A SPECIAL REPORT ON THE SOUTHERN CALIFORNIA ECONOMY : Growth Still Fuels Southland’s ‘Factory’ : Expansion Likely to Continue Despite Market Crash, Development Worries

You’ve heard of GNPs and CPIs, but what about HEFs?

That addition to the alphabet soup of economics, favored by the Los Angeles Area Chamber of Commerce, stands for Huge Economic Forces--basic industries or trends that bring new money into an area.

And Southern California has an abundance of Huge Economic Forces--so many, in fact, that economists now talk of the region’s natural “competitive advantage” that is likely to fuel growth for the rest of the century.

“There’s a lot of reason to be optimistic,” says Chamber of Commerce economist Jack Kyser, sitting in an office where such local trademarks as inflated palm trees and a Dodger cap compete with volumes of population and labor force statistics.

“People think of us as a bunch of bubble-gum snapping, boom-box toting surfers, and that doesn’t play anymore,” he says. Southern California “is just a big international crossroads and we’re going to continue to be a crossroads. . . . It’s the amazing little engine of growth.”

Kyser’s predictions may not be just the rah-rah sentiments expected from chambers of commerce.

Economists in general have a very upbeat view about how the region’s economy will fare during the next several years, despite the uncertainty and fears of recession created by the stock market crash. Although no one seems to agree where Southern California begins and ends--is it five, six or seven counties?--they say that it will continue to grow faster than the nation as a whole.

To be sure, Southern California has enjoyed more than two decades in which it has outpaced the country’s economic fortunes, and no one is predicting a dramatic change from that trend, barring a natural disaster or worldwide economic panic. But the region has now become such a growth factory that forecasters see almost nothing on the horizon that could slow its long-term advance dramatically.

Already, that growth factory is providing jobs and homes for more people than inhabit the states of Arizona, New Mexico, Oregon and Washington combined. And the next several years will provide more of the same, economists say.

- Driving the expansion is a rapidly growing, ethnically diverse population augmented by a baby boom and continued immigration from other countries and other states.

- The regional economy, long admired for its diversity, is growing ever more diverse, thus insulating the area from the wide swings experienced by those dependent on a few industries --Texas and oil, for example, or Detroit and automobiles.

- Rising international trade, particularly with Pacific Basin countries, will become a bigger segment of the economy. As such trade matures, Southern California will be a hub for foreign investors bringing their wealth here--buying office buildings and homes, and buying or starting businesses.

- Los Angeles will gain stature as a world financial center. It has already overtaken San Francisco as the banking and investment capital of the West by most measures, and some now predict that the region could rival New York, London or Tokyo by the turn of the century.

- Relatively new “HEFs” such as high tech, apparel and health care are expected to draw more jobs and wealth to the area. They will join old standbys, such as aerospace, retailing, entertainment, tourism, construction and agriculture, most of which are expected to do fairly well over the next decade.

- A healthy entrepreneurial spirit will mean more business starts and more jobs as well as a decreasing reliance on large, traditional employers. More people will start more small businesses or will start working as independent contractors. That should increase the region’s economic diversity.

But there are several factors that could darken those rosy forecasts, economists say.

The stock market collapse of recent weeks has economists worried that even well-diversified Southern California could be hurt by a recession or a significant decline in Pacific Basin trade. A world economic panic--although such an event is by no means certain--could change things dramatically, especially if it hurts the burgeoning industrial powers of Asia.

Southern California’s growth--more people, more jobs, more wealth--will aggravate existing problems if not managed properly. If affordable housing, effective transportation, better training of low-skilled workers, and reduced pollution are not achieved, the boom could be choked off.

Many Southern Californians are tiring of fast growth, leading to building restrictions. If the slow-growth movement continues to gather support, it could have a lasting effect on the region’s outlook.

Quakes a Consideration

In addition, no one knows how effective recent changes in the immigration law will be in stopping illegal immigration, an important source of workers for area industries. There are some indications that the new law is already having at least a temporary effect.

Then there’s the Big One. Most economists offhandedly qualify their predictions with “barring a major disaster.” But after October’s earthquake, measuring 5.9 on the Richter scale, the very real possibility of a major temblor hitting the area before the end of the century must be considered. “You can’t factor something like that into the forecast,” says David Hensley, director of California modeling at the UCLA Business Forecasting Project. But “for people thinking of moving to California and making a life here, that’s a very real issue.”

Nonetheless, “Los Angeles is going to grow a lot in our forecast,” says Stephen Levy, senior economist for the Center for Continuing Study of the California Economy, a private, independent research organization in Palo Alto. “In terms of location for where the world economy is going in the next 15 years, Los Angeles is ideally located.”

Thirteen of the state’s 15 fastest-growing cities are in Southern California, a recent Center study revealed. More than half of California’s largest publicly held companies are based in Los Angeles and Orange counties, according to the Times’ annual roster of leading California companies.

The fallout from the stock market’s meltdown probably will mean slower short-term growth in Southern California and the nation, although economists do not agree if a recession is on the way.

“We don’t think that a recession is necessarily a foregone conclusion in 1988,” says Duane Paul, vice president and senior economist at Bank of America. “It’s more likely now than it was a month or a month and a half ago, but we’re not talking economic collapse because of what happened Oct. 19.”

Adjustment Periods

Says Levy: “We’re about to enter a period of reduced standard of living while we attempt to pay back to foreigners at least a portion of what we’ve borrowed,” represented by the United States’ huge budget and trade deficits. Despite the three- or four-year adjustment period, patterns of job and population growth will not change, he says.

Thus, despite worry and uncertainty about the national and worldwide economies, every major forecast for the rest of the century now sees Southern California growing faster than the nation, as it has for the last 25 years or so.

But there is little evidence that the region is poised for a dramatic growth spurt, economists say. Rather, Southern California’s growth in the 1990s--while still strong--probably will moderate as growth slows nationwide.

“We are still going to maintain our advantage in growth,” Hensley says. “But the demographics are such that the growth of the population and the labor force is going to slow down in the 1990s.”

But even if growth moderates, all sides predict that the area’s population will still increase significantly by the year 2000.

In fact, Southern California currently is enjoying a baby boom in the midst of a slowing birth rate for the nation as a whole, Kyser says.

A total of 151,500 babies arrived in Los Angeles County maternity wards in 1985, the latest figures available. That marks a steady rise since 1973, when 104,100 births were recorded in the county. Most experts say that, if anything, the birth rate is even higher now.

Immigration a Factor

Southern California will also continue to attract people from other states and from other countries, not all of whom will arrive legally. Despite changes in the immigration law that penalize employers for hiring illegal aliens, “the forces on both sides of the border are too strong” to stop the flow, Kyser says.

If illegal immigration continues, Southern California probably will not face the lack of workers that many are predicting nationwide in the coming years, says J. Gordon Palmer Jr., manager of economic analysis and development programs for the Southern California Assn. of Governments.

The continued immigration means Southern California’s racial mix will continue to change. Latinos and Asians will become a bigger portion of the population, while the percentage of Anglos and blacks will decline.

Meantime, the regional economy will continue to diversify.

The region “reflects the United States on a smaller scale,” Palmer says. “Certainly one of the advantages of this is the ability to hedge against things going on in the economy.”

Southern California excels in high-skill industries, such as aerospace and computers, as well as lower-skill industries, such as apparel and furniture manufacturing, he says. The industries in between--things such as steel making and tire manufacturing--are not well represented in the area any more.

The region will continue to be a manufacturing powerhouse, but the percentage of jobs provided by service industries will grow much more quickly, Palmer says.

One of Southern California’s prime competitive advantages is its location close to Pacific Basin markets, which will lead to rising levels of international trade.

“We’re going from trade over the Atlantic to trade over the Pacific and we have a unique geographical advantage in that regard,” Paul says.

An outgrowth of rising international trade is the region’s increasing importance as a financial center.

“You see that in downtown Los Angeles--all the buildings” and the growth of foreign investment, Levy says. “Los Angeles is also emerging vis-a-vis San Francisco as a more competitive area for Western regional offices” of firms headquartered elsewhere, he says.

As a result, the service sector, particularly business services, is booming.

Small business will continue to be an important generator of jobs in Southern California. The area has developed a reputation as being particularly hospitable to new businesses, and that should continue, experts say.

Business starts rose 3.2% in Southern California last year compared to 0.7% nationwide and business failures increased 1.8% in the region compared to 6.9% nationwide, a Dun & Bradstreet Corp. survey found.

Companies employing 49 or fewer people accounted for nearly 95% of all the businesses operating in 1984 in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. Businesses with up to 49 employees make up about 30% of total employment in Los Angeles County compared to 34.5% for firms with 500 or more employees.

Southern California also has the largest concentration of companies owned by women and minorities, which tend to be small firms, a 1982 Census Bureau survey determined.

Although it is difficult to say with certainty that Southern California has more entrepreneurial spirit than the nation as a whole, the potential exists in available capital and brain power for a small business surge, experts say.

“We are certainly one of the leaders in terms of business ventures,” says Alan Carsrud, associate professor of entrepreneurism at USC. “There is money here and that’s the fuel that helps keep it going.”

Southern California boasts the fourth-largest concentration of personal income in the United States, exceeded only by the entire states of California, New York and Texas, according to a report by Security Pacific Corp. called “The 60-Mile Circle.” One Rolls-Royce is purchased every two days in the region, the report says.

Wealthy Area

But Levy warns: “This does not come free, all this growth stuff.”

More people and more jobs means more wealth, but it also could translate into an overburdened transportation system, overcrowded schools and more smog. A lack of affordable housing could keep job seekers out of Southern California. A growing mismatch between the skills needed by businesses and the skills possessed by the labor force could become critical without training and retraining.

Some Southern Californians have already had enough and are calling for restrictions and moratoriums on building.

One such restriction was Proposition U, passed by Los Angeles city voters in November, 1986, which effectively cut in half the size of new buildings allowed on more than 70% of the city’s commercial and industrial sites. Many cities--among them, Los Angeles, Beverly Hills, West Hollywood and South Pasadena--have halted, at least temporarily, the development of mini-malls.

Another unknown is how effective the new immigration law, which penalizes employers for hiring illegal aliens, will be in stemming illegal immigration.

Hensley says the UCLA Business Forecasting Project has found early indications that the new law is having at least a temporary effect, although it is too soon to determine if there will be any lasting impact on immigration and economic growth.

Employment in California’s manufacturing industries, a big employer of illegal immigrants, declined at a 0.6% annual rate during the second quarter, Hensley says. The state has been adding manufacturing jobs at four to five times the national rate since 1960.

What’s more, many manufacturing industries that employ large numbers of Mexican immigrants, both legal and illegal, have lost job share compared to the rest of the nation since the end of last year. Those industries include leather, furniture and textiles.

If the Immigration and Naturalization Service vigorously enforces the law, “I just can’t believe that it’s not going to have some impact,” Hensley says. “It seems to me that’s one of the most important issues in the state.”

Despite the problems ahead, Southern California will remain fairly healthy, Levy predicts.

“Whatever is going on, it’s probably true that most cities would envy having Los Angeles’ attractions,” Levy says. “If you’ve got a healthy economy, you can buy your way out of most things.”