State Economy on Rebound
State budget, shipping concerns and wage debates could slow recovery
The California economy struggled through a sluggish first quarter, but after reaching its lowest point, recovery is on the way, according to Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. (LAEDC).
“It looks like it has hit bottom,” said Kyser. “What you’re starting to see are signs of upward lift, primarily coming out of international trade. You’re starting to see recovery in the tourism sector and in the entertainment sector, then depending where you are in the state, new home building is either hot or cold.”
Kyser said that home building is cold in Los Angeles County but hot in Orange, Riverside and San Bernardino counties, where lots are easier to find and develop during the current housing shortage.
Rumors of defense-related cash coming into the state have sparked optimism, but Kyser warned that such optimism should be tempered with the realities of a huge time lag between the time such monies are allocated and then disbursed. He also warned that there are other concerns.
“The bottom line is that we still expect a slow recovery to develop over the rest of the year,” he said. “California will lag a bit behind the national recovery, and there are some things that the businessperson has to be aware of.”
California businesses should watch for a few key items that could negatively impact their financial forecast, particularly actions coming from state government, according to Kyser.
“The key thing that we are watching right now would be the state budget crisis,” he said. “That is already starting to impact. The State Trade and Commerce Agency has cut back on its activities.”
Kyser said that there are some other “worrisome” issues for California businesses, including an increase in Workman’s Compensation costs and a proposed living wage hike.
“The effort to qualify the Livable Wage Initiative for the ballot would effectively make the minimum wage in the state $10.29 per hour and the only firms exempt would be firms with five or fewer full-time workers,” said Kyser. “There’s an obvious impact for the apparel, travel and tourism and food service industries, because people would be earning higher levels of income, but the businesses would be under tremendous profit pressures.”
Those profit pressures, according to Kyser, would make the businesses extremely selective about who they hire, forcing many to eliminate jobs, placing lower-skilled people at higher risk of unemployment.
“We are still losing jobs,” he said. “We lost about 7,000 jobs statewide during the first quarter.”
Kyser added that some of the labor negotiations on the horizon could hamper the state economy’s recovery process.
“We are watching the negotiation between the dockworkers and the shipping companies, with the July 1 expiration of the longshoremen’s contract,” he said. “The apparel industry will be impacted if there is any type of slowdown or stoppage, because it would interrupt back-to-school or forward orders for Christmas.”
In February, the LAEDC forecast a surge in shipments followed by a slump. Kyser said that the slump may be extended by the problems in the labor relations on the docks.
“We’re still in the first phase of the surge in shipments,” he said. “You have the U.S. economic recovery, but with the anticipation of the problems on the docks, people are thinking about stockpiling and looking at alternative ways of getting their goods in. Don’t put away the aspirin.”
The economic forecast for the retail sector continues to be uncertain as consumers remain price-conscious, causing mid-range department stores to continue to struggle. Kyser said those stores are facing more risk with the entry into the Southern California market of Menomonee Falls, Wis.-based discount retailer Kohl’s.
“Kohl’s will have an impact, because people will want to sample to see what it is all about,” he said. “The question is, will people be favorably impressed so that they will go back? This is a major risk for the mid-range retailers again.”
On the upside, Kyser said that the apparel industry can benefit in the long term from the current attention being focused on the works of Southern California fashion designers.
“I think the thing that we have going for us is the interest in L.A. designs again, and you are seeing groups come into the country for it,” said Kyser. The LAEDC helped bring the Designers & Agents show to market week in Tokyo earlier this year. The group included several California labels, including AG Adriano Goldschmied, Blue Cult and Edward An.Organizers deemed the showing successful enough to investigate a second trip.
“They found L.A.’s fashions edgy, new and fresh as opposed to New York—they loved it,” Kyser said. “There’s an opportunity that we can convert on.”
