Looking Ahead.

Forecasters say the L.A. economy will slow down slightly in 2000 and in 2001

L.A.'s economy is about to slow down. Really, That's at least the cautious expectation of local economists who like everyone else have been routinely underestimating the durability and longevity of the current expansion.

The 2000 forecast is not exactly gloomy -- and far from anything approaching an outright recession. But with the Federal Reserve expected to raise interest rates again as a way of controlling inflationary pressures, things are likely to cool off just a touch in 2000 and 2001, before picking up again in 2002.

The impact on the local economy will be a moderate slowdown in the number of new jobs created. Local forecasters project that non-farm employment in Los Angeles County will increase 2.1 percent this year. Next year, that rate will inch down to 1.9 percent, and in 2001, 1.8 percent.

"Make no mistake about it, inflation is already on the rise," said Rajeev Dhawan, director of economic forecasting at the UCLA Anderson Forecast. "Last year the national CPI (consumer price index) increased just 1.6 percent, but this November it is already up 2.6 percent."

Dhawan cites a weaker dollar, higher energy prices, and wage pressures as key factors in pushing up the CPI, and he expects the annualized inflation rate to reach 3.0 percent by the first quarter of next year. This, he believes, will prompt the Fed to raise interest rates by 50 basis points.

The upshot is that U.S. gross domestic product will grow by a moderate 3.2 percent in 2000, down from 3.8 percent this year.

Besides inflation, other factors that could put the brakes on local growth are a labor shortage and, perhaps more relevant in L.A., an affordable-housing shortage.

Here's how various local sectors are expected to fare.

Manufacturing

While L.A.-area manufacturers will see some increased global demand, that will be largely negated by an ongoing decline in the local aerospace and apparel industries.

The Los Angeles County Economic Development Corp. foresees a 5.2 percent decline in the number of high-tech and aerospace jobs in L.A. County in 2000, as commercial aircraft programs at the Boeing Co.'s Long Beach facilities wind down.

"There is still a sizeable aerospace industry in Los Angeles, with the Lockheed Martin Skunk Works in Palmdale and Boeing's research and development facilities here," said Jack Kyser, chief economist with the EDC. "Increased defense spending could bring more jobs to the region, but that won't happen until after the next presidential elections. So, we expect continuing job loss in L.A. through 2002."

While aerospace construction jobs are declining, airplane maintenance will pick up some of the slack. Just last week, Zurich-based SR Technics announced that it would set up a facility to overhaul and maintain its airbus fleet in Palmdale. The facility is expected to bring between 5,000 and 7,000 jobs over the next five years.

The apparel industry, meanwhile, is also expected to shed local jobs in the coming years, as more low-end manufacturing leaves Los Angeles for Mexico. On the other hand, the better-paying, high-skill apparel jobs are expected to stay put.

Business services

This sector has been adding the largest number of jobs to the local economy, and that is expected to continue in the foreseeable future.

Between November 1998 and November 1999, 18,200 new business services jobs were created in L.A. County, according to the California Employment Development Department. The 1999 job-growth rate for this sector is expected to be 5.7 percent, down from 7.5 percent last year. The EDC projects further slowing next year, to 4.6 percent, and then down to 4.1 percent in 2001.

But even at that slower rate of growth, the business services sector is projected to add in excess of 30,000 jobs in L.A. County over the next two years.

"Eventually business services will overtake manufacturing as the largest single sector," said Tom Lieser, executive director with the UCLA Anderson Forecast. "The sector will continue to grow fast, while manufacturing will continue to stagnate and shed jobs."

Entertainment

Hollywood is likely to pick up the pace after a few years of stagnant growth. The EDC projects that employment in movie and TV production will increase by 0.4 percent next year and by 0.8 percent in 2001. This comes after a 1.0 percent decline this year.

"The industry has had its problems, but it is still doing very well," said Lieser. "We are seeing record box-office receipts this year, and as the dollar weakens against other currencies, it will be less attractive to make films in Canada and elsewhere."

Lieser projects statewide employment in entertainment to increase by 3.3 percent in 2001 and by 3.5 percent 2002, with the vast majority of those jobs being created in L.A. County.

International trade, tourism

The EDC expects the value of two-way trade through Los Angeles to hit the $200 billion mark next year, and international trade will continue to be one of the driving forces of the local economy.

The key factor is the rapid recovery of the Asian economies. Whereas last year, the overall value of trade through L.A. declined 2.3 percent, this year it was up 6.5 percent. For 2000, the EDC projects a 4.3 percent increase, accelerating to 5 percent in 2001.

With overseas demand for U.S. goods again on the rise, export volume is growing faster than import volume. The value of exports coming through LAX and the seaports of L.A. and Long Beach are expected to increase by 6 percent next year, to $69.7 billion.

Another beneficiary of the Asian recovery is tourism. A total of 24.3 million visitors are expected to visit L.A. next year, a 2.1 percent increase over 1999 -- and the result of renewed business from Asia as well as the Democratic National Convention.

Construction

With interest rates expected to go up next year, the construction industry faces a slowdown from its recent, torrid rate of growth. Last year, the number of construction jobs in L.A. County increased by 7.8 percent; this year it's expected to be up by 6.2 percent. For next year, the EDC forecasts a more moderate 4.8 percent increase, and 4.2 percent for 2001.

That deceleration will be a main factor in slowing down the overall economic growth of L.A. County, according to Mark Schniepp, director of the UC Santa Barbara Forecast Project. "As construction slows, you will see slower job creation and slower income creation," he said.

While both residential and nonresidential construction have been steadily increasing, they are nowhere near their peak levels of the late '80s and are not expected to get back up there anytime soon. That may be positive for the region's long-term economic prosperity, because developers are not indulging in the speculative commercial overbuilding they did in the '80s.

Housing

While developers' restraint on commercial projects is considered a plus, their inactivity in residential construction is widely seen as an impediment to future economic growth.

Lack of new construction and continuing demand means that home prices will keep going up. Higher mortgage rates, on the other hand, will likely act to slow the rate of sales. The California Association of Realtors projects a 5 percent increase in the median home price in California, while the volume of existing- home sales is projected to decline 8 percent.

In Los Angeles, home prices are expected to rise more than elsewhere in the state, and local sales activity is expected to slow less.

"Los Angeles is still behind the curve in the recovery of the housing market and has some catching up to do," said G.U. Krueger, deputy chief economist with CAR. 'The affordability problem is not as pronounced here as in the rest of California, but that could change within a year."

                            Economic Forecasts
        PROJECTIONS FOR CALIFORNIA IN 2000, FROM VARIOUSFORECASTERS
                             Annual Percent Increase
                                                     Personal Taxable
Forecaster                         Employment         Income   Sales    CPI
Legislative Analyst's Office           3.1%            6.1%     5.5%    3.1%
LAEDC                                  2.9             6.6      5.9   No est.
UCLA Anderson Forecast                 2.7             6.1      5.8     2.7
Calif. Assoc. of Realtors              3.0           No est.  No est.   2.6
Sacramento Forecast Project            2.1           No est.    5.1     3.1
                             Unemployment New Housing
Forecaster                       Rate       Permits
Legislative Analyst's Office     4.7%       153,000
LAEDC                            5.1        152,100
UCLA Anderson Forecast           4.8        150,000
Calif. Assoc. of Realtors      No est.      170,500
Sacramento Forecast Project      5.2        No est.