No Going Back to Good Old Days for O.C. : Painful Restructuring Will Follow Deep Slump

What’s wrong when Orange County creates more jobs in hamburger production than rocket production?

What’s wrong when a high-tech manufacturer opts to move 500 local jobs to New York because of tax incentives and California’s state employment agency opens a new office in tony Mission Viejo to handle jobless claims?

The answer is the oft-quoted slogan for Bill Clinton’s presidential campaign: It’s the economy, stupid.

Those words describe the problem and, at least in part, the solution for Orange County in the year ahead.

It doesn’t take a rocket scientist to figure out that the county is stuck in one of its worst slumps since World War II and will likely go through a painful restructuring of its economic base beginning this year.

That regrouping will be a necessity as real estate continues to stagnate and the defense industry sinks deeper into its slump.

So what will lift Orange County out of the mire? Local experts see a possible solution in another Clinton campaign maxim: And don’t forget health care.

Led by advances in the medical manufacturing industry and a boom in health-care services, experts say, the county’s economy will inch out of the recession by the end of 1993--more than a year later than the national economy, which is already showing signs of recovery.

The conventional wisdom, however, is that, while the local rebound will lead to slightly better times, they will be different times. No more will the area benefit from the once-pervasive defense industry. No more will a real estate trust deed look like a winning lottery ticket.

Orange County is entering middle age.

“That is the reality of the situation,” said David Anast, publisher of Biomedical Market Newsletter, based in Costa Mesa. The publication tracks trends in the medical manufacturing industry nationwide.

Anast and other experts predict that the local economy will slowly begin to pick up by the middle of the year as the Clinton Administration works through its first 100 days. And because of the stated objectives of the new Administration, the best opportunities may very well be in health care.

“There is a lot of potential there,” Anast said.

That is the good news. On the other hand, the burgeoning health-care industry will probably never grow large enough to accommodate all of the thousands of unemployed defense workers. Some may be retrained, but a majority of those who lost their jobs may have to settle for lower-paying positions in the services sector.

Accelerating a trend that began before the recession, the county’s services sector is expected to add thousands of jobs this year, even though overall manufacturing will continue to contract. That means fewer $16-an-hour positions in defense factories and construction, and more minimum-wage jobs in fast-food restaurants and convenience stores. And it means that people may be unable to find jobs that pay enough to cover the basic costs of living--if they find work at all.

Consider Haydee Downy, a 26-year-old Los Alamitos resident who is a victim of the struggling construction industry.

She used to earn about $10 an hour as a secretary at a construction company but is now learning to make do on the $4.50 an hour she earns as a part-time clerk at a video store. Still, Downey considers herself lucky to be working at all.

“It’s not as bad as it is in Somalia,” Downey said. “Things are tough, but don’t let them get you down.”

Though the incoming Administration will have a hand in what kind of recovery the nation will have, economists say, some county trends will continue, regardless of new federal policies.

While the 1980s were characterized by a boom in development of shopping malls and office towers in Orange County, the 1990s will be a period for mature, slower growth. Some manufacturers will continue to feel competitive pressure to move their plants from here to low-wage factories in Mexico or states with fewer regulations and lower taxes.

Only 22% of the county’s workers will be producing goods in 1997, compared to 26% today, according to Chapman University forecasts. That means a boost in the services industry, which encompasses everything from financial-planning companies and insurance agencies to janitorial services and restaurants. The sector is expected to grow by 23,832 jobs in 1993.

“I think this is a growth area,” said Esmael Adibi, director of Chapman University’s Center for Economic Research.

According to a survey released in December by Manpower Inc., more job losses are expected in the banking and insurance industries. But other service jobs, albeit in a lower wage range, are expected to keep that sector’s growth going.

The net effect of that growth, Adibi said, will be a continued slowdown of the real estate industry. Lower wages mean fewer down payments on houses, which means a further drop in real estate values. Adibi forecasts another 2.8% decline in housing prices by year’s end, largely because of the shift away from defense and related high-wage industries.

Orange County has been depending on military contractors since the 1950s, when defense factories began sprawling across the landscape.

In 1991, defense accounted for 4% of the county’s non-agricultural employment, compared with 7.2% just four years earlier. By 1995, defense employment is expected to fall to 2.5% to 3%, according to a study by Cal State Fullerton economists.

And though the defense industry may not continue its nose dive of the past few years--it may be near the bottom of its decline now--there continue to be uncertainties.

“Defense is still a wild card,” Adibi said. “We still don’t know how deep the defense cuts will be (in 1993). We do know there will be more hardships.”

The defense slowdown will hurt some municipalities more than others. Five cities--Fullerton, Anaheim, Huntington Beach, Seal Beach and Newport Beach--accounted for 83% of $2.6 billion in military contracts awarded in Orange County in 1991, according to the Cal State Fullerton report.

Industries such as transportation offer one avenue of hope for replacing the estimated 17,500 defense jobs that could disappear in the next four years.

Harry Vaccola, a Lockheed Corp. executive, thinks the federal government stands at a crossroads similar the one it faced in the 1960s when it decided to begin funding NASA’s space exploration drive. Technology again will be the key, he said, only this time in transportation rather than aerospace.

Rather than laying asphalt, Vaccola said, the government will invest in technologies that will help drivers maneuver through traffic faster--”smart” toll booths, for example, that use roadside scanners to collect payments electronically as cars drive by at full speed.

“We believe the technologies that the aerospace companies have will make that transition move faster,” he said. “In 1993, with the Clinton Administration, is when we will find out the scope of our national policy.”

Lockheed plans to hire as many as 500 workers for a new transportation subsidiary in Orange County to build smart toll roads for the county’s Transportation Corridor Agencies. Hughes Aircraft Co. in Fullerton, which lost about 2,000 jobs during 1992, is also banking on transportation technologies.

Another area that defense-related companies can consider in this post-Cold War era is health care.

Anast said that there will be a strong demand for medical devices such as diagnostic instrumentation, and that could provide a niche for some defense companies. Beckman Instruments, the Fullerton-based maker of laboratory instruments, is an example of a company that has developed an international reputation in high-tech health care.

But so far there does not appear to be any significant transition by military contractors toward medical-device manufacturing, Anast said.

“It is a major challenge that they haven’t succeeded in winning yet,” Anast said. “They don’t appear to be moving fast enough.”

The notion that defense can be converted to non-defense work overnight is “mostly fantasy,” said Sam F. Iacobellis, chief operating officer of Rockwell International Corp. in Seal Beach.

Still, Iacobellis said, it is realistic to hope that some portion of the “peace dividend” from Clinton’s proposed $60 billion in cuts in the defense budget over the next five years could be channeled into other sectors of the economy.

More likely, though, Orange County will come to rely on its commercial high-tech industries for new jobs. In 1992, the county had about one commercial high-tech job for every two defense jobs. More recently, AST Research Inc. in Irvine added a third shift at its PC factory in Fountain Valley. Other companies will also be poised for growth, having already gone through technical and administrative restructuring.

Commercial positions--including jobs at computer manufacturers, software publishers, telecommunications companies and biotechnology--could outnumber defense jobs by the end of Clinton’s four-year term--that is, if companies don’t move from here to other states.

One such corporation is Symbol Technologies Inc. in Costa Mesa, a maker of bar-code scanners. It announced last year that it would cut 500 jobs and move to Long Island in New York, where tax breaks await.

Gerald Blackie, chief executive of 230-employee Platinum Software Corp. in Irvine, complains, “It is increasingly difficult to stay here, given the tax situation and conditions for doing business here, even for a high-wage industry.”

Experts expect high-tech industries as a whole to benefit from a variety of federal proposals under consideration: a research and development tax credit that would reward companies that invest in new technologies, a permanent investment tax credit for companies that invest in factories and equipment in the United States, a job retraining program that could teach new skills to former aerospace workers, and Pentagon or Commerce Department funding to develop advanced technologies.

Export sales have boosted the high-tech sector, and any government policies that promote trade could also be instrumental in pulling Orange County out of the recession, analysts say.

The North American Free Trade Agreement, the General Agreement on Tariffs and Trade and the reopening of trade with Vietnam present dramatic opportunities for local companies, particularly Latino and Asian firms that already have contacts abroad.

Chairman Chip Lacy of Ingram Micro Inc., a computer distributor based in Santa Ana, decided last month to acquire a new subsidiary in Mexico. That move, he said, was prompted in part by new sales potential from NAFTA but more by the fact that Mexico’s economy is growing so fast.

Computer-related companies are not the only small businesses expected to play a major role in the recovery. Peter Ueberroth, chairman of the task force created to rebuild Los Angeles after April’s riots, maintains that small minority-owned businesses could well lead Southern California out of its slump.

And while tourism in the region may still be suffering from the fears stirred up by the unrest, Orange County could benefit if more Los Angeles County companies relocate to what they perceive to be safer sites here.

Tourism is expected to continue suffering for another reason too: As long as consumers lack confidence, they will cut back on fun to make sure that they have money for necessities.

Those tight personal budgets will also affect another sector vital to the area’s economic health: retail. Chapman economists expect retail sales to be little changed this year, despite a projected increase in profits as stores try to get by with fewer salespeople.

But both industries could also produce jobs quickly as soon as the recovery mind-set grips consumers.

Retail’s future could depend on Orange County’s ability to attract more of the so-called category killers--giant superstores that sell large volumes of goods at low prices--that are driving the industry’s growth momentum. Though the county does not have the population to support more than the dozen shopping malls it already has, there is room for smaller plazas that house chains such as Home Depot, Kmart Corp.’s new Sports Authority stores, Circuit City, CompUSA and Costco.

And Mickey Mouse has the clout to reverse the tourism industry’s fortune.

Sometime this year, Walt Disney Co. will decide if it will pump up the local economy with its proposed $3-billion expansion of Disneyland in Anaheim. That proposed project could generate 28,000 jobs and $150 million in annual tax revenue.

The decision to build Westcot, a futuristic addition to the theme park, depends in part on whether cities agree to foot an estimated $750 million to $1 billion of the tab.

But, experts say, the area in which the service sector will shine this year will be health care, which will benefit not only from the aging of the baby boom generation but also from the growth of alternative health-care delivery. Such businesses include outpatient surgery centers and in-home nursing companies.

The growth of those services will in turn drive further manufacturing of devices and drugs.

Lisa Remington, publisher of Remington Report, a medical industry newsletter based in Laguna Niguel, said that the restructuring health-care industry will definitely provide new jobs for Orange County.

How many is not clear. But as the Clinton Administration strives not to forget health care, the industry could end up being the key to success in Orange County, doing for this region what computer-related manufacturing did for what is now the Silicon Valley.

“Clinton is talking about integration,” Remington said. “What he will do is open doors to the eventual development of home health care, biotechnology and alternative delivery sites. Those areas are really going to grow.”

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Rebuilding in 1993

As Orange County tries to recover from a lingering recession characterized by a massive hemorrhaging of jobs, many industries are expected to lose even more positions. Two bright spots are the service and retail industries, which are expected to add jobs this year.

*Construction

Employment in the construction industry picked up a bit in mid-1992 but may end the year at a lower level.

*

1992 1st qtr. 47,867 2nd qtr. 51,533 3rd qtr. 51,500 4th qtr. 49,543 1993 1st qtr. 44,304 2nd qtr. 48,612 3rd qtr. 48,346 4th qtr. 47,637

*High-Tech, Defense

The defense and technology industries can expect hard times to continue in 1993 as the number of government contracts shrinks.

*

1992 1st qtr. 77,833 2nd qtr. 76,000 3rd qtr. 74,600 4th qtr. 75,632 1993 1st qtr. 75,056 2nd qtr. 73,708 3rd qtr. 72,741 4th qtr. 74,827

Manufacturing

An erosion of manufacturing jobs is likely. Though food processing may see modest gains, durable-goods manufacturing will keep declining.

*

1992 1st qtr. 151,933 2nd qtr. 150,267 3rd qtr. 149,100 4th qtr. 149,664 1993 1st qtr. 147,050 2nd qtr. 147,153 3rd qtr. 148,311 4th qtr. 149,625

Federal, State, Local Government

Jobs lost at the U.S. Postal Service and positions created as unincorporated areas become cities will mean little change.

*

1992 1st qtr. 130,366 2nd qtr. 131,034 3rd qtr. 119,400 4th qtr. 128,797 1993 1st qtr. 129,040 2nd qtr. 130,340 3rd qtr. 119,144 4th qtr. 128,729

*Retail

Renewed consumer confidence means more than 8,000 jobs will be added within the retail industry, which includes restaurants.

*

1992 1st qtr. 195,133 2nd qtr. 194,033 3rd qtr. 192,800 4th qtr. 198,581 1993 1st qtr. 191,739 2nd qtr. 192,898 3rd qtr. 192,844 4th qtr. 199,963

* Services, Health Care, Tourism

The service industries, which include health care and tourism, should gain more than 17,000 jobs this year.

*

1992 1st qtr. 315,300 2nd qtr. 320,133 3rd qtr. 323,500 4th qtr. 323,999 1993 1st qtr. 316,132 2nd qtr. 325,699 3rd qtr. 331,653 4th qtr. 333,438

* Source: Projections by Chapman University Center for Economic Research; Researched by DALLAS M. JACKSON / Los Angeles Times *

Hard to Find Work

Joblessness hit Orange County hard in 1992. Real relief isn’t expected until 1994. Percentage change in employment, by quarter (1993-97 projected.

*

1992 1st qtr. -2.25% 2nd qtr. -2.45 3rd qtr. -2.95 4th qtr. -1.85 1993 1st qtr. -1.34 2nd qtr. -0.18 3rd qtr. 0.62 4th qtr. 1.30 1994 1st qtr. 0.66 2nd qtr. 1.48 3rd qtr. 2.26 4th qtr. 2.73 1995 1st qtr. 2.87 2nd qtr. 3.01 3rd qtr. 2.89 4th qtr. 2.81 1996 1st qtr. 2.47 2nd qtr. 2.00 3rd qtr. 1.46 4th qtr. 0.88 1997 1st qtr. 0.1 2nd qtr. -0.49 3rd qtr. 0.17 4th qtr. 0.76

Source: Projections by Chapman University Center for Economic Research