California Rebound Unclear
Analysts who say the economy is on the mend will have a tough time convincing Van Nuys businessman Bob Lieberman.
The president of DeMott Technologies Corp., which makes metal-forming machines used to manufacture commercial airplane parts, has watched sales nose dive since the September terrorist attacks. Customers have canceled $1million in orders, and the phones aren’t ringing with new ones. Lieberman’s once-bustling factory floor is so quiet that he recently parked his wife’s car there to have it waxed.
“Recovery? What recovery?” Lieberman asked. “I don’t see it in my little world.”
Just a few yards away in the same industrial corridor, business is bustling for C&C; Drilling Inc. Crews are working feverishly, digging environmental soil samples for construction clients itching to break ground on new housing and commercial buildings.
“I’m so busy that I’m turning down work every day,” said Yvon Corbiere, C&C;’s vice president.
This blue-collar pocket of the San Fernando Valley isn’t the only place where businesspeople are trying to decipher mixed signals about the state’s $1.4-trillion economy. Last year’s unusual downturn has given way to an atypical recovery, with sectors such as housing and health care swaggering through the slowdown while manufacturing, high-tech and other industries stagger.
The view from the trenches depends on where you stand.
While the nation’s and states’ economies are improving, albeit slowly, recent indicators seem to provide conflicting information. Data on consumer confidence and orders for durable goods move ahead one month only to retreat the next. Oil prices rise and fall on changing Middle East tensions, while investors remain jittery about the latest Enron-style accounting scandal and flagging corporate profits.
The scrambled picture has led many economists to view California’s rebound with caution, even though the state, particularly Southern California, has come through the slowdown better than the nation as a whole.
“There is still a lot of uncertainty out there,” said economist Dennis Aigner, who directs an annual survey of Orange County business executives for UC Irvine’s Graduate School of Management. The most recent results show business leaders much less bullish than they were two years ago, even as Orange County ranks among the state’s brightest economic stars, its 3.7% unemployment rate one of the lowest in the state.
“We’re seeing a lot of caution,” Aigner said.
Such fear might seem unjustified given that growth in gross domestic product in the first quarter was a solid 5.8%. But much of that surge was the result of companies rebuilding depleted inventories. Unlike typical consumer-led downturns, this one was sparked by businesses that stopped purchasing capital equipment. But while companies sat on the sidelines, consumers kept spending, enticed by low mortgage rates and interest-free auto financing deals.
That helped prop up the U.S. economy and soften the effect of the business investment slump and the 9/11 tragedy. The downside is that since consumers, who represent two-thirds of the economy, never closed their wallets, they probably won’t power the economy forward this year with the pent-up demand seen in past recoveries.
That’s bad news for retailers such as department stores, which already were suffering at the hands of discounters before last year’s slowdown. Federated Department Stores Inc., for example, posted a 6% decline in April sales compared with the same month last year.
Federated’s Macy’s West division expects sales to rise slowly over the year, said Chief Executive Jeremiah J. Sullivan. The company is planning conservatively, with orders, inventories and payroll roughly similar to 2001.
State Slower to
Create New Jobs
Hiring in most industries is expected to be weak this year in California as well as the rest of the nation. Companies are likely to hold off adding new workers until they are sure the recovery has staying power. Though California’s unemployment rate climbed to 6.4% in April from 5% a year earlier, the state’s job losses have been less severe relative to those of the nation.
Still, California isn’t showing the ability to create new jobs anywhere near the pace it did during the height of the technology boom. Through the end of April, the state has seen a net gain of only 10,500 new jobs for a growing labor force of more than 17.5 million.
“Employers are not yet certain about the strength and sustainability of the recovery,” said Howard Roth, chief economist at the state Department of Finance. “They are waiting to see.”
Ongoing profit pressure will compel many firms to keep their staffs lean even as the economy recovers. This new austerity is already evident in the entertainment industry, where cost-cutting measures are likely to stick.
The most visible effect has been on television production, a renowned Southern California gravy train that’s being forced to shed excess baggage. Last year’s 6% drop in network TV ad revenue has led to changes in the system, including shorter shoots, leaner payrolls and more production in cheaper locales.
Such practices will continue even as the economy recovers, according to Dana Walden, co-president of 20th Century Fox Television Inc., the TV production arm of Fox Broadcasting Co. Walden said Fox will be making only 18 pilots this year versus 24 in 2001 in an effort to cut costs.
“We’re producing less and scrutinizing where we spend our money, only going for the shows where we stand to make the most money,” Walden said. “That won’t reverse,” regardless of any economic rebound.
There are some sectors in which the recent downturn was virtually nonexistent. The $1.3-trillion health-care industry added about 300,000 jobs nationally in 2001--nearly 25,000 of them in California--a trend that is expected to continue as baby boomers age.
Likewise, residential real estate has been a mainstay for the state’s economy, in contrast to the recession of the early ‘90s when falling home prices combined with a collapsing aerospace industry to wallop Southern California.
Low interest rates and a fast-growing population have kept new buyers streaming into the market over the last year, fueling double-digit annual appreciation in many areas.
Home values even in what are considered “affordable” California markets are fast outpacing competing regions. The Inland Empire saw its median-priced home top $170,000 in April, putting it ahead of Phoenix and Las Vegas.
Though there is some talk of a looming real estate bubble, the activity nevertheless has benefited a slew of related businesses, from real estate agents, banks and mortgage brokers to entrepreneurs such as Van Nuys driller Corbiere. He says his biggest problem is keeping up with the demand for all those soil samples for new construction.
Other sectors of the California real estate industry haven’t been as fortunate--most notably the commercial office market in downtown San Francisco. The vacancy rate for Class A office space reached 21% in the first quarter this year, up from virtually zero during the height of the dot-com frenzy in the summer of 2000.
The office space fallout is merely a symptom of the bigger problem confronting the Bay Area and other tech-dependent economies--when will high-tech turn around? If first-quarter financial results are any guide, it won’t be soon.
No Improvement
Seen Until 2003
Computer, telecom and wireless firms continue to slash jobs and post dismal earnings because their corporate customers aren’t buying new business equipment. Some analysts predict no improvement until 2003 at the earliest.
That could have severe consequences for California’s export sector--nearly half of which is represented by high-tech goods. Last year, the state saw its overall exports decline nearly 11% to $106.8billion. The main culprit was the state’s information technology sector. Exports of computers and electronic products totaled $50.3billion in 2001, an 18% decline from 2000. That more than offset gains in other areas such as agriculture products, which increased 9% to $3.9billion.
With many overseas economies still in the doldrums and a strong dollar making U.S. goods expensive, California exporters can expect another challenging year, said Ross DeVol of the Milken Institute in Santa Monica.
Still, there are some signs of life. Global semiconductor sales in March rose 7.2% from the previous month. Though sales are still sharply lower than a year ago, some industry watchers say it’s a signal that the worst is over.
California’s hard-hit tourism sector likewise is clawing its way back, thanks to a strong drive market and some help from a state-funded marketing campaign. At the beginning of the year, summer visitor spending in 2002 was expected to be down 9% compared with 2001. That figure has since been revised to a 5% drop.
Still, foreign visitors will be in short supply. And many business travelers, fed up with high air fares and security hassles, haven’t returned to the skies. That’s hurting the bottom lines of airlines, hotels and others that depend on those big-spending customers.
Feeling the squeeze are businesses such as Suzuki Enterprises Inc., which supplies Asian-style in-flight meals to carriers at Los Angeles International Airport. Shelly Suzuki, executive director of the Inglewood firm, said business is off about 50% from where it was last September.
Though that’s an improvement from the bleak period just after the terrorist attacks, Suzuki said she’s not yet declaring an end to her personal recession.
“Things aren’t getting any worse,” Suzuki said. “But it doesn’t feel like a recovery yet.”
Staff writers Abigail Goldman, Corie Brownand Ronald D. White contributed to this report.
