California's job growth surged in 1996 and is headed higher next year, analysts say. The big question now: Is the state's economy really. . . : Ready to Fly? : Tech, Trade and Movies Main Engines


Three years after starting to crawl out of recession, California is heading into 1997 in the best economic shape of this decade.

Job growth in 1996 ran at a robust 2.7%, spurred by entertainment, high-tech manufacturing and international trade, the new pillars of California's economy. UCLA economists predict the state will do even better in 1997, outstripping the nation for the second straight year.

Business executives are more confident than ever, as are consumers, whose rising incomes are boosting sales of new cars and home appliances. The state is flowing with tourists and once again attracting companies and outside investment. Aerospace is no longer the drain it once was. And finally, the stubbornly depressed housing market in Southern California appears poised for improvement.

"We could see California running on all six cylinders for the first time since the '80s," said Mark Zandi, chief economist at Regional Financial Associates in West Chester, Pa.

Though there are some qualifiers, the optimism is palpable throughout the state.

Peek at the project calendar in Technifex Inc., a special effects firm in Valencia that only three years ago was a hairline from bankruptcy:

Early next year, the 43-employee company will begin work on a water effects attraction for an Orlando theme park, dazzling lights for a Las Vegas hotel, visual illusions for a fun center in south Korea, and animated monsters for a haunted house in Japan.

"We've signed contracts that will take us through 1998," beams President Monty Lunde, a former special effects designer at Disney who broke out on his own with another Disney alumnus, Rock Hall.

The fortunes of firms such as Technifex speak volumes about how the state has regained its luster--largely on the strength of industries such as entertainment.

Motion pictures, the main component of entertainment, have added about 120,000 jobs in Los Angeles County since 1990. That's almost as many as the total number of aerospace layoffs in the county in the 1990s, according to Jack Kyser of the Economic Development Corp. of Los Angeles.

"The entertainment industry has several more years of good, solid growth," Kyser said, adding that the only constraints are shortages of sound stages and skilled labor.

The state's other economic engine is high technology: semiconductors, computers, software and multimedia produced in Silicon Valley; medical instruments and computer peripherals in Orange County; and biotechnology and telecommunications in San Diego.

Tom Lieser, associate director of the UCLA Business Forecast Project, estimates that California's electronics industry will grow by 7.8% in 1996. Next year won't be so hot, he says, but electronics jobs should still rise by a robust 2.9%.

Datum Inc., an Irvine maker of timing devices for the telecommunications industry, plans to add 100 manufacturing and administration staff members over the next two years. And what will support that growth? Foreign sales, says Datum Chief Executive Louis B. Horwitz.

"At one time, nobody talked about anything but Japan," Horwitz said. "But China, South Korea, Taiwan, the Philippines and Malaysia are all very, very large customers of American products. And being on the West Coast gives us a tremendous advantage."

Horwitz expects foreign shipments to account for 15% of his firm's $90 million in revenue this year. To boost that share to 20% in 1997 and 25% in 1998, Datum last spring formed an overseas sales department, which has a staff of four. "Growth in international sales will be one of our major opportunities for expansion," he said.

Datum is one of the many businesses that have helped California become a major exporter, notably to the rest of the Pacific Rim.

Exports from California grew by 19% in 1995, to $97 billion, and rose 13.5% in the first half of 1996. Japan's improving economy, the devaluation of the Mexican peso and recent decisions to abolish or lower tariffs on computers and certain agricultural products and to provide copyright protections for software makers should all support California's trade-related activity.

"Small to medium-sized companies are becoming more actively involved in exports than two years ago," said Ralph Clumeck, a former Security Pacific Bank executive who runs an export consulting business in Laguna Niguel. "The expectations for '97 are extremely bright."

But there are some patches of clouds.

The state's jobless rate--6.9%--remains 1.5 percentage points above the national figure. Though this gap will continue to narrow next year, analysts don't see California catching up completely until after 1999--a reflection of how far the state fell during the recession and of the continuing wave of immigration to the state.

"Until we get our unemployment below the national rate, we're not as attractive a location," said Bruce DeVine, chief economist at the Southern California Assn. of Governments. Though generally optimistic, DeVine also expressed concerns about how the regional economy will absorb the ranks of people who will be coming off public assistance under welfare reform.

"None of us really know what will happen," he said.

Another risk is the increase in consumer debt. Personal bankruptcy filings and credit card delinquencies have been rising in California, though at a rate no greater than for the nation as a whole.

Howard Roth, a Bank of America economist in Los Angeles, says the relatively level of high consumer debt could upset the economy if interest rates run up. But more than anything else, he says, California's prospects will depend on the continued growth of the national economy. Though recent signs point to a slowdown, most analysts don't see a national recession arriving any time soon.

"The national economy appears to be quite healthy, with remarkably few imbalances after more than five years of growth," Roth wrote in his economic outlook for 1997.

Mark Schniepp, director of UC Santa Barbara's Economic Forecast Project, points to one other caveat to the state's otherwise sanguine prospects: Los Angeles County's continued lagging performance.

Job growth and retail sales in Los Angeles County this year have been running at half the pace of the rest of the state. Commercial investment, an indicator of new and existing business expansion and growth, is up 2.8% in the county, according to Schniepp. That compares with a 21% increase for the rest of the state, including 32% in Orange County and 20% in San Diego.

Moreover, Schniepp worries about the kinds of jobs being created in Los Angeles County. He estimates that 49% of the new jobs came from retail trade and business services, a grouping that includes computer services and temporary help firms, in the first 10 months of this year. According to his calculations, the average salary per worker in business services was $19,331 and in retail trade was $16,259--compared with $33,808 for all industries in Los Angeles County.

"You don't see much of a momentum building in Los Angeles County," Schniepp said.

The EDC's Kyser is much more bullish on Los Angeles County, rattling off an impressive list of ongoing and upcoming expansion projects--the ports of Los Angeles and Long Beach, Universal Studios, Disney, DreamWorks SKG studio, Alameda Corridor.

What's more, Kyser said, companies such as FMI International Corp., a New Jersey garment distributor, and Kendell Co., a health products firm based in Massachusetts, are establishing facilities here. And big retailers such as Sears and Bloomingdale's are opening or refurbishing stores in Century City, Sherman Oaks and Long Beach, among other places.

"On the surface it looks like more of the same," Kyser said of Los Angeles County. "But beneath the surface, there's a heck of a lot of paddling."

Certainly, Los Angeles and the rest of the state will continue to benefit from California's much-improved image.

After years of being hammered by earthquakes, fires and floods and a civil disturbance, California is once again a magnet for people and investments.

By using data from the state Department of Motor Vehicles, the Center for Continuing Study of the California Economy, based in Palo Alto, estimates that 25,000 more people will have moved into California from other states this year than have moved out. Although some view that figure as too high, there is no dispute that the flight by people and businesses of the early 1990s has slowed sharply.

Dennis Donovan, a business relocation consultant based in Morristown, N.J., says he still thinks California's tax structure and its regulations on labor and the environment are hurdles to doing business there. But clearly, he said, more companies are looking more seriously at California.

"This is a dynamic that has really turned around in the last year," he said, noting that California's pool of skilled labor and its spot on the Pacific Rim are the biggest draws.

Already institutional investors have begun to plow back into the state. In the last year, Westmark Realty Advisors, a Los Angeles-based manager of national pension and real estate funds, bought office buildings in downtown Oakland, San Jose and San Diego.

"We're going to be more active in the L.A. area," said Doug Herzbrun, Westmark's director of investment research. "A couple of years ago, nobody even wanted to touch an investment there."

Indeed, in 1993, the office building market in Los Angeles was ranked last among 18 major markets by Chicago-based Real Estate Research Corp., which interviews investors. But in its Emerging Trend publication for 1997, Los Angeles moved up to No. 8, ahead of cities such as Dallas and Phoenix.

The vacancy rate for office space remains high in Los Angeles--19.5% for the third quarter--but that should drop next year, following the lead of other areas such as Orange County, where office vacancy dropped to 12.8% in the third quarter from 15.9% a year earlier.

Ray Thomas, chief financial officer at fast-growing HNC Software Inc. in San Diego, noticed the change in his area when he went shopping for extra office space a few months ago. Thomas found 35,000 square feet of space in a nearby building in the high-tech corridor known as Sorrento Valley. But he said rates were 10% to 15% higher than two years ago.

"Things are booking up fast now," he said.

Consumer confidence, too, has climbed noticeably in the last year.

Early in 1996, 27% of the Californians surveyed by The Los Angeles Times said they did not think the state was in a recession. By election time in November, that number had risen to 41%.

Confidence is almost certain to swell if the long-slumbering housing market awakens next year, as most expect will occur. UCLA's economists think residential construction, as measured by the number of new permits issued, will rise to 122,000 next year, after five years of zigzagging between 80,000 and 90,000.

But analysts such as Zandi predict that housing permits could surge to 158,000 in 1997. "I think that market's going to come alive next year," Zandi said.

Even if that doesn't happen, though, many believe the state's economy will sail along on the winds of all the changes that have occurred during the recession. The economy has become more broad-based, and many businesses once near death's door have gone through the pain of restructuring, found new markets and remade themselves into stronger companies.

Bill Mow, chairman of Bugle Boy in Simi Valley, remembers the high-flying '80s when his apparel company rode to riches on basically one product: cargo pants for young men. "In the '80s, we knew 100 ways to redesign pockets on pants," Mow said with a laugh.

But when that fad passed and the recession set in, Bugle Boy nearly went under. In the last three years, the company has restored its business by catering to middle America, creating basic lines of clothing for all family members and taking advantage of the North American Free Trade Agreement to produce its clothing in North America.

After five long years of "walking 10 steps and coming back 9 1/2," Mow says Bugle Boy's sales and work force are growing again.

"In the '80s, we were one-dimensional," said Mow, who is again considering taking his $500-million company public. "Today we have developed the core competency of an apparel company . . . . We are embarking on a new vision."

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