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Signs Point to a Slow-Moving Economy

July 16, 2010

California Apparel News

By Andrew Asch, Retail Editor

During the first half of the year, the economy slowly climbed out of its hole, pushing retail sales into positive territory and making everyone breathe easier. But the second half of the year is shaping up to be less robust.

Improvement has been moving at a glacial pace because the economy is still overcoming the bruises and shocks of the worst downturn since the Great Depression of the 1930s, said Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp. “The best way to characterize the economy was that it was very sick. It was in intensive care,” Kyser said of the economic downturn that started in September 2008. “You just don’t jump around immediately after you leave the hospital. It can take a long time to recover.”

One bright spot in the economy is California manufacturing. According to a recent survey from the A. Gary Anderson Center for Economic Research at Chapman University in Orange, Calif., purchasing managers see continued growth in the state’s factories. In the quarterly Purchasing Managers Survey, released July 6, managers expected production, new orders and employment to grow during the third quarter of 2010, but it won’t be as aggressive as during the second quarter of 2010.

Economic growth occurs if the survey’s composite index increases above the benchmark of 50, said Raymond Sfeir, the survey’s director and an economics professor at Chapman. The most recent survey reported a composite index of 61 for production, new orders and employment.

Even better for the economy, more workers are forecast to be hired in the next few months at companies that make hi-tech, durable and non-durable goods, which is in stark contrast to the jobless recovery of the past year. “There was an increase in production earlier this year, but it was taking place without any hiring at all. Productivity increased because managers were just getting workers to work harder. Now they’re hiring to increase production,” Sfeir said.

Unfortunately for apparel manufacturers, the more optimistic forecasts were made by people producing hi-tech and durable goods. The survey’s apparel companies expected no increase in orders or hiring in the current third quarter compared with last quarter. The California Employment Development Department reported that apparel manufacturing lost jobs in May. Apparel manufacturing jobs shrunk 7.3 percent to 58,400 people in May, compared with 63,000 in May 2009.

Retailers have fared better. Retail employment has grown slightly in California. For May, state statistics show a 1.8 percent increase in people employed at retail, or 125,000, compared with 122,800 people employed in May 2009.

Rooms with a view

Another positive sign in the economy was the state’s housing industry. Home sales inched up 1.2 percent in May 2010 compared to the same period last year, according to the California Association of Realtors. The association’s president, Steve Goddard, said the increase was due to first-time home buyers who timed their closings to capitalize on both federal and state tax credits.

Even commercial real estate seemed to be stabilizing.

According to the Mid-Year 2010 Retail Report from real estate information company CoStar Group, commercial vacancies across the United States remained unchanged at 7.4 percent during the first and second quarter.

California’s commercial real estate world seemed to be healthier than the rest of the nation. Los Angeles County’s commercial real estate vacancy rate was 5.2 percent in the second quarter. Orange County’s rate was nudged up to 6.1 percent while the Inland Empire’s commercial real estate vacancy was still high at 9.1 percent. Farther south, San Diego County had a 5.5 percent vacancy rate while up north, San Francisco County was doing well with only a 3.3 percent vacancy rate.

On the retail front, many of Los Angeles’ top shopping streets are seeing fewer vacancies, said Jay Luchs, a vice president at CBRE Richard Ellis who has been brokering commercial real estate deals since 2003 in Los Angeles areas such as Malibu, Beverly Hills and West Hollywood. During the height of the recession, he saw more than six vacancies on tony Robertson Boulevard. Since the beginning of the year, the vacancy rate has been slipping, and by the end of the year it could be whittled down to as little as one vacancy.

“Things are looking up. Landlords have taken deals at less rent. Tenants realized if they don’t take [properties] now, they may be locked out of the market,” Luchs said.

Investors in the ring

An improved economy has made many companies feel more confident in looking for funding and partnerships, said Paul Zaffaroni, a director in investment-banking group Roth Capital Partners in Newport Beach, Calif.

“[Mergers and acquisitions] discussions and deal activity have increased significantly over the last 90 days in the branded consumer space,” he said. “We are seeing an increased level of interest from both strategic buyers that are looking to put record cash levels on their balance sheets to work and private-equity firms that now have easier access to credit.

“There are a lot of high-quality, privately held companies with unique brands or concepts looking for partners after sitting on the sidelines in 2009 now that valuation levels have stabilized. We expect this pace to continue or accelerate during the second half of the year.”

Even with the economy showing some hopeful signs, the pace of the recovery has been frustrating, said Andrew Tananbaum, president of Capital Business Credit, a factoring company in New York.

He had expected that retail sales would be better by now. He observed that consumers are still being tight with their money and retailers are still keeping their inventories lean. “They don’t have clear visibility, because of unknowns in the economy,” Tananbaum said.

Apparel and Textile Employmnet

Los Angeles County May 2010 May 2009

Apparel Manufacturers 47,300 50,000

Textile Mills 7,000 7,800

Wholesale Sales 19,500 19,900

California May 2010 May 2009

Apparel Manufacturers 58,400 63,000

Textile Mills 9,000 9,900

Wholesale Sales 28,400 29,000

Source: Los Angeles County Economic Development Corp.