Economic Indicators Point to O.C. Gathering Strength : Commerce: Positive forecasts look beyond misery of job losses in months ahead due to county bankruptcy.

Despite a year-end government financial crisis and news just four days before Christmas of $30 million in budget cuts and hundreds of layoffs, Orange County’s economy is destined to expand in 1995, analysts and business leaders say.

The general economic underpinnings are solid, experts say, although the coming months will bring misery to those who lose their jobs in the wake of the county government’s $2.02-billion loss in the bond market and Dec. 6 bankruptcy filing.

“It will certainly be felt throughout the county in reduced services, especially in programs for the poor,” said Anil Puri, chairman of the economics department at Cal State Fullerton. “But it just isn’t enough to make the overall economy suffer a great deal.”

After nearly five years of recession, Orange County rides into 1995 on a wave of rising economic indicators. Taxable sales, housing construction and median family income are all increasing, and the latest employment figures show that local employers added 16,000 jobs to their payrolls from August through November.

The county’s economy benefited this year from increased foreign trade, thanks in part to the North American Free Trade Agreement’s relaxing of rules on commerce with Mexico and Canada. Those gains are likely to increase, analysts say.

“Business in general will continue to thrive,” said Larry Friend, president of the Irvine investment banking firm L.H. Friend, Weinress & Frankson Inc. “There is a lot of money out there, and while we will be held back a while, I don’t see any long-term problems.”

Even after factoring in damage from the county’s financial crisis, economists at Cal State Fullerton, Chapman University, UCLA and First Interstate Bank stand by their earlier projections of slow, steady growth.

The losses blamed so far on county Treasurer-Tax Collector Robert L. Citron’s high-risk investment strategy, in fact, is about 10% of the $22-billion loss to falling housing prices in the past five years, said economist James Doti, president of Chapman University.

Layoffs and budget cuts could subtract as much as $100 million from taxable spending in Orange County next year and more than $500 million from the gross county product--the value of all goods and services--but “it’s a dampening, not a death blow,” Doti said.

For 1995, Doti is forecasting that employers will add 17,000 jobs to their payrolls; that the gross county product--the value of all goods and services produced here--will rise almost 6% to $81.9 billion; that median household income will increase about 2% to $55,500; and that work will begin on almost 13,500 new homes.

In spite of that optimistic outlook, there are some worries.

Builder Larry Webb, president of Greystone Homes’ South Coast division in Newport Beach, said his company will not move ahead with any new projects in Orange County until the long-term results of the bankruptcy filing become clearer.

One fear is that cities hurt by the investment losses will try to recoup money by raising the fees they charge developers for streets, sewers and other infrastructure improvements, he said. If that happens, the construction industry will pass the higher fees along to home buyers.

One local developer, Irvine Apartment Communities, has already decided to postpone a planned $327-million debt refinancing because of uncertainty about how Wall Street will view Orange County investments in the coming months.

“I would expect that, until this is explained, people are going to be apprehensive to invest in Orange County,” said Philip S. Inglee, president of Liberty National Bank in Huntington Beach.

But Inglee said his bank still plans to open two branches next year, despite the county’s fiscal troubles.

To gauge the outlook of the local business community for 1995, The Times Orange County spoke with leaders in various segments of the economy.

Retail

Robert B. McKnight Jr., chairman and chief executive officer of Quiksilver Inc., was jubilant as the holidays approached.

This will be a “great Christmas for my wife,” he said, “because I’m compensated according to how well we do, and we’re doing good.”

McKnight said that the holiday shopping season has been the best in several years for Quiksilver, a Newport Beach maker of casual clothing and beachwear.

Profit for the year so far is up 61% to $7.1 million, he said, and sales are up 33.3% to $126.1 million. Even sweeter, he said, is that orders for the spring, which typically account for a third of annual sales, are up 30%.

“We feel like it’s going pretty good,” said McKnight, a California native who has lived in Orange County for 20 years. Local shoppers this holiday season are spending freely, he said.

McKnight said he is somewhat concerned about the county bankruptcy filing. “Once somebody figures out where the bottom of this thing is,” he predicted, politicians “will try to hit everyone with a special assessment.”

As for the long-term effect on the economy, he said, “it’s like the earthquake. There’s a trickle-down or ripple effect.”

Hotels

Wayne Bodington, general manager of the 390-room Westin South Coast Plaza hotel in Costa Mesa, thinks economic growth for 1995 is much more than a wish.

“From our perspective, it is solidly underway. This year will represent the second-highest occupancy year ever,” he said. The best was 1981, but figures for 1994 so far are “very, very close to that mark.”

The reason is business travel, said Bodington, who is a director of the Anaheim/Orange County Visitor & Convention Bureau and a 25-year veteran of the hotel industry. Companies spend money for travel, he said, only when they think the economy is on a roll.

A fuller hotel needs a bigger staff to keep up with guests’ needs, Bodington said, so he has been hiring room attendants recently, as well as restaurant, bar and banquet facility employees.

“We are looking forward to a continuation of the resurgence of the economy” in 1995, he said. “We think next year will be as good as this year has been and even a little bit better.”

“Hopefully, the bankruptcy of the county will not affect our business in any way,” Bodington said, although “it’s just hard to know how people react to this kind of thing.”

High Technology

Scott Mercer, chief financial officer at Western Digital Corp. in Irvine, has been in Orange County for only 18 months, which affords him a different perspective from many of his counterparts.

The Laguna Niguel resident said he finds the area to be “pretty friendly to business. The business community and the county have worked together in leadership roles.”

The local economy, he said, seems to be “slowly building. There is a good, solid base in health care, and (business) start-up activity is good.”

The county bankruptcy, he said, will have little effect on business in general and none at all on Western Digital, which makes computer disk drives and semiconductors for sale around the world.

“Our industry is not dependent upon the health of Orange County. Half of our business comes from outside the United States,” he said, “and the other half from all over the country.”

Like many other large companies with headquarters in Orange County, he said, Western Digital actually does “very little local business. If there is a major impact it will be on (our) employees . . . with the possibility of a tax raise.”

Real Estate

Newport Beach consultant Richard Gollis makes his living advising real estate developers, and right now he’s telling them “not to make any sweeping decisions.”

The effect of the county’s financial crisis on the ability of major land developers like Irvine Co. to sell bonds to finance the water, sewer and transportation systems is yet to be seen, Gollis said, until more information is available.

In the meantime, he said, he is advising his clients to “look at every possible deal as an individual deal, and examine it on its own strengths and weaknesses.”

He also expressed concern about the effect of the county’s bankruptcy filing on the ability of private builders and public agencies to market bonds for construction of subsidized low-cost housing and apartments.

But he is convinced that business, especially the real estate industry, has the power to help resolve the situation by taking a leadership role.

“If we are concerned about the future of the toll roads, for instance, then the business community needs to become involved with the banking consortium that is financing the toll road bonds,” Gollis said. “Business needs to bolster investor confidence in the future of the county.”

Meanwhile, he sees evidence that local developers have confidence in themselves, and because of that he is cautiously optimistic about 1995.

“All of the long-term trends are still in play for next year,” Gollis said. “We still have strong job growth in the business services, medical technology and export services industries. We have a vibrant business economy, and there is a pent-up demand for housing.”

International Trade

Cecil Chee, who arranges deals with Chinese companies for American-Asian Trade Connection in Irvine, saw a definite increase this year in both the number of clients in China who want to sell their goods in the United States and in companies here that want to move into the Chinese market.

“It was a lot more positive year, and I believe 1995 is going to be better,” said Chee, who joined American-Asian as a trader a year ago from Citibank Corp. in Singapore. “The whole economy is picking up.”

Orange County’s financial crisis is a shame, he said, but not likely to affect his business. In fact, he said, his company has increased its staff by 66% since it was founded in 1993. It has five employees now, up from three.

Health and Fitness

The year ending has been a good one, and the year ahead stands to be even better, said Cynthia Graff, president of the medical weight control clinic chain Lindora Inc., which her father founded 23 years ago in Newport Beach.

Lindora added three clinics and 20 employees in 1994, bringing its total to 31 locations and 160 employees. A continued expansion is planned for 1995, said Graff, though, citing competitive factors, she would not be more specific.

Privately owned Lindora increased its revenue by 15% this year, Graff said, and especially toward year’s end the clinics’ clients seemed to be much more upbeat about the local economy.

“We grew because of aggressive marketing and because a lot of people who weren’t spending money on new homes and cars and other big-ticket items decided to focus on themselves,” Graff said. “For a lot of the year there still was a measurable sense of caution. But there has been a lot more optimism in the last few months.”

The financial problems of Orange County governments “certainly can hurt overall confidence in the economy, if enough other municipalities around the country are in the same kind of trouble,” Graff said. “But so far we don’t expect much impact. It’s really so complex that most people can’t yet know exactly what it means.”

Temporary Employees

Kimco Staffing Solutions, founded in 1986 by Kim Megonigal, is ending its best year of the 1990s, with a 50% jump in placements.

Megonigal said the 10 offices of his Irvine-based company placed about 9,000 temporary workers during the year, boosting annual revenue to $23 million from $14 million.

That surge, he said, reflects the fact that companies typically add temporary workers at the start of a recovery until their business increases to the point that they can make permanent hires.

The entrepreneur expressed some concern about the effect of Orange County’s bankruptcy on his business, especially if taxes rise.

“The bottom line to my business is that, if costs go up, it’s going to hurt us,” he said. “It’ll have the same effect as early in the recession. The question is: What is the magnitude? I’m not going to add any more overhead until I figure out which way we’re going.”

Megonigal said he is optimistic about the year ahead and projects that Kimco’s revenue will grow by another 30% in 1995, “but I am much more cautious. And as soon as I see something happen, I’ll adjust expenditures.”

Consulting Services

Eric Flamholtz is a widely published management specialist, a professor at UCLA’s John E. Anderson Graduate School of Management and president of Management Systems Consulting Corp., a private firm.

Flamholtz, who has a number of clients in Orange County, maintains that the bankruptcy and related layoffs and budget cuts “could be viewed as a non-event for most business. It’s like the 1987 stock market crash--a lot of headlines and temporary disruption, but the economy went speeding on for two more years.”

Companies he advises, Flamholtz said, “know the importance of strategic planning, and they will factor this in. I don’t know of anyone scrambling around in a panic.”

Because Flamholtz specializes in management training and development, his firm is hired by companies looking to grow. Thus his business serves as an early indicator of the economy, he said. He loses business before it is apparent that a recession is coming, and he gains clients before it is apparent that a recovery is imminent.

“I think 1995 is going to be very strong,” he said. “In the past year we are seeing the kind of business we saw in the rapid growth of 1986-1988.”

The wild card for the economy, he said, is the Federal Reserve Board: “If the Fed keeps increasing interest rates, that could cool things off.”

Tax Advisers

Judee Slack still sees the ravages of the recession when she meets with her clients, most of which are small businesses trying to make up for losses of the past several years.

A lifelong resident of Orange County, Slack said the past four years have been the roughest for small business in her experience, but the worst appears to be over.

“I think the economy is picking up, finally,” said Slack, who owns her own tax consulting company, Slack & Associates in Westminster. “But not with the steam that we keep hearing the economists and politicians talking about.”

Very small businesses seem to be rebounding, she said, “but the businesses in the middle, with 10 to 20 employees, they’re still pretty stagnant.”

“I think that people are still leery about spending money. I have clients with expansion ideas, but they say they’re afraid to let loose of the cash they have saved because they are afraid of what will happen if the economy crashes again.”

For those companies, Slack said, the county government’s bankruptcy could magnify uncertainty that lingers after a five-year slump. The greatest concern among her clients, she said, is that local governments will impose fees on business to replace the lost money.

Contributing to this report were Times staff writers James S. Granelli, Greg Johnson, Don Lee and Chris Woodyard, and Times correspondent Hope Hamashige.

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Growing Into the Year 2000

Despite county government’s financial crisis, Orange County’s economy will expand at a steady pace through the turn of the century. Projected key indicators of growth--namely employment, taxable sales and new housing units--indicate continuing progress:

Good Job Market

Growth in non-agricultural areas, such as retail, manufacturing and services, will increase employment about 7.6%, or nearly 85,000 new jobs. New jobs in millions: ‘99: 1.20 ***

Buying Goods

Taxable sales are expected to increase by about 30%. Estimated figures, in billions: 1999: $36.54 ***

Homes Growth

Nearly 45% more new homes will be built over the next five years. 1999: 16,387 ***

Exporting Orange County

The U.S. ratification this month of the world trade agreement is forecast to improve the county’s share of the global market. Exports in billions: 1999: $11.69 Sources: Chapman University Center for Economic Research and Cal State Fullerton Institute for Economic and Environmental Studies

Researched by VALERIE WILLIAMS-SANCHEZ / Los Angeles Times