SANTA ANA, CALIF. -- For Joe Soulia, these are not the best of times. But, then again, they're not the worst.

Recent cutbacks in military orders have all but halted growth at Infotek Development Inc., the defense electronics firm he co-founded in 1979, leaving only fond memories of the glorious double-digit growth rates of the mid-1980s Reagan military buildup.

But Soulia's firm is adjusting to the new post-Cold War environment, largely through sales of its computer software services to public and private customers outside the military. This year, non-Defense Department clients will account for nearly 30 percent of the company's roughly $53 million in sales, up from a mere 5 percent in 1985.

"These are terrible times for a lot of my friends in the defense industry, but for us, it's not really a crisis," said Soulia, a 53-year-old Massachusetts native and 22-year Air Force veteran. "We're working hard and migrating to other sorts of work. We're able to cope."

A lot is riding on the ability of California's optimists to make good. As the state goes, so may go the American economy. And today, defense-related cutbacks in aerospace firms and their suppliers have become the stuff of daily headlines in the region: Northrop Corp. has already reduced its work force by 3,000 and stands to lose as many as 20,000 if the B-2 Stealth bomber is canceled; Hughes Aircraft Co. is down 15,000 and Lockheed Corp. has shed almost 20,000 employees from their peaks; and by last count McDonnell Douglas Corp. had cut 9,000 workers. The ripples have already begun to wash over the industry's high- and low-tech suppliers. By one estimate, 140,000 of the 350,000 aerospace jobs added in California during the 1980s will be eliminated by 1992, with the majority of those losses in Southern California.

The setbacks recall the words of Fletcher Bowron, mayor of Los Angeles at the end of World War II, who predicted the loss of wartime manufacturing could not be replaced. "The good Lord did not intend for this to be an industrial city," he said.

Southern California's postwar boom proved him wrong, then. But now, the new round of defense cutbacks is not the region's only problem. The pending imposition of strict air pollution controls will surely put a crimp in the normally free-wheeling California business style, and it directly threatens the very existence of a number of industries -- most notably furniture making, which employed some 63,000 here as recently as two years ago.

The environmental controls could eventually dictate how many new homes, shopping centers, factories and offices could be added to the region -- and, in effect, dictate the pace of economic growth for as long as it takes to bring air pollution under control.

Water, too, has become a problem -- and not just for the pockets of agriculture that remain in this land of urban and suburban sprawl.

While Santa Barbara may have volunteered to parch itself to prevent unwanted development, much of the rest of Southern California is just beginning to face the consequences of a multi-year drought that could create serious impediments to growth if conservation measures don't take hold or new sources of water are not found.

Most unsettling have been the signs of some problems in real estate, a sector that boomed throughout much of the 1980s. In the first quarter of 1990, housing prices in Los Angeles dropped 4 percent compared with the previous year, and a number of highly visible real estate firms have been forced to close their doors.

Weaker markets for commercial, hotel and industrial properties are reported in areas of San Diego, Orange County and the South Bay region near Los Angeles International Airport, all home to many defense-related industries and their workers.

Some of the region's financial institutions are already beginning to feel the pinch. A number of high-flying thrifts -- among them the now-infamous Lincoln and Columbia savings and loans -- ran afoul of speculation in real estate and junk bonds.

But even the more stolid savings institutions, such as Coast Savings Financial, CalFed Inc. and HomeFed Corp., were forced to report quarterly losses just this past week as a result of softness in the local real estate market.

Painting Two Pictures

The full impact of all these problems and restrictions is only just beginning to be felt. The economy continues to grow, albeit at a slower pace: The regional Chamber of Commerce calculates that Southern California's equivalent of the GNP will grow 2.6 percent this year, down from 3.4 percent in 1989 but still well ahead of the nation as a whole.

Overall unemployment in Los Angeles County jumped over the past year to 5.5 percent, up from around 5 percent in 1988, but in Orange County, unemployment has held steady at only 3 percent.

Still, the spirit of Mayor Bowron lives on. Adding up the portraits from the defense, construction and real estate sectors, economic forecasters at the University of California at Los Angeles have begun to raise the possibility of an aerospace-driven recession for the region by 1992.

David Shulman, the voluble head of property research at Salomon Brothers, said an even worse scenario faces the City of Los Angeles. The current downturn, he suggested, may be a first step toward Los Angeles's descent into a "stratified urban center burdened by brutal challenges of crime, poverty, congestion and environmental degradation."

To Shulman and a growing chorus of pessimists, the Los Angeles area is evolving not, as many had hoped, into a capital city of the Pacific Rim, but the new "Capital of the Third World."

"You have a situation in which a larger and larger population is separated and getting poorer," said Richard Weinstein, chairman of the UCLA School of Architecture and Urban Planning, an emerging center of pessimist thinking about Southern California's future. "It's a vicious cycle and a self-reinforcing situation that's going to create more and more problems."

But other observers believe that the Southern California economy -- and its ethnic mosaic -- will prove the skeptics wrong once again.

Jerry Jordan, chief economist for First Interstate Bank, pointed out, for instance, that the region is now far less dependent on aerospace and defense than at any time since World War II.

Although regional statistics are hard to come by, California's dependence on military spending statewide has dropped from 15 percent to about 8 percent. That makes the state less than half as dependent on defense for jobs as Massachusetts or Connecticut.

Following Jobs

Some cite population growth as a factor. Just as people follow jobs, jobs can follow people -- and one thing Southern California has continued to attract is new people.

Population growth remains two to three times the national average: Last year alone, nearly 200,000 people moved into the region, roughly divided between those from other states and legal emigrants from abroad.

Dennis Macheski, vice president and regional director of the commercial real estate firm Grubb and Ellis, credited this growth for keeping the net absorption of office space -- which has doubled in Southern California over the past decade -- among the highest in the nation, along with Seattle and Sacramento.

"The {East Coast} perception that we're ready for a fall doesn't understand that we are still absorbing people and creating jobs -- while both are now negative in places like Massachusetts and Connecticut," noted First Interstate's Jordan. "As long as you have net growth and people coming in, the buildings should keep filling up even if it takes more time."

Even less understood, according to Jordan, is the increased importance of global forces on the Los Angeles area's economic health.

Since the early 1970s, direct jobs in international trade have surged to 275,000. Once primarily an import center, the port last year saw a 21 percent jump in net exports.

Particularly successful has been Orange County's technology industry, whose export licenses alone grew to $6.2 billion from $2 billion between 1987 and 1989.

Southern California's successful movement into the global economy is also evident in the growing interest of foreign investors. Last year, three Southern California cities -- Los Angeles, Anaheim and San Diego -- ranked in the top five cities for Japanese real estate investment.

At the same time, the region has become a favorite of Taiwanese, British, French and other European money people, who often find Class A office space in Los Angeles two to four times cheaper than in other comparable "global cities" such as New York, Sydney, Tokyo, Paris or London.

"Europeans are not just looking at New York any more," said Jeremy Davies, a partner from Price Waterhouse's headquarters in London who is being reassigned to a special Los Angeles task force. "The corporations who are our clients are becoming more global and see Los Angeles as a primary entry point for trade with Asia and Mexico. If you look at Los Angeles as a global city, it's cheap."

The Foreign Boost

But perhaps even more important has been the impact of foreigners settling in Southern California. In 1988, roughly 120,000 people immigrated to Southern California, the vast majority of them from Asia and Latin America. And as immigrant groups have always done, they have taken to starting and growing new companies in ways that put the lie to any notion that the American Dream is dead.

Economic indicators that can be gleaned from the immigrant communities -- so often the center of pessimistic accounts of Los Angeles's future -- actually appear stronger than those in the mainstream community.

Over the last year, for instance, advertising lineage at the region's dominant English-language paper, the Los Angeles Times, increased only slightly, according to the newspaper. In contrast, the Chinese Daily News, the largest Chinese-language paper in the region, saw its advertising jump in Southern California by more than 50 percent. Its circulation in the region over the last three years has increased 58 percent, to more than 70,000.

Perhaps more important has been the remarkable strength of the city's Spanish-speaking economy. Joseph Lozano, publisher of La Opinion, the region's premier Spanish-language daily, said aerospace cutbacks may have affected real estate prices near his own home in swank Manhattan Beach, but have had little noticeable effect on properties and businesses in the predominantly Latin east side neighborhoods. So far this year, his paper's advertising lineage has soared more than 20 percent over last year's pace, and his 100,000 circulation is just about double that of five years ago.

"The service industry is still strong, garments are still strong, our people are okay," Lozano said. "The east side {of Los Angeles} is actually weathering things better than the rest of the city."

Yet even in the heart of aerospace-oriented areas such as Orange County and west Los Angeles, the economy continues to show surprising signs of life.

Losses in the defense aerospace industry, for instance, are being at least partially offset by rising orders for commercial aircraft. (According to Jack Kyser, chief economist of the Chamber of Commerce, Boeing has nearly 300 subcontractors in Southern California who provide nearly $3 billion in goods and services annually.)

And many of the skilled workers, technicians and engineers will be greeted eagerly by a high-tech sector that dwarfs in size those of Silicon Valley and Boston's high-tech corridor.

Transferring Skills

The transfer of engineers and skilled workers from defense firms to high technology is a well-worn path in Southern California. Among the survivors of the post-Vietnam downturn was a laid-off Hughes Aircraft engineer named Tom Yuen, who, along with Safi Quereshy and another partner in 1980, founded AST Research. Today, AST has become the area's premier microcomputer company, with more than $500 million in sales and 1,300 employees in Southern California.

As in the 1970s, Quereshy, now president of AST, sees opportunities in the layoffs of skilled engineers for his and other technology companies, many of whom have been suffering from severe shortages of scientific and technical talent.

"For our industry, it's a positive," said Quereshy, who admits his worries about filling about 30 engineering vacancies have been somewhat lessened by the sudden availability of technical talent.

"When I look at people's backgrounds here, a lot first came from aerospace. People with good skill sets can transfer out. People may think it's the end, but this area can absorb them."

Several miles north in Santa Ana, however, Joe Soulia is not waiting for someone else to bail him out. Three years ago, he started two new temporary agencies as a sideline, one specializing in office help, the other in high-tech assembly work.

For the moment, while Infotek struggles just to stay even, the agencies, which do little to no military work, are booming, with sales nearing $4 million.

"For myself, I actually feel pretty good. There's no question about it, this is still the best entrepreneurial breeding ground in the world," Soulia said. "We may have some troubles, but I have confidence people will find a way to cope. Southern Californians are pretty flexible people."