ECONOMIC FORECAST: FLAT BUT NOT BLEAK : Declines Seen in County in ‘88, but Business Leaders Hopeful
If the economic pundits are right, Orange County can look forward to a 1988 that will largely be a repeat of 1987.
Unemployment will remain low, but there will be relatively few new jobs. Wages will barely keep pace with inflation, and business growth will be slow in most areas, with real declines in the construction and defense industries.
A flat economy, in other words.
But many in the county business community are operating on the theory that flat doesn’t mean bleak. In 1987, businesses here churned out an estimated $50 billion in goods and services, and the Chapman College Center for Economic Research’s prediction for 1988 is $53.2 billion.
Even in the face of warnings that a recession could be in the offing for late next year or early 1989, the county doesn’t seem to be developing a siege mentality.
Instead, most businesses in the county--which boasts the 30th-largest economy in the world--are looking for at least a respectable year in 1988.
The watchword for the coming year is discipline. Companies that do well will probably do so because they keep tight control of their growth and spending.
Most area businesses in the next year will “concentrate more on day-to-day business, with less willingness to do exotic research and design,” said Ralph Sabin, partner-in-charge of the emerging business group at the Ernst & Whinney accounting and consulting firm’s county office.
“They will be looking for product applications that can get to market sooner, and there will be less willingness to devote a lot of capital to facilities and furniture,” he said.
Sabin and other business consultants and economists who study the county’s place in the regional and national economies generally see for next year a small but real growth in retailing; business-related services such as banking, marketing and financial planning, and in non-defense manufacturing, particularly in the electronic and medical technology fields.
But the building industry is expected to be hit hard, especially in the first half of the year, as home, office and industrial construction levels all drop below 1987 levels.
And in the hotel and health services industries, retrenchment and consolidation appear to be in the offing. An anticipated drop in tourism and business travel is expected to combine with the county’s existing over-supply of hotel rooms to make 1988 a tough year in the lodging business, while ongoing reductions in government and private insurance payments for medical services will continue taking a toll in that industry.
Still, the overall mood for the county’s business in 1988 is cautious optimism, and one reason appears to be the county’s diverse business base. With an estimated 80,000 licensed businesses--most of them with fewer than 10 employees--there is no one dominant force in the local economy. Thus, if defense industries are hurt by a cut in weapons spending, the shock effect of layoffs and lost income is not enough to stagger the county’s entire economic system.
That diversity traditionally has made the county recession-proof. While there is a growing feeling that the area won’t always be able to escape the impacts of a severe economic downturn, attitudes about 1988 appear upbeat.
“Orange County has healthy employment levels and a diversified economy, so it isn’t tied to any one thing that happens,” said Margaret Magnus, editor and associate publisher of Personnel Journal, a national publication based in Irvine. “It is not at the mercy of OPEC or the stock market, so the outlook is more optimistic for business” than in other areas of the country, she said.
Still, there are reasons for tempering local business optimism, a pair of wild cards in the deck being dealt for 1988: the stock market and general consumer confidence.
Both are unpredictable, closely linked and able to make short shrift of anyone’s economic predictions.
The market’s direction is anyone’s guess, but general confidence in the county seems to be fairly high as the year ends.
Retailers appear not to have suffered as intensely as first predicted from a fourth-quarter buying slowdown in reaction to the market collapse. And local stock and investment brokers said most area investors, while not buying madly, at least are not liquidating their portfolios as they wait for the Wall Street roller coaster to smooth out.
The major change in business operations in the county in 1988, executives and consultants said, is that the year will be marked by an underlying conservatism. High-fliers will come back down to earth, and decisions on many business expansions, borrowings and new product research and development programs will be focused on the immediate costs and potential for return, rather than on the long-range results.
“We made a commitment that we can make great strides in protecting our market share by introducing lower-priced products (in 1988),” said Steve Keefer, president of Monitoring Automation Systems, an Irvine software firm serving the security industry.
In an uncertain economic climate, he said, “people in the industry who may hold off on large capital expenditures will buy a less expensive product that does almost as much as our more expensive system. This market is where we are concentrating in 1988.”
Thomas Wilck, a former Irvine Co. executive who now specializes in corporate public relations and marketing, hears a lot in his business about what other businesses plan for the future. He said he now thinks 1988 is shaping up to be a a fairly good year--especially in the service industries.
“People are deciding to be a little more conservative and disciplined, but they still are going ahead with things instead of retrenching,” he said.
While there is talk of a possible recession, Wilck said he does not hear anyone planning for one.
“Security Pacific (Bank) is coming into Orange County with a major regional office. They obviously see this as a good area, and Alaska Air just had a board of directors meeting in the county and said that they see this as a key West Coast location.”
At Planning by Technology, a business planning and cash-flow forecasting firm in El Toro, Vice President Rick Lamprecht said his clients show “almost no fear or hesitation about 1988. There is virtually no (economic) impact that is expected to have any effect on the businesses I come in contact with.”
Lamprecht said his clients, all county companies, include a major electronics manufacturer, an aerospace contractor, a flame-retardant maker and a new medical-products maker.
“There’s no holding back on plans at all,” Lamprecht said. “The only one even cautious about ’88 was a sleeping bag manufacturer. We went over all the numbers, however, and now that fear has gone, and they are coming out with two new consumer products, so that company is spitting in the face of economic predictions.”
Then there is Tor Eckert, president of Eckert Enghauser & Partners, a Newport Beach consulting firm that specializes in mergers and acquisitions and recruitment of marketing and advertising executives.
“One of the indicators we use to help determine where business is going is what happens in the fourth quarter to our own workload,” he said. “And we are seeing the busiest fourth quarter in the past five years.”
Eckert said demand for marketing and ad executives can be strong for two reasons: Either times get hard in a particular industry, and corporate officials dump their marketing and ad people for a new crew with new ideas, or companies perceive good times ahead and increase staffing in those departments.
“What we are seeing are requests for additional staff rather than for replacements,” Eckert said.
“The advertising dollars that major clients spend also is a good indicator of what business thinks is coming,” he added. “We are seeing a lot of changing of ad agencies right now, billions of dollars worth of accounts are being traded this year as companies switch agencies, and when they change agencies, they usually increase their budgets. So we are looking at more money than ever being spent on advertising in 1988. And that, to me, shows there is a positive outlook.”
Ron Clark, president of Sundance Spas, a major spa manufacturer whose business is closely tied to consumer confidence, is a bit less optimistic than some of his fellow business owners--but he is far from downcast about the local scene.
“I’m looking at a flat market in ’88 in the hot-water products industry nationally,” he said. “But Orange County always seems to perform better than the rest of nation. It’s diverse, and there’s a lot happening here. I view Southern California as a separate market.”
Clark said his attitude about the national economy is changing slightly as figures from the Christmas season begin coming in, “because it now seems like the season went well, so as time goes by I get a little more comfortable with 1988 and more concerned about 1989.
“However,” he said, “small-business people are perpetual optimists.”
That optimism is part of what makes the county’s economy work, said Sabin, the Ernst & Whinney specialist on emerging businesses.
“My perspective is that, in a general sense, business in Orange County is so diverse that there is lot of confidence and optimism for 1988,” he said. “The tools businesses may use to achieve success in ’88 may change, because of changes in the financial markets, but people will find the tools they need.”
The stock market crash dampened investor enthusiasm for corporate debt and for new stock offerings, so 1988 holds out “less possibilities of raising money by going public,” Sabin said. “But that just makes private investment more lucrative, and private financing sources have a lot of interest now in good companies in niche industries.”
Sabin said a review of Ernst & Whinney’s county clientele shows that “our clients probably did better in 1987 than in ‘86, and probably will do better again in ’88.”
Reflecting on an almost-industrywide consensus that office construction will drop steeply in the county next year, Sabin said he believes that the county “will continue to attract high-end businesses” that are looking for relatively luxurious office space and that the slowdown in new construction will only help ease the current 20% vacancy rate in existing office buildings.
Economic forces “may present a risk to some segments of an industry--like health care--but they also present tremendous opportunities to others in the same industry,” Sabin said.
And in the county, “there is no dominance by a single industry that’s going to go away and cause massive unemployment, so restaurants and retail businesses are still going to have customers, there still will be growth and we will still be looked to by the rest of the United States for our innovations.”
Even James Doti, the Chapman College business and management dean who this month released a set of predictions that call for almost no real growth in 1988, said he has great faith in the county’s ability to perform well in sluggish times.
Next year “is basically going to be a repeat of 1986 in Orange County,” he said. “But in 1988, as in 1987, the county will continue to outperform the nation, even with declines in economic performance.”
The 1988 forecast, produced by Chapman’s Center for Economic Research, suggests that a slackening of defense spending will affect employment and revenue at county manufacturing firms that rely heavily of government contracts. In fact, several defense-dependant companies in the county have already reported slower sales and even layoffs as the flow of federal funds constricts.
“But while manufacturing has been weak and will continue to be weak, we have to be careful to segment the industry into its component parts,” Doti said. “There are going to be some strong areas of manufacturing in the county, especially in segments that will benefit from the lower value of the dollar because they compete directly with firms from abroad whose prices will have to increase. These are areas like high tech, measuring devices, computer components, office equipment, medical technology and biomedical products.”
Doti predicted that the county’s “next boom” will be in international trade, as Pacific Rim markets expand through the rest of the century. He said trade-related businesses should do well in 1988 because of his growth.
But even with projected declines in all areas of construction and in some manufacturing and low-level service-industry sectors, Doti said: “Orange County can withstand shocks in some areas without going into shock overall.”
