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Golden Heartbreak


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GOLDEN HEARTBREAK

For 30 terrifying seconds, the earth shook as hard as anyone could remember. When it stopped, virtually all of Los Angeles' 3 million residents were left in darkness. Car alarms shrieked in the early morning confusion. Above the blacked-out city, a rare display ef brilliant stars glittered eerily. Battery-operated radios brought news of collapsed freeways, blazing gas mains, crumbled apartment houses.

The earthquake that hit L.A.'s Northridge section on Jan. 17, the most powerful to shake the region in decades, leveled scores of buildings and killed dozens of residents. It also gave California's economy a brutal jolt. The effects will delay the Golden State's economic recovery by several months at least, until billions in insurance money and state and federal disaster relief funds arrive. And even after the city rebuilds, the quake could constrain the state's efforts to attract new investment and to keep disgruntled businesses from leaving. Says Roger Brinner, economist at DRI/McGraw-Hill: "California just got another strike against it."

TRIPPED UP. On top of all the human drama and misery, economically, the quake's timing couldn't have been worse. After a three-year slump, California's economy was bottoming out. Its unemployment rate fell to 8.7% in December from 9.8% in October, and the pace of job losses at California-based aerospace contractors had slowed by 42% in the last half of 1993 from the first half. Retail sales and home buying were up, as was tourism. A revival in California, which accounts for about 12% of gross domestic product, would have boosted the national economy.

Now, crippled highways, damaged homes, and lost business will delay any California rebound. Early estimates put the structural damage around L.A. well above the $7 billion in damage sustained during the 1989 San Francisco earthquake--perhaps as high as $30 billion. That doesn't include lost production at companies such as computer maker Packard Bell Electronics Inc., which abandmned its headquarters when an aftershock damaged the building on Jan. 19. An Atlantic Richfield Co. oil pipeline, a major conduit for Los Angeles basin refineries, burst and caught fire, destroying houses and cars. The pipeline will be closed for four days, and cleanup costs will be substantial. Add to those disruptions countless smaller ones: Organic Transport, a small produce-hauler, has seen its two-hour run into Los Angeles from Bakersfield stretched into an eight-hour marathon.

Certainly, there's an upside: Billions in insurance money, as well as federal and state disaster-relief funds, will flow into Southern California, allowing the region to rebuild. Industry experts estimate $1 billion to $2 billion in insured losses, and the Federal Emergency Management Agency and other U.S. agencies expect to spend at least $2.5 billion for disaster relief. Eventually, businesses and households will also dip into savings to replace broken furniture and damaged cars. In this way, natural disasters "have a negative short-run impact on the local economy, and then they are beneficial in the second, third, and fourth quarters" thereafter, says Robert Wescott, a senior economist on the President's Council of Economic Advisers.

Take the four freeways that need extensive rebuilding and the many condemned buildings that will be torn down and rebuilt from scratch. All that construction activity requires equipment and labor. "A whole lot of people in the building trades will be going back to work," predicts state Assemblyman Richard Katz, whose district includes several heavily damaged communities. Similarly, the earthquake could shave the nation's economic growth slightly in the early months of 1994 but stimulate growth by an equivalent amount in later quarters. Last year's Midwest floods subtracted 0.5% from growth in the third quarter of 1993 but added 0.5% later, says Mark Zandi, economist at Regional Financial Associates.

The looming question, however, is whether the quake convinces businesses and households to join the exodus from Southern California. Well before the disaster struck, fed up with high taxes, cumbersome regulatory burdens, and 1992's riots, many had fled. Some 225,000 people left the state for other parts of the U.S. in the last 18 months--a staggering shift from the 207,000 that entered the state three years before.

A host of California employers, meanwhile, are considering taking operations elsewhere. Taco Bell Corp., based in Irvine, says it may move to either Texas or Georgia. Montgomery Ward & Co. has decided not to expand in California, opting for Arizona instead (page 34). Says Bernard F. Brennan, chairman of Ward's, which does 20% of its $5.7 billion sales in California: "I think the quake will create an enlarged migration out of the state."

With good reason. The direct loss of wealth from the disaster will prove enormous. Moreover, Los Angeles' highway transportation system was hit hard. A damaged infrastructure could further discourage businesses from expanding in the region. "If the transportation system is revealed as more fragile than before, that could have long-term implications for future investments," says David Hensley, economist at Salomon Brothers Inc.

COLORADO'S GAIN. And even as Los Angeles rebuilds, nearby states will be eagerly trying to encourage more migration. Development officials say they're backing off just now, in deference to good taste. But Colorado, for one, has attracted 30,000 Californians in the past year. "Every six months there's more bad news from Southern California," says John M. Mullins, Colorado's director of business development.

California is fighting back. Last year, Governor Pete Wilson and the state legislature made headway in improving the state's business climate, overhauling its much-maligned workers' compensation system and streamlining its environmental-licensing process, among other things. Northern California's economy, moreover, is relatively strong.

After the quake, though, the California dream looks ever more tarnished. Just ask Ari Celik. As workers toiled to rescue victims in Northridge, she sat dazed in front of the twisted pile that had been her dry cleaning business, Mirage Cleaning and Laundry. Without earthquake insurance, rebuilding may be out of the question. "People have already been leaving California," said Celik. "Now, there's just one more reason to go." All too many businesses may be getting the same idea.Eric Schine and Amy Barrett in Los Angeles, Christopher Farrell in New York, and bureau reports


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