Bracing for the ‘Build-Down’ : Aerospace: Defense cutbacks will hit the Southern California economy hard. But the suffering isn’t likely to be as great as it was 20 years ago.

In the 1977 film “Fun With Dick and Jane,” George Segal and Jane Fonda played a husband and wife who turn to armed robbery to support their comfortable Southern California suburban life style after he is laid off as an aerospace engineer and cannot find work.

It was an exaggeration, of course, but the black comedy did reflect the pain and dislocation then occurring in the Southland’s aerospace industry.

The impending end of the Vietnam War, coupled with completion of the Apollo moon-landing program, wiped out more than 100,000 Southern California jobs between 1970 and 1973, and many workers had trouble finding comparable employment outside the defense or space areas. Some engineers became janitors, surplus defense plants became ghostly federal warehouses and the regional economy went into a bad recession.

Now, as the Cold War seems to be ending and the Reagan-era defense buildup is fading, some worry that another economic tailspin may be lurking--perhaps even worse than that of nearly 20 years ago. There is strong evidence that a slump has already begun: An estimated 5,000 aerospace jobs in Southern California were eliminated last year, and 9,000 more have been lopped off this year. All forecasts are for job losses of that magnitude or greater to continue well into the 1990s.

What is clear is that the local economy will take a wallop over the next five years as defense budgets shrink, major weapons projects end and thousands of aerospace workers lose their jobs. That will have spillover effects on everything from charitable contributions to municipal tax revenues.

So far, however, many experts are crossing their fingers, arguing that the Southland economy is vastly larger and more diversified than it was and therefore should weather the difficult times faced by its huge defense segment with little lasting damage.

Given the region’s strong job market and expanding economy in most other sectors, the dislocation coming in defense may be minimized, most experts believe, and most workers will be able to find new jobs.

They are especially hopeful that the booming market for commercial jets--Boeing and McDonnell Douglas have huge order backlogs from the airlines that will last at least a decade--will soften the blow of defense cuts. Although Boeing is based in Seattle, much of the subcontracting for its jetliners is done in Southern California, and McDonnell Douglas builds its commercial aircraft in Long Beach.

“I wouldn’t jump to the conclusion that (laid-off defense workers) are all going to be working as clerks at Sears,” said John Oliver Wilson, chief economist at Bank of America. “Unlike the 1960s, we’ve got demand for engineers and the defense companies are rushing to diversify.”

Since World War II, Southern California has had the nation’s largest concentration of defense contractors. Its pioneering flight industry was quickly converted to wartime production in the early 1940s, and, in essence, it has never really switched back. From the region’s factories and hangars have poured fighter planes, missiles and other armaments to fight three wars and to maintain the Cold War arsenal.

According to figures compiled by the Commission on State Finance, federal defense spending in California hit a relative peak in 1968, representing a whopping 14.6% of that year’s gross state product (the value of all goods and services produced in California). That dropped off rapidly with the end of the Vietnam War, hitting a low of 6.6% in 1979 before the Reagan buildup began.

“Aerospace went into a free fall after 1968,” said David Hensley, director of California forecasting at the UCLA Business Forecasting Project. “But it’s not in a free fall now, and it probably won’t go into one.”

Even at the peak of the 1980s defense buildup in 1986, federal defense spending in California amounted to just 9.6% of the gross state product--well below the 1968 record. It is estimated at 8.1% for 1989, heading to 6% or less by the mid-1990s.

“Everybody seems to be expecting us to take a kick in the pants (if defense spending drops sharply),” said Jack Kyser, chief economist for the Los Angeles Area Chamber of Commerce. “But we may already have had it since 1986, and we’ve hardly noticed.”

Of course, it is easy to talk of the ability of the Southland economy to swallow the big defense cutbacks in the “macro” terms favored by economists. In that world, the regional economy is simply one big job factory and everybody who is let go by a defense contractor will simply find work elsewhere because the job market is so strong.

The truth is, however, that the defense “build-down” will hit many people and economic segments very hard, and it is likely that the local economy will take years to recover. The most likely effects:

Many highly skilled engineers and technical workers will have a very hard time finding comparable work in commercial or civilian fields in Southern California. The Reagan-era buildup lasted almost a decade, and many of those who will lose their jobs have been working in highly specialized fields for relatively high pay. Although the Southland job market is considered robust, its ability to absorb thousands of skilled technical workers with considerable experience and hefty salary needs is highly doubtful.

In addition, employment in the commercial aircraft programs that many are counting on to take up the slack of defense cuts is not likely to be expanded dramatically in the next few years. The commercial jet companies seem content at this point to increase productivity through overtime and to stretch out delivery schedules instead of adding new production facilities in expensive Southern California.

Although most experts predict a fairly gradual, managed decline in defense expenditures, it is possible that at least one or two major projects being built in the Southland could be wiped out soon. Among the threatened programs seem to be McDonnell Douglas’ C-17 transport, Northrop and Lockheed’s Advanced Tactical Fighter and Northrop’s Stealth bomber. Together these programs employ more than 20,000 workers in Southern California. To lose one or more of them in the early 1990s, as seems probable, would be a devastating blow to industry hopes for only a gradual loss of jobs, mostly through retirements and normal attrition. (Last week, in fact, Defense Secretary Dick Cheney was reported to have proposed cutting production of the C-17 from 10 planes to six next year.)

The region’s huge network of defense subcontractors, who make everything from electronics to fasteners, plastic devices and fabricated metal parts, is already hurting from the end of some projects, notably Rockwell’s B-1 bomber. Many subcontractors are expected to have a difficult time switching to commercial work after years of lucrative defense contracts. Although some are finding success as subcontractors for the region’s burgeoning high-tech and biotech industries, others have noticeably scaled back operations and laid off workers.

The shrinkage of the defense industry here could be a body blow for the region’s commercial and residential real estate industries. The area’s astronomical home prices have already softened, some say in part because of the loss of so many high-paying aerospace jobs. And large vacancies have already occurred in the Los Angeles International Airport, El Segundo and South Bay regions, where the defense industry is concentrated. By one account, 25% of the office space near the airport is now vacant.

How severe the effects of the defense downturn will be depends largely on how the Bush Administration decides to make the cuts and how strongly Congress fights reductions that will hurt local employers. The early signals from the White House and Defense Secretary Cheney are that a fairly rapid reduction in the size of the Army may occur but that the elimination of big procurement programs will be gradual.

“I don’t think (the federal government) will make the same mistake again and cut defense spending sharply all at once, as they did in the early 1970s,” said Roy Anderson, retired chairman of Lockheed, who lived through the difficult aerospace slump of 1968-76. “There seems to be a good understanding in Washington of the impact of precipitous cuts, which just launch us on a cycle of slump and boom.”

Southern California is less vulnerable to reductions in the size of the armed forces than it is to cuts in defense procurement of weapons and armaments. To be sure, the region has several major military installations. Largest among them are the San Diego and Long Beach naval facilities, the Marine base at Camp Pendleton and several Air Force bases. Overall, California has an estimated 250,000 active-duty military personnel within its borders.

But the Southland has no major Army bases, and therefore it should not suffer greatly as the Administration shrinks the Army. In fact, the diversity of the state’s defense spending should provide a buffer against cutbacks in any one area.

According to 1989 figures from the Commission on State Finance, federal defense spending in California divides up as 23% for research and development, 33% for procurement of weapons and armaments, 27% for civilian operations and maintenance of military installations, and 17% for military salaries and pensions.

The severity of the downturn in Pentagon purchases of weapons and armaments will depend to some degree on what the government does with the money it will no longer spend on defense.

“The money won’t disappear into thin air,” said Stephen Levy, economist and director of the Center for the Continuing Study of the California Economy. “It will be redirected, through tax cuts, deficit reduction or new government spending programs.”

Two years ago, the center and the Southern California Assn. of Governments conducted a study to determine how the region would be affected by defense cutbacks. Levy said the report assumed a one-third reduction in the “real,” or inflation-adjusted, defense budget from the 1986 level--a much larger cut than most now expect in the early 1990s.

“The scenario that would keep the most (defense workers) in their jobs in Southern California would be if the federal government decides to go hellbent for space or technology programs,” Levy said. “The switch would be relatively painless; the employers would probably be the same.”

Any other scenario would involve a painful transition in which many workers might require retraining or might be forced to leave the area, he said.

If the government decides to cut taxes or reduce the deficit instead of investing in new programs, he said, California’s economy would also benefit in the broad sense from lower interest rates or increased personal income.

But, he added, the tax-cut scenario would have the least benefit and could produce a modest decline in the region’s manufacturing job base. Even that, however, would not be comparable to what happened in the early 1970s.

“The big difference is that we have a healthy economy now, unlike 1971-73. The Los Angeles region is running below the national unemployment rate,” Levy said. “We ended the huge B-1 program in the last few years, but I can’t even read that in the regional economic numbers.”

Adds B of A’s Wilson: “If the defense cutbacks are spread over five or six years, the cuts by themselves are not sufficient to plunge the California economy into a recession. It would take other things to do that, such as an overvalued dollar hurting California exports, the closure of some Asian markets to our products due to political change or a policy mistake by the Federal Reserve to tighten monetary policy (which would hurt California’s interest-rate-sensitive economy).”

Wilson acknowledges, however, that “the $64 question” is how difficult the dislocation of former defense workers will be on Southern California, and there are ominous signs that it will not be easy.

“The market for out-of-work engineers and technical people is already dismal and has been since the slump began two years ago,” an executive recruiter in Los Angeles said. “This could get very bad.”

The region’s manufacturing industries that have expanded greatly since the great aerospace slump of the early 1970s--apparel, furniture, chemicals, printing and high tech, among others--are not a good match for defense employees looking for work, he said. In addition, most of those industries do not offer nearly the salary or benefits of defense work, and that may make it tough for laid-off workers to maintain their current standards of living.

Otis Booth III, executive director of the Russell Reynolds Associates executive recruiting firm’s Los Angeles office, said he has noticed that most of the defense workers who have been laid off since 1986 are finding work at smaller “niche” companies--often defense subcontractors that have grown larger during the buildup in the 1980s and now need experienced managers and technicians.

Many of these firms still have a substantial defense backlog that will run into the 1990s, so these people should be secure for at least several years, Booth said.

“The trend seems to be that as big projects end, people leave the large prime contractors and go to the smaller firms that still have lots of work,” he said. He predicted that even as defense budgets shrink, the Pentagon will seek funding to upgrade existing weapons systems with new electronics and other capabilities. And that should help the smaller Southern California defense firms that make such devices.

In the end, perhaps the most wrenching transition for the region will be to accept the realization that the defense business will no longer be the economic linchpin it has been since World War II.

“Frankly, even without this cutback, I would not have expected much expansion by the defense industry in Southern California,” said John Cushman, president of Cushman Realty Corp. of Los Angeles and an expert in regional real estate trends. “The industry is eyeing Texas, Nevada and Arizona for new plants, places where the cost of doing business is less, the tax structure is more to their liking and the cost of housing and utilities is cheaper.”

In fact, some observers believe that the so-called negative quality-of-life issues swirling around Southern California--pollution, traffic, overdevelopment and high housing costs--may ironically act to cushion the personal blow of defense cutbacks.

Said UCLA’s Hensley: “You hear these complaints all the time. I suspect that what is keeping a lot of people here who can’t afford to buy a house and who don’t like the smog is the strong job market. They can make a good salary. Take that away, and why stay here?”

So, unlike the situation in the early 1970s, when laid-off aerospace workers such as those in “Fun With Dick and Jane” fought to maintain their life styles in what seemed a much more desirable Southern California, some may now view the loss of a defense job as the excuse to leave.

“I’m hearing a lot of people talking about Phoenix, Albuquerque, Portland and Tucson,” Booth said. “The fact is that salary levels in Southern California manufacturing don’t seem high enough any more to maintain that nice life style everybody talked about.”

COMPARING DEFENSE SLUMPS

Chart compares net and percent changes in various sectors of the defense economy during the aerospace downturns of 1968-76 with those estimated for 1987-94

1968-76 1987-94 Est. Change % change Change % change Real defense spending -$94.2 billion -37.4% -$52.5 billion -19.8% California employment -94,900 -17.4% -65,000 -8.6% Computers +19,600 +46.0 -1,600 -1.5 Radio and TV +600 +3.9 +1,100 +7.4 Communications -11,600 -9.9 -32,000 -18.4 equipment Electronic components +22,400 +42.7 -5,400 -3.6 Aircraft -86,900 -44.5 -15,600 -9.1 Missiles and space -46,900 -48.4 -20,900 -25.8 Measuring, control +7,900 +32.2 +9,500 +17.3 devices

Source: UCLA