Economic Forecast: Cloudy, then Sunny

By Jorge Casuso

Jan. 5 -- Don't expect the local economy to pick up for at least 18 months, but when it does, Santa Monica has the pieces in place to make a strong and lasting comeback. That is the forecast of local economic experts asked by The Lookout to predict what 2003 has in store for the City, and especially for the Downtown.

The predictions, they warned, would be scrapped if the country goes to war with Iraq, or if another terrorist attack further chills travel to a city that relies in large part on the tourist trade.

So far, Santa Monica has managed to weather the economic downturn better than most California cities, the experts contend, though the decline may seem more pronounced when the 1999 and 2000 boom years are used as a barometer.

"I think we're going to continue to do well, but this is not 1999 or 2000," said Robert O. York, a consultant for the Bayside District. "There has been a considerable shift in the economy."

"I'm cautiously optimistic we've hit bottom and are coming up," said Gwen Pentecost, senior economic analyst for the City's Economic Development Division. "I think that we are on the upturn again. It's just that it's not splendidly dramatic."

A major factor in the City's recovery will be the local impact of a staggering $34.8 billion deficit faced by the state, which, like the impacts of war and terrorism, is outside the control of local government.

The state budget deficit will contribute to a projected $8.5 million shortfall in Santa Monica's budget for next fiscal year, city officials said. If not addressed, they warn, the local deficit could grow to $16.4 million in the 2004-05 fiscal year.

"This is by far the worst budget problem the state has ever seen," said Mike Dennis, the City's finance director. Santa Monica, Dennis said, faces a "financial management challenge because we're impacted by forces we can't unilaterally control -- the state budget and visitors.

"The impact on Santa Monica is not only what the cuts are going to mean," Dennis said, but likely state tax increases "are going to take money out of people's pockets that they would spend and further slow the economy."

The ongoing economic downturn is reflected in slumping sales taxes, which are $1.5 million short of projections, and bed taxes, which have fallen $300,00 to $500,000 short of where they should be, Dennis said. The taxes, he added, aren't expected to reach 2000-01 fiscal year levels until 2004-05.

"Both key revenue sources are not performing as we expected," Dennis said. "In terms of people spending their money, and visitors, we are below our recovery path … the tech sector has simply not recovered. Personal income taxes and tax sales revenues are significantly down."

If the economic downturn -- which is also in part due to the dot.com bust and a slumping entertainment industry -- has been felt citywide, the Third Street Promenade has fared better than most other business sectors in Santa Monica, as well as in Southern California.

Promenade sales increased 3.2 percent in the first half of 2002, compared to a 5.4 percent decline for the rest of the City. However, other parts of Downtown posted a 15.3 percent decline during the same period. (Figures for the third quarter won't be available until mid-January, and final sales figures for 2002 won't be released until April.)

City officials attribute the Promenade's ability to weather the downturn to a strong retail market. "Five to ten years ago, there was a greater emphasis on entertainment and restaurants," said Jeff Mathieu, the City's head of Resource Management. He added that retailers provide "a stronger base and more consistency" that's "not based on trendy products or tourists.

"The major producers of sales tax in the Downtown area are driven by retailers," Mathieu said. "And the range of retail products, the diversity and variety of retail options indicate we will have a return to a strong economy."

York, who is a partner in The Fransen Co., agrees. "I think the Downtown will continue to outperform the rest of the City and most retail districts in Southern California," he said. But York cautioned, "That doesn't mean it's going to look like the heyday, but it's going to be solid."

The holiday shopping season, York said, is a barometer of what 2003 holds in store. "If it turns out stronger, there will be more retailers with money to expand and more lenders willing to invest in the mom and pop stores," he said. "It will really set the tone on how retail is looked at as an investment. It also will set some of the mood for consumers."

The day after Thanksgiving -- which is dubbed "Black Friday" because businesses expect to move from the red to the black -- "looks better than expected," York said. But, he cautioned that the period between Thanksgiving and Christmas -- which is when merchants reap 40 to 70 percent of their yearly profits -- is one week shorter this year due to a late Thanksgiving.

Still, Bayside officials said that Promenade businesses seemed on track to meet their sales goals for the season. "Businesses have been making their daily sales goals despite the slower traffic on the Promenade," Bayside Marketing Manager Marivi Valcourt said one week before Christmas. The shorter holiday season, Valcourt added, may not make much of a difference since "people will still have to make their purchases."

Once Santa Monica weathers the tough economic times, the future looks sunny, according to a report conducted for the City by the Office of Economic Research at Cal State Long Beach.

"It does appear that the worst is behind us," the report concluded. "As the national and regional picture improves, we anticipate that Santa Monica's economic picture will continue to shine brightly. The factors that made Santa Monica an attractive place to live, shop, work or visit before the recession are still in place as the recovery takes hold."

City Finance Director Dennis agrees. "The fundamentals are (its) location, visitor industry and policies and programs that make this environment a desirable place to be in," Dennis said. "It has a creative community, two hospitals, a college, a core of entertainment industry and RAND.