L.A. May Avoid Recession’s Worst

As the nation and California slide into what may be a sharp economic downturn, greater Los Angeles, long considered a “victim” region, is in a position of relative strength. This marks a major turnaround from the situation a decade ago, when Americans and Southern California, in particular, last tasted the bitter fruits of recession. Today, the region could, with the right leadership, not only survive the recession but also help lead the nation’s next recovery.

At the core of the region’s current and enduring strength is the diversity--economic, ethnic and geographic--that many often cite as a source of weakness. In a sense, greater Los Angeles is not only a region, but also a nation-state, with an economy larger than Mexico’s. But, more important, it boasts an economic base far more varied than most of its national competitors. No industry dominates Southern California, for example, in the way that durable manufacturing, which has been in the vortex of the current downturn, shapes the economies of the Midwest and newly industrialized South. Similarly, the Bay Area’s near-total dependence on commercial high technology, which also has been disproportionately hit in the slowdown, is the major reason why it’s feeling recessionary pressures.

Another Southland advantage is its geographic dispersion. The region’s much maligned lack of a “center” makes it far less vulnerable than competing urban regions to the threat of terrorist attacks. Highly concentrated regions like New York will have to adapt to what appear to be powerful decentralizing economic forces. Southern California, by contrast, virtually invented the multipolar metropolis, making it better able to weather the post-Sept. 11 aftershocks.

Indeed, to a large extent, Los Angeles County’s generally slower growth rate is offset, in part, by the growth engines along its periphery--Orange, Riverside and San Bernardino counties. These areas, particularly the Inland Empire, enjoy relatively low housing and land prices, which provide local businesses and individuals an outlet to cut costs without abandoning the region.

Greater L.A.’s ethnic diversity, often cited as a cause of weakness by both left-wing and right-wing analysts, also acts as a counter-cyclical force. As economists at the University of Georgia recently concluded, areas with large immigrant populations, notably Latinos, enjoy a powerful, naturally expanding local marketplace. Latino families, with their need for housing, durable goods and other retail products, provide Southern California businesses with an alternative source of growth in times of national and global recession. It should be recalled, for example, that immigrant areas withstood the early 1990s recession far better than more affluent Anglo bastions.

This ethnic diversity also represents a critical linchpin in the area’s vast trade sector. Southern California’s human ties to other regions--especially to China--are critical to attracting new capital and trade to the region. Although the global economy is slowing, the ports of Los Angeles and Long Beach are likely to avoid any major job reductions.

But more than anything else, it is greater L.A.’s broad economic diversity that will insulate it from the harsher effects of recession. In contrast to the early 1990s downturn, the regional economy has broken its once stifling dependence on the volatile defense and aerospace industries. Aerospace, which accounted for roughly 8% of regional employment in 1986, now represents only 3%. Ironically, Southern California’s remaining aerospace industry may be a beneficiary of the war on terrorism. Much of the gear needed to fight terrorists--surveillance technology, advanced communications and avionics--is produced by those sectors that survived the early 1990s implosion.

“The defense industry has changed in L.A.; it’s more mobile and more high-tech,” says Rohit Shukla, president of the Los Angeles Regional Technology Alliance. “There’s going to be a lot of things for reconnaissance and homeland defense.”

Large defense contractors like Northrop Grumman Corp. and TRW Inc. are likely to receive most of the Pentagon money, but many highly innovative smaller companies--such as Vidius, Rapiscan Security Products and CS3 Contracting--seem positioned to benefit as well. Growing employment in these firms could help attract the kind of technical and scientific talent the region will need when the next commercial-technology expansion begins.

Along with trade and defense, the third linchpin of the region’s recession-resisting economic diversity is the entertainment sector. On the surface, Hollywood seems to be in a downturn of its own, with significant job losses over the past year. But much of this can be traced to the lingering effects of the threatened actors’ and writers’ strikes, which caused many studios to “front-load” their production last year, leaving a large backlog of product for the current season.

The long-term prospectus may be much brighter. Cody Cluff, who runs the county’s Entertainment Industry Development Corp., predicts double-digit employment gains for the industry next year. The reluctance of “A” talent to travel abroad, a possible repeal of some Canadian tax breaks and some new incentives being proposed in California could slow down the troublesome “runaway” production that has gnawed at the local industry over the past five years.

Entertainment, which along with trade led the 1990s revival, is traditionally counter-cyclical. Since the atrocities in New York and Washington, box-office sales have jumped 8%; Internet and cable viewing have risen as well. There has also been a bump in the sales of video games, says Robert Kotick, president of Activision, the largest L.A.-based game maker.

“People want to have a fantasy experience without the cost and hassle of leaving the home,” says Kotick. “The home entertainment industry will benefit from [Sept. 11].”

All these factors augur well for Southern California’s ability to withstand the recession with only moderate pain and lead the recovery. Yet to do so, our institutional elites need to attune themselves to the economy’s emerging leaders. This new generation includes people like Toytown founder Charlie Woo, now chairman of the L.A. Chamber of Commerce; Dominic Ng, president and CEO of East West Bancorp and recent chairman of the United Way; and creative digital entertainment moguls like Activision’s Kotick.

It is to these people and industries, many of them hardened by their experiences in the last recession, that the Southland needs to turn for direction and leadership as the American economy emerges from the current slump.