Cool economic winds in hot valley: sectors face downturn as consumers pull back.

So far, the numbers aren't bad, but anyone listening closely to some of the comments coming from CEOs can't help but notice the hint of some economic bumps ahead.

Phrases like "challenging retail environment" and "slowing pace of home sales," are creeping into the vernacular of the heads of companies nationwide as they size up performance of recent months and look to the second half, and the San Fernando Valley is no exception.

Other troubles that could take an economic toll locally have also been emerging in recent months. Ford Motor Co. has said it may reduce its dealership network, which now numbers about a dozen in the Valley. Several of the Valley's tech companies, including Vitesse Semiconductor Corp., THQ Inc. and Semtech Corp. are all facing SEC investigations. And the threat of inflation continues to dog the economy.

The Valley, with its diverse economy, is likely to fare better than most in the second half of the year and the next one, experts say, but some sectors are primed for a downturn and, overall, there are signs that the growth of recent quarters is slowing considerably.

"Indications are the economy is slowing its pace of growth, and that will slow revenues," said Dan Blake, director of the San Fernando Valley Economic Research Center at California State University Northridge. "Secondly, we've seen a boost in the inflation rate, which means companies' costs are going up, and we know that their energy costs are going up and that can be a big chunk for some companies."

As books closed on the first half of 2006, many of the Valley's largest public companies reported enviable increases in earnings and revenues. Still, a review of the 10 largest public companies in the region showed an average 4 percent decline in earnings and a more modest 9.5 percent increase in revenues, a performance that seems all the more lackluster in light of several previous quarters when the group averaged double digit growth in earnings and revenues.

The first half earnings slump was due mostly to Amgen, which saw a 47 percent decline in net income to $1 billion or $0.84 per share in the first half of 2006 compared to $1.9 billion or $1.49 per share in the first half of 2005, largely due to acquisition expenses, and Ixia, which was hit by problems at Cisco Systems Inc. that affected numerous telecom companies. Ixia reported its net income fell 95 percent to $785,000 or $0.01 per share on revenues of $78.8 million, off just a hair from revenues of $79.7 million in the second half of 2005.

Entertainment, health care and insurance sectors registered some of the strongest numbers in the first half of the year. Earnings at Health Net Inc. more than doubled to $153.6 million or $1.30 per share from $74.9 million or $0.66 per share in the comparable period a year ago. Zenith National Insurance Corp. reported its earnings rose 30 percent to $11.6 million or $3.00 per share, compared with $85.7 million or $2.36 per share in the 2005 half year. And 21st Century Insurance Group logged a 24 percent increase in earnings to $49.6 million or $0.58 per share, versus net income of $39.9 million or $0.47 per share in the first half of 2005.

Walt Disney Co., which last month reported its nine-month figures, logged a 20 percent earnings increase to $2.6 billion or $1.28 per share, compared with earnings of $2.2 billion or $1.03 per share in the first nine months of 2005.

But even among some companies that saw earnings rise by 10 percent or more, there were indications that the momentum was flagging.

Home builder The Ryland Group, which reported a 10.6 percent earnings increase for the first half, also noted that new order dollars in the second quarter of 2006 declined by 40 percent and new order units fell 39.4 percent. Although its first half earnings rose 12 percent to $1.4 billion or $2.25 per share, Countrywide Financial Corp., noted that pre-tax earnings on loan production in the first half declined 47 percent. Shortly thereafter, the company noted that mortgage loan fundings for the month of July were off 19 percent from levels a year ago.

And at music retailer Guitar Center Inc., where earnings in the first half were relatively flat, at $29.1 million or $1.03 per share, officials said they anticipate that net income in the third quarter will fall closer to the low end of the guidance range provided in February.

"The baton is being passed from the consumer to the business sector, and I think that's real," said Hessam Nadji, managing director of research services at Marcus & Millichap of the shift from the past several years when consumer purchasing fueled economic growth.

The slowdown in consumer spending is likely to affect the local economy in many ways, these experts said.

A general tightening of purse strings will likely affect restaurants, entertainment and big-ticket durable purchases such as automobiles and washing machines.

Then too there are the jobs that were generated over several years of frenzied home buying activity--employment levels in construction, the mortgage industry, real estate brokers and home improvement store workers all will decline.

In 2004, the most recent year for which those figures are available, the Valley's real estate industry generated an annual payroll of $500 million, according to San Fernando Valley Economic Center data.

The Economic Center data projects employment growth of 1.6 percent in 2006 with a slight rise over that in 2007. But Blake said current indicators suggest 2007 growth may be slower still.

"We think it might be closer to 1.6," said Blake, who is currently at work revising those earlier predictions.

For several years now, as business retrenched, consumer industries have more than picked up the slack. Now, however, as consumers appear to be tightening their belts, business will not be able to pump enough into the economy to make up for the losses on the consumer side, experts say.

"Two-thirds of the economy is driven by consumers," said Nadji. "No matter how much business kicks in, there will be a shift and slowdown in growth, but I don't see it as becoming a dramatic downturn, especially in the San Fernando Valley, for a number of reasons."

Nadji said that in the Valley entertainment, business services, health care and education will help to mitigate the consumer spending downturn.

BY SHELLY GARCIA Senior Reporter

Highs and Lows
Selected Valley Public Company Results

Company                        Net Income    Net Income     Percent
                               First Half    First Half      Change
                                  2006          2005       '06 v. '05

                                         (in millions)

Health Net Inc.                 $153.6            $74.9      +100.1%
Zenith National Insurance         116.1            85.7       +30
21st Century Insurance Group       49.6            39.9       +24
Ixia                                 .785          19.1       -95
Amgen                           1,000.          1,900         -47

Source: Company documents