State’s Economic Strength Has Shifted to the Southland

Software executive Phil Ressler looked around recession-ravaged Southern California in the early ‘90s and used a four-letter word to describe his best career option: move.

Who could blame him? Better opportunities awaited elsewhere, and Ressler eventually made his way to Silicon Valley. These days, amid the malaise that has settled over the Bay Area, he’s relocating again--to Southern California.

Ressler’s latest move mirrors a shift in the state’s economic balance of power. Throughout much of the last decade, the tech-frenzied Bay Area held sway while Southern California sorted through the wreckage of defense cutbacks, a real estate bust, riots and natural disasters. But in the wake of the recent dot-com collapse, the south has emerged as the sturdier pillar of the state’s economy.

With its slow-but-sure job creation and its relatively stable manufacturing base, Southern California is playing the steady tortoise to the Bay Area’s exhausted hare. Though the south still lags badly in vital measures such as unemployment and income, analysts say it probably will narrow those gaps.

“We’re still pulling out of the last downturn while the north is getting the disease we had,” said Edward E. Leamer, director of the UCLA Anderson Business Forecast.

Northern California’s economy had outshone the south’s so dramatically in recent years that this turnabout might seem like an anomaly.

But, in fact, for much of the last century in the historic rivalry, the Los Angeles area has been the powerhouse. Los Angeles grew during the Great Depression, while San Francisco stagnated economically. Just three years ago, Silicon Valley was sniffling from the so-called Asian flu while Southern California’s recovery was hitting stride.

This time, however, Southern California could fare better for several years, analysts say.

All the same, it’s hardly a situation for the Southland’s boosters to crow about, said Brad Williams, senior economist for the California Legislative Analyst’s Office. “As long as you believe in high tech, you’ve got to be optimistic about the Bay Area over the long term,” he said.

Williams added that a prolonged entertainment industry strike would threaten Southern California’s current advantage. What’s more, he said, the U.S. economy’s recent troubles and Friday’s Bankruptcy Court filing by Pacific Gas & Electric dampen the outlook for the entire state.

“Looking ahead for the next year or whatever the duration of national economic slowdown, no region will be booming, but Southern California is in a better position to enjoy some growth,” Williams said.

Diversification is key to the Southland’s newfound resilience. Where the Bay Area is heavily dependent on technology companies, Southern California has added many service businesses and become far less susceptible to manufacturing downturns and big corporate layoffs. The Los Angeles area’s economy encompasses everything from huge international ports to automobile design operations to food processing plants, not to mention the region’s deeply rooted entertainment and aerospace industries.

Southland Nimbler After Recession

Alec Levenson, an economist at USC and Santa Monica’s Milken Institute, likens Southern California to a corporation that has gone through a massive restructuring and come out stronger and more nimble. “The fact it took us longer to recover means there’s now more wind at our backs,” Levenson said.

Even aerospace, the Southland’s Achilles’ heel during the last recession, stands to benefit over the next few years from the Bush administration’s defense programs.

In addition, Southern California is blessed with lower housing costs than the Bay Area and has more vacant land for construction projects. It also has reliable municipal power in its principal city, Los Angeles.

Some economists say that if you define the region to include San Diego along with the five-county Los Angeles area, Southern California could become the main driver of the state’s economy for years to come.

One of the clearest signs of the times: Some of Silicon Valley’s high-tech workers are starting to head south, something almost unthinkable at the height of the Internet gold rush. From Dec. 1, 2000, to Feb. 28, 2001, 32% more families moved out of the San Jose area than moved in, according to U-Haul International Inc. Among the top destinations for the departing northerners--Los Angeles and San Diego.

The Southland’s technology firms are already reaping the benefit. For example, Santa Monica-based Xdrive Technologies has snagged some Bay Area refugees for top management posts, including Ressler, who recently joined the company as its senior vice president of marketing.

“Now I’m trying to convince a couple of people I used to work with to move south,” Ressler said. “It’s still a challenge . . . but the hold of the [Silicon] Valley isn’t as strong as it used to be.”

In fact, the Bay Area heated up so quickly that some cooling was inevitable. The most recent surveys put unemployment at a scant 2.4% in the nine-county Bay Area, compared with 4% for all of Southern California and San Diego. Likewise, the per capita income of $37,640 in the north is a whopping 40% higher than in the south, a gap that could narrow in coming years, but will never close as long as the Southland remains a magnet for low-wage immigrant workers.

Los Angeles County still hasn’t regained all of the half a million jobs it lost in the early 1990s. It is projected to reach that milestone around the middle of this year.

Though no one can cheer the painful loss of thousands of good-paying defense jobs and the departure of large corporate headquarters, economists say those misfortunes have yielded some benefit. The region doesn’t depend on any single industry or cluster of companies. Its foundation is small and medium-size businesses that may be better able to cope with economic ups and downs.

Southern California’s manufacturing base, the nation’s largest, also is proving remarkably resilient given the manufacturing recession gripping much of the nation. That’s because the region is less dependent on the production of durable goods--cyclical, big-ticket products such as cars and computers.

In fact, durable-goods manufacturing accounts for only 8% of employment in the Los Angeles area, compared with 24% of the jobs in Silicon Valley’s Santa Clara County, according to an analysis by Lisa Grobar, director of the Cal State Long Beach Economic Forecast Project.

The effect already is apparent. A recent UCLA study found that though other major metropolitan areas in the state kept adding jobs, Silicon Valley’s overall employment dropped over the last three months.

Some large Southern California employers such as Walt Disney Co. have announced major cutbacks of their own. Still, executive recruiters say the region’s balmy weather and sunny job outlook are helping them lure job candidates to the region. That’s a far cry from the early 1990s, when headhunters lamented that it was nearly impossible to draw executives here from other parts of the country.

For some young workers, too, Southern California looks more alluring now that Silicon’s Valley tech bubble has burst. Recent college grad Courtney Carroll fled the stratospheric rents and Internet hype of the Bay Area for a job with a Pasadena-based executive recruiting firm. The job has given her a unique perspective on the continuing fallout from the dot-com crash.

“We’ve had an influx of resumes from Northern California,” said Carroll, an associate with Gary Kaplan & Associates. “They want to go somewhere more stable.”

Northern California’s Fortunes Tied to Tech

The Bay Area, meanwhile, could suffer the ripple effects of the technology-spending downturn. The run-up in home buying and other consumer spending was fed in Northern California by the rise in stock prices of dot-coms and other technology companies. Now that Nasdaq has tanked, consumer spending could shrink.

Ken Rutkowski, founder of KenRadio.com, recently moved to Marina del Rey from San Francisco’s once-hopping South of Market area, in part because it had gotten so depressing. He says restaurants in his old neighborhood are empty, and Bay Area friends are lamenting their former free-spending ways.

“I know people who bought Porsches two years ago who now can’t afford the gas,” he said.

There’s also evidence that the kind of overbuilding that plagued Los Angeles during the last downturn could fall heavily on San Francisco this time around. Office vacancies in Rutkowski’s old South of Market neighborhood are approaching 20%, up from virtually nil last summer, according to statistics from real estate firm Grubb & Ellis. In addition, more than 3.5 million square feet of new commercial space--the biggest building binge in 15 years--is set to come on line in the San Francisco market this year.

Until California sorts out its energy crisis, the availability of electricity will be a key factor in determining economic growth. On this score, too, analysts give Southern California a decided advantage.

That’s largely because Los Angeles, the heart of Southern California, gets its electricity from the city’s Department of Water and Power. With 7,000 megawatts and its own transmission lines, DWP isn’t subject to the power rationing and blackouts that have bedeviled the state’s power grid.

As a result, the city is “probably better off than anybody in California and probably will be for the foreseeable future,” said Lee Cordner, an energy consultant in Marin County.

Meanwhile, Pacific Gas & Electric, the Bay Area’s principal utility, just declared bankruptcy, adding even more uncertainty to the region’s energy picture. In addition, Bay Area communities “depend on the Pacific Northwest for imports, and those imports aren’t likely to be available this summer,” said Ted Gibson, chief economist for the California Department of Finance. “I’d worry more about energy being available in the north than in Southern California.”

All told, forecasters such as UCLA’s Leamer say Southern California could have the edge in economic momentum for the next five years. That’s welcome news to observers such as Rohit Shukla, president and chief executive of the Los Angeles Regional Technology Alliance, who have been waiting for the south to emerge from the north’s long shadow.

“I can’t help but gloat a little,” Shukla said with a laugh.