Certain Industry Sectors Still Somewhat Vulnerable.

WHAT about the big picture?

No matter how well or badly the banking industry fends off any Y2K glitches, the key question is whether it will upend local, national and global economies.

No one knows for sure, of course, and while most economists expect only minor problems related to Y2K computer glitches, certain sectors -- among them financial services, transportation and energy -- clearly are more vulnerable than others. So are certain countries that are not as Y2K-compliant as the United States -- a potential sore spot for Los Angeles because the local economy is so dependent on international trade.

A very few economists warn that computer malfunctioning in the coming months may be serious and prolonged enough to trigger a full-blown recession. But most see the impact, at worst, as comparable to that of a minor natural calamity, such as a blizzard. In short, it may disrupt normal life for a few days.

"Of all the countries, the U.S. has paid most attention to preparing for the date change," said Ted Gibson, chief economist with the California Department of Finance. "The financial markets and the Federal Reserve are well-prepared, all the key sectors of the economy have contingency plans, and every public company has had to disclose their Y2K-preparedness progress in their quarterly and annual reports."

Focus on critical industries

A recent report by the Department of Commerce shows that the U.S. public and private sectors will be spend about $114 billion between 1995 and 2001 to overhaul information technology systems in preparation for Y2K. The bulk of the spending so far has gone for what's considered critical industries, such as financial services, telecommunications, energy and transportation. A sustained disruption of operations in any of these industries could have catastrophic economic consequences.

In particular, the financial services industry -- including banks, insurance companies, and investment firms -- got an early start in Y2K planning and is generally regarded as fully prepared for the millennium changeover.

Pessimists, however, worry about other industry sectors and countries as potential sources of turmoil. Edward Yardeni, chief economist with Deutsche Banc Alex. Brown who has been among the most pessimistic forecasters, notes that many businesses and foreign countries have been late in upgrading their computer hardware and software. As a result, many have cut corners and been unable to test whatever fixes that are being made.

"There is an enormous amount of complacency about the potential for an economic collapse," said Yardeni. "Between 1 and 5 percent of mission-critical systems in the U.S. will fail, and this may very well have a domino effect, depending on the amount of data exchange that is involved."

The problem could be severe, according to Yardeni, because the system failures will all happen at about the same time, and therefore will have a more disruptive effect than they otherwise might. Any problems will be especially acute for global, just-in-time supply chains in manufacturing, petroleum production, and government distribution of welfare checks and the like.

With such potential direct impacts, and even broader indirect effects, Yardeni is assigning a 35-percent probability of a major global recession lasting six to 12 months. He says that a more modest, six-month recession is a bit less likely to occur, with a 30-percent probability.

Andrea Daly, senior manager with Arthur Andersen who oversees the firm's Y2K practice in Los Angeles, also sees a good chance of an economic slowdown. But her envisioned scenario is far less dire than Yardeni's, and it's linked to expected delays in oil shipments.

"The petroleum industry is heavily dependent on computers and is not Y2K compliant," said Daly. "The U.S. economy is extremely dependent on petroleum, and we could see higher gas prices and higher cost of goods, as transportation becomes more expensive."

City not ready?

Daly also is concerned about local governments' preparedness. While L.A. city officials have taken pains to indicate they are ready, she doubts all the antiquated software systems have been fixed. The result could be delays in city services.

But other experts downplay the likelihood of Y2K-originated troubles.

Tom Oleson, research director with the International Data Corp., a market research firm based in Framingham, Mass., projects that roughly 2.5 percent of Y2K-upgraded systems will experience some problems -- the normal failure rate of any upgraded system.

"About two-thirds of the failures will be either amusing or annoying, but they won't be serious," said Oleson. "Perhaps the date on top of a computer-generated letter will read January 1, 1900 instead of 2000."

IDC calculates the total economic loss from Y2K to be no more than $50 billion worldwide, less than 1 percent of the total global economy.

"These losses will occur mostly in the Far East, Eastern Europe and Latin America," he said. "We don't expect that there will be many losses in the U.S."

And while there is some concern that overseas Y2K problems may have ramifications for the U.S. economy, and might in particular affect international-trade dependent local economies, these worries generally are played down.

"The good news is that many of these under-prepared countries are not as heavily technology dependent and typically do very little trade with us," said Joe Magaddino, chair of the Department of Economics at Cal State Long Beach.

One of the most significant consequences of the millennium bug, according to Magaddino, is an indirect one -- inventory stockpiling by many U.S. businesses as a precaution against any Y2K disruptions.

"Businesses don't want to be caught off guard and even if they don't expect any problems, have been building up their inventories," he said. "As a result, we'll see a very strong fourth quarter, but economic growth will slow down during the first quarter of next year."