Military Money Keeps County a Financial Oasis
Lately, a lot of news suggests the Orange County economy is in for a bumpy ride. In addition to the national economic slowdown, we have experienced a dot-com meltdown, power blackouts and the onset of a bear market with a negative wealth effect that will hit Orange County particularly hard.
Yet, Orange County is hanging tough and outperforming most areas of the country. Unemployment rates remain low, and job growth remains high. Unlike the ‘90-91 recession, when Orange County was in a tailspin, the county is more than holding its own.
Certainly, one factor that explains this difference is the continuing strength of the building industry in Southern California, which is in sharp contrast to the precipitous drop in construction prior to the ‘90-91 recession. This time, construction spending is near record levels. The supply of unsold housing and nonresidential vacancy rates are at historic lows. Housing appreciation remains high, and the only thing holding home building back is the scarcity of approved lots.
But a strong construction industry is not just an Orange County phenomenon. New and existing home sales are at record levels across the country. Even markets like New York and San Francisco that experienced softness late last year have come back strong, and most national housing indicators suggest the construction boom will continue. Since construction is doing well around the nation as well as in Orange County, it, alone, cannot account for the county’s unusual strength during the current slowdown. There has to be another factor of considerable importance that explains why the Orange County economy is outperforming the nation.
Research at the Anderson Center for Economic Research suggests a sharp increase in defense spending largely explains the county’s strong economic performance this year. Although power blackouts and the bear market are getting all the attention, defense spending is the silent engine of economic growth.
Orders for defense goods nationally increased about 20% in 2000. Given the usual lag of five-to-eight quarters before defense orders translate into actual spending and increased hiring, we see most of the positive economic impact hitting in 2001. In Orange County, defense-related jobs, which tend to be high paying, are projected to increase by roughly three-quarters of a percent or about 10,000 jobs this year.
Much of this job growth will occur at companies that don’t get a lot of attention--companies such as Interstate Electronics Corp. (IEC) in Anaheim, which was recently awarded $7 million for a low-cost guidance and navigation unit for smart-weapons systems, or Pacific Consolidated Industries in Santa Ana, which received a $6.9-million contract for nitrogen-servicing carts used for flight systems.
AAI Corporation in Brea achieved a banner year in 2000, posting record results. Key defense-related contracts underway include a $2.6-million program for the U.S. Air Force for the next generation of advanced electrical generators called the MC-2000. Under a separate, $2.7-million contract, the company installed the first four in a series of generators used to test starting mechanisms on cargo and transport aircraft, and the firm’s under contract to fulfill component technical orders.
Although not in the same league as Boeing or Northrop, these small defense subcontractors in the aggregate, and many of which are in central Orange County, pack an economic wallop. The fact that they use cutting-edge technology and employ high-paid workers underscores their economic significance.
The surge in defense spending, which is only recently beginning to see the light of day, is just the start. Senate Armed Services Committee Chairman John Warner is asking for $333 billion in the next fiscal year’s budget. Such a spending level would be $23 billion or 7.5% more than the current year and $8.5 billion more than President Bush is asking.
Rep. Loretta Sanchez (D-Garden Grove), who has been instrumental in channeling defense dollars to Orange County firms, recently introduced legislation along with Rep. Howard P. “Buck” McKeon (R-Santa Clarita) to require the Defense Department to study fighter production costs at various sites, including the former B-2 production site in Palmdale. Preliminary estimates suggest that a Palmdale production site would translate to an additional 10,000 jobs for Southern California.
Whatever the location, the multiyear, B-2 joint-strike fighter project will keep many county subcontractors humming for quite some time.
It’s ironic the defense industry that melted down following the end of the Cold War and contributed so much to the severity of the Orange County recession of the early 1990s, now explains much of the county’s current economic strength.
