Asia's Woes Affecting State More Deeply

By EVELYN IRITANI

Aug. 16, 1998 12 AM PT

TIMES STAFF WRITER

Low unemployment and a hot real estate market have masked the pain being felt in the most trade-vulnerable parts of California, but there are disquieting signs that the Asian financial crisis is spreading further and cutting deeper than initially expected.

This is particularly evident in Northern California, which is already experiencing a slowdown in its overheated economy as Silicon Valley firms accustomed to double-digit growth in Asia face sharply slowing sales, stock market declines and layoffs.

No one is predicting a recession, given the strength of the state’s climb out of the deep trough that followed the aerospace downsizing and real estate crash of the early 1990s.

But as long as Asia’s woes continue to worsen and bad news keeps pouring forth from Japan, the world’s second-largest economy and California’s leading trade partner, the clouds over the state will darken.

Peel back the surface on California’s outward prosperity--strong job growth, rising home prices, inexpensive capital--and you find pockets of extreme vulnerability to a prolonged recession in Asia.

“Today is a troubling day if you live in California,” said Howard Roth, a Los Angeles-based economist at Bank of America, referring to last week’s global stock market turmoil. “We knew the economic fallout was ahead of us, but we were hoping we had reached some financial stability. Now, it appears we’ll feel the effects longer than we initially thought and it will be bigger than we initially thought.”

The Bad Keeps Getting Worse

Economists predict that the regional economic crisis that began last summer in Thailand will slow California’s gross state product growth--a robust 5.2% in 1997--by more than 2% in 1999. And it could be worse than that if Asia’s economies worsen severely, further squeezing trade, investment and tourism into California, economists warn.

“The question we wrestle with and have no answer [to] yet is, ‘Are we able to pull off a soft landing or do we actually find recession?’ ” said Bruce Smith, an economist with the state Department of Finance. “Our guess is a soft landing. But there are a lot of things we just don’t know.”

California’s economic relationship with Asia is just one of myriad complex factors influencing its giant economy, whose annual output of $1 trillion is outranked by just six countries in the world.

For every Inland Empire almond farmer who has lost sales to Japan or Silicon Valley programmer caught in a job cutback, there are millions of Californians benefiting from Asia’s troubles through cheaper prices on imported goods and low interest rates.

But California’s extensive web of economic interdependency with Asia has inextricably tied its fate to that region through good and bad.

And the bad just keeps getting worse. Economic globalization has sent Asia’s fiscal problems rippling across the planet, depressing oil and commodity prices, sparking capital flight from other emerging nations and creating ever fiercer competition from Asian producers now able to slash prices because of their currency devaluations.

This is already slowing the Mexican and Canadian economies, which the U.S., and California in particular, were counting on to absorb the millions of dollars’ worth of goods that are no longer wanted by stores or assembly lines in Asia.

California is second only to Washington, home of Boeing and Microsoft, in its dependence on trade with the 10 hardest-hit Asian countries. The Golden State is nearly twice as exposed to Asia as the rest of the United States, according to economists.

Some segments of this state’s economy--high technology, aerospace, farming, tourism, forestry, seafood--are even more vulnerable because of their heavy reliance on Asian markets, particularly Japan.

And the trading relationship--the exchange of cotton for cars, lumber for Walkmans--is just a piece of it:

* California tourist destinations, including luxury boutiques and theme parks, report a 20% to 40% drop in Asian visitors, particularly from South Korea and Japan. The decline in Japanese visitors is particularly painful because they typically spent $2,000 per trip.

* California colleges have seen a fall-off in enrollment among cash-strapped students from countries such as South Korea and Indonesia. The 500,000 foreign students studying in the United States spend an estimated $7 billion a year.

* Northern California’s loggers and mills, which make up the nation’s third-largest lumber-producing region, have seen sales to Japan plunge 67% in the last year. The resulting glut has pushed down Douglas fir prices from $443 per thousand board feet a year ago to $324 today.

San Jose Area Hit the Hardest

California’s business with the hardest-hit Asian countries amounts to about $70 billion a year--or 7% of total state economic output--and includes a large share of high-priced items such as electronic components, aerospace parts, software, legal services and movie licensing fees, according to a study being conducted by the Santa Monica-based Milken Institute.

Asian countries cannot afford to continue pumping money into semiconductor equipment, computers and telecommunications systems, particularly when the strength of the dollar makes the prices of such U.S. components sharply higher.

No single region in the country is more exposed to the Asia meltdown than the San Jose metropolitan area, according to the Milken study.

In 1996, San Jose exported $29.3 billion worth of goods, about half of which went to Asia and 95% of which were high-tech capital goods.

“If you talk to Silicon Valley executives now, they are finally beginning to acknowledge that they are being hurt in ways they couldn’t have even imagined six to nine months ago,” said Ross DeVol, director of regional studies for Milken. “This is still working its way through the economy.”

Already, Silicon Valley firms are trimming sales projections and their work forces. Unemployment remains low--with shortages still reported in key areas--but the overheated housing market has softened considerably.

Other worrisome signs are appearing. On Friday, the state reported an abrupt halt in July to the state’s job growth for the first time in more than two years, because of weakness in manufacturing and services.

Newspapers are feeling the pinch as high-technology companies cut back their recruiting. The Los Angeles Times reports a “significant” decline in high-technology and engineering job ads since the beginning of the year. “It’s clear to us that the Asian crisis has been a negative impact on the [high-tech] sector,” said Robert Brisco, a senior vice president at The Times. “We’re seeing a lot less recruiting strength from those companies.”

But the Asian financial crisis is far more than a high-tech problem. It is making itself felt from the Siskiyou Mountains to the Mexican border.

Farmers Finding Alternative Markets

In Central California, the loss of Asia’s lucrative markets has made a bad year worse for farmers, who export an estimated 20% of their crops. Of that, 60% to 65% traditionally goes to the Pacific Rim.

Although there are other factors hitting farmers--notably El Nino, which hammered crops such as cherries, apples and cotton--the slump in demand from Asia has put downward pressure on prices across the board.

Though statewide figures are unavailable, officials say agriculture exports to Asia are down in volume. Monterey County, a major producer of lettuce, broccoli, celery and a host of other produce, reported a 10% to 11% drop in export certificates issued since the beginning of this year.

Due to the strength of the U.S. domestic market and growth in Mexico and Canada, California farmers have so far been able to find alternative markets for their export-bound crops--but at weaker prices, according to Vernon Crowder, an agricultural economist with the Bank of America in Fresno.

“If the Asian financial difficulties hadn’t happened, you would have seen more price pressure upward,” Crowder said.

Meanwhile, Southern California--after lagging behind the north--finds itself in the enviable position of being less vulnerable to the problems in Asia because of the diversity of its economic base.

To be sure, aerospace-related business remains a major source of high-paying jobs in the region. And Seattle-based Boeing Co., Southern California’s largest private employer since its takeover of McDonnell Douglas, has been hurt badly by the recession in Asia, formerly the fastest-growing market for its passenger jets.

But the aerospace industry is not as important to Southern California as it used to be; the slack has been picked up by trade and transportation, multimedia, biotech and entertainment.

Even with the ill winds from across the Pacific, Los Angeles County is expected to add 101,400 jobs this year, up from 83,700 the previous year, according to the Los Angeles Economic Development Corp.

“The irony is that everybody’s been hammering on Los Angeles for not growing very fast, and now it’s just chugging right along,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp.

The cargo coming through the ports of Los Angeles and Long Beach--the busiest complex in theU.S.--is a mixture of low-priced commodities such as waste paper, toys and apparel as well as high-end goods. In sharp contrast to San Jose, only 30.5% of the Los Angeles area’s sales to Asia are high-technology products.

Meanwhile, as California exports to Asia dropped off sharply in the first quarter of the year, there was a big surge in cheaper imports from Asia. This is expected to send the U.S. trade imbalance soaring to as much as $160 billion this year and is putting a huge strain on the shipping industry and Southern California’s rail and trucking systems.

But this also means lower prices for consumers and higher profits for California companies dependent on imported goods or components. The beneficiaries include Southern California’s toy wholesalers and apparel manufacturers.

Impact Felt in Mexico Too

California exports to Asia should also get a boost from state manufacturers shipping components to assembly plants in Asia to take advantage of Asia’s suddenly lower manufacturing costs, explained Smith, of the Department of Finance.

“In some ways, economic turmoil can increase exports,” he said.

But in an example of how insidious the Asia crisis has proved to be, even a region like San Diego--whose sales to Asia represent just 18.9% of its total exports--will feel a disproportionate impact.

The main reason is that Asia’s problems are spreading to Mexico, which is San Diego and Orange counties’ chief trading partner and an increasingly important export destination for California.

In the first quarter of this year, California’s exports to Mexico jumped 30%, more than offsetting the 12% drop in sales to Japan. But Asia’s problems are projected to cool off Mexico’s heated economy to a 3% growth rate this year, half the pace of 1997.

Two key reasons: The collapse in world oil prices due to the slump in Asia’s demand for energy is hurting Mexico, a big oil producer; and Mexican manufacturers of apparel and other labor-intensive goods are starting to lose business to Asian competitors enjoying lower costs. This means fewer jobs and less Mexican spending power to buy things from California.

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Exports to Asia

California’s major cities--and the incomes of residents--depend in part on exports to Asia’s 10 hardest-hit countries. Those shipments are dropping. Percent of total exports that go to Asia, and the percent of personal income tied to those exports:

Metro Area Exports to Asian 10

% of total exports

% of personal income

San Jose

Los Angeles/Long Beach

San Francisco

Orange County

Oakland

San Diego

The Asian 10 China

Hong Kong

Indonesia