Bloody, but not bowed, economy in L.A. churns out slow growth; aerospace decline other shocks take heavy toll.

Bloody but not bowed, economy in L.A. churns out slow growth

Aerospace decline, other shocks take a heavy toll

The huge Los Angeles economy, where 4.3 million people make a living, should shake off shocks to its aerospace, real estate and tourism sectors to post modest growth in the second half of 1990.

Nevertheless, local unemployment rates are already rising, posing questions about job growth even before the expected negative impact of defense cuts hit Southern California.

It is only the Southland's extraordinary diversity and population growth -- local trump cards for decades -- that will keep local businesses moving ahead, if more slowly than the brisk 1980s. Overall, the local economy is expected to grow by about 2.5 percent after inflation in 1990, compared with 3.1 percent last year.

"We will continue to have growth at sluggish rates relative to the last few years," said Fred Cannon, senior economist with Bank of America. "We don't have a recession in our forecast. The defense and construction industries are slowing down, but there is strength in the wholesale, retail and business services sectors. Apparel is strong."

Said Jack Kyser, economist with the Los Angeles Area Chamber of Commerce, "Our economy is flying lower than at any time in several years. We are at tree-top levels, but we are not going to crash."

While the overall picture is cautiously positive, few Angelenos make their living in the general economy. Fortunes rise and fall with specific segments.

With some industries sagging, the unemployment rate in Los Angeles County reached 5.4 percent in April, up from 4.3 percent in April a year ago, the state Employment Development Department reported last week. Roughly 250,000 Angelenos are looking for work, and thousands more will soon be pounding the streets because of lay-offs in the aerospace industry.

Real estate is already suffering; the Southland may be overbuilt.

With real estate bubbles bursting across the country, never before have so many viewed Southland turf with wary eyes.

Banks and thrifts could find more "work-out loans" -- slightly sour IOUs -- on their books than they would like, crimping new lending activity, and possibly slowing construction activity.

Those in the construction industry, which employs about 155,000 here, could see a lack of work soon. Real estate dealmakers say the last 60 days have brought a chilling change of mood among lenders.

"I just had financing on a $10 million condo project in the San Fernando Valley fall through, after I had worked on it for eight months," said Barry Katz of the Investment Properties Division of the Grubb & Ellis real estate brokerage. "The thrifts, which used to be involved in lending for commercial construction, purchase, joint venture and even direct development, are out of the picture. And banks have tightened their underwriting guidelines, looking for more equity from borrowers and better numbers."

Katz said good deals are still getting done, but activity is going to be reduced from the 1980s.

As a result of the thrift debacle and bankerly tightfistedness, construction lending is dropping; in the first four months of 1990, only $1.82 billion worth of construction loans were extended in Los Angeles County compared with $2.30 billion in the same period last year, a 21 percent drop, according to Dataquick Information Services Inc., a real estate firm.

Economists say that lay-offs in aerospace and the manufacturing sector are doubly important to the Southland. Each manufacturing job, generally speaking, creates another two to three jobs in collateral activities, such as trucking, warehousing, administration, accounting, advertising and sales.

Additionally, manufacturing activity brings money into the local economy -- there is a limit to prosperity generated by taking in each other's laundry. New money enters the economy when a product is sold that is manufactured here.

While aerospace and military industries are not as important to the local economy as they were in the early 1970s, they still send ripples across the local economic landscape with each wiggle.

An economic simulation performed by UCLA's Business Forecasting Project forecasts a 1 percent increase in the state unemployment rate by 1992 should large defense cuts be voted through by Congress. For Los Angeles County, such cuts would translate into another 50,000 unemployed.

Such cutbacks could trigger a local recession, akin to the slowdown that securities industry slashes have caused in the New York economy. In New York, the securities industry comprised between 4 percent and 5 percent of the state economy; the defense industry comprises 7 percent of the California economy, and probably a larger percentage of the local economy, given the huge aerospace plants in Burbank, Palmdale and Long Beach.

"The aerospace situation has everybody on tenterhooks," said Kyser of the Los Angeles Chamber. "We'll just have to see how it shakes out."

An economic black eye for Los Angeles is the region's faltering tourism and convention business, which has been undermined by endless drug and crime stories, and the hapless Los Angeles Convention Center, which is too small to attract business.

"Through 1991, I do not think the prospects look promising," said George Kirkland, president of the Los Angeles Convention and Visitors Bureau. "Things will be hurting now, and through next year."

The tourism industry is Los Angeles' second-largest industry, but the building of a new, enlarged Convention Center is falling years behind schedule. A new convention hotel adjacent to the convention center -- considered key to the success of the facility -- is still not even on the drawing boards.

The city Community Redevelopment Agency last week again solicited proposals for a new hotel, after concluding more than two years of discussions and negotiations with a builder who did not have the financial ability to complete a project.

Like aerospace and manufacturing, tourism is vital to the Southland economy because it draws fresh dollars into local coffers.

Despite weak sectors, the Southland economy will push ahead. One bright spot is the international trade sector, which employs 274,000 in Los Angeles County. This sector is composed of all workers who have anything to do with moving goods in and out of the federal Los Angeles-area customs district, which includes the Los Angeles-Long Beach Harbor and Los Angeles International Airport.

The good news here is that exports are surging; in this year's first quarter $10.3 billion worth of merchandise went overseas through local exit points, up a hefty 17 percent from last year. Imports are growing too.

"The additional trade activity means more jobs," said Kyser of the Los Angeles Chamber. "And this sector employs more people than commonly thought." In fact, trade employs more than four times as many people as does Hollywood, the industry with which Los Angeles is so often coupled in the national media.

The exports are also directly helping local manufacturers. California companies capture about 12 percent of total U.S. exports, according to Bank of America. Los Angeles County -- where nearly 900,000 work on manufacturing lines -- is an industrial center, and probably takes more than its share of the export pie, said economists.

For better of worse, the Southland remains a mecca for people across the nation and even the globe. The population in Los Angeles County was 8.77 million at the start of the year, up 2.6 percent from two years earlier. Many, such as economist Kyser, contend that official tally undercounts the true extent of in-migration to Los Angeles, due to the large amount of illegal aliens here.

However, there are ominous telltale signs on the population front -- signs that could foretell of a long-term slowdown in the Southland's economic picture.

Beginning in 1986, people began leaving Los Angeles County, and in droves. Before 1986, no more than 300,000 Angelenos ever migrated out of the county in any year. However, by 1988, more than 400,000 people left Los Angeles County, nearly as many as the number migrating in, according to the UCLA Business Forecasting Project.

"It is clear, however, that out-migration is increasing faster than in-migration and, if this trend continues, growth will slow or even halt and decline, at some point," said Nancy Bolton, a demographer hired by the UCLA forecasting project.

Births are still exceeding deaths, but if out-migration grows more, even the "natural" increase could be overwhelmed by departures -- with predictable effects upon real estate, housing prices and retail sales.

The declining quality of life probably lays behind the sudden interest of Angelenos in living elsewhere. Yet traffic and congestion will only grow worse unless Californians approve major bond issues 108 and 111 this July, to finance the building of freeways and mass transportation projects.

"My guess is that the infrastructure (roads, sewers, rails, etc.) could become a major constraint on growth if these bond issues do not pass," said economist Cannon of the Bank of America. "If they pass, it would probably be a net stimulant on growth."