O.C. Can Look Forward to Steady Growth in ’96

Like a bear lumbering from its cave after a long hibernation, business in Orange County has shaken off the effects of a five-year economic slump.

The year spreading out ahead promises to be--for most--the best so far this decade, which opened with the deepest recession in 50 years, economists and business executives say. The county’s economic underpinnings are firm and the general economy, helped by low inflation and low interest rates, is “sound and vigorous,� said economist Walter D. Hahn, head of real estate consulting for E&Y; Kenneth Leventhal Real Estate Group in Newport Beach.

For most of the nearly 75,000 Orange County businesses--and the more than 1.1-million people who work for them--that means that years of dealing with layoffs, bankruptcies, budget cuts, shortened workweeks, shrinking profits, paltry paychecks and myriad other economic disasters likely have come to an end.

“Certainly, the mood out there is upbeat,� said Dennis Aigner, dean of UC Irvine’s Graduate School of Management and a student of corporate attitudes in the county.

The long-awaited financial recovery had been prophesied by economists at the start of each of the past two years, then was stalled by such factors as an unexpected run-up in interest rates, the county’s bankruptcy at the end of 1994 and a surprisingly stagnant housing market through much of 1995.

There still are a few caveats for the new year. Manufacturing will continue to be sluggish and the health-care delivery industry, which includes hospitals, physicians, medical groups and HMOs, will continue to founder. Otherwise, Aigner believes that “it ought to be a very good year.�

The dean’s good cheer echoes that of economists from most major banks, universities, colleges and real estate firms. At least six recent forecasts have said that 1996 for Orange County--indeed, for most of Southern California--will be a year of growth.

True, gone are the boom days of the 1980s when home prices appreciated at double-digit annual rates and businesses added new employees at a 34,000-a-year clip. But that’s actually good, economists say. It was the heights achieved in the successful years that made the plunge into the recessionary years so deep and prolonged.

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So look for--and welcome--a year of slow and steady, but sustained, improvement.

The signs started popping up in 1995:

* Local businesses began hiring in the fourth quarter, creating about 10,000 jobs in the final months of the year.

* The long-depressed residential real estate market began picking up, posting its first gain in home sales in 13 months in November.

* Commercial and retail leasing activity--much of it reflecting expansion of existing small businesses--was moderately strong all year.

* County-based businesses turned a major corner and discovered that developing overseas markets for their goods can go a long way toward offsetting whatever slumps and bumps occur in the economy at home.

As a result, the county’s overall gross domestic product--the value of goods and services produced here--probably will grow by $1.7 billion to $84.1 billion next year and employers in the county will add at least 24,000 jobs to their payrolls, Chapman University economists say. At E&Y; Kenneth Leventhal, Hahn is predicting 30,000 to 35,000 new jobs in the county in 1996.

There are some dark spots, however.

Consumer debt is soaring. The average credit card balance in the county is up 20% to $2,572 and 29% of the county’s households admit to owing $10,000 or more to credit card companies, up from 24% in 1994. That kind of debt, said consultant Tony Cherbak of Deloitte & Touche in Costa Mesa, means “consumers are starting to feel the squeeze. At some point, they will have to pull back.�

But not everyone sees the growing credit card balances as an ominous sign.

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“It is not a very reliable guide because it could just mean that people are using their credit cards more and other forms of credit less,� said Anil Puri, head of Cal State Fullerton’s economics department. “It could be that people are now confident that they can handle more debt because they no longer are in fear that they will be laid off.

“Consumers are not dummies,� he said. “The vast majority know when to say, ‘No.’ �

Overall, Puri said, the economic horizon “is calm. I was looking for some trouble spots a few days ago for a speech I had to give, and I really couldn’t find any.�

That is the economist speaking. To gauge how the people who actually make the economy work feel about the coming year, business writers for The Times Orange County spoke with leaders in a number of local industries.

High Technology

Thomas H. Scott--he prefers Tom--is vice president and general manager of the Computer Systems division of Toshiba America Information Systems, one of five Toshiba divisions based in Irvine that employ a total of 1,700.

Scott’s unit makes the notebook computers Toshiba sells in the United States and accounts for about 70% of Toshiba America’s total revenue. He sees nothing but growth for his and other high-tech firms in 1996.

His high-tech lifestyle helps explain why.

“I have a portable computer on my desk; I take it home at night to do my finance work; and I take it on planes with me so I can work or play classical music [on a CD-ROM drive],� said Scott, 49. “I’ve got a sailboat down in Newport Harbor, and my portable hooks into my satellite navigation system so I can use it as a navigation device.�

Computers have made their way into about one-third of American households, and onto millions of corporate desktops. Their growing speed and power as tools of entertainment and business indicate their popularity will continue to boom.

That bodes well for hundreds of high-tech companies based in Orange County, including dozens of software publishers, giant manufacturers of computer memory products, and a growing contingent of firms that make computer networking devices.

The only constraint on Toshiba’s success, Scott said, is an ongoing shortage of components, such as high-powered batteries and memory products. But that was true in 1995, and Toshiba still posted a 21% increase in the number of notebook computers shipped.

Scott, an Orange County resident since 1977, is only slightly less optimistic about the county’s overall economic prospects in the coming year. Citing a rosy Chapman University forecast that predicts housing prices might start rising in 1996, Scott said he believes the Southern California economic recovery will continue.

But the days when investors could get rich by snatching up real estate and selling it a few months later might be gone for good. “The [Orange County] economy will be less speculative than it has been in the past,� Scott said. “Some of the industries insulated in Orange County--building and development--really have to be careful.�

For Scott and other executives at high-tech companies, the Orange County bankruptcy was barely a blip on the radar screen.

The bankruptcy “was a little unsettling,� said Scott, who lives with his wife in Turtle Rock. “But did I ever once think this is unsettling enough that I would want to leave, or that other businesses would leave? No way. It’s a tremendous area to live, and offers a tremendous quality of life.�

Residential Market

Like many in the real estate industry, Larry Webb is hoping for better days next year.

Webb is president of John Laing Homes in Newport Beach, a large Southern California home builder. Most encouraging, he says, are projections that home values will rise for the first time since 1990. By the end of 1996, he hopes he can actually raise prices on the homes he builds and sells.

Chapman University predicts homes will appreciate 1.4% in Orange County next year. UCLA predicts a 3.1% rise in home values throughout the region and the California Assn. of Realtors expects an 0.5% increase.

“This is good for everyone--builders and people who own homes,� said Webb, who also is president of the Orange County Building Industry Assn., a trade group of builders. Housing appreciation drives the real estate industry and demand for homes because people don’t want to buy or sell a home if they don’t believe they can make a profit.

Builders also are encouraged by predictions of job growth in Orange County, Webb said.

“For the first time in five years we are really having job growth--and that’s the most important for real estate,� Webb said. “If people don’t have that security they can’t buy homes.�

A devastating real estate downturn that continued longer than anyone expected has made home builders especially careful, however. “Even with these projections, I’m running our business as if there will be no change in the economy. I’m not running out and expanding,� Webb said.

Commercial Properties

It’s been a long time coming, but the commercial real estate market, moribund in Orange County since the late 1980s, seems to be on the move again, says Clarence Barker, president of Irvine Co.’s office and industrial division.

The 47-year-old executive said he and his staff “have been working very hard, but we’re having a lot more fun that we did in 1991 and ’92. That’s when everyone was tightening down. We spent our time helping companies figure out how to pay their rent. Now I still work 60-hour weeks, but I’m spending the time helping them grow.�

Barker cites as an example the experience of just 16 of the 2,000 businesses that call the Spectrum home. Those 16 companies were all small start-ups in 1988, occupying a combined total of 226,000 square feet of space in the 3,600-acre business park.

Today, the same 16 companies--including high-tech hotshots Wonderware Corp. and Pinnacle Micro Inc. and medical technology developers Neocrin Inc. and CoCensys Inc.--occupy more than 1 million square feet of space, he said. “Wonderware was a little company with a couple of employees and 1,000 square feet of space in 1988,� Barker said. “Now they’ve got 70,000 square feet� and more than 300 employees.

Particularly exciting, Barker said, are the kinds of companies growing in the county. “When the defense industry dominated our economy, a lot of these technology and medical companies were just starting up. Now, as defense has fallen, these companies are coming into their own,� he said.

“And they are in world industries, like computer software and hardware and medical equipment. Orange County has turned the corner and become a place that produces for export rather than a place the depends on local consumption for its business.�

Export-Import Trade

Exports are being touted as the engine that will drive the county’s economic recovery for the next year or two. Service companies and producers of goods should benefit from the growing world appetite for U.S. technology and know-how, especially in the electronics, medical and design industries.

“A recent state report showed that exports by California companies were up 18% in the first nine months of 1995,� said Don Miller, president of the World Trade Assn. of Orange County. “That trend will certainly continue, and we are part of it.�

According to economist Esmael Adibi at Chapman University, exports alone will account for as much as $11 billion of Orange County’s total output next year--about 9% of the economy.

Miller said the most significant growth will come from the county’s technology businesses. Food processors and some of the trendier manufacturers of retail sportswear will boost the tonnage of county-produced goods being shipped overseas.

“It’s a dynamic growth area,� he said, citing the county’s heavy use of a regional export service center, which opened in Irvine several months ago and serves manufacturers in five Southland counties. In its first four months, Orange County manufacturers seeking assistance in exporting their products accounted for 41 of the center’s 62 clients.

Tourism

Southern California’s tourist industry is still recouping from five years of regional disasters and negative publicity, including the riot following the Rodney King beating verdict, earthquakes, floods, wildfires and the residual effect of the Gulf War, which profoundly slowed all international travel. The unraveling Mexican economy also hurts because Mexican tourists traditionally make this region a top destination.

Despite all the obstacles, Bruce Baltin believes that tourism nationally and in the Southland is recovering its health. “As long as the dollar remains where it is [in the foreign exchanges], people will travel� because some currencies buy more dollars now, said Baltin, senior vice president at PFK Consulting, a Los Angeles tourism and amusement industry specialist.

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Hotel occupancy in Orange County is up 3% this year and the absence of major disasters, plus the exposure the area received worldwide from the televised O.J. Simpson trial, all make the outlook for 1996 even better, Baltin said, noting that tourists tend to lump Orange and Los Angeles counties together when planning vacations.

Orange County has a special edge, however, because it is home to the original Disneyland--a must destination for millions of people every year. The Anaheim attraction had 14.1-million paying guests, outdrawing the much larger Disney World theme park in Florida this year to become the nation’s most-visited park.

The Walt Disney Co. is expected to announce details in early 1996 of a park expansion in Anaheim. While scaling back from earlier plans to build a $3-billion theme park next-door to Disneyland, Baltin said, whatever Disney does here “will have a positive impact on Southern California tourism.�

Medical Care

Cost-cutting pressures next year will force Orange County hospitals and doctors’ groups seeking merger partners to quit flirting and start dancing, said Michael D. Stephens, chief executive of nonprofit Hoag Memorial Hospital Presbyterian in Newport Beach.

Cuts in federal and private rates for health care will reduce the income for providers across the county in 1996, making it a difficult year for many, he said.

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Even Hoag, financially cushioned with a big endowment, is looking for a match, he said.

Stephens believes that consolidations among doctors’ groups will come first--two major groups, Monarch HealthCare in Mission Viejo and St. Joseph Medical Corp. in Orange, have said they intend to merge soon. A wave of hospital combinations could follow within six months, he said.

Alan R. Hoops, chief executive of PacifiCare Health Systems Inc. in Cypress, expects competition to intensify as well in the health maintenance organization arena. Industry consolidations will create larger HMOs that must compete on price and quality.

Labor

Organized labor in Orange County and elsewhere figures to benefit next year from the new national leadership at the AFL-CIO, Angela Keefe said.

Under the militant style of John J. Sweeney, who was elected national president in the fall, local labor leaders such as 32-year-old Keefe think unions will show a greater willingness to organize and will get more backing from the national organization.

“I’m confident local unions are going to be gutsier,� Keefe said. She is president of the 5,000-member Hotel Employees and Restaurant Employees Local 681 in Santa Ana and head of the Orange County Central Labor Council, which represents about 100 AFL-CIO locals with close to 100,000 members.

Keefe thinks Sweeney’s plan to build union membership on the issue of declining earning power will catch fire among wage earners.

For her part, Keefe said, her local’s goal is to enlist as many new hotel workers as possible. In 1995, she said, her local’s membership held steady. But the time is ripe for organizing hotels, she said, because with the economy continuing to recover, hotel occupancy is likely to grow, and Disneyland is booming again.

Keefe said the biggest obstacle facing organized labor in the area is employers’ continued push to transform full-time jobs into part-time and casual work for less pay and fewer benefits.

Retailing Newcomer

Like a lot of Orange County residents, Tom Thompson commutes to his job. But the 46-year-old commutes long distance as president and chief operating officer of Anaheim-based Carl Karcher Enterprises, the CKE Restaurants unit that operates the 660-unit Carl’s Jr. chain. He flies down Monday mornings from his Bay Area home in Hillsboro and heads back each Friday. In between, he lives in a rented house in Fullerton and keeps in touch with his wife and children by phone.

While he is new to Orange County and based in a part of the state that began its economic recovery almost two years ago, Thompson is as upbeat as the old hands.

“I think things are starting to turn positive,� he said. “Both Northern and Southern California got hit by base closings and the shrinking defense industry, but [defense] is a bigger part of the economy down here, and it hurt more. Tie in the Orange County bankruptcy, and the bad things started to pile on, if you will.�

But Carl’s Jr. just reported its strongest week of the year measured by store sales. That’s unusual, Thompson said, because the strongest week typically comes during the summer.

The sales peak “tells me people are out and about and have money in their pockets,� Thompson said. “I know that retailers are struggling, but our [heavy] sales suggest that, at the least, [consumers] are out looking.�

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This article was reported by Times staff writers Greg Johnson, Don Lee, Barbara Marsh, Greg Miller, John O’Dell, Debora Vrana and correspondent Dan Margolis. It was written by O’Dell.

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Ready to Recover

Economic indicators signal that 1996 is the year Orange County’s recovery should begin in earnest. Although employment is expected to dip in two of the local economy’s five largest job categories, overall nonagricultural employment will continue a modest increase. Percentage changes, 1995 figures estimated and 1996 forecast:

Resale home prices

1995: -1.3

1996: 1.4

Personal income

1995: 4.1

1996: 5.1

Total taxable sales

1995: 5.5

1996: 5.3

Nonagricultural employment

1995: 1.2

1996: 2.1

Five biggest job categories *--*

Finance/ Retail State/local Wholesale insurance/ Services trade government trade real estate 1991 2.1 -6.3 2.6 -2.6 -1.9 1992 0.5 -1.2 -0.9 -0.1 0.0 1993 1.9 -0.2 0.1 -3.2 -0.5 1994 0.8 0.5 1.0 2.8 0.6 1995 2.3 1.1 -0.9 4.3 -2.8 1996 2.8 2.0 -0.9 4.6 -0.4

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Source: Chapman University Economic & Business Review