REGIONAL REPORT : The Slumping Southland : Recovery Lags, but There Are Bright Spots

Business had grown steadily at the Ralphs market in La Crescenta, during times of growth and during times of recession--until this year.

Even in this affluent suburb, where household incomes average $60,674 a year, people are spending less on Dove Bars and more on staples such as flour, sugar and cooking oil.

“The first thing my manager asked was, ‘Where did all the business go?’ ” said Ralphs Grocery Co. Chairman Byron Allumbaugh after a recent visit to the store. “It’s hard to understand what’s taken place and how it happened so quickly.”

Even usually recession-proof businesses such as supermarkets are seeing slack sales--Ralphs same-store sales are off 2% to 3%, the first downturn ever, Allumbaugh said.

It is a sign of how much Southern California, which has weathered past recessions better than the rest of the nation, is suffering this time along with everyone else--and a hint that the region may fall behind further even though a recovery is struggling to emerge elsewhere.

The reasons come as no surprise. Two pillars of the region’s diverse economy--aerospace manufacturing and real estate--have been hurting for some time and show no sign of rebounding. At the same time, other sectors of the Southern California economy have been unable to escape the hurt afflicting the rest of the nation.

Although many economists believe the nationwide recession has bottomed out, the prognosis for the region is far less sanguine. David G. Hensley, director of the UCLA Business Forecasting Project, said the local recession may linger into 1992. As he bluntly put it: “The train has left the station, and we are not on it.”

There is an up side, however, to the current malaise--signs that a longer-term shift is under way in Southern California’s economy that diminishes what many saw as over-dependence on aerospace and real estate. The result could be an even more resilient local economy that is based on emerging industries such as biotechnology and industrial design.

The immediate outlook remains clouded by the prospect of continuing job losses--in aerospace, defense and other manufacturing industries, in real estate and construction and in banking and retailing. As the Christmas shopping season looms, fear of being laid off could keep consumer confidence low and rein in the spending that could fuel a recovery.

“Obviously, consumers, if they feel insecure, they tend to spend a little more carefully,” said Fabian Linden, executive director of the Conference Board’s Consumer Research Center.

“California, in total for this year, will show a decrease in non-farm employment, one of the few states in the country to do so,” added Kenneth Ackbarali, a senior economist at First Interstate Bancorp.

Newly revised figures suggest that employment in the state actually fell more sharply in 1991--on the order of about 2.3%--than previously believed, said Ted Gibson, principal economist with the state Department of Finance.

“I would say that we’ll see an emergent recovery in California and Southern California in 1992, but it will be somewhat weak and slowly developing, and this helps to differentiate it from other regions of the country that might be doing slightly better,” First Interstate’s Ackbarali said.

That would be at odds with the assessments made by President Bush’s economic advisers, who say that the recession bottomed out in the second quarter of 1991 and that the recovery has already begun.

Should the nationwide recovery sputter, “it will delay (Southern California’s) recovery even more,” said Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County.

“If there’s a double-dip recession, it means even less demand for apparel produced in Southern California, for a wide variety of goods we manufacture here. . . . It will mean airline traffic won’t come back, so another airline will defer an order from Douglas Aircraft. It’s tough times.”

Southern California’s current slump harks back to the recession of 1970, when cuts in defense spending triggered layoffs and the job growth in the state lagged, Hensley said. Until now, that downturn marked the only time in eight post-World War II recessions that California’s economic performance trailed the country’s, he said.

This time, California has not escaped downturns in retailing, tourism and other sectors. “Most of us look at the state’s economy and say national trends account for about 80% of what’s happening here, and then we have aerospace,” Gibson said.

The high-rolling entertainment industry is giving lip service to cutting costs, after one of the weakest summer box-office takes in recent years. Tourism, which suffered during the Persian Gulf War, is still soft, and some well-known Los Angeles hotels may face foreclosure.

The retailing slump may turn around soon. UCLA predicts that retail employment will fall about 1% in the third quarter and a little more than that in the fourth, then turn around early in 1992.

The history of Buzz Magazine embodies the downs--and ups--of the year’s economic turmoil. Created by three New York entrepreneurs and a Silicon Valley investor just as the recession got under way, the magazine won commitments from national advertisers eager to tap what they believed was the recession-resistant upper echelon of the Los Angeles consumer market.

“We’d go back to New York and pitch them, and their eyes would light up when you mentioned L.A.,” recalled the publisher, Susan Gates.

Shortly after the magazine was launched, in the summer of 1990, it fell victim to the recession. The downturn took its toll on Silicon Valley and the main investor--Lawrence J. Ellison, chairman of Oracle Systems Corp.--pulled out.

The magazine was saved only with a bailout from overseas: $4.5 million over three years from Sondhi Limthongkul, a Thai media magnate who was also eager to capitalize on what he perceived to be Southern California’s promise.

Advertisers continue to buy space, Gates said. The current September-October issue, for example, has 32 pages of ads--more than the projected 30--and future issues remain above budget, she said.

The outlook for much of the Southern California has lost its luster, however. Although an improving manufacturing sector is helping to pull some parts of the nation out of recession, heavy industry in Southern California is dominated by hard-hit military suppliers, and economists say the downturn in defense could last three more years.

“It’s going to hold the brakes on the whole economy,” economist Kyser said.

Because of the military cuts, local aerospace employment--which has fallen from a peak of 375,000 in 1988 to 304,000 now--stands to continue in a downward trend, and 38,000 additional jobs may be lost by the end of 1993, UCLA’s Hensley said.

“It’s a bad situation,” said Henry Leo, founder of Prema Engineering Inc. in Chatsworth, which makes parts for aircraft builders and military contractors. Leo said his sales have fallen to $3 million a year from $5 million or more five years ago. “I’m one of the few (contractors) who keeps going,” he added.

Defense budgets, already under scrutiny in Congress, will come under even more pressure as the perception of a Soviet menace diminishes, economists said.

Significant defense contracts that would employ thousands of Southern Californians may be delayed or canceled, Kyser said. Congress is already mulling whether to curtail the costly B-2 bomber program, now with Northrop Corp.

Some watchers of the Southland economy caution against too much gloom and doom, however. Alan D. Levy, president of Tishman West Cos., a property management firm, acknowledged that his company’s commissions from leasing commercial space have suffered as fewer deals are struck, and at lower rents. In addition, his company’s business doing construction for new commercial tenants has fallen by half in the past 18 months.

But he remains sanguine. “In reality, it’s not as bad as a lot of people have made out, though a lot of the prophecies tend to be self-fulfilling,” he said.

Others say Southern California’s recession appears so severe mainly because it stands in stark contrast to an economy that was strong for so long. They add that Southern California’s economy remains diverse, its population continues to grow and some businesses are managing not only to survive but also to thrive.

For example, there is a robust “underground economy” in Southern California--a cash economy, primarily among new immigrants, in which transactions are not reported to state or federal agencies, economists say.

It is unknown how recession affects the cash economy, and no one has a clear picture of its extent. Said writer Joel Kotkin, a senior fellow with the Center for the New West think tank: “There are maids and gardeners and construction crews out there, some of whom make pretty good money.”

In the conventional economy, there are still opportunities in medical, biotechnical and professional services, economists said. And Southern California still holds promise as a trading center of the Pacific Rim.

Even some defense firms in the region face better prospects now because they have moved to insulate themselves from Pentagon cuts by severing ties with the government.

Zvi Kurtzman, president of Aura Systems, which makes electromagnetic bearings and actuators in El Segundo, said he “saw the handwriting on the wall” about two years ago and began turning his firm, which mainly supplied defense contractors, toward non-defense commercial customers.

As a result, his company is growing dramatically, he said. Sales have climbed to $20 million from $8 million two years ago; the work force has grown to 150 from 72. He is about to hire 50 engineers, technicians, machinists and other skilled workers.

“We have not felt the recession at all,” he said. Indeed, the recession may have helped him, he said, because it forced his customers to shop for cheaper equipment, “and we offer people an opportunity to do something better and cheaper.”

Kurtzman’s experience notwithstanding, economists say commercial aerospace business cannot expand enough to offset defense cuts.

Other states, notably Utah, Arizona, Nevada and Colorado, are aggressively wooing aerospace plants from Southern California. To build its next-generation passenger airliner, the MD-12, Douglas Aircraft is already shopping for a plant location in another state.

California’s water problems, continuing fiscal crisis and stringent regulations will also prompt some businesses to pull up stakes. One survey of 837 companies showed that one in four manufacturers planned to leave the state, said Wilford D. Godbold Jr., chairman of a task force on business retention for the California Chamber of Commerce.

Godbold’s own company, Zero Corp., which makes cases, cabinets and cooling equipment for the electronics industry, plans to move two of its 10 California factories to Utah. “It’s because of workers’ compensation costs, health-care costs and the perception that the California Legislature is becoming more anti-business,” said Godbold, who is also president of Zero Corp.

Aerospace will remain the hardest-hit manufacturing industry, but it won’t be alone. Automobile manufacturing, in which a modest uptick is helping the Midwest, will disappear from Southern California once General Motors closes the last Southland auto plant, in Van Nuys, next summer.

Other key industries--furniture and apparel--will probably remain sluggish, for different reasons.

“Job losses will come across the board, particularly in durables and those areas associated with real estate and construction: furniture, lumber and stone, clay and glass. There is some question about how much rebound they’ll experience,” Hensley said.

Furniture suffers when real estate slumps. Moreover, furniture manufacturers face new costs under the new South Coast Air Quality Management District pollution guidelines.

Apparel probably will continue to languish, given weak consumer confidence. In several surveys, including a Los Angeles Times Poll last week, consumers expressed doubts about job security in the months leading up to the Christmas-shopping season.

The other pillar of the Southern California economy, real estate, will also see further hard times. The continuing weakness in commercial and residential real estate also hurts banks, financial services and the construction industry.

On the commercial side, vacancy rates in much of Southern California are running above 20%; in overbuilt downtown Los Angeles, that could reach 30% in 1992, Hensley said. To work out that inventory, non-residential construction will continue to plummet, and construction employment is expected to fall 6.4% in 1991 and by 5.1% in 1992, Hensley said.

High vacancy rates also spell continuing trouble for lenders. UCLA predicts 20,000 layoffs from banks and other financial institutions during the next year.

First Interstate Bancorp. has said it will furlough 3,500 employees, about half of them in California. Troubled commercial real estate loans also contribute to mergers such as that between BankAmerica and Security Pacific, which will result in 15,000 to 20,000 more job losses.

There’s a glimmer of hope in residential real estate. “I think you’ve hit bottom in new residential construction, and you’re just rolling sideways,” Kyser said.

There is some hope for a rebound in late 1992. “The market, from our standpoint, is recovering from the low point experienced last year and in the early part of this year,” said Joel Singer, executive vice president of the California Assn. of Realtors.

New housing construction has been low while Southern California’s population continued to grow, creating pent-up demand, economists said. Continued low interest rates and the increasing availability of mortgage financing could spur a resurgence in home buying.

“Now, lending is tight for all types of real estate loans, not just commercial,” Hensley said. “But if there is demonstrable improvement in the housing market--if prices firm up and housing remains tight--financing could become available, even if it has to come from outside California.”

Most economists agree that the recession will peter out and that when it does, Los Angeles will remain a major, and vibrant, player in the world economy. As Susan Gates, publisher of Buzz magazine, has found in her business, Los Angeles still holds a mystique for outsiders, especially for those on the East Coast:

“In their minds, L.A. is this city of light on the West Coast.”

Southern California Unemployment Unemployment as a percent of work force, by county Los Angeles: Jan.: 6.6% Feb.: 7.4% March: 6.9% April: 7.2% May: 8.4% June: 8.5% July: 8.6% Orange: Jan.: 4.7% Feb. 4.8% March: 4.8% April: 4.6% May: 4.8% June: 5.4% July: 5.4% Riverside/San Bernardino: Jan: 9.0% Feb: 9.4% March: 9.1% April: 8.9% May: 9.2% June: 9.7% July: 10.0% San Diego: Jan: 6.2% Feb.: 6.3% March: 6.3% April: 6.1% May: 6.4% June: 7.1% July: Not available Santa Barbara: Jan.: 6.9% Feb.: 6.5% March: 6.9% April: 5.8% May: 5.2% June: 5.9% July: 5.8% Ventura: Jan.: 7.5% Feb.: 7.1% March: 7.0% April: 6.1% May: 6.2% June: 7.2% July: 7.5%