Asia’s Economic Crisis Expected to Slow State Growth

Asia’s deepening financial crisis will slow California’s robust economic growth next year, reducing by tens of thousands the number of new jobs the state was expected to add, according to several widely watched reports to be released this week.

However, the reports say Asia’s problems will not derail the state’s comeback, as a resurging housing market, growing imports and several other factors probably will offset some of the shocks from abroad.

Based on emerging signs and economic models, economists at UCLA, the Los Angeles Economic Development Corp. and other private and public organizations agree that the biggest hit to California will be on the export side. Tourism, high-tech manufacturing, transportation, agriculture and engineering services are all expected to feel the pinch from Asia’s troubles.

These economists say the problems abroad will flatten the state’s export growth next year and cut into California’s job growth. They predict that Asia’s slowdown will cost the state between 26,000 and 65,000 new nonfarm jobs next year. The high end of that range would account for about one-sixth of the total new jobs expected for next year.

“It’s going to be a foot on the brake,” said Jack Kyser, the economic development panel’s chief economist, who sharply revised his forecast for California exports, among other economic indicators, after watching South Korea fall into turmoil in recent weeks. In his upcoming annual report, Kyser writes that California export growth will plunge to 1% from an expected 9% this year.

“The longer Asia’s problems go on,” Kyser added, “the heavier the foot.”

In UCLA’s quarterly forecast, to be released today, economist Tom Lieser says the “cracks in the Pacific Rim will cause leaks in California,” particularly in the Silicon Valley, with its high concentration of electronics manufacturing.

“The slowdown is bound to have an effect on all regions of California,” he writes, noting that Orange County is likely to see decreased exports of medical instruments and computers, while Los Angeles County notices a slowdown in shipments of aircraft parts and San Diego County sees a reduction in telecommunication sales.

(Earlier this month, Chapman University economists predicted that Orange County alone will lose $150 million of about $1 billion in annual sales to Hong Kong, Singapore, Indonesia and other areas of Southeast Asia, resulting in a loss of 2,400 jobs.)

Jay Winter, executive secretary of the Foreign Trade Assn., said the Los Angeles area tends to export high-density, low-value merchandise such as cotton, waste paper and pallets--products that can be obtained in other parts of the world more cheaply these days because of the strong dollar. “It could certainly have an adverse impact,” he said of Asia’s effect on Southern California.

However, Lieser and other economists remained sanguine about California’s long-term prospects. He said the state is heading into the new year with strong momentum, on pace to add about 400,000 jobs this year, or a growth rate of 3.3%. Based on increased building permit activity the last few months, Lieser raised his projections for housing growth. And he said that while California exporters rely much more on Asia than the rest of the nation, the domestic market and sales to Europe and Mexico remained strong.

What is more, Lieser and other economists now believe that with the Asian crisis, the Federal Reserve will hold off on raising interest rates any time soon, which will keep strengthening California’s real estate market.

“There will be offsets for California, and we do have enough diversity in California to contain the damage,” Lieser said Tuesday.

Ted Gibson, economist for the state Department of Finance, agreed. Nonetheless, Gibson says that for his forecast, which will be released in early January and is influential in developing the state budget, he is preparing to knock off between 0.2 and 0.5 of a percentage point in California’s job growth rate because of the Asian crisis. Based on the state’s nonfarm employment of 13 million, that works out to a cut of 26,000 to 65,000 new jobs.

Economists say Asia’s slowdown coupled with the strong dollar has begun to spill over into the state’s economy. Exports to South Korea, for example, fell 18% in the year ended June 30, after booming 41% in 1995. Further deterioration is expected next year.

Already some exporters of commodities--a principal product in the Los Angeles area--say they have seen a major slowdown in new orders from Asian nations.

“We are impacted by this a lot,” said Mike Koh, who is in charge of the export division at Recycle Fibers, a recycled paper company in the city of Commerce, which does a lot of business with Korea. “All of the shipments we made [to Korea], we can’t get paid,” he said, adding that he is reluctant to fill any new orders because “we’re afraid we won’t get paid.”

Other businesses in the region say they have not yet been affected but are bracing for a slowdown. “We haven’t had any projects put on hold or delayed; however, we anticipate there could be some delays in projects in the Asia Pacific region,” said Lisa Boyette, a spokeswoman for Fluor Corp., the giant Irvine-based engineering and construction services company. The Pacific Rim accounted for about 20% of Fluor’s revenue, which totaled $14 billion last year, Boyette said.

It is that uncertainty that worries economists, who even as recently as a month ago did not expect the problems then mostly in Southeast Asia to have much effect on California. But after the International Monetary Fund was called to bail out South Korea, the world’s 11th-largest economy and one of California’s top trading partners, the picture changed for many economists, who feared that the problem could trickle down to Japan as well.

Howard Roth, economist for Bank of America, said the risk to California’s economy from the financial problems in Indonesia, Malaysia, Thailand and the Philippines is small; those four countries account for just 8% of California’s total exports. But adding Korea, Japan and other Asian countries raises that share to 51%--compared with just 29% for U.S. exports overall to Asia.

In his annual forecast issued three weeks ago, Roth pegged California’s job growth next year at 2.6%. He says he is about to lower his projections to 2.3% or so. “You don’t want to minimize the problem,” he said.

However, Roth said his overall assessment of California’s economy and its prospects has not changed. In his report, he cited three reasons for confidence: a better geographical balance of job growth as Southern California catches up with Northern California; better industry balance, with the long-awaited rebound in real estate and construction taking shape, and better demographics, with more people coming into the state than leaving.

Other economists cite other factors that, they believe, will help California weather the Asian crisis:

* The regional tourist industry, which has already seen a slowdown of visitors from South Korea, is expected to get a big lift from the nationally acclaimed Getty Center and the opening next summer of the Aquarium of the Pacific and the Queensway Bay tourist attraction in Long Beach.

“Our hope is that the popularity of the Getty Center and some increases of tourists from the European market and Canada and Mexico would offset any downturn from Asia,” said Carol Martinez, a spokeswoman for the Los Angeles Convention and Visitors’ Bureau.

* The motion picture industry, which has been booming in Los Angeles County, could actually get a lift from the troubles abroad. “Entertainment is not going to be impacted, because it is counter-cyclical,” said Los Angeles Economic Development Corp.’s Kyser. “If people don’t travel, they will see more movies.”

* Some manufacturers, notably apparel makers, will be able to buy raw materials much more cheaply from Asia. The strong dollar is also expected to help Los Angeles’ growing toy industry, which buys most of its goods from Asia for distribution and sales throughout the United States.