How Badly Are We Doing? : California’s in a slump. The good news: Some say it may not be terrible. : Building Slump Drags Down O.C. Economy With It
Kenneth Dean worked steadily in Orange County for years.
But Dean, 50, has been out of a job for two weeks now--victim of a growing economic malaise striking hard at what has been one of the bulwarks of the county’s economy--construction.
A union plumber, Dean is one of thousands of construction workers who have been thrown out of work this summer because of the housing slowdown in the county.
The situation hasn’t been this bad since the early 1980s, when empty concrete slabs dotted the county as development came to a standstill during the deep recession, said John Patterson, business agent for the 1,200-member union Local 582 in Santa Ana.
Economists are almost unanimous now in predicting that if a national recession isn’t here already, one will hit by early next year. They disagree only on how deep and long it will be, although most doubt it will be as severe as the 1981-82 downturn.
And the diverse Orange County economy, which some optimists thought was recession-proof, will not be immune.
“It is going to be a construction-led recession. That’s the part of the economy that is dragging everything else down, “ said Chapman College economist James Doti. “And because construction is such an important part of the Orange County economy, it is really going to hit hard here this time.”
That is a difficult idea for many to come to grips with because the county for nearly a decade has enjoyed one of the healthiest and fastest-growing economies in the nation.
The county’s unemployment rate still is among the nation’s lowest. Economic growth--as measured by creation of new jobs and new businesses each year--has been among the best in this fast-growing state. The personal wealth of Orange County residents has consistently ranked the area with the world’s richest regions.
But after eight years in which the lines on almost all the economic charts and graphs pointed up, they are now heading for the floor. Among the signs in Orange County:
* Real estate foreclosures for the first nine months of 1990 are up 31% from a year earlier.
* September’s unemployment rate of 3.8% was the highest in 44 months. The 1.1% job-growth rate from September, 1989, through last month was the lowest since the last recession.
* Surveys show new and resale homes have been plummeting for almost two years, with resales in September down 31.6% from a year earlier and new home sales in the first three quarters down 39% from the same period in 1989.
* Commercial construction has slowed dramatically. The dollar value of non-residential construction permits issued in the first three quarters of this year was down 45% from the same period in 1989.
* Many of the county’s publicly traded companies are reporting sharply reduced third-quarter sales and earnings because of economic pressures. And many have suffered severely in the stock market. The value shares that 50 Orange County companies spread across the financial, service, development, technology and medical fields have dropped 32.7% in the past 12 months.
* Personal and business bankruptcy filings for the first eight months of 1990 are at the highest level in five years.
The numbers paint a distressing picture, but the story of an economy in decline is a human one as well. For many workers, fever lines on economic charts are not nearly as important as where the next house payment will come from.
Dean, the Stanton plumber who has 12 children, including two still living at home, looks glumly toward Thanksgiving, just four weeks away. “It’s hard to give thanks when you’re not working,” he said.
And it is not only blue-collar and service workers feeling the pinch.
One 48-year-old marketing executive, laid off more than a year ago when his employer, an Orange County medical-products firm, let 90 middle managers go in a cost-cutting move, said the economic slump is making his job hunt a difficult task.
In the past month, three separate companies have told him that they have decided not to fill jobs he had applied for. “Companies have become very cautious about moving ahead with hiring,” said the man, who asked that he not be named. “They said they would cover their bases as best they can with the existing management team.”
The executive, who has lived in Orange County for 18 years, says he is facing several tough decisions: whether to move to find work; whether to accept a lower paying job in his current field, or whether to change careers.
Michael Thompson still has a job, but the economy has upset his life, too.
The head of C.O. Thompson Petroleum Co. in Orange put the 45-year-old family business into Chapter 11 bankruptcy reorganization earlier this month.
The company, which supplies gasoline, oil and other petroleum products to independent service stations, trucking and transportation firms and other large fuel users, survived the 1971 oil shortage and the 1981 recession, but it wasn’t able to cope with the current economy.
As a result, Thompson has laid off a number of employees and is considering selling off parts of the company.
A number of developments have led to the bankruptcy filing. But Thompson says the plug was pulled months ago when major oil companies, worried about the overall U.S. economic decline, stopped extending 30-day credit terms to companies like his and began demanding payment within two weeks of delivery.
At about the same time, construction companies in the county began pulling back--some delaying payments for fuel that Thompson had delivered, others simply letting their heavy equipment sit idle.
“That cut our sales way down,” Thompson said. “I never thought this could happen. It is just horrible.”
Although companies dependent on construction have been among the hardest hit, other sectors of the economy increasingly have been feeling the impact.
In one day last week, announcements of weak sales and sharp earnings declines were issued by three large public companies in three different industry segments in the county: Allergan Inc. said its third-quarter earnings fell 5% because of a drop in consumer demand for its contact lens products; Hammond Co., a Newport Beach mortgage banker, said a “big chill” in home sales caused an 89% drop in second-quarter income, and Armor All Products said its second-quarter earnings were down 71% because of a sales slump.
The aerospace and high-technology industries in the county--once celebrated as a booming center for both--haven’t escaped either.
FileNet Corp. in Costa Mesa said recently that it expects to report a $500,000 loss for its most recent quarter and has curbed an ambitious hiring plan because of a slowdown in orders for its computerized document-processing systems.
A dozen other high-tech and aerospace companies--ranging from power-supplies maker Emerson Computer Power in Santa Ana to McDonnell Douglas Space Systems Co. in Huntington Beach--have slashed hundreds of jobs from their payrolls in the county in the past six months.
The county’s financial industry also is suffering--hit hard by the near collapse of the savings and loan industry, tougher government regulation that is discouraging many banks and thrifts from making loans, and a slump in demand for new loans.
To replace income from lost business loans, many banks are trying to push single-family mortgages, picking up the slack from the retrenching S&L; industry. But home buyers are nearly an endangered species in Orange County these days.
The income of the county’s 38 independent banks dropped 36% to $22 million in the first half of the year from $30 million a year earlier. Local S&Ls;, under strict federal requirements to improve the ratio of capital to assets, have been shy about lending at all.
As construction and mortgage lending funds dry up, the county’s building slump has worsened and spread into commercial and industrial construction.
In a recent report, Grubb & Ellis Co. said that 23% of the space in the county’s 660 largest buildings--nearly 1 million square feet--is vacant. There also is an estimated 10 million square feet of vacant space available throughout the county and the leasing pace has slowed.
As a result, some of the biggest developers have stopped building, touching off a ripple effect in the local economy. Consultants, engineers, architects and other professionals all find themselves scrapping for work. Trade workers are idled. Spending slows and a whole group of support businesses is adversely impacted.
Layoffs by local companies have increased sharply since August. Alpha Microsystems, Fela Precision, ITT Cannon Components, CalComp Inc., A&E; Systems, Diceon Electronics and Brothers International Corp. have all cut their work forces in the face of a sluggish economy.
The number of people filing into the county’s four state Employment Development Department offices to apply for unemployment benefits has soared in the past year, after remaining flat for several years.
A total of 11,194 applicants filed for benefits in September, up 26% from 8,881 a year earlier.
The number of applications climbed 10% just between April and September, according to Janet Strand, an administrator in the EDD’S Orange County-Inland Empire area office in Anaheim.
Among the noticeable trends, she said, is a decline in winter-season hiring by retailers--a portent of a weak Christmas--and an increase in white-collar unemployment.
Retailers in Orange County had a lukewarm summer and analyst Tony Cherbak of the Deloitte and Touche accounting firm said he senses a growing concern.
“Everyone is starting to get a little more worried than two or three months ago,” he added.
Still, some businesses manage to do well despite the downturn--and some do well because of it.
For Susan Smith, an owner of Credit Bureau Services of San Clemente, business hasn’t been so good since the last recession. She is adding two new collectors to the 15-person office to keep up with the volume.
“The ‘80s were entrepreneurial heaven,” said Smith. As a result, “there are a lot of people out there who owe a lot of money.”
The economic downturn has meant a booming business for bankruptcy attorneys as well. “I can’t find my desk under the paper,” said William M. Burd of Burd & Marshack in Santa Ana, one of Orange County’s largest bankruptcy firms. The company is hiring more attorneys.
About half the bankruptcies being handled by Burd’s firm are related to construction, something he hasn’t seen since the early 1980s. And the financial problems facing the bankrupt firms are dire.
“More and more, right out of the chute, people are saying, ‘we’re dead, we’re ready to (liquidate)’ ” rather than seek bankruptcy court permission to reorganize, Burd said.
The tight-money situation is affecting Gene Silva in a different way. It’s an effect that many can relate to in a county where home equity represents the bulk of most people’s wealth.
For years, Silva has been planning to buy a house in Seal Beach, and the time seemed right when the price dropped recently on a home from $475,000 to $360,000. The catch: he can’t sell his Long Beach condominium for enough money to afford the house.
“We dropped the price to $189,000 and it still wasn’t selling,” he said. “I said, take the sucker off the market.
“Two years ago, if you stuck a sign out, you’d have 10 engineers bidding on your property.”
They would need a house, he said, because business was booming and Orange County companies were hiring. “They’d be coming to work at Lockheed or McDonnell Douglas.”
Times staff writers Michael Flagg, James Granelli, Dean Takahashi, Chris Woodward and Leslie Berkman contributed to this article.
JOB GROWTH AND UNEMPLOYMENT Declines in Orange County job growth historically parallel rising unemployment. Signs Point to Hard Times Ahead Key economic indicators suggest that a recession has already begun in Orange County. Construction and help wanted lineage are declining, while bankruptcies, foreclosures and unemployment are on the rise. FORECLOSURES After bottoming out in the fourth quarter of 1989, the number of foreclosures has started to rise again. BANKRUPTCIES The number of bankruptcies filed in Orange County is projected to reach a 5-year high in 1990. Sources: TRW Real Estate information services; State Employment Development Department, Construction Industry Research Board, Mike Rotberg (U.S. Bankruptcy Court), San Jose Mercury News. Researched by ELENA BRUNET ans DALLAS M JACKSON / Los Angeles Times
