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Economic “Gut Feelings” Take Turn for Worse

Economic ‘Gut Feelings’ Take Turn for Worse By SHELLY GARCIA Senior Reporter You may want to toss out the relentless stream of data that shows the economic picture is improving. A number of local executives say they’re seeing signs that the economy has actually worsened since the beginning of the year, even as stock prices have risen and the GDP seems to be back on track. Escalating gas prices are threatening the almighty consumer that held recession at bay through most of last year. Corporations remain stingy with their dollars. Hiring has stalled. And the recent terrorist attacks threaten to further dampen an already weak export market. These insights may not be coming from the latest economists’ reports, but some executives say their sources are just as valid the gut feeling that comes from watching the world around them. “I think the times are harder than are being acknowledged,” said Dan E. Levine, executive vice president at Celebrity Escrow Corp. in Northridge. “You see it in the trenches. If you go two days before payday, some people are saying I’m skipping lunch today. Durable goods are up, but they’re not talking about shoes for your kids.” Ask most executives running companies and they will say they’ve got their own way to gauge the economy, and they are getting signals that are often in conflict with what the economic reports indicate. “I’ve told people for years that in order to figure out the economic growth of China you need to open the draperies in the hotel and count cranes,” said Ron Nechemia, president of Eurorient, an investment and merchant banking group in Encino. “If you see less than six or 10 cranes from each window, you know the economy is getting into recession. When the economy is on the go you can feel it in your belly.” Lately, Nechemia and others say, there’s a nagging feeling in their bellies. Nechemia wonders if all those folks shopping at the mall are making any purchases and he suspects that a quick survey of the Los Angeles Port would show that many of those containers being unloaded are going back to Asia empty, a sign that U.S. companies are not getting their fair share of international markets. Others point out that loan activity seems to be sputtering. And the job market seems to have vanished altogether. “One way I tell is the number of resumes I get bombarded with,” said Carlos Garcia, founder and president of Garcia Research Associates Inc., a Hispanic market research firm in Burbank. “When I start getting resumes from people all over the country who aren’t Hispanic, who don’t speak Spanish, who have no reason to think a company like mine would be able to hire them, I get a sense that there is a lot of desperation out there.” Initial unemployment claims, which rose again over the most recent four-week period, are perhaps the one economic indicator that coincides with the more intuitive criteria sending up red flags. But while many reports like a just-released survey conducted by the National Association of Manufacturers are upbeat, the local executives surveyed by the Business Journal are not so certain. The bottom line may be improving, but there is little evidence that companies are ready to expand staff, they say. Going offshore For one thing, a lot of jobs moved overseas. “The thing that really taints the whole thing is a lot of jobs are gone to Asia forever,” said Doug Sink, CFO at Remo Inc., a maker of drums and other percussion instruments in Valencia. “That’s what scares me about California’s economy. You’ve got all the people coming here and these jobs aren’t there.” And many of the same companies that report business is bouncing back are still refraining from any hiring, whether it’s here or abroad. “These are very unusual times,” said Christian K. Bement, president and CEO at Earl Scheib Inc. in Sherman Oaks. “All the other times when manufacturing is up, it was automatic that employment was up. That’s not the case anymore. I think employment will increase down the line, but right now we’re able to increase business without having to add employees.” Then too, companies are still holding tight to the purse strings when it comes to any type of expansion. Roberto Barragan, president of the Valley Economic Development Center, said he often measures the economy by talking to the folks seeking to do business with the organization. Last year there was a spate of activity, although a lot of it came from small business owners seeking loans to stay afloat, Barragan said. This year, “actually, I think loan demand is down. And that’s not a good sign either,” Barragan said. “Everyone is staying static, few people are hiring, few people are investing because no one knows where the economy is going.” The low interest rate environment, although it has kept the housing market afire, has done little to encourage businesses to invest. “It’s gotten to the point where interest rates are so low and the economy is still having trouble,” said Bob Pearlstein, a partner at BDO Seidman LLP. “They can’t make interest rates any lower so it’s a what do we do now.” Low interest rates have not fueled any real desire to resume capital spending, and even the apparent improvement in the mergers and acquisitions market may not be especially significant, said Brent Reinke, a managing partner at Reed Smith LLP in Westlake Village. Because his law firm handles a lot of transaction work, Reinke said it serves as a good barometer of the economy clients will come calling in greater numbers for help with acquisitions and financing when the economy is good and conversely, they’ll have little need for his services when the economy is failing. Lately, Reinke said, business has picked up at Reed Smith, but it is from new clients, not necessarily new activity. “Our law firm is getting more and more of a reputation on the corridor, so we’re gaining additional clients, and that’s keeping us busy,” said Reinke. “Are those clients individually more active than they were four or five years ago? Probably not. I think there is an uptick in activity, but people aren’t comfortable at all that it is going to be a sustained uptick.” The consumer factor Perhaps the pivotal question remains the consumer, and whether the buying frenzy that has kept the economy afloat for the past several years will continue. Most agree that the refinancing activity that put cash into the pockets of consumers is over, although spending, at least so far, appears to be continuing. “When you go outside your office just in your own neighborhood, you see the economy is doing well,” said Rick Mateus, executive vice president and CFO at Encino State Bank. “I see people going to restaurants, entertaining themselves in movie theaters. I see a lot of spending money.” To be sure, executives say, the lines at Costco and Home Depot are long. At Remo, which sells to music stores, schools and professionals, backorders are the highest they’ve been in the company’s history. “That tells us at least in the music industry that everything is bouncing back,” said Sink. Ditto for Earl Scheib, which for its most recent reporting period saw same-store sales increase by 6 percent, up from relatively flat performance in prior periods. But other indicators suggest there may be more trouble ahead. “My friends, not too many are getting let go, but it seems like the ones that are seem to be having a more difficult time getting other jobs,” said Michael Choe, director of business development at Cherokee Inc., a marketing and licensing company. Levine said his employees, although well paid in an industry that has continued to see gains, have been staying home more, particularly since the price of gas shot up. “What I realize is it’s impacting their life,” Levine said. “They’re not renting hotels. They’re staying home over Memorial Day.” And perhaps most unsettling, there are signs that even consumer goods manufacturers are getting nervous. Garcia Research Associates, which provides expertise to marketers seeking ethnic customers, fares best when there is a slump in the general market. “During the last recession in 2002, our phone was ringing off the hook and our growth was 20 percent,” said Garcia. “During the last year with the economy starting to recover, our growth rate slowed to 7 percent, and now the phone is starting to ring more aggressively. When there are other opportunities out there, the ethnic markets are more likely to be shunted aside and when the economy starts to sputter, this one bright spot becomes the only bright spot.”

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