth rate for California as a whole, which Lieser pegs at 2.9 percent.
(The forecasts by both Kyser and Lieser rely primarily on state figures; Kyser, however, factors in what he says is an undercount of entertainment industry jobs.)
The job-growth numbers are especially important for L.A. because the county has recovered only a portion of the 440,000 jobs it lost during the recession.
The unemployment rate, while down sharply from double-digit levels three years ago, remains at 6.3 percent, considerably above the 4.6 percent national rate.
“Any slowdown in growth means it will take that much longer to regain the jobs we lost,” Lieser said. “We still have a long way to go.”
But such cautionary notes don’t resonate among many in L.A.’s business community.
“I think the L.A. economy will do as well or even better next year as this year,” said Elan Susser, president of fast-growing, Pacific Palisades-based GoldMine Software. “I’m not going by what the economists say; I’m basing my feelings off of what I’m seeing out there as I do business.
“A lot of the people who were laid off from aerospace companies in the late 1980s and early 1990s have started their own companies; those companies are now building up,” Susser added.
Next year also looks strong in the eyes of Alison Winter, president and chief executive of Northern Trust Bank of California and incoming chairwoman of the L.A. Area Chamber of Commerce.
“The outlook is very upbeat among my fellow board members. The whole Southern California economy is so well diversified that it should come through the troubles with Asia in pretty good shape,” Winter said. “The rate of growth may dip for a bit, but it is still positive in absolute terms, and that is what companies here are focusing on.”
A major plus has been the turnaround in real estate. After five years of decline in some places as much as 30 percent to 50 percent both commercial and residential real estate prices have posted increases since the beginning of the year.
On the commercial side, lease rates are headed back up and both industrial space and movie/TV sound stages are in short supply.
And with homeowners no longer afraid that the value of their homes will keep dropping, they could be more induced to spend money on big-ticket items. At least that’s the theory.
That all could change, however, if Wall Street takes an extended tumble, as a few prominent analysts have been projecting in recent days. Another potential hurdle: Corporate profits are not expected to be as high next year as they were in 1997, which Wall Street watchers believe could dampen investment in securities.
“If that happens, one of the first things to slow will be consumer spending. And this would hit all areas of the country, including L.A,” said Chapman University’s Adibi.
With so many workers having their net worth tied up in stock options, 401(k) plans, mutual funds and individual stocks, a prolonged bear market could have a chilling effect on spending, Adibi and Kyser said. But the chances of an extended bear market are slim, they added.
On the Asia front, exporters of technology, food products and engineering and construction are considered the most vulnerable.
L.A.’s tourism industry might also be affected, as traditionally high-spending Asian tourists decide to stay closer to home. L.A. boosters hope the highly publicized opening of the Getty Center will attract more visitors from other regions to offset this anticipated Asian drop.
Most economists agree that certain sectors of the L.A. economy will actually gain from the Asia crisis. With Asia’s currencies devalued against the U.S. dollar, more imports will be coming through L.A.-area ports; this would be a boon to many warehousing and distribution companies. In addition, L.A.-area companies that rely on Asian imports, like garment manufacturers, could see their profit margins improve.
However, the consensus among economists is that these positive impacts will be outweighed by the negative.
Ted Gibson, economist for the state Department of Finance, predicts a statewide net drop in the job growth rate of between 0.2 percent and 0.5 percent next year compared with 1997, which would mean between 25,000 and 65,000 fewer jobs would be created.
One silver lining appears to be interest rates. With the world’s financial markets in such turmoil, it is considered unlikely that the Federal Reserve will hike rates any time soon.
And stable or falling interest rates should provide more fuel for L.A.’s recovering real estate market.
With most eyes turned to Asia and Wall Street, a few potential trouble spots on the home front could also hamper L.A.’s job growth.
They include the shortage of qualified workers, especially at small companies that don’t have the time or other resources for extensive recruiting and training.
“The demand by business for skilled workers is exceeding the available supply,” said Patty DeDominic, chief executive of Los Angeles-based PDQ Personnel Services, a temporary-employment services firm.
This shortage could put pressure on employers to raise salaries. That coupled with raising the minimum wage to $5.75 on March 1 could squeeze profit margins at some companies.
Meanwhile, good economic times have once again made business a tempting target for local governments and organized labor.
For example, the L.A. City Council passed the living wage ordinance earlier this year, imposing a new minimum wage for companies getting city contracts to $7.25 an hour with benefits and $8.50 an hour without benefits.
“We are seeing a tendency to slip back into bad habits on the public-policy front that could once again bring the out-of-state raiders back into California,” said Kyser.
So far, the business community has had difficulty fending off unfriendly measures, as demonstrated by its inability to defeat the living wage ordinance.
“We must be alert to these things so we can remain competitive,” said Winter of Northern Trust Bank. “That was one of the reasons behind the recent L.A. economic summit.”
