Economic Forecast: Scattered Clouds

By Jorge Casuso

Jan. 7 -- When prominent economist Jack Kyser looks into the crystal ball for his 2004 forecast, he sees a Tower of Terror and a dropping dollar. That's the good news.

The bad news may the prospect of a potential entertainment strike and a snarled 10 Freeway that could take years to unclog with the help of a light rail still far off on the horizon.

With the value of the dollar losing ground to the Euro, European tourists are expected to flock to the Los Angeles area in greater numbers, with some lured by theme rides such as the Mummy at Universal Studios and the Tower of Terror at Disneyland, Kyser said.

"You're going to see an improving economy overall, but you've got some significant challenges to the State and individual cities," said Kyser, vice president of the Los Angeles County Economic Development Corporation. The forecast "is favorable," he added, "but here are a lot of question marks.

Among the challenges and question marks are an historic State budget shortfall and the rising costs of doing business in California -- skyrocketing workers compensation costs and contributions to unemployment insurance, as well as paid family leave.

"It's going to be very expensive to hire people," Kyser said. "Right now most of your growth is going to be internally generated. The big challenge is to get firms to move in." New businesses, he added, will be "rare. That's why it's important to have a focus on your local market."

If fewer workers may be hired by firms saddled with the new requirements, there should be continued growth in "informal jobs," which are not reflected in employment statistics, said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast.

While payroll jobs are on the decline, contracted positions are booming -- from one million in 2000 to 1.35 million now, according to a monthly U.S. census. "There are a lot of jobs forming here, they're just not showing up," said Thornberg, who authors the Los Angeles forecast. "Firms are dodging the stats or contracting… Things aren't as bad as they might look."

There will likely be a 1 percent increase in job growth next year, Thornberg said, followed by a 2 percent hike. While jobs in finance, information, education and health-related fields are on the rise, "manufacturing will continue to lose jobs," he said.

Thornberg's crystal ball shows a national economy on "a razor's edge," after the dot.com boom and bust defied common wisdom. And the economy could be headed for another downturn in 2005-06 if consumers continue to go into debt lured by low interest rates, he said.

"The economy looks good," Thornberg told members of the Chamber of Commerce during a luncheon last month, "but there are some fundamental problems underneath. We need to see consumers start slowing down.

"You normally get a sharp increase (in consumption) at the end of downturns because consumers weren't purchasing," Thornberg said. "Not this time. Consumers have been buy, buy, buying all along, though income is down and there's unemployment.

Of the recent 8.2 percent growth rate, personal consumption accounted for 4.5 percent of the growth. That, Thornberg said, is "bad news."

"These sales are occurring at the expense of future sales," Thornberg said. "Consumer debt is at an all-time high… The big worry is we're setting up for another downturn in 2005-06."

ON THE LOCAL FRONT, Santa Monica's forecast seems to mirror the region's, with a slow upswing over the next five years, thanks in part to a rebounding of tourism and a rise in sales, said City Finance Director Steve Stark.

"We're anticipating a slow but steady recovery," said Stark, who took over the post after Mike Dennis retired last summer. "We've seen some indications of a rebuilding of the Transient Occupancy Tax (TOT or bed tax) and some growth in the sales tax."

Still, looming cuts to balance the State budget could result in a "flat year," and the next two to three years will be tough before a longer-term recovery kicks in, Stark cautioned.

"Next year, we anticipate a relatively flat year," he said. "It could decline depending on the State's situation." But Stark added, "We're optimistic that the sales tax and the TOT will continue to grow and that our state government will address its structural deficiencies and that the City receives money from the State.

"We're optimistic the economy will grow," Stark concluded, "and we'll be in better economic health in the next five years."

Despite the economic Downturn that kicked in with the new Millennium, the Bayside District, and especially the Third Street Promenade, have shown a steady increase in taxable sales, according to County figures. And business Downtown should continue to increase in 2004, said Bayside District consultant Robert O. York.

"It appears that the fundamentals in the overall economy are better," York said. "These general things bode well for the district… In the 12 to 13 years the Promenade has existed, the area has survived a couple of major downturns, and it's certainly been a very resilient area, and that continues to be the case."

York sees 2nd and 4th streets benefiting from business investment Downtown and a drop in office vacancy rates.

"There's some renewed investment and growth in technology and creative services firms," York said. "That should help the office sector of the Downtown economy. There's still new businesses opening and retail is expanding in the area."

But the Bayside must address some looming issues, especially the drop in business at Santa Monica Place and the need for more parking Downtown.

"Santa Monica Place is a huge factor and there needs to be infrastructure and capital investment," York said. "For the near and intermediate future, we're on a pretty good path. But there are some infrastructure issues that need to be addressed soon.

"I think next year will be a god year for the Downtown area," York concluded. "The Downtown area is well positioned, but one can't get too myopic."

A BIG BOOST to the Downtown economy should stream in from Los Angeles, which will be hosting the Travel Industry Association of America’s Pow Wow, a national tourism marketing show, in April, Kyser said.

"You generally see a spike in tourism to the host area," Kyser said. "It's an opportunity for us."

Santa Monica's tourism industry also will get a boost from hosting the American Film Market not once, but twice in 2004, as the trade show transitions from February to November the following year.

But while the forecast is generally favorable, one big question mark for the Bayside economy is whether entertainment industry guilds will strike when they renegotiate their contracts in 2004. With 164 businesses in the motion picture and sound recording industries in the Downtown area hiring more than 700 workers and an untold number of contractors, the answer looms large.

"For the entertainment industry, it's going to be another tough year," Kyser said. "We just don't know. We hope we don't get into bitter negotiations and talk."

A problem that will persist in 2004 -- and into the foreseeable future -- is gridlock on the Santa Monica Freeway, experts said. With the State budget crunch, there won't be enough money to build a light rail system anytime soon.

"There are some discussions to try to get some light rail out," Kyser said. "But given the state of funding for transportation, it's going to be a long shot."

The difficulty of getting to and from the Westside could explain why vacancy rates are rising on the Westside, while they are dropping in Downtown LA, Thornberg said.

"It's harder and harder to get the Westside," a problem that could be alleviated if a light rail is ever built, Thornberg said.