Orange County Business : TOP STORIES OF 1990

Things sure looked good as 1990 began.

In the year’s first week, the Koll Co. agreed to buy 15,000 acres for $532 million from Union Pacific Corp., a management group led the buyout of Del Taco/Naugles, and the Phoenix Group International made its first shipment of personal computers to the Soviet Union.

But the good times didn’t last.

The Koll deal died when Koll couldn’t obtain financing, Del Taco’s president resigned unexpectedly, and the Phoenix Group ended up in bankruptcy court as its dream of providing 6 million computers to the Soviets collapsed.

After the boom of the ‘80s, 1990 ended in a bust.

The belief that Orange County had made itself recession-proof during the past decade with a diversified business base, a wealthy population and a strong economy was proven a myth.

The bubble burst, and the county’s eight-year ride on the longest post-recession recovery since World War II ended, thus sending Orange County into a year of reduction, repositioning and, ultimately, recession.

Richard Rodnick, a Costa Mesa consultant and former chairman of a national business brokerage, said the way 1990 turned out--strong at the beginning and weak at the end--should not have caught people by surprise.

“The signs were there, but a lot of people just didn’t want to listen,” he said.

Rodnick, who was in a distinct minority in late 1988 when he predicted a recession in the fourth quarter of 1990, said he sees the year just passed “as a platform from which to look into 1991 and beyond.”

Now the short-term view, he said, is recession, with real estate, construction and development-related businesses and the medical, retailing and software industries all expected to experience problems.

But one industry in which business continued to be brisk in 1990 was white-collar crime. Orange County maintained its position as the investment scam capital of the country, as regulators uncovered and prosecuted dozens of suspected pyramid schemes, defense contracting frauds, investment and insurance frauds, insider trading cases and banking and savings and loan frauds.

The county’s thrift industry continued to be a trouble spot. Regulators seized and closed several county-based thrifts, and as the year ended, the $3-billion FarWest Savings in Newport Beach was insolvent and facing possible federal seizure.

Stung by budget-balancing defense cuts imposed by Congress after the arms buildup of the Reagan years, the county’s defense employers began laying off workers and struggled to shift from weaponry to industrial and consumer goods.

Real estate prices headed downward. Home sales slowed. Office building and new residential construction came to a halt. Stock prices plummeted, and bankruptcy court was one of the busiest places around.

And then in August, when Iraq invaded Kuwait, oil prices soared, the nation began preparing for the possibility of war in the Middle East, and Orange County consumers finally lost the optimism that had buoyed the local economy for much of the past decade.

“The single biggest change we saw in the county in 1990 was the dramatic drop in consumer confidence after Kuwait,” said Mark Baldassare, a UC Irvine social ecologist and public opinion pollster.

The university’s annual consumer survey, conducted in the first weeks of September, recorded a 20-point drop in consumer confidence. That dropped the UCI consumer index into negative territory for the first time ever.

Still, Orange County is better off than many places. The northeastern United States, for example, has been in a recession for almost two years, and the energy states--particularly Texas and Colorado--have been in an economic slump since the mid-’80s.

As bad as the bad news was in the county this year, there also was good news.

* The Walt Disney Co. announced plans to build a $1-billion theme park in Anaheim or on the county’s border in Long Beach. Disney also launched a 10-year expansion of Disneyland.

* Fluor Corp., continuing a rebound that began in 1989, announced a $6-billion contract to help expand Saudi Arabia’s oil and gas facilities.

* AST Research Inc., the Irvine computer maker, broke away from the pack with a hot-selling line of new personal computers, including a notebook-sized model. The company’s sales jumped more than 20% in the first nine months, and its profits more than quadrupled. Its stock soared.

* The county opened a new terminal at John Wayne Airport. The new facility is expected to spur more business activity for the county, generating more than 15,000 new jobs and $1 billion a year in new annual revenue, one study said.

* A number of county-based firms, including Carl Karcher Enterprises and SPI Pharmaceuticals, signed major international trade or expansion deals as the local economy became more involved in global business transactions.

* One of the county’s longest and most visible legal disputes neared an end. A federal court referee ruled that Joan Irvine Smith should be paid about $150 million for her stock in the Irvine Co. That was about $35 million more than company owner Donald L. Bren offered in 1983.

* With the strong backing of business, county voters finally approved Measure M. The initiative provides sales tax revenue for a variety of transportation projects that supporters believe will ease congestion and spur economic growth.

Such developments have given economists hope for Orange County’s future. And the county is starting the 1990s with advantages that didn’t exist in the early ‘80s, said UCI economist David Brownstone.

“We now have critical mass in key industries like computers, high-technology research and financial services,” he said. “And the November elections, especially the passage of Measure M, show that we are starting to see citizens realize there is a value to government and that we have to worry about our infrastructure. And that has positive economic ramifications.”

The current recession is going to be a weak one, most forecasters seem to agree, and with the exception of the real estate industry, most segments of the local economy should begin seeing trend lines trek upward by the third quarter of 1991.

The recovery won’t send the economy into the giddy heights achieved in the 1980s but, rather, will be a slow trudge, economists say. But that is to be expected. Orange County sped through its economic adolescence and is now entering a phase of gentler growth as it achieves maturity.

“The ‘90s are simply not going to be as meaty a decade as the ‘80s were for Orange County,” Brownstone said. “The infrastructure is just not capable of supporting that kind of growth any longer.”

The movement of the county’s defense industry into more industrial and consumer goods is expected to result in a stronger, less vulnerable group of companies. Even the construction and real estate industry slumps could have some positive side effects.

“There is a lot of pain in those industries right now, but the downturn is a good thing because it means the price excesses of the ‘80s have stopped,” Brownstone said. “I hope that what has happened in 1990 means a return to rationality in housing around here.”

Housing was a driving force in the county’s economic boom and is a major factor in the current bust. As consumer confidence waned, buyers appeared reluctant to pay the high prices needed to break into the Orange County market.

One firm caught in the crunch was J.M. Peters Co., the Newport Beach builder of expensive move-up homes in the $350,000-to-$750,000 price range. Early in the year, Peters executives dismissed suggestions that the market for homes in that range was limited. The company was posting good earnings despite a generally weakening market and lenders were lending, so Peters kept on building.

Then the midsummer crunch hit. Buyers who needed to sell existing homes in order to come up with the $50,000 to $100,000 down payments needed to get into a Peters project found they couldn’t move their current properties at the necessary prices because the market for resales was drying up.

Peters posted $6 million in losses for the first nine months of its fiscal year--the first losses in its history as a public company--and began laying off staff and ultimately announced that it was no longer building homes because it was stuck with inventory it couldn’t seem to sell without offering steep discounts.

Other major developers to feel the pinch include the Irvine Co. and the Santa Margarita Co., the county’s two largest landowners, which together control more than 100,000 acres in the county.

The Irvine Co. said in November that it was postponing $100 million worth of new commercial projects and laying off about 11% of its 370 workers because its cash flow had been disrupted by the development crunch. And just nine days later, the Santa Margarita Co., developer of the huge Rancho Santa Margarita planned community, said it would lay off 21 of its 130 workers and delay several unspecified projects for similar reasons.

The real estate crisis was exacerbated by a credit crunch. Banks and S&Ls;, facing tougher regulatory scrutiny, tightened the purse strings. The message became clear in the summer when William Seidman, head of the Federal Deposit Insurance Corp., identified Orange County as an area of concern because of overbuilding.

The tightening of credit also made for fewer mergers than in past years. But Orange County still had some major combinations. The biggest was Loral Corp.’s $715-million purchase of Ford Aerospace Corp. in Newport Beach.

But the end of merger mania was clear when Geneva Cos., a major business broker, this month said it had eliminated almost 10% of its nearly 450 jobs as the number of deals it handles continues to dwindle.

Layoffs were the rule elsewhere as well. By year’s end, construction firms had laid off about 2,000 workers, and economists at Chapman College in Orange predict as many as 6,000 more construction industry jobs could be lost in 1991.

On the positive side, even though 1990 is ending in recession and the unemployment rate in Orange County topped 4% in November, the local job scene still is one of the best in the nation. And Chapman economist James Doti believes the local unemployment rate won’t rise above 5% in 1991.

The county is expected to post a gross product--the value of all goods and services produced locally--of $71.8 billion for the year. That gives it a bigger economy than most nations of the world, and the total is predicted to hit $76.4 billion by the end of 1991.

A large part of that growth will come from new export and import trade as county businesses become even more involved in a growing global economy. The mounting international trade was a key factor in what little economic growth the county experienced in 1990, as dozens of firms lined up to begin trade with the newly freed Eastern European nations and to take advantage of the beginnings of economic unification in Western Europe.

Finally, the median family income in the county grew by 6.6% during the past year, to $53,200 from $49,916 at the end of 1989, outpacing inflation by 2.2%. That growth rate is expected to continue next year.

And that income growth in the midst of a recession hints strongly that a lot of the economic downturn locally has been caused by a reluctance to spend--not an inability.

Most observers of the county’s economy believe that the duration and depth of the recession here depends largely on how and when the Middle East situation is resolved.

And the wait for a resolution may not be too long, as the United Nations deadline for Iraq to withdraw from Kuwait is Jan. 15.

A peaceful withdrawal--or even one forced on Iraq after a short war--could set the county’s economic machinery humming by early in the third quarter.