California’s Economy Is Vulnerable, Experts Say

Hobbled by defense cutbacks, sharply reduced construction and other problems, Southern California’s economy has become increasingly vulnerable to a recession, economists say.

“If the nation heads toward a slump, we will feel it much more than in the past,” said Goetz Wolff, a consultant to the Los Angeles Economic Roundtable, a business organization.

And increasingly, a slump appears to be just where the nation is headed, some analysts say. U.S. employment and overall economic growth have been ominously sluggish in recent months. Moreover, Iraq’s invasion of Kuwait has added a wild card to the scene by threatening to push up consumer prices, a development that has frightened financial markets and already forced up long-term interest rates.

The events in the Middle East could injure Southern California’s economy in at least two ways. First, higher interest rates would hit the already suffering housing market. Also, a sharp increase in the price of oil could hurt other nations’ economies, undermining the brisk international trade that enriches Southern California.

“Japan and our other Pacific trading partners are going to have a difficult time keeping their economies steaming along if they have to pay a lot more for energy costs,” said Gerald R. Miller, manager of economic development for the city of Long Beach.

In addition, while other U.S. regions have struggled with ups and downs in recent years, Southern California has enjoyed in effect an “economic subsidy” from the federal government in the form of defense contracts, Wolff said.

Now, however, cutbacks in the defense industry are eliminating thousands of the area’s highest-paid manufacturing jobs.

And Southern California’s formerly red-hot market for housing has turned chilly, taking a toll on construction employment at a time when national job growth appears to be wilting.

“If the U.S. falls into a recession, I think California is bound to go with it,” said David G. Hensley, a specialist on the California economy at UCLA. “I see no offsetting factors here to carry us.”

In the longer term, Southern California enjoys strong prospects, propelled by growth in international trade and the strengths of its rich, diverse economy, many analysts say. Even such issues as cleaning up the air, a high cost of living and public sentiment against growth are not expected to block the economy’s expansion in the coming years.

“In our eyes, Southern California shapes up better than other parts of the country,” said John L. Bucksbaum, president of General Growth of California, a developer of shopping centers and malls. “If we had to rank where we’re developing, we would rank California as No. 1.”

For now, however, Southern California’s lustrous economy is showing signs of wear. One place to witness the difficulties is Conrad’s Bar & Grill, huddled just off the Golden State Freeway in Burbank.

For years, blue-collar workers at the nearby Lockheed plant packed the wood-paneled restaurant at lunchtime for sandwiches and a moment to glance at one of the two TV screens. Owner Conrad Haider even got a fax machine so customers could transmit their lunch orders ahead of time and reserve tables.

But since Lockheed began laying off workers this year, Haider’s revenues have fallen 30% to 40%. “If they let 5,000 people go in one shot, you know that’s going to have an effect on everybody,” Haider said in an interview. (Layoffs at the aerospace firm might reach 8,000 a year from now, according to company officials.)

Already, major aerospace employers appear to be cutting close to 20,000 jobs this year in Southern California. Yet in some ways, no part of the country is better poised for the jolt of such cutbacks.

Los Angeles and Orange counties continue to generate other jobs, adding a total of 114,000 so far this year, said Jack Kyser, chief economist at the Los Angeles Area Chamber of Commerce. Alone, the two counties are home to more than 5 million jobs, a giant employment base that rivals metropolitan New York’s in size.

Yet “when you get down to the nitty-gritty of it, the prognosis is not very optimistic” for displaced workers, Wolff maintained.

The reason is twofold: Hourly defense workers, such as many involved in weapons production, will re-enter a regional economy in which high-paid manufacturing jobs are gradually declining. In their place, lower-paid factory jobs in apparel and other industries have been increasing rapidly. At the opposite end of the pay scale, many of the more advanced aerospace scientists and engineers have specialized knowledge that is not in great demand outside their field.

“Somebody that makes satellites is not someone who makes bridges--and there are plenty of talented bridge makers,” observed Robert S. Rollo, managing director of Korn/Ferry International, an executive search firm in Los Angeles.

Before the recent concerns about the national economy, Southern California commentators tended to downplay the effects of defense cutbacks, emphasizing the region’s size, wealth and lack of dependence on any single industry for continued growth.

As defense contractors retrench, most people will escape the worst damage, much like in an earthquake, said John O. Wilson, chief economist at Bank of America. “If you’re at the wrong place at the wrong time, you can be devastated. But if you look at the overall effect on the California economy, we can absorb it,” Wilson said.

But increasingly, questions about defense are not the only difficulties facing the Southern California economy.

Single-family home sales statewide in June were 10.2% slower than in the previous June, partly because buyers cannot afford the high asking prices, said Leslie Appleton-Young, vice president of research and economics at the California Assn. of Realtors.

The slowdown is sending ripple effects into the construction industry, where employment is starting to decline, according to the Construction Industry Research Board. In the first six months of 1990, building permits for new housing declined by 48.8% in Los Angeles County, 46.8% in Orange County and 28.2% in Riverside and San Bernardino counties, according to the industry-financed board.

The housing ills provide a striking example of Southern California’s new vulnerability to changes in the national economy: If the current oil shock leads to a protracted rise in interest rates, the region’s slumping housing industry seems sure to slump even more.

“A few years ago, we could have absorbed this,” said Essie Adibi, director of the Center for Economic Research at Chapman College in Orange. He added: “If a recession comes, it would be the worst time for Orange County, especially the construction industry,” although a recession still may be avoided, he said.

In a worst-case scenario, events in the Persian Gulf even could undermine what many view as Southern California’s economic ace in the hole, its growing role in international trade.

Many are banking that such problems can be avoided. Since 1975, the value of goods passing through Los Angeles--both imports and exports--has soared almost tenfold to $101.4 billion, Kyser said. The jobs created by such international trade--at the ports of Los Angeles and Long Beach, at Los Angeles International Airport, and in transportation, warehousing, distribution and other services--will be an economic engine in the future, some predict.

In Long Beach, currently braced for possibly 8,000 layoffs at McDonnell Douglas and an uncertain future for its Naval Shipyard, officials are looking to the harbor for their vision of economic opportunity in the 1990s.

“Most of the job growth in Los Angeles County in the coming decade will be related to international trade--much of which will be taking place around the Port of Long Beach,” economist Miller said.

As a result, perhaps, some analysts are quick to distinguish Southern California from other, less-diverse regions, such as New England and Texas, that have suffered recessions when the rest of the country was continuing to enjoy economic growth.

“Yes, we’d feel a little more pain than the country as a whole (in a recession), but I don’t think it would be that dramatic,” said Kathleen B. Cooper, chief economist at Security Pacific National Bank.

Wishful thinking? By some accounts, Southern California remains stronger than many suspect even now.

State officials were pleasantly surprised recently when they found private employment in July to be up 30,000, even as signs emerged that America’s overall jobs machine was petering out.

“There is some slowdown apparent, but our situation is still better than the rest of the country,” said Pauline P. Sweezey, chief economist at the California Department of Finance.

Some also have been encouraged by the initial interest employers have shown in the growing ranks of laid-off aerospace workers. A whole range of companies--in financial services, aerospace, high-tech, retail, consulting, insurance and other fields--have expressed at least some interest in displaced workers at Lockheed, said Kenneth L. Kneisel, a vice president at the Drake Beam Morin out-placement firm in Los Angeles.

“I think it’s an overwhelming response,” he said.

GENERAL DYNAMICS LAYOFF: General Dynamics will lay off up to 2,000 Los Angeles-area workers. D1