Southland Likely to Keep Growing--Just Not as Fast

The torrid pace of economic growth in Southern California is likely to cool in 1989 as defense spending shrinks and interest rates rise, economists predict. But the expected slowdown may do nothing more than bring the Southland’s economic growth rate in line with that of the nation as a whole, they add.

In recent years, Southern California’s economy has grown significantly faster than the nation’s. The region will still grow faster than the rest of the country, but “we’re looking at three-tenths to four-tenths of 1% faster instead of the 1% to 2% faster rate in the past,” said Phillip E. Vincent, vice president and senior economist with First Interstate Bancorp.

Relatively high federal defense expenditures in the early and mid-1980s contributed to the region’s rapid growth, said Adrian Sanchez, associate economist with Security Pacific National Bank. Defense spending has already slowed from the big buildup in the early days of the Reagan Administration, he said. (For example, defense spending increased 7.5% in 1982 as adjusted for inflation but declined about 1.9% in 1988.)

Although future reductions in defense spending of the magnitude now projected for the next few years won’t severely hurt the region’s large aerospace and related industries, Sanchez added, “defense will no longer be that strong push” for the economy.

Cuts Can’t Be Ruled Out

Still, the UCLA Business Forecasting Project warned at its annual forecasting conference last month that California as a whole could be hurt by defense cuts that are bigger than those now anticipated. Defense spending is expected to rise slightly in actual dollars, but the UCLA study projects a decline once the figures are adjusted for inflation.

“Although our current forecast expects inflation-adjusted defense spending to decline by . . . near 3% annual rates . . . during the Bush Administration’s first term, significantly larger cuts cannot be ruled out, and important sectors of the California economy would be adversely affected,” David Hensley, the UCLA forecasting project’s director of California forecasting, said during the conference.

The UCLA forecasters said drastic cuts are unlikely in the near-term, but they pointed to coming U.S.-Soviet arms negotiations that, if successful, could produce big reductions perhaps as soon as 1990.

Large defense cutbacks would seriously affect California’s aerospace industry, but other sectors, such as primary metals, computers, instruments and construction, would also be hit, the UCLA report said. Additionally, income generated from defense jobs in California stimulate overall economic activity, the report added. In a downturn, California would miss “this important stimulus,” the forecasters said.

A slowdown in defense spending isn’t the only issue that could affect Southern California’s aerospace employment, Vincent said. The Defense Department has been changing its bidding process to elicit more competitive bids, he said. The process is becoming more advantageous to regions of the nation with lower labor costs than Southern California, he said, adding that “over time, we might lose more of that work.”

‘Untenable’ Housing Prices

Additionally, some analysts are concerned about slower growth in high-paying manufacturing jobs (such as in aerospace) and more growth in non-durable manufacturing (such as in food processing). Goethe Wolfe, chief economic analyst for the Los Angeles Economic Roundtable, said he is concerned that such a trend is happening in Los Angeles County. “That raises concerns about the kinds of jobs and wages they will bring,” he said, explaining that non-durable manufacturing usually has lower wage scales.

The UCLA forecast also said the state’s economy is vulnerable to a housing slump because of expected interest rate hikes and “untenable” housing prices, particularly in some Southern California counties, that may reduce demand.

The UCLA forecasters expect the Federal Reserve to cool down the economy by raising interest rates in 1989, “particularly in light of the recent spate of economic reports indicating that the economy continues to expand at a robust pace.” The forecast predicts a “mild, three-quarter recession” beginning in the summer of 1989, and a prime rate increase to more than 12%, from the current 10.5% rate.

The Construction Industry Research Board is projecting a decline in construction this year in California, but it expects construction employment to remain at record levels. The board said employment should remain high because large projects begun in 1988 will still be under construction in 1989, and many housing permits, taken out in early 1988 because of potential slow-growth measures, won’t translate into construction until 1989.

Brakes Are On

The slow-growth movement hasn’t yet had an effect on Southern California’s economy, but it remains a potential factor despite defeats suffered by slow-growth advocates in 1988, Sanchez said. Many of the measures are aimed at curbing construction, he said, and a successful measure may force housing prices even higher. Such a situation would make it more difficult for industry to attract skilled labor and could cause a slowdown in employment with a ripple effect throughout the economy, he said.

Sanchez added that the 1986 immigration reform act is also a factor in braking the local economy, because of its potential to limit the supply of cheap labor that has helped the growth of several local industries, particularly manufacturing.