REGIONAL REPORT : The Humble Beginnings of Recovery : Economy: Executives at six California firms describe their mixed success in a marketplace dogged by unemployment.

The economists have weighed in with econometric models and their best guesses as to when Southern California will begin to emerge from the recession.

Similar--albeit less publicized--analyses are being made every day in the front offices and executive suites at the countless number of small and medium-sized businesses across the region. Their findings will determine how many workers to hire or fire and what strategy to pursue during an unstable economic environment.

The past few months have been especially frustrating for business executives and economic forecasters alike. Just when the recovery appeared to be gaining steam last fall, the economy sputtered, then faltered, and finished the year with many experts dreading that a “double-dip” downturn might be underway.

Now most experts are predicting the region’s economy will begin to recover sometime around midyear, though some pessimists believe there will not be significant growth until 1993.

Are the experts to be believed?

The Times last week conducted a reality check, seeking the views of six executives--a banker, real estate developer, metal fabricator, computer builder, electric motor maker and biotech entrepreneur--who toil in the trenches of the Southern California economy.

A humble recovery does indeed appear to be in the making, according to these top executives, whose companies all are small to medium-sized. But their individual experiences vary widely.

For the banker, for example, a surge in home refinancing has created a boomlet for his operation, and the biotech CEO has been little affected by the downturn. However, those in computers, real estate and aerospace-dependent manufacturing have had to scramble, changing strategy and chasing after new markets to keep their businesses healthy.

Ernie Schaeffer has spent 25 years making electric motors durable enough to withstand the rigors of space flight. Now, Schaeffer wants to ensure the survival of his company through a severe slump in the aerospace industry.

His Chatsworth company, Schaeffer Magnetics, saw several space programs--including a NASA mission to study a comet and a robot to build a space station--delayed or killed last year by a cost-conscious Congress. Schaeffer, whose motors help move solar panels, satellite antennae and other equipment in space, was involved in both projects.

Faced with the decline in government contracts, Schaeffer laid off nearly a third of his 165 workers last year. The company may expand its work force this year, but Schaeffer is not optimistic.

“We are being cautious at this point,” said Schaeffer, who estimated that his company’s revenue in 1992 will decline from the $15 million reported last year. “We see that NASA has not been granted the budget it has requested from Congress.”

The bulk of Schaeffer’s business is still dependent on government contracts. Currently, his biggest projects include supplying motors for satellites that will monitor the Earth’s ozone layer and more motion control equipment for the space station.

But the federal government, Schaeffer has discovered, is not the only customer around when it comes to space programs. European and Japanese government-sponsored space programs continue to expand and many corporations are entering the field. Motorola, for example, plans to build a worldwide cellular telephone network operated through 77 orbiting satellites, and Schaeffer is bidding on the project.

Last year, Schaeffer relied on foreign contracts for 12% of its revenue and is seeking more business overseas. Schaeffer has already made equipment for French, Spanish and Italian-owned communications satellites.

“We are starting to think about increasing our employment here and that is (dependent on) increasing business in Japan and Europe,” Schaeffer said.

William S. Mortensen has reason to be a happy banker.

His company, Santa Monica-based First Federal Bank of California, expects to write 30% more loans this year--thanks to lower interest rates--while profits should soar 25% to $35 million from 1991, when the bank wrote off a substantial amount of bad loans.

But Mortensen is not ready to declare victory over the recession until a key rate has declined--the unemployment rate.

“We are still seeing rising unemployment instead of stable and improving employment,” said Mortensen, chairman and chief executive of the 18-branch bank. “I think we are going to see a rough road ahead until we have seen an improvement in employment.”

High unemployment rates make consumers wary of buying homes and that hurts First Federal’s home loan business. In addition, First Federal saw its foreclosure rate soar last year as unemployed homeowners failed to make mortgage payments. Many landlords defaulted on apartment loans amid high vacancy rates and delays in rent payments from tenants. Mortensen blames high levels of joblessness for the situation.

As a result of such problems in the real estate market, the 18-branch bank wrote off $6.8 million in loans last year and added a substantial $11.8 million to cover future losses.

“We have never had a foreclosure on an apartment loan until 1991 when we had a number of them,” Mortensen said.

But Mortensen takes comfort in the lower interest rates that have triggered a heavy demand for mortgage refinancing and home loans. The lower rates have also forced Mortensen to offer more fixed rates instead of variable rates loans, which used to account for nearly 95% of its loan portfolio.

The bank plans to open two new loan offices to handle the surge. That means boosting the size of the bank’s approximately 425-member staff by 5% with new loan officers, processors and sales people.

However, First Federal’s expansion plans and profit projections could be undermined if unemployment rates remain high or continue rising.

“I would think we are going to have a tough 1992,” Mortensen said. “We have to see a change in the job picture before we see a bullish economy in California.”

Jay D. Kranzler and his company seem immune from whatever course the economy takes later this year.

“Our business is not terribly dependent on what happens in the economy as long as there is money in the bank,” said Kranzler, president and chief executive officer of San Diego-based Cytel Corp.

Kranzler and the 130 workers at Cytel operate in the rarefied world of biotechnology, where investors plunk down hundreds of millions of dollars for products that might not see the light of day until the next century.

The recession, in fact, turned out to be boost for biotech firms like Cytel. With traditional industries performing so poorly, investors last year turned to risky high tech firms for greater returns. Cytel raised $52 million last November by issuing stock to the public.

“It has not been a great year for the economy,” said Kranzler, “but the biotech segment has gone haywire. I think most of us have filled the coffers this year to help us survive in the next two or three years.”

The money Cytel has raised will be used for the costly clinical trials and development of some of its products, including a drug that could be used to treat rheumatoid arthritis. The development phase will lead Cytel to hire 10 to 20 more workers by the end of February and possibly another 50 workers over the next 12 to 18 months, Kranzler said.

Twenty extra jobs may not help much to improve San Diego’s unemployment problems. But there are about 100 biotechnology firms in the area, Kranzler said, and they are all expected to grow and expand their staffs.

“If each of them hires 20 or 30 people this year, that has an enormous impact on the economy in terms of the people employed,” said Kranzler.

Ironically, it is the process of recruiting new workers that forces Kranzler to deal with the results of recessionary economy. Many of those recruits have spouses who needs jobs outside of biotechnology.

“We have people who have been working here for over year and their spouses have not found jobs yet,” said Kranzler.

Real estate developer Ira C. Norris made a good living during the late 1980s building big, expensive homes. This year, Norris expects his business to thrive--but the houses he will sell will be smaller and cheaper than those in the past.

“We think that’s where the market is going to be,” said Norris, whose Upland-based Inco Homes sold a record 500 houses last year after shifting to lower prices models. In January, Inco was selling houses at the rate of 20 a week and the company plans to sell 720 homes this year, Norris said. Some of those homes will sell for as low as $69,900.

This year, the average price of an Inco home will fall to about $107,000 from $133,000 in 1991.

While the lower priced homes are hot sellers, the models earn Inco a smaller profit than the larger, more pricey houses. But Norris must live with the low-price strategy if he wants to make a sale in today’s real estate market.

Last year, for example, an Inco development in the Riverside County community of Murrieta slashed the prices of upscale homes in the $200,000 to $250,000 range by as much as $40,000 to make a sale.

Record low interest rates and President Bush’s proposal to offer first-time home buyers a $5,000 tax break will certainly spur demand, Norris said. He has also noticed that bankers, who put the brake on real estate lending, are more willing to finance new construction.

But there are other, troubling conditions that have tempered Norris’ optimism and shaped his business strategy. Many high paying industries, such as aerospace, have dramatically cut back or shut down their operations in Southern California. That means a smaller market for expensive houses.

“We seem to be exporting or losing the higher paying jobs,” said Norris. “We see that as one of the reasons as to why we plan to stay in the lower prices range.”

It is hard to find signs of an economic recovery in the financial forecast for Alpha Microsystems. Annual sales at the Santa Ana computer maker are expected to rise only 5% to 7% from $49 million in the current fiscal year that ends Feb. 29. Profits will remain unchanged.

“That’s not an aggressive growth pattern by any stretch,” said David A. Young, vice president of finance and administration at the 16-year-old company. But, “that’s what we are hoping and planning for.”

The past two years have been hard on Alpha, which posted a loss and underwent two waves of layoffs in 1990. The company suffered as its business customers held off buying new computers or delayed expanding their existing systems during the recession.

This year, after talking with its dealers that sell its computers to small business, Alpha determined that demand would pick up within six months. But the recovery would be very slow and customers remained very sensitive to price.

To attract cost-conscious customers, Alpha has decided to combine its computer hardware with software into a single package that is priced less than if both items were purchased separately, said Young.

The company is also rolling out a new product that will allow customers to tie Alpha computers together into a single network. Nearly 10% of the computer maker’s budget will be devoted to introducing the system, but the company does not anticipate expanding its 350-worker staff.

Despite the large investment in the network system, Alpha does not expect to see a large return this year, said Young. But, he added, “you got to get the groundwork ready for when that recovery does occur.”

Auto transmissions, railroad engine gear boxes and the replica of Amelia Earhart’s plane. These and countless other products contain the handiwork of Lane & Roderick, a small Santa Fe Springs metal fabricator.

The family-owned firm, which produces parts from sheet metal, prides itself on the ability to produce a wide variety of products. It is a strategy that Lane & Roderick credits for helping the 37-year-old company weather the recession and the uncertain times ahead.

When the real estate slump snuffed out demand for structural metal parts last year, the firm picked up additional orders for auto and railroad engine parts.

“It’s holding out well because of its diversification,” said Daniel Bailey, vice president at Lane & Roderick, of his company and the portion of the industry that has followed the strategy.

The company and its 25 employees are among the countless metal fabricators that dwell in the faceless industrial parks across Los Angeles. Competition was already stiff when when the recession cut into demand. Lane & Roderick responded by improving quality as well as shortening delivery times last year.

“Service is the most important thing that we sell,” said Bailey.

To keep prices low, Bailey has his eye on a $150,000 robotic welder that would cut welding time in half and increase productivity without hiring additional workers.

But don’t look for Lane & Roderick to take a loan out to buy the pricey robot. Instead, the firm will pay cash--as it has for other major equipment purchases. Keeping debt low has long been a company philosophy, but it carries more weight in a rough economy.

“We are cautious because of the what’s happening out there to the economy,” said Bailey, who does not expect the company to experience any great growth this year, despite customers who say conditions are improving somewhat.

“We are a little wary,” said Bailey, “but we are not scared.”