For one thing, there are many ways to measure recession. It's quite possible for output to grow while company earnings grind to a halt. Sales for the 20 largest O.C. companies grew 2 percent for the first nine months of this year. But those same 20 companies posted combined losses of just over $1 billion. The county's health-care industry lost $600 million (vs. earnings of $330 million last year). And among technology firms it was even worse: 12 of the 20 largest O.C. tech companies generated red ink, racking up combined losses of more than $2 billion. Call it an "earnings recession."

The truth is, Orange County, like the rest of California, has had a delayed reaction to the national economic recession that began in early 2001. While the national recession ended in the first quarter of 2002, when U.S. output surged by 5 percent, the Chapman study shows that was when California's own recession was just beginning. O.C. only began to lose jobs in the third quarter when many companies suffering from stagnant prices and higher costs (remember the energy crisis?) used layoffs to cut costs. On top of that, productivity has improved, which means it takes less manpower to do the same job—another reason we've seen layoffs in times of growth.

The good news for O.C.—and their employees—is that recessions like this one can provide savvy managers an opportunity to get ahead. We studied 700 firms that weathered the recession of 1991-92 and found that about a fifth of those that entered the downturn lagging their industries leapfrogged to the top quarter of performance after the recession was over. More than a fifth of those at the top fell to the bottom. Interestingly, only half as many firms made such dramatic moves during recent periods of economic calm.

The key for managers is to avoid panic and stay the course strategically. Easier said than done, of course, but a number of O.C. companies appear to be on the right track. Irvine-based Allergan, for instance, has doubled its research and development budget during the past four years. And that is clearly paying off for the specialty drug maker. In April, it received approval from the FDA for the medical use of Botox. Sales of the wrinkle-reducing treatment are largely responsible for a 24 percent jump in Allergan's third-quarter revenue.

Irvine neighbor Edwards Lifesciences, meanwhile, has worked hard during the downturn to boost its leadership in heart valves and other advanced treatments for cardiovascular disease. Erratic earnings haven't kept it from boosting R&D spending 23 percent in the second quarter or acquiring a Japanese joint venture from Baxter International Inc. Management is predicting strong growth in both sales and earnings in 2003.

Broadcom, which makes chips for communications devices, has spent the last year battling a severe downturn—a slump that has carved more than 60 percent off its stock price in the past year and produced deep losses for two years. Nevertheless, it has maintained spending on R&D and has made key acquisitions. The result: Annual revenue has increased to $787 million, leapfrogging cross-town rival Conexant, which has seen sales cut in half over the past three years.

The message is clear: While ill economic winds continue to blow in California, the companies that navigate the storm bravely have a rare opportunity to come out ahead. And as the state wrestles with budget deficits and sluggish growth, that offers plenty of promise for the future.

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ORANGE GROVE
Russ Hagey, co-author with Savi Baveja, is a fellow executive with Bain & Co., management consultants.
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