O.C. Climb From Recession Is Creaky, Slow

As 1994 dawns, Orange County is struggling out of its deepest and longest recession in 60 years. Experts say a recovery is underway, but so sluggishly it is barely noticeable.

When the last big recession ended a decade ago, the county blasted into one of its strongest economic booms ever.

Why the difference?

Economists tell us that we’re in so deep because of an unparalleled confluence of events: a global recession, major defense cuts, a regional real estate plunge, a sharp drop in tourism and, finally, the collapse of the savings and loan industry and resulting nationwide tightening of credit.

One or two of those events can trigger a recession; all of them happening in the same four-year period added up to an economic catastrophe.

“This is definitely the worst recession since the 1930s,” said Walter Hahn, an economist in the Newport Beach office of the accounting firm Kenneth Leventhal & Co. “But I think that Orange County has a good economic future.”

Even before the recession officially began in July, 1990, Orange County was in trouble from the decline of its real estate development industry. In 1988, commercial builders discovered that they had erected far more office towers than needed in the county, and by the end of 1989 residential builders learned that people no longer were willing to pay $350,000 and up for tract homes.

The ripples from the real estate crunch soon upset the equilibrium of other industries like retailing and business services. With fewer homes being sold and few offices being leased, the market for home and office furniture, draperies, carpets, copy machines, landscape materials, even shoe repair and dry cleaning started shrinking.

The county probably could have weathered that, but when defense cutbacks started turning into layoffs at the Southland’s myriad aerospace and weapons factories, the die was cast. The multiple whammy of major employment losses in development, retailing, services and defense was too much even for Orange County’s vaunted economy to withstand.

Like the previous year, 1993 ended on a dismal note.

Retail sales declined for a second consecutive year, the first two-year drop since World War II. The increase in real estate foreclosures, though slower than in the previous year, still is expected to grow nearly 70% for an all-time high of 5,240 forced sales. And the 11,863 personal and business bankruptcies filed in the county through October barely changed from the number filed in the first 10 months of 1992.

Worst of all, the county’s once-mighty job machine ran out of steam. After adding an average of 38,000 jobs a year to their collective payrolls in the last half of the 1980s, employers in Orange County so far have spent the ‘90s slashing an average of 22,000 jobs a year.

Now the delicate instruments by which economists measure such things have plotted an upward trend for 1994 and beyond. The prediction, announced recently by economists at Chapman University and Cal State Fullerton, is that the economy will bounce along the bottom for the first half of the year with a generally lackadaisical business climate until early summer.

With that as a backdrop, The Times Orange County Edition invited a group of county business executives who daily grapple with corporate decisions to share their thoughts on the local economy and business scene. The Times’ Round Table provides a frank airing of the concerns facing county businesses.

Though they represent a variety of interests and backgrounds, the panel members had several common grounds: All have built businesses in Orange County, all say they want to stay here and each believes that the cost--in time, money and aggravation--of coping with proliferating government regulation of business is at least as onerous a burden as anything the economy has thrown at them in recent years.

Excerpts from the two-hour Round Table discussion:

TIMES: If you could make the rules, what is the most important thing you could do to put us back into a healthy recovery mode?

JUDEE SLACK, small-business owner: We need to get back to free enterprise. That’s what our country was built on. Business needs to be able to do what it does best rather than being made to operate as an agent for the government a lot of the time. That’s particularly hard on small businesses. A lot of these businesses have just two or three employees and the government expects them to be specialists in human relations and taxes and accounting and a dozen other things. We also need to do something to make financing more available to help some legitimate small businesses.

ROBERT MIRANDA, foreign trade specialist: To let business operate competitively and compete globally. And that will require cutting back on this over-regulation that makes us less competitive internationally and creates obstacles to the start-up and the success of businesses. There’s a need to take a close look at a lot of this legislation and decide whether it’s necessary. We have a lot of social problems that are hurting business development here, and the way to cut back on gang problems and crime is to provide jobs for the people.

TED SMITH, high-technology industry executive: I have lived in Orange County since 1968, and particularly in recent years I’ve seen the environment for business deteriorate. The environment for everyone, all of us, has deteriorated significantly. The most dramatic thing recently has been the crime problem: the number of killings in the county, especially in Santa Ana; the gang problem, the graffiti encroachment that is a cosmetic indication of that.

And I think this is on all of our minds. In fact, a UC Irvine survey indicated that 40% to 50% of the people in Orange County are afraid to go out at night walking in their community. For the last five years in my business we have seen talented, brilliant people either thinking about leaving or leaving the county to go to Oregon, Washington, Texas and other places. They’re not going because of economic problems, except maybe the cost of housing; they’re leaving because of the social problems. And if we don’t get a handle on this, then it is going to be working against us.

WALTER HAHN, economist: I’m going to join the parade on the government regulation issue. I have this belief that all the rules and regulations and requirements could be substantially simplified, and the cost of complying greatly reduced, without damaging the objectives that all of this stuff is trying to achieve.

But there are two other things I’d do if I were king here in Orange County, and one of them goes to the problem that Ted and Bob talked about.

I would improve our vocational training programs for the majority of our children who are not going to go on to college. We have a real need for people who can read and write and do basic math and have training in some type of a craft. Other countries, Germany and Japan in particular, have excellent vocational training programs, and we are sorely lacking. We need them so our kids don’t all turn out to be hamburger flippers; so that they can do something much better and provide the kind of work force that most of our growing businesses, including high-tech businesses, need.

The other thing that I would do is stoke up the economic development and promotion efforts in Orange County, both as a county as a whole and individually for the various cities. We need to go out and sell Orange County to the rest of the world. We need to be more competitive, and part of being more competitive is promoting ourselves.

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TIMES: How will county business fare in international trade, especially under the new North American Free Trade Agreement?

MIRANDA: NAFTA is important for all businesses, but smaller and medium-sized businesses especially should look at it as an opening for new markets. Mexico has more than 85 million people and a growing, substantial middle class that really looks to U.S. products as quality products.

I grew up along the Mexican border and I remember as a child that the majority of the people buying goods and services in my town were coming across the border from Mexico. There’s always been a perception there that U.S. products have a higher quality. So Orange County businesses should take a very close look at the trade opportunities that NAFTA has opened up.

Beyond NAFTA, though, is a bigger mission in Latin America. Mexico is what we were hearing about in the news, but other countries in South America and Central America are really looking to NAFTA as a blueprint for a full North and South America trading zone. And that has tremendous potential for the long-term future of Orange County.

ALAN HOOPS, health care industry executive: A lot of companies can benefit from international trade. At PacifiCare, for instance, we’ve had inquiries from Australia, New Zealand, Belgium, Spain, Portugal, Greece and even one country in Southeast Asia. They want us to consult with them to move their nationalized health systems to a more private system because of problems they’re having. So it just may be that health care could have international opportunities, even though you think of it as being much more of a local business.

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TIMES: Health care is at the top of most people’s lists of concerns these days. What does all the change portend for business?

HOOPS: This is just my crystal ball on health reform, but the thing we need to remember is that the things being contemplated by the Clinton Administration plan and other legislative proposals already are well underway here in California. There will be some costs, and we may find that small businesses are going to be burdened by some of the requirements, but I believe that employers here are not going to be impacted much by what goes on in Washington.

As far as the general economy goes, in many respects I see what’s happening throughout California as being a microcosm of what’s happening nationally and perhaps internationally. We have been through a rather unique period of prosperity where America was relatively self-sufficient.

But somewhere in the late ‘70s and ‘80s we lost that self-sufficiency and our whole country had to recognize that we were not going to be independent of the international economy. And now I see the same thing in California. For most of the ‘80s, California was an economic juggernaut, growing every year. We were importing a lot of people and a lot of business, especially small business start-ups, and that was really keeping the state going and growing.

SMITH: But now our economy is being dramatically affected by the removal of aerospace jobs, and that, together with the U.S. and global recession, has had a further impact on the real estate market that has brought growth to Orange County.

On top of that, American industry has finally figured out that it has to be more efficient to get more competitive, so we have restructuring going on in major corporations. It’s practically every other day we see 10,000 to 20,000 jobs being removed from a major corporation. Personally I applaud that because I think it really bodes well for American industry to be effective at becoming lower-cost providers. But it has its costs.

I don’t think that Orange County is going to overcome the loss of aerospace jobs anytime soon. It’s a long-term process to replace that many jobs with other activities. We need to recognize that while we’re in a global recession, it is, after all, a temporary thing. We all know that we will come out of it.

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TIMES: But when, and how?

MIRANDA: In my company we really see at a micro-level what this recession is doing. From our small-business clients, we see a tendency to be not very optimistic about the prospects for 1994. Companies are keeping themselves lean and mean, and there’s a reluctance to add a lot of permanent staff to the payrolls. They tend to work people overtime instead. There’s also a desire to to keep the business flexible so they are able to change rapidly in the event things don’t turn out as hoped for. Inventories are being maintained at very minimal levels--just enough to keep operations going--and there is a big concern about the availability of and access to financing.

SLACK: Access to capital is a very big issue for small business. We recently did a survey of women business owners--most of them are small businesses--and that was a big concern. A lot of banks are saying that they make it easy to borrow. But when you go there and go through the red tape, they say ‘Oh! You don’t qualify.’ Now, a lot of the reason isn’t necessarily the bank’s fault. A lot of small-business owners don’t know how to manage money or write a business plan, and that’s something the banks are looking for. There’s also a lot of underground economy out there. Many small businesses keep books for tax purposes, so they don’t want to show as much profit as they really make, and that hurts when they try to get a loan. It’s a problem. Some of our members in the National Assn. of Women Business Owners would like to see some sort of alternative to bank financing. Even (Small Business Administration) loans don’t always work because in a lot of service businesses there is very little in the way of collateral. If you don’t own a home or have already borrowed against it, you can’t get an SBA loan.

TIMES: In light of data that shows that foreclosures in Orange County are at a record level, are we creating some sort of time-bomb? If owners of small businesses repeatedly refinance their homes to get business capital, how many now face losing their houses because of economic hard times?

MIRANDA: That could be a bubble that’s beginning to burst. A lot of small businesses are being started by people who lost their jobs, and they have certainly looked to their homes as a source of business capital.

SLACK: I know I’ve seen several of my clients lose their homes to foreclosures. I’ve seen them refinance and refinance and turn manageable house payments into $2,000- and $3,000-a-month payments that their businesses just cannot support any more.

MIRANDA: That is a real difficulty with the economy in a spin. A lot of our clients have to access financing sources like the SBA, and those kinds of loans do require a lot of collateral. And with the value of houses going down significantly, it becomes a real tough challenge for a small-business person to go out and obtain financing. Because small businesses traditionally provide most of the new jobs in the county as they grow, if they can’t get financing and grow, we’re going to see job losses as a long-term process.

HAHN: Now it’s time for some economist-speak, specifically on how deep the soup is and how we’re going to get out of it. This definitely is the worst recession since the 1930s. In the previous worst recession we had, in 1981 and ‘82, the state lost about 1.5% of its jobs. By the time this one’s over it probably will be close to four years long instead of a year, and we’ll lose 4.3% of our jobs. It’s a pretty devastating recession.

And Orange County has fared a little bit worse than the state. Before we’re finished here we’ll lose about 65,000 jobs, or about 5.5% of the employment when the recession started. My outlook is that it won’t be until the second half of next year that Orange County will get back to positive job growth. And that is when the recovery starts.

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TIMES: That all sounds rather bleak.

HAHN: But I think that Orange County has a good economic future. First of all, the U.S. economy as a whole is growing at about 3% a year. When you consider that California has about 15% of the national economy and is in recession, that tells you that the rest of the country is doing pretty good. And we sell our goods and services throughout the United States, we don’t export everything. So when the rest of the country is doing well, it definitely helps our economy.

International trade also is very important, particularly Pacific Rim trade, because we are the gateway to the Pacific Rim for the United States. What will help us get out of our recession is that our trading partners are going to recover and buy more of our things.

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TIMES: How will other sectors fare?

HAHN: Another industry that is going to help us pull out of this is entertainment and multimedia, which, in fact, never had a recession and has continued to grow rapidly. The information highway is coming on-line, and Southern California is the world’s capital for a lot of the programming that makes it work. In the related telecommunications field, we have services businesses here that are going to be spending a lot of money on capital improvements like fiber optics, and we have companies in Orange County that produce the equipment and provide a lot of services to help operate the equipment.

Another thing that will help the economy is the housing industry, which I see recovering starting in the second half of 1994 and then going into a fairly substantial building mode for a couple of years as we catch up with the pent-up demand for housing that has gone unsatisfied during this recession.

And the last thing that’s going to help us grow out of this and recover is tourism. California and particularly Southern California is one of the world’s primary tourism destinations. When the national recession hit, that slowed our tourism down because most of our visitors come from the rest of the United States. Even if Disney doesn’t go ahead with its expansion in Anaheim, I see solid growth happening in tourism.

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TIMES: A lot of people suggest that much of the job growth we can expect is going to be lower-skilled, lower-paid jobs. Are we losing one of our most attractive assets--a highly skilled work force?

SMITH: Well, I’ve been actively involved with programs at UCI over the last few years, and it’s been encouraging. About 90% of the graduates stay in Orange County, and that flow of intellect and skill and energy is a tremendous asset.

HOOPS: It’s not really a matter of less-skilled jobs. With the reduced importance of the defense and aerospace businesses here, perhaps we’re seeing the final cleansing of the one-company career track. It may be that people are all going to have multiple careers and will have to develop a number of skills.

HAHN: I absolutely do not see Orange County being hollowed out and losing all of its well-paid jobs. I think it’s going to continue to be pretty balanced. In fact, in the past 10 or 15 years we’ve lost a lot of our lower-paid jobs. The companies that moved here in the 1950s and ‘60s because everything was so cheap have moved again, out of state or to the Inland Empire, because now Orange County is expensive and they can’t afford to be here. While we certainly have added some lower-paid jobs in the ‘80s, we also added a lot of jobs in industries like Ted Smith’s, in telecommunications and biomedical research, and we didn’t lose them all in the recession.

HOOPS: I think that the recovery is going to be a steady one, but probably not a robust one. But the result will be a more resilient economy. Not being able to rely as much on real estate and aerospace means we will have to have a much more sound foundation of smaller employers who perhaps will be more able to deal quickly with economic trends and opportunities. We’ll have a different economic profile, but there is reason for optimism.

Round-Table Panel

Participants in The Times Orange County’s Business Round Table were nominated by the business section’s staff. They come from several key business and industry segments in the county. All have felt the impact of this recession and all have survived previous recessions; several said they are busily restructuring their companies to survive this one. Together, they represent nearly 100 years of business experience in Orange County. They are:

Walter Hahn

Economist, Kenneth Leventhal & Co., Newport Beach

Hahn’s specialties at the international accounting and business consulting firm’s Orange County branch include commercial and residential real estate development and the tourism industry. His company counts many of Orange County’s leading developers as clients.

Alan Hoops

President and chief executive, PacifiCare Health Systems Inc.,

Cypress

Hoops runs one of the nation’s largest health maintenance organizations and is deeply enmeshed in the national debate over health care system reform. The company has nearly 2,800 employees and reported record revenue of $2.2 billion for its fiscal 1993, which ended Sept. 30.

Robert J. Miranda

Founder and president, R.J. Miranda & Co., Santa Ana

Miranda is an accountant who specializes in management consulting, finance and international trade. He met recently with Vice President Al Gore to discuss local and regional impacts of the North American Free Trade Agreement. His company has 100 employees and annual revenue of about $7 million.

Judee Slack

Founder and president, Slack & Associates, Westminster

Slack is a tax accountant and her clients predominantly are small businesses--the ones most profoundly affected by recessions and by the costs of complying with local, state and federal regulations. She also is president of Orange County’s chapter of the National Assn. of Women Business Owners. She has three employees and annual revenue of about $175,000.

Theodore J. Smith

President and chief executive, FileNet Corp., Costa Mesa

Smith runs a major technology firm that does business throughout the world. Originally a developer of both computer hardware and software for a paperless information storage system, FileNet now concentrates on software development. The company, with nearly 900 employees, has annual revenue of about $140 million.