Top Economic Forecaster Predicts Trends

by Jack Kyser

The period 1997-99 was good for the Los Angeles County economy. During that time more than 200,000 new nonfarm jobs were created, unemployment fell to 5.5 percent, and several important projects were completed or under construction. The list includes Staples Center, the MetroRail transit system, Disney Concert Hall, the Cathedral of Our Lady of the Angels, the Hollywood and Highland project, and the Alameda Corridor. The County's population also expanded, adding 888,000 people between July 1, 1990 and July 1, 1999. The total count as of the latter date was 9,790,000.

Most importantly, the local economy became more diversified, moving from the mythical "three-legged" base of aerospace, movies and tourism, to 12 "export" industries (activities that sell goods or services outside of the area). While much attention was focused on growth in the movie industry, the real powerhouse was international trade. The Los Angeles Customs District moved into first place in the nation in 1994, and easily maintained that position in 1999 with a total two-way trade value of $197 billion. New York snagged the number two spot at $190 billion.

Some Dichotomies

But life in L.A. has not been all milk and honey. The aerospace industry continues to post job losses, and the local apparel manufacturing industry moved from a job growth to losses in 1998 that continued in 1999. Most importantly, Los Angeles County has not yet recovered all the nonfarm jobs lost during the early 1990s. We are still 146,000 jobs below the previous peak. But there is an important footnote to these numbers‹they don't adequately capture the "new" economy that has flourished in the County. This includes jobs in advanced technology, new media and professional management services, which are frequently missed in traditional employment surveys. The undercount is about 260,000, which is akin to missing the city of Riverside.

Another key factor in recent and future economic growth for Los Angeles County is "convergence," defined as the application of expertise or technology from one industry to another, creating an entirely new activity. The best example is new media, which uses both the internet and the creative input of Hollywood. Another very good example is the themed entertainment industry, which uses inputs from Hollywood (lighting and set design) and the theme park industry. This has quietly become an international business, with the association headquartered in Burbank.

What's Powering the Growth?

An array of industries is pulling the economy forward, with international trade setting the pace. Tourism is also growing, with the number of overnight visitors up 1.7 percent in 1999 to 23.8 million. Next year should be a good year, as experience has shown that a host city for a political convention sees a jump in tourism the following year. The bio-medical industry is active, although it's difficult to track. Non-bank financial services are in a growth mode as well, as Los Angeles becomes fertile territory for investment bankers and venture capitalists. Technology is stepping along, with the region seeing a recent flood of venture capital money. And finally, professional management services are doing well, reflecting both the strong U.S. economy, and the recovery underway in Asia.

On the flip side, watch for interest rate increases by the Federal Reserve, and the gas price situation. There will also be a lot of "background noise" through November, due to presidential elections in the U.S. and Mexico, California's most important trading partner.

Near Term Growth Trends

Growth of Los Angeles County's economy will slow slightly during the rest of the year, and into 2001, reflecting the impact of higher interest rates. Nonfarm employment should increase by 75,000 jobs in 2000, while the unemployment rate should ease down to 5 percent by year-end. One slightly sour note in the picture is an increase in inflation, with the local price index advancing 2.7 percent after 1999's 2.4 percent gain. The problem areas are familiar ones: fuel prices and housing.

What About Downtown?

The mergers involving Arco and Times Mirror have set off a hue and cry over the fate of Downtown, since they are the last Fortune 500 firms located here. There has also been the on-going clucking about the high office vacancy rate in the area, with the year-end 1999 reading coming in at 17.3 percent. A little noticed irony is that telecommunications firms having been leasing space in older buildings for "switches," though some of the area's leaders are concerned about the small number of employees involved. On the other hand, the industrial vacancy rate in "Central L.A." (which includes Downtown, Vernon and Commerce) ended 1999 at the incredibly low level of 1.3 percent, despite the decrepitude of many of the buildings. A central location at the hub of the freeway and rail freight system is still attractive.

In the meantime, Staples Center has generated lots of business for Downtown restaurants, and the Los Angeles Center Studios seems to be quite active. Work is underway on Disney Hall, the Cathedral, and the Medici apartments. Tom Gilmore's "Bank District" project seems on track, and the MetroRail red line to North Hollywood opens in June. Work is also underway on the light rail line to Pasadena, now dubbed the "Rose" line.

"Urban pioneers" are reported to be active in Echo Park and Silver Lake, so there are many interesting changes on the horizon for Downtown. In five years, there could be a new "hot" area in the County, running from Hollywood to Downtown.

Challenges Ahead

While the economy overall looks promising, there are some major challenges facing the County. These include: the "poverty gap"; the need for infrastructure to keep up with business and population growth; housing availability and affordability; and land use (we are running out of land for quality industrial space, housing and schools). These all interact, and finding solutions will not be easy.

Managing a Complex Economy

There are some important facts to keep in mind when thinking about how to keep the economic ball rolling for Los Angeles County. One is that business recruiters from other states are still active here. The second is that there is poor "product knowledge" about Los Angeles‹the rest of the U.S. thinks that local residents are shallow, have frequent face lifts, and work in the movies.

Some issues are complex and prone to conflict. For example, the middle class is shrinking. However, research has indicated that manufacturing is an important tool in growing middle income jobs. But, environmentalists are concerned about the impacts of such growth on local livability.

So, moving the Los Angeles County economy ahead will be difficult. It will require: communicating all the resources available to business; thinking globally at home‹about the economy of the whole County instead of just small portions; and acting strategically to use our resources and communicate better about the "real" Los Angeles. The Los Angeles County Economic Development Corporation is working on the problems and will roll out its "L.A. by Design" program in May, which calls attention to the stunning array of creative skills available in the area. Some of these skills are unique, and if properly managed can create quality jobs.

Jack Kyser is the chief economist at the Los Angeles County Economic Development Corporation.

Page 1, 03/27/2000

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