1991 recession may forever change L.A. economy.

1991 recession may forever change L.A. economy

The vast Southland economy is locked in a recessionary vise that shows little sign of loosening - and even when the business climate eases, left in the crunch will be wreckage in the manufacturing and financial sectors that will be hard to repair, say economists.

Other key industries, such as real estate, will be years in recovery. As a result, the rebound, when it comes, will most likely lack much zip.

Meanwhile, to some extent the slump is masking longer-running, fundamental change in the very nature of the Los Angeles economy. Industries that formed the underpinning of the county's economic growth are fading, changing or departing.

Manufacturing jobs have been dwindling for some time. Amid the recession, the aerospace/defense industry is grappling with a search for new directions to replace lost business as federal spending is reduced. And the dream of becoming a giant banking center, including a dominant role in Pacific Rim trade, is dying as the last major banks are acquired by non-Los Angeles firms.

And the ripples wash over businesses that feed off them, such as residential and commercial real estate as well as retailing.

Los Angeles' economy is undergoing a basic transition, and the challenge facing political and business leaders is to find new directions in which to move, new industries with which to fuel renewed growth for one of the nation's most vibrant regional economies by locating sources of new industry and jobs.

"When will we get back the 50,000 local manufacturing jobs we lost in the last year?" rhetorically asked Jack Kyser, chief economist with the Los Angeles County Economic Development Corp. "Never. Those jobs aren't coming back."

Some industry has fled high costs and government regulation, while aerospace and defense are savaged by federal cutbacks, noted Kyser.

Meanwhile, banks and other lenders, traumatized by sour property and business loans, are treading warily, and thus slowing the flow of capital into Southland enterprises, particularly real estate.

"The bank mentality seems to be towards working out (problem) loans, not making new ones," said David Hensley, director of the UCLA Business Forecasting Project. "That could make an environment in which it is difficult for the economy to get off the floor."

Added Charlotte Chamberlain, economist with the National Economics Research Association in downtown Los Angeles, "When the Southland stops building, it makes it harder to break out of a recession."

Because the Los Angeles metropolitan region has been growing, a larger than average fraction of the economy here has been based on construction, noted Chamberlain and other economists.

Now, from commercial office buildings to retail complexes to apartment buildings, financing for construction has dried up. "The (banking) regulators appear determined to put the kibosh on any construction lending," said Chamberlain, referring to tightened rules that federal banking examiners are enforcing upon Southland banks and thrifts. "The multiplier effect of that is spreading throughout the local economy."

Bad statistics

While there are tantalizing signs of a turnaround in the national economy, California, true to its mythic origins, remains an island apart - and Los Angeles a hard town on the isle.

A barrage of statistics in recent weeks paints a local economy on a darkening plain:

* The number of people with jobs in Los Angeles County fell to 4.24 million in July, off 1.3 percent from a year ago and 2.4 percent from the all-time peak in December of last year.

* The help-wanted advertising index for the Los Angeles market in July sank to 82, a new low for the year. The index was at one-half its 1989 average level and at the lowest level since 1975.

* Retail sales in June in Los Angeles County were off 6 percent to $5.68 billion from last June, after adjustment for inflation.

* The level of property foreclosures in Los Angeles County hit a record in July of $247.6 million, up more than 240 percent from a year earlier. Bankruptcies are also hiking to record levels month after month.

* The office vacancy rate in many parts of Los Angeles County is approaching 20 percent, while large industrial space - that with 50,000 square feet or more - is going begging, from the South Bay to Ventura. The City of Commerce, for example, has an industrial vacancy rate exceeding 16 percent.

When turnaround?

Even more daunting than the numbers is their direction: still down, with little sign that the economic stats are "bottoming out."

For example, while employment in Los Angeles County in July was down 1.3 percent from a year earlier, in April it was off only 0.8 percent from the previous April.

Manufacturing employment in particular is still in a sickening slide, losing 8,600 jobs in the one-month period from June to July alone. Manufacturing employment has sagged from 854,300 last July to 805,200 this July.

Bankruptcies and foreclosures are hitting new highs monthly, while office vacancy rates have risen enough in downtown Los Angeles to provoke cover stories in the Wall Street Journal.

"There is no light yet at the end of the tunnel," said Kyser. "The U.S. economy is starting to recover, but I haven't seen any signs of it here."

Kyser projects no job growth in Los Angeles through 1992 - essentially a flat economy for at least another year, with consequent ramifications for retailers, residential real estate brokers and others.

Other economists are more optimistic than Kyser, but have pushed back their timetables for a Southland economic recovery.

"We were hopeful the California economy might recover this fall; now that it is September we think the chances for recovery are postponed to next year, with Los Angeles maybe later," said Hensley of UCLA. He added that residential construction seems to have bottomed out and may provide a foundation for an economic revival.

Hensley and other economists, such as Michael Bazdarich of La Canada-based MB Economics consulting firm, said the awakening national economy will ultimately pull Los Angeles up, as business and consumers elsewhere buy Los Angeles goods and services, and local tourism improves.

"I don't think the Southland economy is headed for a cliff, or anything like that," said Bazdarich, echoing the sentiments of other economists interviewed. "We have a diversified economy, unlike that of Texas, which was tied to oil, or Ohio or Pennsylvania, which were tied to steel and heavy industry. We are going to recover, it is just not going to be an explosive recovery, or anything like that."

New economy?

Some say that after nearly a decade of robust growth in the 1980s, during which many a fortune was made, Los Angeles must come to grips with a major restructuring in the midst, and wake of, a recession.

One big change: Due to a thicket of regulations, workers compensation fraud, high land costs, a cooling Cold War and free trade, manufacturing jobs that left the region will probably not return, said Kyser and other observers.

Small and medium-sized manufacturers are checking into Mexico and low-cost U.S. locations, such as Arizona and Nevada, while the big manufacturers in defense and aerospace face a questionable future due to reduced federal military outlays, said Kyser.

The drop in manufacturing is more important than perhaps popularly realized. Though little heralded, manufacturing is the backbone of the Southland economy - one out of five Angelenos works on a production line, and most economists say that each factory job creates another two to three paychecks in collateral activities, such as trucking, warehousing, accounting, sales and administration. When factories disappear, they pull a lot down.

"Manufacturing brings money into an economy," explained Kyser. "When you sell a good made in Los Angeles, it brings profit here. We can't survive without manufacturing or providing services that others want."

Causing consternation for some observers is that those manufacturing jobs that are remaining in Los Angeles tend to be in low-wage industries, such as garment-making or other small factories.

"In the 1970s we lost the big rubber plants, the big steel plants, the auto plants, now we are losing General Motors (in Van Nuys) and some aerospace," said Goetz Wolff, economist with Resources for Employment and Economic Development in downtown Los Angeles.

In the 1970s, there were 900,000 manufacturing jobs in Los Angeles County - in a local economy that employed about 3 million - and many jobs were good-paying tickets into the middle class.

But unless the current tide is reversed, said Goetz, "we'll have 700,000 sweatshop jobs in Los Angeles manufacturing non-durables, like clothes, in food processing, printing, other small stuff."

A worrisome trend: Since 1980, the number of non-durable-goods factory jobs has actually increased in Los Angeles County, but more than 100,000 jobs in the durable-goods sector have disappeared, according to state figures.

(A durable good is something which will last, such as airplanes or automobiles, while non-durable goods are such items as clothes, paper products, food products and soap. Generally speaking, durable-goods manufacturing jobs are better paying.)

Service industry: Savior?

In past recessions, hiring in the service industries tended to yank Los Angeles out of economic doldrums, even as manufacturing slogged along.

But not this time, said economists. With huge uncertainties in finance, insurance and real estate, that route out of recession may be blocked for several years.

Banks and thrifts, stung by non-performing loans, are streamlining, not hiring. Insurance companies, a laFirst Executive, are in much the same boat.

"There is a general restructuring in business, in order to increase productivity. Companies are cutting into the ranks of white-collar workers," said John Hekman, senior economist with Micronomics in downtown Los Angeles. "The merger of Bank of America and Security Pacific (two major California banks) is supposed to result in the 20 percent cut in employment (at the combined bank). We are going to nationwide branch banking next year - if you assume a 20 percent cut in employment in banking (as a result of mergers) it is pretty staggering."

Many analysts expect a second large bank merger - Los Angeles-based First Interstate with San Francisco-based Wells Fargo - to also cut the rolls of bank workers.

The service sector squeeze is one reason why the help-wanted advertising index in July for Los Angeles was at its lowest level since the 1975 recession - employers are still tightening belts, not hiring, said economists last week.

The long run

Still, the recession may spread a few silver linings around Los Angeles, although in the short run the linings might look like concentrated rain.

For example, Southland house prices have been stable, in nominal terms, for nearly two years and have actually dropped after adjustment for inflation. More moderate housing prices could help local businesses attract talent and stay in Los Angeles.

"If we have a moderation in home prices, we may lose fewer businesses," said Heckman. "I don't know if our home prices will ever get low enough to attract businesses, but they may help us from losing more businesses."

Median Southland home prices have been hovering near $200,000 since 1989.

Too, an abundant supply of industrial and office space will keep commercial rents low for years to come - it is a remarkable fact that it is cheaper to rent space today in downtown Los Angeles than in 1979, even before adjustment for inflation.

After roughly figuring in inflation - difficult to do, due to the common landlord practice today of offering "free months' rent" and other incentives - office rents in downtown Los Angeles are off about half from 1979.

Meanwhile, large industrial space is readily available in the Los Angeles area, with older buildings downtown renting for as little as 20 cents a square foot, and nicer buildings in the South Bay available for less than 30 cents a square foot.

In the late 1980s, industrial rents in the lower range were rising above 30 cents or 40 cents a square foot, although there are many variables based upon the location and type of building.

But however one cuts it, when the recovery begins - and the economists interviewed emphasized it was a matter of when, not if - businesses will find that "high-cost" Los Angeles is pretty cheap when it comes to rents.

Another silver lining may be the new assertiveness among the business community - and a growing consensus - that the Southland needs to act to retain companies, particularly manufacturing concerns.

Too, all economists interviewed emphasized that while they were predicting continued local doldrums - generally a flat to slightly down economy - they were not projecting the local economy would go into a prolonged tailspin.

The Los Angeles population is still growing, and as the national economy strengthens, it will tug L.A. along.

"It will be a slow recovery, but ultimately the growth of the local population will drive the economy, because it means people who can work and buy things," said Hekman of Micronomics. "We are still a growing region."

Table : Manufacturing jobs (in Los Angeles County)

                             Durable   Non-durable
Date               Total     goods     goods
1991 July          805.2     496.6     308.6
1990 July          854.4     540.1     314.3
1989               886.2     570.5     315.8
1988               904.3     592.9     311.4
1987               905.9     597.5     308.4
1986               891.4     597.5     293.9
1985               887.1     602.3     284.8
1980               912.1     618.3     293.8

Note: Figures in thousands Source: California Employment Development Department

Table : Los Angeles County Employment

                                       Percent
                   1991      1990      change
July               4,243.0   4,298.5   -1.3
June               4,280.0   4,340.6   -1.4
May                4,273.5   4,330.3   -1.3
April              4,279.4   4,312.8   -0.8
March              4,286.7   4,317.2   -0.2
February           4,274.1   4,280.9   -0.2
January            4,264.6   4,251.3   +0.3

Note: Figures in thousands. Source: California Employment Department

PHOTO : Employment office: Business is brisk

PHOTO : Looking for work: Jan Geraci, left, an unemployed executive assistant

PHOTO : Hopefuls line up : Employment Development Department in Santa Monica.