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?
Orange County’s economy, which bloomed in 1996 after lying fallow for the first half of the decade, is expected to continue on a healthy course in the coming year.
If 1996 was the year the county bounced back from a long recession and the municipal bankruptcy that shattered residents’ confidence, next year will complete the rebirth, many analysts believe. They base their rosy predictions on stable interest rates, a booming export market, low unemployment and a strong technology sector.
“We’ve had a rough road getting there, but the signs are that we certainly have recovered and the future looks very bright,” said Nate Franke, a partner at Deloitte & Touche accounting firm in Costa Mesa.
Some recent economic reports underscored that view.
In their recent annual forecast, Chapman University economists said that a surging export market and renewed construction activity would fuel the county’s economic expansion in the coming year. They also predicted that local payrolls would grow an average 2.6% for the next five years.
Despite widespread optimism, there are some fragile links in the local economy.
* Consumer debt remains at historically high levels. That’s troubling, economists say, because high debt loads could discourage retail spending and home buying--major contributors to a bustling economy. “Until people deal with this large debt overhang, I don’t see there being a big impact on the retail sector,” said Dennis Aigner, dean of UCI’s Graduate School of Management.
* Any uptick in interest rates could crimp economic growth. Higher rates would raise borrowing costs on everything from mortgage loans to credit card debt. Consumers would think twice about buying new cars and computers, and businesses might not expand as quickly.
* Most of the jobs being created are in the service sector, but experts are divided over whether that’s a bad sign.
Esmael Adibi, director of Chapman University’s Center for Economic Research, believes that most of the service jobs being created are in highly paid fields such as engineering, management and health services.
Aigner is skeptical. He thinks many service jobs remain at the lower end of the pay scale. Without more better-paying jobs, housing prices aren’t likely to rebound any time soon, he said.
While the Orange County unemployment rate stood at a low 3.5% in November, some observers note that the figure doesn’t reflect those discouraged job seekers who have dropped out of the employment search. The minuscule rate also masks the fact that many new workers are temporary personnel, rather than permanent hires bestowed with full benefits, they say.
* The stock market could retrench. Orange County companies rode the surging equity markets in 1996, a banner year for initial public offerings. While most prognosticators don’t expect a major correction, the possibility remains that the stock market could dive, sending a chill through the economy and hampering companies’ ability to raise funds.
Nonetheless, many local business people are sanguine about their prospects for 1997. One is Charles Haggerty, chief executive of Western Digital Corp. in Irvine. The computer disk-drive concern is ending a benchmark year in which a restructuring brought increased market share and surging sales and profit. “We’ll finish the year in as healthy a shape as we’ve ever been in,” he said.
He expects the company to continue improving financially next year, helped in part by increasing foreign sales.
Indeed, international trade has emerged as one of the chief drivers of the county’s economy, said Walter Hahn, an economist and consultant at E&Y; Kenneth Leventhal in Newport Beach. Add to that a strong non-defense technology sector, and Hahn expects another 30,000 jobs will be added to county payrolls next year--on top of the nearly 30,000 new jobs this year.
But Aigner cautioned that the current expansion is different than past upswings, which were fueled largely by the aerospace industry. “We went through four to five years of the economy restructuring,” he said. “Most companies have restructured, fired lots of people--most in middle-management positions, most of which have not been replaced.”
And while many companies are now posting profit gains, they’re doing so with fewer high-paid employees, he said.
For the Orange County economy, “it’s not the same game.”
Breaking down the economy by category:
Manufacturing
For those who survived the last eight years, when nearly 50,000 manufacturing workers lost their jobs in the county, business is looking up again.
Employers are slowly recovering from the battering they took from the worst recession in 50 years and federal defense and aerospace budget cuts. They added about 1,000 new jobs this year, according to preliminary figures from the state Employment Development Department.
If there is a hiring surge in 1997, it will likely come from the aerospace companies that survived the crunch and now are benefiting from an uptick in commercial aviation and private and government spending on space.
“We see a hell of a future in space,” said John McLuckey, head of the new Boeing North American Inc. unit created when the Seattle aircraft maker bought Rockwell International Corp.’s aerospace and defense businesses this month. His Seal Beach-based division already needs to hire nearly 900 engineers and manufacturing workers because of new contracts.
Overall, though, don’t look for manufacturing to get much bigger as a source of jobs. County manufacturers these days run their payrolls like their inventories, as lean as possible. Many bring on temporary workers to increase production when orders swell and let them go when demand slackens.
“Across the board, almost everyone in manufacturing is looking for continued growth at least through the turn of the century. . . . They have learned to manage their businesses, to be more competitive and to use technology to their advantage,” said James White, a Huntington Beach-based consultant with the California Manufacturing Technology Center.
Foreign Trade
Like this year, 1997 should be a banner year for exports for a number of reasons:
* Orange County’s goods and services are in demand in burgeoning overseas economies.
* The local business community, after years of slumbering, has fully awakened to the vast potential of foreign trade.
Orange County is now one of the largest international trade markets in the country, mainly because its business base is so diverse that almost every segment of the economy is involved. “It is a significant engine of growth for our economy,” said Cal State Fullerton economist Vincent Dropsy. He and other observers say that the value of goods shipped overseas by county-based business should top $12 billion this year, $14 billion in 1997 and could reach $20 billion by the turn of the century.
The explosion is partly due to export facilitators such as Hunter Global in Laguna Hills, which helps other companies get into foreign markets. In three years, the company’s revenue has nearly tripled to $1.5 million.
A former international project manager with Irvine-based Taco Bell Corp., Cathie Loncar joined Hunter to start a new food products division when PepsiCo--which owns the Mexican fast food chain--relocated its food service international operations to Dallas. Since then, she has signed Taco Bell as a client. Hunter was hired this year to help Taco Bell export meat, cheese, tortillas, salsa and other products to Japan to supply its franchises there.
Technology
Because of all the media attention it gets, the Internet often seems like a phenomenon that has peaked. But a technology poll conducted by The Times earlier this year found that while 76% of the people in Orange County knew what the Internet is, fewer than one in 10 actually used it.
That gap, which is even more pronounced elsewhere in the country, is bound to close. And thousands of companies, including many in Orange County, will make fortunes helping to close it.
The Internet “adds to the already huge appetite for data processing and communications equipment,” said Roger Davisson, who works for Brentwood Venture Capital scouting Southern California for promising start-up companies. “Any companies involved in making any of that technology will benefit.”
Some already have. PairGain Technologies Inc. in Tustin, for instance, is one of the fastest-growing companies in the country because of huge demand for its devices that help boost the capacity of telephone lines to carry more voice and computer data. PairGain employs about 560 people today, up from 450 a year ago. The company currently has about 40 openings, and plans many more hires in 1997.
According to the Orange County Business Council, there are about 8,000 high-tech companies in the county, employing more than 220,000 people.
The number of jobs in computer hardware and some other sectors has slipped since the late 1980s, said Jay DeLong, a researcher with the council. But many of those jobs were low-paying assembly and manufacturing positions that have given way to higher paying engineering and management slots, he said. And in the meantime, employment in the software industry has soared 53% since 1988.
Commercial Real Estate
Orange County’s commercial real estate market continued to pick up steam this year. Space tightened significantly in both office and industrial buildings, and rents have begun to edge up.
In the John Wayne Airport area, which holds half of the county’s office space, the average vacancy rate was just under 8% at the end of the third quarter, according to CB Commercial Real Estate Group Inc. In posh Newport Center, several new leases hit an all-time rent high of $3 per square foot. Now, the Irvine Co. and Trammell Crow Co. have plans for new office buildings. The buildings won’t be built, however, until a significant number of tenants have agreed to lease space.
But industry observers cautioned that the momentum could stall next year when several large blocks of office space go back on the market.
Housing
A housing recovery began in earnest this year, as buyers became more confident about the local economy and their financial situations. Through November, the area’s 33,285 sales had outpaced last year’s total sales by 8%, creating the fastest-paced market since 1991, according to Dataquick Information Systems.
The downside? Values dipped, as sales tended to skew toward lower-priced homes. Analysts say that prices should start to stabilize next year. “I think we will continue to see improvements in the local housing market and that will translate into value stabilization,” said Nima Nattagh, an analyst at the Anaheim-based real estate data firm Experian. “But I can’t see appreciation in values in 1997.”
The move-up home buyer returned to the market this year, breathing life into high-end South County communities. Home builders say they are confident that this recovery will last through the coming year, but they don’t expect sales to pick up dramatically.
Health Care
Experts predict the bigger-is-better forces will press ahead with a wave of consolidations among companies providing health care across Orange County.
Shareholders of PacifiCare Health Systems Inc. and FHP International Corp.--two rival health maintenance companies--are scheduled to vote Tuesday on PacifiCare’s plan to buy FHP, although the companies were forced to push back the deadline for closing the deal pending further review by federal regulators.
Hoag Hospital Memorial Presbyterian in Newport Beach is considering whether to link with St. Joseph Health System of Orange or Memorial Health Services of Long Beach. Hoag’s chief executive, Michael D. Stephens, promises a decision by March.
Stephens also expects more mergers among health plans serving Cal-OPTIMA, Orange County’s experiment with managed health care for hundreds of thousands of its poor, elderly and disabled. While 36 plans offered coverage when the experiment began a year ago, only 19 remain. Many of the rest failed to attract the minimum 2,500 enrollees required.
Stephens predicted that more Cal-OPTIMA plans affiliated with providers will pull out because their flat monthly payments to serve its enrollees can’t cover catastrophic events. “A $100,000 to $200,000 transplant case for one patient could take most of the payment, and the hospital is at risk for the rest,” he said.
Tourism
It was a sizzling year for Orange County tourism, as a record 40.2 million visitors dropped $5.5 billion into the local economy, according to estimates from the Anaheim/Orange County Visitor and Convention Bureau.
Experts predict another solid year in 1997--barring any unexpected jolt from the economy or Mother Nature--but anticipate growth to be a bit slower. For starters, Disneyland may have a tough time topping this year’s record-shattering attendance, estimated at 15 million visitors, which was fueled by the super-hyped farewell season of the Main Street Electrical Parade.
The Anaheim park will unveil its new Light Magic parade in late May or early June. The new nighttime spectacular will likely blow the doors off its predecessor with sophisticated light projection techniques and new fiber-optic technology. Still, it won’t have the pull of a limited engagement like the Electrical Parade did this year.
Parade fans lit up Orange County hotels as well this year, boosting countywide occupancy to 74% from a 69% average in 1995. Scott Paschall, vice president of Los Angeles-based PKF Consulting, sees occupancy creeping up to 75% next year. Room rates, which still are playing catch-up from the early ‘90s recession, should climb a healthy 5% to an average of $85 a night countywide.
Retailing
When executives at large, national retail chains look at Orange County, they see the same strong economy and low unemployment rate that prompted Places Rated Almanac to tout the county as the best place to live in the country.
“Strong economic growth and low unemployment translate directly into purchasing power,” said Nate Franke of Deloitte & Touche. “And that’s why you’re seeing the big chains [like Best Buy and Barnes & Noble] opening in Southern California. They’ve got a renewed belief that Southern California has overcome its economic problems.”
The appearance of big, bargain-oriented chains is good news for consumers because it expands competition--and forces prices down. But the arrival of savvy, well-capitalized chains will force existing retailers--particularly smaller shops and full-line department stores--to hone pricing and marketing strategies to keep their share of the market.
The retail scene is changing as shopping centers scramble to line up stores that will appeal to today’s shoppers. Fashion Island in Newport Beach won the hotly contested race for the county’s only Bloomingdale’s department store. The South Coast Plaza shopping complex in Costa Mesa countered by adding 29 new retailers.
If there is a cloud on the retail horizon, it’s the propensity for consumers nationwide to continue adding credit card debt.
Rick Evans, president of the Irvine Co.’s retail division, is bullish on 1997. He believes the strong economy will allow consumers to continue using credit cards. But he notes that consumers who’ve been counting on the strong stock market to help meet financial obligations will “be very wary if something bad happens in the market. And they’re going to be very sensitive to things like higher interest rates.”
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O.C. Economy Looks Healthy
Forecasts show the 1997 Orange County economy growing in a wide variety of ways. Some year-to-year comparisons by quarters:
Residential Building Permit Values (in millions)
*--*
1996 1997 Increase 1st $283,899 $311,964 9.9% 2nd $461,000 $543,564 17.9% 3rd $384,651 $477,077 24.0% 4th $337,742 $450,326 33.3%
*--*
Nonresidential Building Permit Values (in millions)
*--*
1996 1997 Increase 1st $133,550 $141,736 6.1% 2nd $227,614 $242,695 6.6% 3rd $176,774 $189,677 7.3% 4th $155,318 $168,497 8.5%
*--*
Payroll Employment (in thousands)
*--*
1996 1997 Increase 1st $1,159,600 $1,186,980 2.4% 2nd $1,175,300 $1,202,232 2.3% 3rd $1,175,000 $1,209,439 2.9% 4th $1,196,011 $1,233,477 3.1%
*--*
Personal Income (in billions)
*--*
1996 1997 Increase 1st $17,123,916 $18,042,906 5.4% 2nd $17,844,020 $18,847,078 5.6% 3rd $18,262,240 $19,369,490 6.1% 4th $18,092,458 $19,219,724 6.2%
*--*
Total Bank Deposits (in billions)
*--*
1996 1997 Increase 1st $21,823,652 $23,194,648 6.3% 2nd $22,872,212 $24,283,628 6.2% 3rd $22,906,548 $24,338,006 6.2% 4th $24,574,810 $26,221,786 6.7%
*--*
Taxable Sales (in billions)
*--*
1996 1997 Increase 1st $7,392,628 $7,848,172 6.2% 2nd $7,999,043 $8,505,667 6.3% 3rd $7,925,775 $8,453,227 6.7% 4th $8,514,285 $9,111,911 7.0%
*--*
Note: Numbers for fourth quarter 1996 are estimates. All 1997 numbers are forecasts.
Source: Chapman University Economic & Business Review
*
This article was reported by Times staff writers Patrice Apodaca, Maria Dickerson, Greg Johnson, Barbara Marsh, Doug Miller, John O’ Dell and correspondent Malinda Fulmer. It was written by Apodaca.
