By and  on January 2, 2002

IT MAY NOT HAPPEN IN THE FIRST HALF, BUT AN ECONOMIC RECOVERY IS IN THE WORKS.

Along with the rest of the country, California slipped into a recession in the third quarter, as tourism plunged following Sept. 11.

The state's industries also have struggled this year with rising energy costs and a minimum wage that's 23 percent higher than the federal standard. But the Golden State's recession is "a mild one," according to Jack Kyser, chief economist with the Los Angeles Development Corp. Kyser predicted that the dual powerhouses of defense spending and Hollywood will spark a gradual recovery in the middle of 2002. Century City, Calif.-based aviation contractor Northrup Grumman, for example, recently announced plans to hire 1,200 people as part of the $80 billion joint strike fighter program with Lockheed Martin. In addition, Hollywood is coming off a record-breaking $8.3 billion in domestic box office revenues this year, Kyser pointed out.

While the overall picture for California is relatively healthy, Kyser acknowledged that retailers have a tough road ahead. The state, which has seen a retail building boom in the past four years, is now saturated, he said. He predicted a wave of Chapter 11 filings in the first half of the year, as retailers take a hard look at their market niche and restructure with fewer locations. As for manufacturers, they need to be attuned to the consumer's mood, Kyser said. "If the values of practicality, family and home continue for a while, it will have major ramifications, especially on upper-end goods," he said.

The following is a look at what the first half holds for vendors and retailers.

The Vendors

With a tough first half ahead, vendors are going lean and mean.

Most are not anticipating a quick fix, said Rob Greenspan, managing partner of Moss Adams, an accounting firm with 300 apparel industry clients. Vendors' sales volumes have dropped 10 to 15 percent this year, he estimated.

"They're projecting to adjust overhead costs and inventory levels so they can survive and make money," he said. "But they're not looking for any big years."

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