How Badly Are We Doing? : California’s in a slump. The good news: Some say it may not be terrible. : REGIONAL REPORT

Every time the economy hits the skids, cobbler James Hedge sees more customers walk into his small Ventura shop asking for repairs of old, worn shoes that would be thrown away in more confident times.

“There’s a regular flow of people now,” said Hedge, co-owner of Paramount Shoe Repair.

Judging by more conventional standards, economist Stephen Levy thinks that Southern California and the whole state are very close to a recession.

“We are in a slowdown,” said Levy, director of the Center for Continuing Study of the California Economy, an independent research group based in Palo Alto. “Whether or not we are in a recession now . . . , Southern California will not be immune.”

Nationally, economists are split about whether the recession will be short and mild or whether the economy, weighed down by corporate and consumer indebtedness, will be in for a painful, lingering illness.

Locally, the downturn should be less of a trial, although it may last a bit longer than the national slump, thanks to defense industry cuts, said Jack Kyser, economist for the Los Angeles Area Chamber of Commerce.

The region’s relative good health won’t be attributable to Los Angeles County, which will be slammed by bad times in defense, construction and general manufacturing. Instead, “Riverside-San Bernardino is going to be the area’s engine,” Kyser said.

During the heady eight-year economic expansion nationwide, California was more than lucky. Not only did it escape the regional downturns that hit Texas and New England, but nearly all parts of the state grew faster than the country as a whole.

And make no mistake--even now, pockets of strength remain: entertainment, parts of agriculture and international trade, among others.

Still, an economic slump--hastened by the spurt in energy prices--appears to have begun in Southern California.

Of course, deciding when a slowing economy has slipped into a recession is like the old joke about the hypochondriac’s headstone. It reads: “I told you I was sick.” Expert opinions often conflict; a national recession isn’t officially proclaimed until sometime after the fact by a nonprofit organization called the National Bureau of Economic Research.

But out on the street, people like Joe Ingrande are ready to make the call.

“I think the recession is here,” says Ingrande, co-owner of People’s Fish Market, a restaurant on San Diego Bay. On some days, counter employees run the risk of “falling asleep standing up.”

“We’ve got to dismiss this notion that California is somehow special or insulated from either a regional downturn or a national downturn,” said David G. Hensley, who forecasts the direction of the state’s economy for UCLA.

Indeed, Hensley said, because of shocks to the aerospace and construction sectors, the region and the state might face a downturn more like the recession of 1969-70, the last of the postwar recessions to hit the state as hard, if not harder, than the nation as a whole.

“It’s pretty clear that we’re in hot water,” Hensley said.

To assess the impact of the business slowdown on the Southland economy, Times reporters took stock of 15 of the region’s most important industries.

AEROSPACE/DEFENSE

Aerospace firms and defense companies in Southern California don’t blame a recession for their woes, but the firms’ job cutbacks are widely cited as telling indicators of the depth of the slowdown in the local economy.

More than 10,000 people have lost their jobs at Lockheed Corp., McDonnell Douglas Corp. and Hughes Aircraft Co., largely in response to cuts in defense spending or the winding down of existing contracts.

The companies say no further big layoffs are planned in preparation for a general economic slowdown. That could change if defense spending keeps shrinking, but “the prospect of recession was not the thing that was driving” the most recent cutbacks, said Donald Hanson, spokesman for Douglas Aircraft Co. in Long Beach, which builds commercial and military planes.

“We have already prepared ourselves” for a recession, said Scott Hallman, spokesman for Calabasas-based Lockheed. The company this year slashed 4,600 jobs from its aeronautical group in Burbank, 1,920 of those by layoff. “We’ve consolidated as much as we feel we need to,” Hallman said.

Not all of the aerospace industry, moreover, is in a nose dive.

Flamemaster Corp., a small Sun Valley-based maker of coatings, sealants and adhesives for commercial jets, is adding workers. “We’re going to have a record year,” said President Joseph Mazin.

What distinguishes Flamemaster? Most of its sales--expected to total about $5 million this year--come from customers who maintain existing jets, and that business is going strong, Mazin said.

AGRICULTURE

The old line is that no matter what the economy does, people still have to eat. But Southern California agriculture is starting to feel the bite of recession in a number of ways.

For now, high fuel prices are causing universal pain, which will only worsen in December. As temperatures fall, citrus growers and farmers raising such winter crops as strawberries, avocados, celery and bell peppers need to protect them from frost. That means using fuel to pump water, power wind machines and run smudge pots.

“That’s where we’re going to see the real crunch,” said Bob Vice, president of the California Farm Bureau Federation and a Fallbrook avocado farmer. “The energy cost to agriculture is high, and it will have an effect on our bottom line.”

The recession apparently is taking root in Southern California’s dominant nursery industry. At El Modeno Gardens in Irvine, the nation’s 20th largest wholesale nursery, annuals such as chrysanthemums aren’t selling, and many more than normal are being discarded.

“Plants are a luxury item,” said Jo Anne Groot Beall, vice president for operations. “People use their discretionary dollars to buy plants, and they’re one of the first things to go.”

But not all of agriculture is feeling the pinch. In Temecula, the premium, high-priced wines that the area produces have saved it from the recession--so far. Nor have the purveyors of purple potatoes and other exotic produce been squeezed: Retailers have not cut back on their orders to Frieda’s Finest Produce Specialties.

“I would imagine that if a consumer were feeling the crunch, they may not be able to buy a new car or new furniture, but they do have to eat,” said Karen Caplan, president of the Los Angeles company. “They always want to pamper themselves in some way. If they can’t go out, they’ll still have good tasting, special produce at home.”

COMMERCIAL REAL ESTATE

The Southland’s office market was hurting before the economy began to downshift. Now, the dwindling number of companies looking for office space and a mushrooming number of new buildings threatens to drive vacancy rates even higher.

“It’s a good time to be a tenant and a pretty lousy time to be a landlord,” said John Coats, a leasing agent with Grubb & Ellis, the commercial brokerage. “If you’re willing to sign a 10-year lease in downtown Los Angeles, most of the landlords will give you a year or two worth of free rent.”

Developers didn’t worry much about vacancies a few years ago, when big East Coast companies--Wall Street brokerage firms, insurers and the like--were opening new offices in the West. But those same types of companies began slicing expansion plans after the stock market crashed in 1987.

Now, concerns about the future of the economy have caused them to cut back even more.

If all this weren’t bad enough, Japanese investors, whose buying binges fueled huge increases in the value of office towers throughout much of the 1980s, have suddenly rushed to the sidelines. Rising interest rates in their own country and stock market jitters here and abroad have lessened their yen for U.S. investments.

HEALTH

The health-care business would appear to be more resistant than other industries to recession: If you’re sick, you’re sick. But health care, it seems, is not immune.

Hospitals already reeling under the burden of uninsured and under-insured patients fear that the crunch will only get worse as more people lose their jobs, and hence their health insurance.

“A recession will clearly increase those numbers of uninsured,” said Bill Noce, executive vice president of St. Joseph’s Health System in Orange County.

Hard times have already arrived at California Medical Center, a 344-bed acute-care hospital near downtown Los Angeles. Its high level of uninsured patients has swelled as other hospitals have withdrawn from the Los Angeles County trauma-care network.

“In our community, our people are largely unemployed anyway,” Chief Executive Irwin Hansen said. “I don’t know what a recession looks like any more.”

ENTERTAINMENT

As a source of at least temporary respite from economic ills, entertainment is thought to be among the most recession-proof of industries.

The major entertainment companies foresee little, if any, impact on their business from the looming recession, and most companies have no plans to scale back activities.

That’s because the industry is even more diversified--and, therefore, stronger--than during the past several recessions, said Jeffrey Logsdon, an entertainment analyst with Seidler Amdec Securities in Los Angeles. Logsdon figures that cable, video and other markets should hold up well in the event of a downturn.

Of the various forms of entertainment, history has shown feature film revenues to be counter-cyclical. Since the Depression, it has been a truism that people go to movies more during hard times as a form of escape.

Recessions are rougher on the music industry and theme parks. Television could be hit hardest by a downturn, because advertising revenues probably would drop. And consumers might switch from buying videos to renting them.

The major studios report that they are moving ahead with motion picture production schedules. And there is no sign that budgets or staffing levels probably will be affected. “We see our industry and our company as recession-resistant as any,” said Erwin Okun, a senior vice president at Walt Disney Co. “There will be no change in any of our plans.”

Carolco, one of Hollywood’s most aggressive motion production companies (they’re the people behind the “Rambo” films), plans to make four or five high-budget films in 1991, the same as 1990, said spokesman Tom Levine.

The only difference, he said, is that U.S. economic conditions are making it necessary to find more funding for production abroad.

ENERGY

“Generally, recessionary times have their impact on oil companies just like all other businesses,” said Alfred F. Grove Jr., a senior vice president who runs the energy and utilities group at Bank of America.

But the Middle East crisis has changed the normal rules of the game, and the economic downturn is coming at the same time that energy prices are at all-time highs. Oil industry economists say it is impossible to separate the effects of the two.

In the third quarter, oil companies made money pumping oil out of the ground and selling it. But their profits shrank in refining and marketing operations, which must pay more for crude oil and then face falling demand as a result of higher gasoline prices.

“The higher prices independent of the recession are already beginning to hurt demand for energy products,” said Thomas G. Burns, manager of economics for Chevron Corp. “To some extent, parts of the business may already be starting to see a decline in demand even before recession.”

It’s unclear how much demand for gasoline could fall in a recession.

“Some say a lot of patterns will change, as they did in late 1970s: people moving closer to work, a lot more conservation,” said Trilby Lundberg, publisher of the widely read Lundberg Survey of gasoline prices. “But to reduce the dependency on driving would require a more sustained period (of high prices) than we’ve already seen so far.”

BANKING

California banks so far have not been bloodied like their cousins in the Northeast. But subtle signs suggest tougher times are coming.

Security Pacific’s earnings declined. First Interstate set aside more money to cover possible losses on loans it has made in California. Wells Fargo has closed four offices nationwide that were involved in real estate lending, two in California.

The biggest question for California banks is who will fill all of those office buildings, industrial parks, condominium units, mini-malls, hotels and other real estate developments still being built.

Developers may have trouble getting tenants or finding buyers. Or they may give away space just to lure tenants. And that means banks could have problems getting their money back.

Worse, lenders may be stuck with the property. Last week, Coast Federal Bank disclosed that it had foreclosed on a large building near Long Beach Airport. Coast had loaned the developer $29 million.

The California savings and loans that survived the nation’s thrift debacle are among the strongest in the country.

But they depend on making home loans for their business. Should home sales continue to slow, that business could begin to dry up. In addition, new federal regulations require thrifts to build a stronger financial cushion against losses. Most are under pressure to cut costs and have been trimming jobs as a result.

CalFed Inc. recently posted a $92-million loss, in part because its California Federal Bank has few buyers for the tract homes it built and because those who buy are getting generous concessions.

HOUSING

The housing market, usually one of the first segments of the economy to be hit in a downturn, has been in decline for more than a year. After growing used to the double-digit appreciation rates and the rapid sales pace that prevailed throughout the late 1980s, brokers, builders and homeowners are faced with falling home prices and declining sales volume.

Jules Nissam, who is moving his family to New Jersey, has been trying to sell his Studio City house since June. He originally listed it at $449,000 but has since reduced the price of the three-bedroom home with pool to $369,000.

“We anticipated, like most people in Southern California, that our house was worth a certain level. And now we’re finding out it’s worth less,” Nissam said.

Overall, real estate executives say the Southern California home sales market has fallen about 30% from last year. Riverside and San Bernardino counties are down only slightly because homes in those areas are still relatively affordable.

Some markets are faring worse, however. In the Antelope Valley, for instance, sales volume is half what it was in 1989.

Big brokerages report that they’re keeping a closer eye on overhead, and some are consolidating offices. Mike Glickman Realty, formerly the San Fernando Valley’s biggest brokerage firm, filed for bankruptcy liquidation in June.

Dozens of small real estate offices have closed their doors this year. Part-time agents are leaving the business, while agents who stay say they’re working longer hours and expect sharp cuts in their total commissions.

Builders are lowering prices on new homes, holding auctions and boosting marketing efforts. One builder even offered to buy the old houses of purchasers of new homes

TECHNOLOGY

The high-tech industry is no longer sprinting as it did in the early 1980s, but neither is it limping.

Some companies in emerging technology sectors are expanding. Among them: Irvine-based PacTel Cellular, the cellular phone subsidiary of Pacific Telesis. Thanks to the popularity of cellular phones in the nation’s gridlock capital, the company has grown to 1,400 employees in the past six years and is still hiring.

Other industries within the sector are not as well off. The aging minicomputer business is being squeezed on each end by cheaper mainframe computers and increasingly powerful personal computers, leading to layoffs at some companies, such as Alpha Microsystems in Santa Ana.

Overall, high-tech firms continue to make productivity gains that result in higher industry revenues every year, but job growth has stagnated, according to the American Electronics Assn. Southern California technology firms mirror that trend, said Phillip E. Vincent, vice president and economist at First Interstate Bank.

Just how much the high-tech sector will slow depends on whether war breaks out in the Middle East and on the health of the commercial aircraft industry. Other factors that will influence the commercial high-tech outlook are the level of exports and the amount of capital investment occurring in the general economy, Vincent said.

INTERNATIONAL TRADE

While many corporate executives are crafting blueprints for how their companies can survive a recession, Safi Qureshey is charting a course of expansion abroad for his Irvine computer company, AST Research.

A weak U.S. dollar has made his personal computers competitive in the world market. And so far, fears of a U.S. recession have not hurt demand for U.S. exports. International trade now accounts for 38% of AST’s total sales, up 8% from last year, and Qureshey hopes to increase exports further to offset any weakening demand for his products at home.

Qureshey is not alone in using the export market to hedge against the possibility of a slowdown in domestic demand. Construction companies, franchisers and even law firms are eyeing the international market as well.

According to U.S. Commerce Department officials, Southland companies are exporting more, but the increase is not as strong as expected. And the weak dollar is hardly a boon to companies with manufacturing plants abroad.

The business of local exporters may be strong, but the picture could change if the Persian Gulf crisis gets hotter, said Susan Lentz, executive director of World Trade Center Assn. of Orange County.

“If a war breaks out in the Middle East and oil prices shoot up uncontrollably,” she said, “all the major markets for U.S. exports, such as Western Europe and the Pacific Rim countries, will be dramatically affected negatively.”

RETAILING

Cash registers are ringing up a flat note for local retailers. From clothiers to restaurateurs to appliance dealers, merchants are seeing sales stagnate as consumers cut back major purchases.

Big layoffs by local aerospace companies are one of the chief reasons, said Sarah Stack, a retail analyst for the stock brokerage Bateman Eichler, Hill Richards in Los Angeles. But Stack said consumer confidence has been shattered as well by Middle East jitters, soaring gasoline prices and sagging real estate values.

Nearly everyone who sells to the public is feeling the pinch. Some industries, particularly those that sell such items as cars and furniture, have it worse than others. Restaurants, too, have had to offer discounts to attract customers.

Retailers are trying to hold down inventories, imposing hiring freezes and waiting for the Christmas season with crossed fingers.

Customers may prove more patient, however.

Consumers are “not dumb. They know the impact this recession is having on retailers. They will wait for sales,” said Tony C. Cherbak, a retailing expert in the Orange County office of the Deloitte & Touche accounting firm.

But there are winners, even in the worst of times.

“Our business has been pretty good,” said James Halpin, president of Home Club, a 65-store chain of home-improvement stores based in Fullerton. “While nobody’s recession-proof in the home industry, we are recession-resistant. When housing starts are down, people typically spend more to fix up their home.”

TOURISM

Whatever the depth of the economic downturn, it seems California hasn’t lost its allure for travelers.

The American Automobile Assn. recently printed a record 3 million copies of its 1991 California tour book. “It is the most popular of our books among our members,” spokesman Gerald Cheske said.

Still, during the past year, tourism has taken its hits this year. And executives at major Southern California attractions fear that a recession will exacerbate the litany of problems that hurt gate receipts this past summer: fear of gang violence, aftershocks from the Bay Area earthquake and high theme-park prices.

“Economic sense tells you that you’re going to lose those who have to come the farthest,” said C. Lance Barnett, chief economist for the state Department of Commerce.

Yet travel trends during past recessions suggest that Southern California’s tourism industry might fare better than other segments of the economy. Although the 1981-82 recession knocked California’s overall economy “flat on its back,” tourist spending remained constant, said Barnett.

Once again, tourists probably won’t abandon California. Rather, they will stretch their buying power through cheaper day trips and extended weekends--a potentially positive trend in a state where natives generate 60% to 70% of total tourist dollars.

“A recession doesn’t change peoples’ tastes for glamour or attractions,” Barnett said. “It just means you can’t afford it as much. A recession doesn’t make California inherently less attractive.”