Slumps in Oil and Electronics Industries Trim Earnings for California Economy : Slumps in Oil, Electronics Trim Earnings for California Economy
California’s economy last year suffered from twin slumps in oil and electronics, two of the state’s largest and most important industries.
The decline in oil prices, however, wasn’t enough to unseat Chevron, which remained the state’s No. 1 industrial company with $45.3 billion in sales for 1985.
Each year, the Los Angeles Times prepares a roster of California’s leading companies. In last year’s report, California firms soared. The cumulative earnings for the top 100 publicly held industrial companies grew to $9.6 billion--up 23% in the first year of the post-recession economy.
But in 1985, earnings plummeted to $5.5 billion, nearly a 40% drop. Most of that decline is attributable to Big Oil and electronics. In fact, four giant oil-related concerns--Atlantic Richfield, Occidental Petroleum, Unocal and Fluor--are responsible for more than one-third of the earnings decline.
Overall Economic Growth
The poor results of the oil and electronics firms may obscure what was a good year for many elements of California’s diverse economy. Economists point out that the state’s economy as a whole grew. They point to UCLA’s estimate that the state’s economy grew by 4.8% in 1985, compared to a 2.2% increase in the U.S. gross national product.
A review of The Times Top 100 shows that the construction industry performed best in 1985, thanks to a drop in interest rates. The home construction boom, in turn, gave a boost to service businesses, such as restaurants and dry cleaners, as new homeowners looked for places to eat and and launder their clothes.
Several large companies familiar to generations of Californians, including Levi Strauss, MGM/UA Entertainment and Signal Cos., are missing from this year’s list, either because they were merged into out-of-state firms or because they became private companies.
Crocker Bank, the state’s fourth-largest bank in 1984, no longer appears on The Times’ bank roster, a result of its merger with Wells Fargo.
The Times also ranks several other business categories separately.
American Savings & Loan Assn. was ranked as the No. 1 S&L; in 1985 in assets, although it has slipped to No. 2 in the first quarter of 1986, behind Home Savings of America.
Executive Life Insurance Co. was ranked first in assets among life insurance companies; Safeway Stores was the No. 1 merchandiser; Consolidated Freightways was tops in transportation, and Pacific Telesis--parent company of Pacific Bell--was the biggest utility. Bank of America remained the No. 1 bank, with $106.1 billion in assets, while its parent, BankAmerica Corp., was the biggest financial holding company.
It now appears that--at least for the oil industry--last year provided an unwelcome preview of 1986. The recession in the oil industry has deepened, as crude oil prices on world markets have dropped to under $15 from $26 last December.
Outlook for Electronics Brighter
The 1986 outlook in electronics is somewhat brighter than for oil. Economists said computer makers now show signs of recovery. Corporations that resisted computer purchases over the past year are showing renewed interest in buying computer equipment, economists said.
World Semiconductor Trade Statistics, a firm that tracks semiconductor--or computer chip--sales, recently predicted that domestic semiconductor sales would increase by 11.5% this year to $9 billion, after a sharp 30% decline last year. Industry officials also said semiconductor orders have increased monthly for the first four months of this year.
Even so, Jeanette Garretty, a Bank of America economist, is not particularly enthusiastic about the prospects of the semiconductor industry noting the intense foreign competition.
The firms involved in defense electronics also face uncertainty in the coming year because of efforts to deal with the federal budget deficit. Aerospace employment in California grew by 3.1% in 1985, compared to 7.9% growth in 1984. Economists expect 1986 employment growth in aerospace to remain near last year’s level.
Garretty expects greater economic balance this year as overall growth slows somewhat. “We won’t see extraordinary strengths balanced by extraordinary weaknesses. It will be a much more even year,” she said.
The construction industry should continue to do well this year, economists said. Lower mortgage rates spurred demand for new construction. Last year, 263,000 housing permits were issued in California, a 19% gain over 1984.
The housing boom benefited two California-based home builders--Kaufman & Broad (No. 38) and Standard Pacific (No. 74), both of which reported sales increases over 25%. Two construction engineering firms, Jacobs Engineering (No. 85) and Guy F. Atkinson Co. of California (No. 37), also reported gains.
The housing boom should continue, economists said, since mortgage rates remain quite low--below 10% in some places. Larry Kimbell, an economist at UCLA and director of the school’s economic forecasting project, said a glut of office space should slow commercial development, which expanded by 16.4% last year. The UCLA forecasters expect just a 5.2% increase in office construction this year.
The continued housing boom should spark even more growth among the service industries, said Joseph Wahed, chief economist at Wells Fargo Bank. Home sales increase the need for “lawyers, accountants, housekeepers and gardeners,” he said. New office space created a demand for additional data processors, temporary employment agencies and even fast-food establishments, Wahed said.
Irvine-based El Torito Restaurants acquired 49 restaurants last year and reported a sales gain of 27.5%. Many service companies are too small to make The Times’ roster of leading companies. One exception is the state’s health-care industry, which grew through acquisitions.
HealthCare USA, No. 99, an operator of health maintenance organizations, reported a revenue gain of 127.9%, the largest year-to-year gain of any company on the roster. The company, based in Orange, attributed much of the gain to the $120-million purchase of Independent Health Plan, a Michigan HMO.
Other health-care companies reporting large gains, largely because of acquisitions, are Care Enterprises, Maxicare Health Plans, Nu-Med Inc. and Summit Health.
Garretty said California’s growth was led by a surge in consumer spending. Retail sales in the state rose 8.1% in 1985 to $209.6 billion. That is significant, because “consumer spending drives 65% of your economic growth,” said Garretty.
California’s top 10 merchandisers showed mixed results, with the median gain at 7.2%. Ross Stores, (No. 10) a clothing and soft goods retailer, joined the list this year after reporting a 78.5% sales gain. The Arden Group (No. 9), primarily a supermarket operator, reported a 4.4% sales drop.
Paying Off Debt
Consumer spending isn’t likely to be as brisk this year, as consumers work to pay debt accumulated during the last two years, economists said. Lower spending and sluggishness in energy, electronics and agriculture are expected to lead to slower growth in 1986 despite lower interest rates and gains in disposable income.
The outlook is perhaps dimmest in agriculture, economists say, although most major agribusiness firms are not listed in The Times’ Top 100 because they are private companies.
California farmers last year suffered from the same problems affecting farmers throughout the nation. Farmers in 1985 found themselves caught between a declining market for their goods and high debt payments. The outlook for 1986 isn’t much better.
Two wholesale food distributors, however, reported large sales gains last year, although those increases were achieved primarily through acquisitions. McKesson (No. 7) and Rykoff-Sexton (No. 40) each reported sales gains of more than 25%. Their profitability as measured by return on sales, however, was unchanged.
Other Times 100 companies reporting sales gains of 25% or more last year are Winn Enterprises, Xidex, International Technology, Northrop, Hexcel Corp., CooperVision, MCA and Apple Computer.
Of the roster’s 100 industrial companies, 28 reported a decrease in revenue. Firms related to the oil or electronics industries suffered the greatest revenue declines.
Advanced Micro Devices, a manufacturer of semiconductors, reported a 38.1% sales decline, the worst year-to-year drop of any firm on the list. Advanced Micro Devices, based in Sunnyvale, fell to No. 49 from No. 36.
Other companies with interests in electronics reporting declines are Bell Industries, Litton Industries, Micom Systems, Monolithic Memories, Ducommun, Teledyne, Oak Industries, Intel, Whittaker, Wyle Laboratories, Tandon and Seagate Technologies.
Other oil-related companies reporting declines are Pauley Petroleum, Smith International and Tosco.
11 Industrials Added
Eleven companies joined this year’s industrial roster, including Guy F. Atkinson Co. of California and Xidex (No. 77), a Mountain View manufacturer of computer memory products. Four companies new to the list--Care Enterprises, Community Psychiatric Centers, Nu-Med and HealthCare USA--are involved in health care.
Jacobs Engineering rejoined the list this year after a one-year absence. Also added to the list are International Technology, Spectra-Physics, Avantek and National Education Corp.
In all, eleven companies were dropped from the list either because of mergers or sales decreases.
Economists are optimistic about 1986, although they project California’s gross state product--the value of goods and services produced in the state--will experience a lower growth rate. Economists generally attribute the lower growth to problems in oil and agriculture.
The UCLA forecasters predict the gross state product will grow by 3.5% in 1986 to $453.2 million. Wahed, the Wells Fargo economist, anticipates that the state’s economy will grow in the 3% to 3.25% range.
Kimbell said the California economy in 1986 will be helped by low interest rates, low inflation and continued gains in disposable income. “There’s no reason why it shouldn’t be a great year,” he said.
To be included in The Times Roster, companies must have their principal headquarters in California and, with the exception of certain financial institutions, their stock must be publicly held. Those requirements eliminate many companies in the state generating billions of dollars in sales and profits, because their head offices are located outside California or because they are privately owned.
Compilation and analysis for the 1986 Roster were provided by Margaret Wetzel, Maureen Perry and Martha Mc Nair of the Los Angeles Times marketing research department. Design: George Carey and Frank Bursinger.