Economic Mirage : O.C. Recession’s Staying Power Surprised Experts

As 1992 began, economists and many business people thought the year held all the promise of brightly wrapped packages under a Christmas tree.

Experts who study the Orange County economy at three local universities agreed that there would be an improvement by midyear: Layoffs would end, incomes would grow faster than inflation, and consumers would regain confidence in the economy and begin spending, reviving the drooping fortunes of retailers, restaurateurs and home sellers.

Business leaders concurred. Early in the year, a UC-Irvine survey found that two-thirds of the county’s executives said 1992 would be better than 1991. A majority said the recession was over for them.

As home sales started growing in January and February, even the hard-hit construction industry began talking of recovery. Applications for building permits increased in February and March for the first time in eight months.

But as the year ends, it is obvious that its early promise was not fulfilled. Retail employment fell for the second year in a row after more than 20 years of growth. Housing sales and prices declined for a third consecutive year. Median household income fell for the first time in more than a decade, to $45,000 from $49,000.

The only thing that grew, it seemed, was the number of bankruptcies and business failures, which were breaking records by midyear.

In August, seven of 10 people polled by UCI’s Mark Baldassare said that they had “no faith” in the economy. That was significant, marking the first time in the poll’s six-year history that consumer confidence in Orange County was below the national average.

The year, which looked so appealing as it began, turned out to be a series of disappointments, like a lump of coal in a Christmas stocking, a gift-wrapped box of underwear, another necktie or Chia Pet.

“This recession has been unprecedented,” said Anil K. Puri, co-director of Cal State Fullerton’s Institute for Economic and Environmental Studies. “I think it’s universally true that most (economists’ (forecasts) have missed it this time.”

He pointed out that economic predictions are based on past experience, so when new factors enter the mix, earlier forecasts are often wrong. And no one seems to understand just yet, Puri said, why an economic recovery is so slow in coming to Southern California.

“It’s been a combination of factors,” he said. “It will take a while before we can untangle the reasons.”

One factor that confounded local economists early on was the fact that the national picture was brightening. The retail industry said in February that it had made a mistake when figuring the previous year’s Christmas spending: Shoppers had actually spent 0.6% more than the previous year, not 0.4% less, as was originally reported.

“Everything seems to be building toward an optimism about the economy,” said Tracy Mullin, president of the National Retail Federation in Washington, at the time. Consumer confidence, which experts from Tacoma to Tallahassee say is the key to economic recovery, was on the rise.

Election-year thinking boosted that confidence. Many Americans thought that President Bush would make a huge effort to put the economy into gear as part of his reelection strategy.

In March, the President’s chief economic adviser, Michael J. Boskin, forecast that the economy would be growing at an annual rate of 3% in the second half of the year. That would have been the fastest growth rate of the Bush presidency.

Many economists--including James L. Doti, president of Chapman University--were predicting that the recovery would be strong enough to keep Bush in the White House for a second term.

Doti was so sure of his prediction that he promised to “eat crow” if it failed. Earlier this month, he did so before a crowd of 1,000. He took the liberty of substituting quail for crow, however.

“A beautiful presentation,” Doti said of his lunch. Afterward, he explained that he had overestimated the positive feeling left from the Gulf War, underestimated how sluggish income growth would be and made his prediction before Ross Perot entered the presidential race and changed all the equations.

But Doti said he was right when he predicted that the Orange County economy would recover halfway through 1992. It is recovering, he said--it’s just that only an economist can tell.

“It’s a recovery in the way that economists would measure it,” Doti said during a recent interview. “It doesn’t feel like we’re in a recovery--we’re still losing employment--but we aren’t losing as much as we did.”

Economists use the same argument to say that the national recession ended in March, 1991.

But there is disagreement about whether a leveling off justifies saying that the recession is over.

On June 18, the same day that Doti and Chapman University issued a report saying that the local recession had ended, UCLA published its own report, titled, “Hopes for a ’92 Recovery Are Fading Fast.”

It argued that so long as job totals continued to shrink--no matter the rate of shrinkage--California would still be in a recession.

There were 1.13 million jobs in Orange County in October, the most recent figures available from the state Employment Development Department. That was down 2.8%, or 32,900 jobs, from October, 1991. During the previous year, between October, 1990 and October, 1991, 3.1% of the jobs in the county, or 37,500 positions, were eliminated.

This economic slump has cost Orange County 78,600 jobs so far. During the previous recession, in 1981 and 1982, the county lost a total of 19,000 jobs.

The previous recession lasted 16 months. Most economists say that this one started in July, 1990, which would put it in its 29th month now.

Counting the number of jobs in the county is a measure of the health of local businesses. The more well-known figure, the unemployment rate, counts the number of residents who are out of work. The two figures don’t match because some people who live outside of Orange County commute here to work, and vice versa.

During 1992, the unemployment rate hit a high of 6.7% in June and August. That was the highest monthly rate since the 7% reported for August, 1983.

Still, Orange County fared relatively well. The statewide unemployment rate was 9.5% in August, and the national rate was 7.3%.

In the early ‘80s recession, the Orange County unemployment rate peaked at 9.4% in January, 1983.

A highly educated labor force, a diversified economy and a large employment base are reasons economists give for Orange County’s resilience. But there are aspects of the county that make it particularly vulnerable to a prolonged recession, experts say, among them its links to tourism, retail and military contracting. All of those sectors suffered in 1992.

From Disneyland to Knott’s Berry Farm to the luxury hotels that stretch from Huntington Beach to Dana Point, Orange County is highly dependent on tourism. Fun is a $7-billion-a-year business here--and one of the first items people will cut from a limited budget.

After six months of increases, hotel occupancy rates took a precipitous fall in July, one of the most important months for the hospitality industry here. The average occupancy rate for that month was just over 70%, compared with 75% a year earlier.

Hoteliers blamed the national economy and the April riots in Los Angeles for keeping people away.

More than 10% of the county’s tourism jobs have vanished since 1989. The recession of the early ‘80s, by contrast, caused no decrease in tourism-related employment.

Among the hardest-hit are restaurateurs. The Rex restaurant in Newport Beach closed in January; Italianate Zeppa in Fashion Island shut down in June; and Villa Nova, which has been in business in Newport Beach for 25 years, filed in April for protection from creditors in bankruptcy court.

Another vulnerable sector in a recession is retail trade, which accounts for half of consumer spending. Orange County is filled with shopping malls and is well known for its high-end stores such as Chanel and Tiffany’s.

Retailers had eliminated 8,200 jobs from August, 1991, to August, 1992, or 4% of the total work force.

Economist Esmael Adibi, a forecaster at Chapman University Center for Economic Research, said the county’s retailing industry has grown so large that it has reached a kind of critical mass and cannot expand further unless there is a significant population boom. Most economists say that such a boom cannot occur because most newcomers cannot afford to buy homes here, even in good times.

Finally, there is the defense business.

Economists predict that jobs in construction, tourism and retail will come back with economic health. But the military contracting jobs--another former mainstay of the Orange County economy--are probably gone forever as the federal government continues to cut its budget.

“The defense layoffs are going to have to continue,” said Eleanor Jordan, state labor market analyst for Orange County.

Between 1987 and 1991, Orange County lost an estimated 27,000 defense positions--more than a third of such jobs here, according to a report released in October by two Cal State Fullerton economists. The county could lose another 11,600 to 17,500 jobs in the defense industry during the next four years, the report said.

In the past year, Loral Corp. cut 800 jobs at its Aeronutronic division in Newport Beach. The company said that another 100 to 300 of its 1,700 positions remaining here will be moved out of state and that it will likely relocate its production facilities from Newport Beach by 1996 to avoid rent increases.

Last month, McDonnell Douglas eliminated 254 jobs in Huntington Beach and Santa Ana, that company’s third such layoff--about 250 people each time--since 1990.

The harsh reality of job losses translated into low consumer confidence in 1992. People concerned about job security spent less for cars, appliances and the other big-ticket purchases that economists track as a measure of how consumers view the future.

Only 4,342 new homes were sold in the county through October this year, according to TRW Redi Property Data, compared with averages reaching 12,000 to 15,000 annually during the boom years of the late ‘80s.

Auto sales, too, are feeling the pinch. Newport Imports in Newport Beach, which for years was the top Jaguar dealership in the nation, filed for bankruptcy protection in September, saying that sales had been down since 1990. And bankrupt Jim Slemons in the spring sold the last of his seven Southern California car dealerships.

Chapter and Verse

More people were insolvent this year than in 1991. The vast majority of filings in Orange County were under Chapter 7 of the U.S. Bankruptcy Code, which most experts attribute to overspending during the 1980s.

Defining the Chapters *Chapter 7: Personal or business debts are so far in excess of assets that the petitioner seeks liquidation. *Chapter 11: Generally used by a business seeking protection from creditors while it reorganizes its finances. *Chapter 13: Personal financial reorganization under which a consumer repays creditors under supervision of a court-appointed trustee. *Bankruptcies *

Chapter 7 Chapter 11 Chapter 13 January 937 33 164 February 850 43 122 March 1,156 34 159 April 988 35 146 May 995 35 163 June 1,058 35 164 July 1,032 37 153 August 990 37 155 September 1,030 23 148 October 1,038 44 151 November 1,117 24 163

*Total bankruptcies 1991-92

1991-92 1991 1992 % Change January 940 1,134 +20.6% February 972 1,015 + 4.4% March 1,078 1,349 +25.1% April 1,024 1,169 +14.2% May 1,195 1,193 - 0.2% June 976 1,257 +28.8% July 1,119 1,222 + 9.2% August 1,133 1,182 + 4.3% September 1,137 1,201 + 5.6% October 838 1,233 +47.1% November 931 1,304 +40.1%

* Source: U.S. Bankruptcy Court Researched by DALLAS M. JACKSON / Los Angeles Times