A Time of Uncertainty.

STRIKES, U.S. SLOWDOWN COULD KEEP L.A. FROM BUILDING UPON SUCCESS

No one disputes the fact that the Los Angeles economy is finishing up a stellar year. The only question is whether the good times will keep rolling.

If the national economy does go through a widely feared slowdown next year, a number of local economists are convinced that L.A. will feel only a minor impact and even post solid, if slower, growth. But if there's a hard landing nationally, things may not go quite as well here.

Throw into this the possibility of a nasty and protracted motion pictures strike and/or continued record energy shortages and prices and there is the potential that the economy could be pulled down even more.

"The weakest point of the Los Angeles economy is the state of the national economy," said Anil Puri, dean of the College of Business and Economics at Cal State Fullerton. "But at this point we don't foresee a recession yet, only about six months of slower growth."

Pun believes that the current momentum of the L.A. economy will not only shield it from a nationwide slowdown, it may even grow at a faster clip next year. His forecast calls for 2.1 percent job growth in 2001. versus an estimated 1.8 percent this year. He expects that the national economy will grow by 3 percent next year, as opposed to the estimated 5.1 percent this year.

To be sure, not everybody is quite as optimistic. But the consensus still comes down in favor of another good year.

"We probably reached the peak in employment growth this year, but there is still going to be significant growth next year," said Joe Magaddino, chairman of the Department of Economics at Cal State Long Beach. "All the large sectors are still growing fast. Services, retail, and government are driving the economy and absorbing the losses from manufacturing, and by the end of the year we should have recovered the number of jobs we lost during the recession."

Indeed, unemployment in L.A. County dropped to a seasonally adjusted 5.0 percent in November, indicating that at this point there is still little sign of a local slowdown.

Meanwhile, a number of large infrastructure projects, including the Alameda Corridor and the expansions of both the ports of L.A. and Long Beach, together with private sector projects such as Disney Hall and Hollywood and Highland, will continue to provide momentum to the economy next year.

Here's a rundown of the outlook for key L.A. industrial sectors.

Manufacturing

The manufacturing sector is still the problem child of the local economy, and it doesn't look that this is going to change soon. Both the aerospace and the apparel industry are still shedding jobs, and the expectation is that this trend will continue next year.

"The big disappointment remains durable goods manufacturing," said Magaddino. "Even with President-elect Bush coming in, it will take some time, maybe three to four years before Los Angeles will start benefiting from higher defense spending."

The Los Angeles County Economic Development Corp. estimates that 10,500 local aerospace jobs will be lost this year and another 5,000 next year. There is a remote chance that the Joint Strike Fighter will be built in Palmdale, where both Boeing Co. and Lockheed Martin Corp. are developing their so-called concept demonstrators: That contract will be awarded next year,

Meanwhile, in the non-durable goods sector, the apparel industry had a rough year, losing 2,600 jobs, and the outlook for 2001 is not much better.

"Textile manufacturers are hurt by the high energy costs, and apparel manufacturers by weak retail sales," said Lonnie Kane, president of Karen Kane Inc. "There are a lot of small designer startups that were spawned by the local trade schools and that are running into trouble getting financing. Next year could be difficult unless the Fed cuts interest rates and consumer confidence picks up."

Technology

Although the dot-com bust has taken its local toll, with companies like CarsDirect.com, eToys Inc. and Stamps.com Inc. among the better known victims, the damage is not major, and the technology sector in L.A. County is expected to expand in 2001.

"Our strong suit is in advanced communications technology and services -- technology that has come out of classic aerospace research," said Jack Kyser, chief economist of the LAEDC. "We still expect modest growth in this sector next year."

A large number of these communications technology manufacturers and services providers are located in the South Bay, around El Segundo and along the Ventura (101) Freeway Corridor in the Western San Fernando Valley. Both areas are among the fastest growing regions of L.A. County.

But local technology businesses would be affected by a nationwide, cyclical downturn, which is going to make it harder for start-up companies to get funding.

"We're not going to see the deals VC firms were seeing one or two years ago in terms of returns," said Alex Suh, managing director of California Technology Ventures. "But there are still opportunities. There are a lot of bright people here, who tend to be a bit more pragmatic than their compatriots in Northern California or on the East Coast."

Suh is looking for more diversification in his investment portfolio, including life sciences startups. Indeed, the biotech industry in L.A. is expected to do well next year, as the major research universities see large private sector investment in new biotech-related research facilities. In particular, Caltech is spawning an increasing number of spin-off companies.

"There has been no speculative bubble or excessive expectations in the biotech sector, and so you're not seeing a backlash either," said Bill Opel, executive director of the Huntington Medical Research Institutes. "In Pasadena we're seeing steady progress in creating a biotech corridor, with three developers planning speculative research buildings along Raymond Avenue."

Entertainment

With the likelihood of major actors and writers strike next year, the multi-billion motion pictures industry could be hit hard next year. The ripple effect of such a strike will be felt in all sectors of the local economy.

"Based on what happened before, we anticipate a three-month strike next year, and that's going to slow us down to about 1.9 percent job growth," said Kyser. "If the strike is going to be longer than that, there will certainly be a lot more layoffs."

The ramifications of a motion picture strike, and in particular the stockpiling of films in preparation for a work stoppage, can have long lasting implications for the financial health of the studios.

"There's a lot of hubris on the part of the studio guys, who think that a strike may actually be good for business," said Tom Gray, a senior advisor with the entertainment practice of Deloitte & Touche LLP. "They think that stockpiling films and rolling them out systematically may be advantageous. But basically, by rushing to get stuff into production, you're going to see a lot of crap."

By trying to finish as many movies as possible before the actors and writers go on strike, the studios are producing too much inferior product, argues Gray, who thinks that's going to hurt them at the box office.

In addition, with many theaters chains going through Chapter 11 bankruptcy reorganizations, it's expected that there are going to be fewer screens next year, which is also going to hurt box office revenues for the studios.

International Trade

International trade has been one of the fastest-growing sectors of the L.A. economy, as a record volume of imports arrived at the ports of L.A. and Long Beach and a record volume of exports left through LAX.

The value of two-way trade through the Los Angeles Customs District went up by a staggering 19.4 percent this year, according to the LAEDC, and that is not likely to be repeated in 2001.

For one, if the dollar weakens versus other currencies as part of a nationwide recession, the huge flow of imported goods arriving at the ports could see some significant reductions.

As a result, the LAEDC expects the value of two-way trade next year to increase by a more modest 10.7 percent, which will amount to an additional $25 billion in goods passing through the region.

However, if the national economy has a hard landing next year, a more substantial drop-off of imports through the ports could be widely felt. Not only will importers and distributors see their business suffer, truckers, warehouse operators, business service providers, and real estate developers, all of whom have been benefiting from the boom in international trade, will feel the impact.

"We still see trade as a plus for the local economy," said Tom Lieser, senior economist with the UCLA Anderson Forecast. "But if a national recession is going to impact the trade balance, we are going to be affected by it."

Real Estate

Since there has been no excessive construction during the current economic expansion in L.A. County, it is not expected that a local slowdown will impact the real estate market in a significant way.

In particular the industrial real estate market is still very tight, with regional vacancies below 5 percent, and new space continues to get leased or sold as quickly as it is finished.

"We're still cautiously optimistic for the regional market even if there will be an economic slowdown," said Robert Ruth, area president and managing director of Trammell Crow Co. "The fundamentals are still very strong in terms of the growth of the ports and LAX. You cannot underestimate how important a land bridge Los Angeles has become for the rest of the United State."

Ruth also expects the regional office market, particularly on the Westside, to stay solid in 2001 even if lots of dot-coms pull out. As the traffic infrastructure in L.A. continues to worsen, entrepreneurs and executives will want to have their offices as close as possible to their homes on the Westside and other high-end neighborhoods, he said.

A perennial concern for local economists is the virtual absence of new housing. This year, 17,200 permits for new housing units were issued in L.A. County, and the LAEDC expects this to decline to 14,200 in 2001. That is not much considering that the local economy is creating over 80,000 new jobs per year.

Lack of new product combined with an anticipated drop in interest rates should mean that home prices in L.A. will continue to rise next year.

"Lower interest rates are going to push up demand, because it improves affordability and improves consumer confidence," said Leslie Appleton Young, chief economist with the California Association of Realtors. "That's going to show up particularly at the low end of the market where we're seeing the greatest price appreciation."