Economy Could Face Bumpy Road Ahead

By Olin Ericksen and Jorge Casuso

January 6 -- While Santa Monica cash registers rang out a bumper sales year in 2005 thanks to the strong return of tourism and a heady consumer confidence, it is unclear whether the booming economy will continue its strong roll throughout the New Year.

Economists predict the U.S. dollar could edge downward, luring more foreign tourists to the city in 2006, but they also worry darker clouds could be looming on the economic horizon in the form of rising interest rates and higher energy costs.

In addition, housing prices are leveling off, if not falling; the entertainment industry is facing stiff competition from abroad, and the Internet – bolstered by a major merger – could start siphoning sales from old-fashioned walk-in stores.

"We're cautiously optimistic for 2006," said Jack Kyser, senior vice president and chief economist at the Los Angeles County Economic Development Corporation. "Times are good, we're walking down that yellow brick road, but you never know when that damn wicked witch is going to pop out."

City finance officials are also cautiously optimistic that the local economy – which has seen sales climb to levels that exceed the pre-9/11 boom years – will continue to edge upward.

"We are anticipating slow steady growth as in the past two years at about 5 percent," said Steve Stark, the City's chief financial officer.

Stark, however, shares some of Kyser's worries.

"There are continuing concerns regarding the national, state and local economies including higher energy prices, the threat of higher inflation and higher interest rates, which could have impacts on the local economy and taxable sales in the future," Stark said.

But the city "continues to grow," he added.

Cash registers Downtown, the heart of the city's economy, also are expected to continue ring up record sales, said Bayside consultant Robert O. York.

"Downtown continues to show a lot of positive movement," York said. "Retailers here, as across the nation, have shown mixed results, but with regards to Downtown, we are very excited about several new merchants coming in and adding momentum."

Joining the Promenade's strong retail mix are Mango and Famima, and REI will open shop in a two-level, 30,000-square-foot space just off of the popular shopping strip in the spring, York said.

The year 2006 will also see a new tenant move into the department store at Santa Monica Place vacated by Robinson's May early in 2005. "Everybody is waiting to see who will move in there," Kyser said.

A Target or Nordstroms could take over the giant anchor store, Kyser speculated. But dark horses could include JC Penny, and you "can't count out Dillard's," which could be looking to expand on the West Coast Market, he added.

Although cash registers rang loudly across the City in 2005, traditional retailers are facing stiffer competition from cyberspace shoppers, who are increasingly turning to the Internet to buy goods delivered free of charge without the hassles of getting in and out of a store, Kyser said.

"The Christmas Internet retailing is very strong," he said, adding that when the revenues are tallied, online sales will have risen by more than the 21 percent originally projected.

And the competition could tighten even more with recent mergers, Kyser said. "With Google recently hooking up with AOL, Yahoo won't sit still," he said. "All this has very interesting implications for retailing as well."

But if shoppers are taking to cyberspace, foreign tourists will likely continue taking to the air in 2006, as the dollar continues to weaken.

While the Travel Industry Association of America forecasts that the growth in travel spending nationwide will slow down, international travel to the United States is growing faster than domestic travel, and that's good news for Santa Monica, which relies heavily on foreign visitors. (see related story)

The city's bed tax has been strong, Stark said, and will continue to be strong in 2006. Other economic experts agree.

"Expect the US dollar to decline slightly in value, so we will probably see a continued flow of (international) tourists, which is good for Santa Monica," Kyser said.

The Getty Villa a short drive up the coast will be opening this year and is expected to be a draw for tourists to the area, he added.

Still, there are factors beyond Santa Monica's control that could dampen the strong economic prospects. At home, rising interest rates – which last year hit their lowest level since the 1960s – could further curb a record-setting housing market, realtors said.

After housing prices in California peeked in August at a median cost of $570,000, mirroring the countywide median, the market is expected to slow down, with prices in the coastal regions leveling off, said Robert Kleinhenz, deputy chief economist with the California Association of Realtors.

"Interest rates will continue to go up and continue to have an impact on the market," Kleinhenz said. "The coastal regions will level off, but prices are still not in the range for people without a million dollars."

Many buyers took low down-payment loans, interest-only options and adjustable rate loans, which could pose a danger to the general economy, Kleinhenz said.

"If we do happen to hit a slow patch in the economy and people start to lose their jobs, will people be able to pay that money is the question," he said.

Santa Monica could be less vulnerable to regional, or national, housing trends, Kyser said, noting that no one is looking for the city's housing stock to be increased or prices to drop in either the housing or condo markets anytime soon.

"For there to be a change, everybody is saying we need to move to higher density in Santa Monica, but those seem to be fighting words," Kyser said.

Still, as the housing market cools off, City finance officials expect to reap less tax money from property sales in 2006. "The volume of sales is not as high, so the property transfer tax is not as high for the City," Stark said.

The health of the entertainment industry could also have an big impact on the Santa Monica economy, which is home to Sony Music, MTV and hundreds of businesses in the motion picture and sound recording industries, experts said.

"The entertainment industry is walking a tightrope right now," Kyser said. "There's a lot of turmoil going on and it affects everyone connected to that industry."

Smaller lines at the box office, a leveling off of DVD sales, the continuing exodus of productions from the region and an increasing hard-line stance by key unions, such as SAG and the Writers Guild, could spell trouble for the industry in 2006, Kyser said.

While Santa Monica isn't immune to general economic trends, its unique character could make it less vulnerable to a sluggish economy across the nation, and even the region, experts said.

"The same trends that affect us as a nation affect Santa Monica, like the price of gas," said York, "however, Santa Monica may be a bit more immune to those trends because of such things as our weather.

"Santa Monica tends to be a more stable and consistent area," he said. "There is a very strong local following, a regional following and international pull."