Mid-Year Economic Review: Forecast: Uncertain

Declining jobs in apparel manufacturing and the threat of a housing bubble offset a steady outlook for the end of ’05

Los Angeles County’s economic report card shows the apparel manufacturing industry getting a very mediocre grade.

The reason is that employment in the county’s apparel industry continues to shrink. The 2005 average is down 13 percent to 59,600 jobs, compared with 68,300 jobs in 2004, according to recent estimates by the Los Angeles County Economic Development Corp. (LAEDC).

LAEDC Chief Economist Jack Kyser, who recently released an updated version of his “2005–2006 Economic Forecast & Industry Outlook for California and Southern California,” gave the Los Angeles County apparel manufacturing industry a C- in his industry score card, the same grade the industry received in January. That looks downright lackluster compared with the aerospace industry, which received a healthy A-.

“The nature of the [apparel] industry continues to change,” Kyser said. “There is more manufacturing competition from offshore. We are moving quickly to being a design, marketing and logistics center.”

Trade show potential

Several factors are affecting the apparel industry’s economic health. Safeguard measures, or temporary quotas, have created uncertainty concerning clothing manufacturers’ decisions to produce overseas or domestically.

“Some apparel manufacturers are pulling back from Asia because of quality, particularly in denim,” Kyser said. “Import security is becoming more costly. But still, domestic production doesn’t pencil out economically.”

Another issue affecting local manufacturers and mall owners is the recently approved merger between Federated Department Stores Inc., the owner of Macy’s West and Bloomingdale’s, and The May Department Stores Co., the owner of Marshall Field’s, Lord & Taylor and Robinsons-May.

“Certainly some manufacturers will be impacted on the West Coast,” said Dave Reza, senior vice president of the Western region for Milberg Factors Inc. in Glendale, Calif. “But a number of our clients were not selling heavily into the May Co. stores. Their feeling is they will benefit from the acquisition because they will get more business from the May Co. stores that remain.”

Last year’s port congestion was cited as one deterrent to economic health. Clothing makers saw their goods sitting on the water for as long as one week while ships waited for a berth to dock. Los Angeles–based Tarrant Apparel Group, in an update of its 2004 revenue expectations, noted that port congestion was one element hurting the company’s earnings. With less-predictable delivery times, several retailers canceled orders or imposed charge-backs on the apparel company. Tarrant had a net loss in 2004 of $104.7 million on sales of $155.5 million.

Still, Kyser said he believes the Los Angeles apparel industry could grow by tapping more into the trade shows that take place in the Fashion District five times a year. He noted that City Hall has shown interest in promoting those events or giving more support to the county’s largest manufacturing sector.

“With a new mayor, the city might become more proactive in promoting the industry,” Kyser mused.

Hot or cold?

For the rest of 2005 and the beginning of 2006, economists and business executives are not really sure which way the California economy is headed.

The big uncertainty is housing prices. Will they finally flatten out or even decline?

If they do, watch out. The economy might take a tumble and head toward a recession.

“We don’t see housing as a bubble, but we are starting to see it slow down and taper off,” said Joseph Magaddino, chair of the economics department at California State University, Long Beach.

He noted that a cooling housing market would affect San Bernardino, Riverside and Orange counties more than Los Angeles because many new jobs in those areas are tethered to home mortgages, title insurance and other financial institutions dependent on a growing real estate market.

Christopher Thornberg, a senior economist at UCLA’s Anderson School of Management, said he has been expecting the housing market to peak for some time. It may have started. Recent data show that Southern California home prices in June rose only 14.5 percent from the same time last year. That is the smallest gain since March 2002.

“If the housing market peaks, within six months you will start to see prices flatten,” Thornberg said.

UCLA economists see a California economy that is fragile because it is at the end of an old expansion instead of at the beginning of a new one.

In his updated forecast issued on July 19, Kyser noted that California’s economy will grow at a healthy pace for the rest of the year but will cool a bit in 2006. Non-farm employment, he said, should grow by 1.8 percent, or 265,000 jobs, in 2005.

Kyser said the largest employment gains will be seen in construction, with 48,000 new jobs; administrative services, with 44,000 new jobs; leisure and hospitality, with 42,000 new jobs; and retail, with 22,000 new jobs. The manufacturing industry, primarily durable goods, will see a boost of 13,000 new jobs this year.

The state’s unemployment rate will average 5.3 percent in 2005, compared with 6.2 percent in 2004, according to Kyser. And total personal income will increase by 6.2 percent, with per-capita income averaging $36,264.

Negative factors include a possible housing market bubble; high energy costs; and the precarious state of the business environment, which is still affected by business taxes, workers’ compensation and traffic problems, Kyser said.

But most economists are predicting that the economy in 2006 will not be as robust as it was in 2005.

An updated economic forecast released in June by the A. Gary Anderson Center for Economic Research at Chapman University warned that the rapid increase in home prices over the last three years coupled with higher projected interest rates will sharply reduce housing affordability in the state. Consequently, Chapman economists are predicting that housing prices next year will decline 4.9 percent.

Declining housing prices, however, may help some business owners.

“We are a little concerned about the ability to attract new jobs to the region and provide employees housing,” Magaddino said. “One year ago, we thought the Inland Empire [San Bernardino and Riverside counties] was affordable. But now it looks like only 17 percent of the people who reside there can afford a house.”