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Whither the San Diego economy this year? “I cannot anticipate much growth,” says Kelly Cunningham, economist for the National University System Institute for Policy Research.

Says Marney Cox, chief economist for the San Diego Association of Governments, “If you liked 2013, you may like 2014. It will be another mediocre year. Nothing substantial — steady, but below par.”

Kelly Cunningham

Kelly Cunningham

If all goes reasonably well, the total inflation-adjusted output of the local economy will grow 1.5 percent, says Cunningham. That would be the slowest growth since 2010, when the economy contracted by 0.4 percent. (In 2009 it plunged by 4.5 percent.)

Marney Cox

Marney Cox

Cox estimates that county nonfarm jobs will grow by only 1.5 to 2 percent. “The unemployment rate will start the year around 7 percent and average 6.5 percent to 6.25 percent,” he says.

Industries that will add a large number of jobs will be those that hire a lot of part-time employees and pay low wages, says Cox. “But that’s not good for the whole economy,” he says. The good news is that tech jobs, such as in biomed, biotech, and telecom, account for around 10 percent of employment and pay the highest wages.

The congressional budget compromise restores some military expenditures that would have been cut if automatic, across-the-board spending cuts were to resume. However, some veterans’ benefits take a haircut. Cunningham has thought it possible that San Diego would go into a recession this year, but Congress’s compromise budget makes that less likely.

Cunningham estimates that more than 25 percent of the San Diego economy is related to government. Defense spending, which was almost 20 percent of the local economy in 2010, will drop to 16.8 percent this year, he forecasts. This includes contracting, such as aerospace manufacturing and military shipbuilding, along with civilian employment, construction on bases, and benefit payments. “The defense sector was growing until 2010 and since then has been declining,” he says.

Defense spending “may get some relief during the year — not strength, but less weakness,” says Cox, noting that the local military outlook is “slightly better” than it was prior to the budget agreement.

Another huge chunk of the San Diego economy is real estate — construction, sales, renting, and mortgage activity. Cunningham says it accounts for 25 percent of the economy. And real estate has been coming back. Zillow, Inc., predicts that San Diego will be the eighth-hottest American housing market in 2014.

But Cox and Cunningham agree that San Diego’s big comeback has been led by institutions buying homes with cash. That institutional buying will probably slow down, partly because interest rates will rise along with prices, say the economists.

According to the Department of Numbers, an organization that puts together public data, median prices for San Diego homes peaked in mid-2006 at $539,225 and steadily plunged to a $336,250 nadir. Then home values climbed back, and the median is now only 10 percent below that 2006 peak. However, others say the median is still around $100,000 below that 2006 high, or about $438,000 — a figure Cunningham says is close.

Economists tend to think that high home prices are a sign of strength. But tell that to homebuyers. Since the local market is shifting from institutional buyers to first-time and move-up buyers, the big recovery in home prices may not prove to be such a blessing. On the other hand, there is no question that rising home values have a positive wealth effect and stimulate consumer spending.

But look at San Diegans’ incomes. In 2007 (the year the recession began), inflation-adjusted median family income was $79,536. Five years later, it was $10,000 lower, according to Department of Numbers data. Cunningham notes that it has risen sharply of late, but there is no way that it will return this year to the 2007 level. Tech and management incomes “have rebounded and are higher than ever,” he says. “But middle-level wages have been flat to down,” and workers at the lowest rungs on the ladder are still suffering.

San Diego Taxable Sales

San Diego Taxable Sales

San Diego's Total Economic Ouput

San Diego's Total Economic Ouput

With incomes so anemic, it is no surprise that San Diego’s retail sales are depressingly weak. Inflation-adjusted taxable sales hit $38.7 billion in 2005. This year, Cunningham estimates such sales will be $35.2 billion, up 2.2 percent from 2013. This means that this year’s retail sales will be less than in 2000, when they were $36.2 billion.

Comparisons have been worse. Cunningham points out that in 2009, when inflation-adjusted taxable sales plunged 12.3 percent, “they were the lowest they had been since 1996.” And in 1996, the county’s population was 2.7 million. This year, it is likely to be 3.2 million. In recent years, county population has been growing at 0.7 percent a year. In the 1980s and 1990s, 3 percent annual growth was not unusual.

Jerry Morrison

Jerry Morrison

Tourism is one of San Diego’s major industries. Here again, the county is lagging. In 2007, the average annual hotel occupancy rate was 72.9 percent and the average room rate $138.89. But the county has not climbed back to those 2007 levels. Jerry Morrison, a hotel expert, says that in January or February of this year, San Diego should finally struggle back to 2007 levels.

But coastal California competitors have topped their 2007 figures for some time. “San Francisco is a strong international destination — travel is huge from Asia and strong from Europe,” says Morrison. Los Angeles is also a big international market. Anaheim has Cars Land of Disney California Adventure, which opened in June of 2012. Anaheim also has Mickey Mouse, of course.

San Diego tourism has been hurt by the reduction in military travel, as well as the sharp cutback in travel marketing expenditures. That money has now been restored, but the county will lag other major California markets until the end of this year, he says.

All told, with government spending one-fourth of the economy and sputtering, and real estate another one-fourth and only doing so-so, half the economy is vulnerable. With tourism, another of the major industries, having problems, it’s no wonder that Cox and Cunningham use words such as “struggling,” “lackluster,” and “mediocre.”

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Comments

Visduh Dec. 31, 2013 @ 9:28 a.m.

These forecasts are based on the assumption that the national economy continues to grow. If there is a correction/contraction, the situation will be far worse. That is a sobering thought. Yet, somehow, home prices are up, and judging by all the club/restaurant/rock band reviews in the Reader, there is plenty of discretionary income sloshing around in the county. Those who have are spending on food and entertainment. Those who don't have are presumably suffering in silence. All that adds up to a strange economy, perhaps a sort of new normal, that is based more on consumption of services than on consumer goods.

the near term future doesn't look promising at all, under the best case scenario. What if things really head south again?

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Don Bauder Dec. 31, 2013 @ 10:26 a.m.

Visduh: The explanation is that there is PLENTY of money sloshing around in the U.S. and most major nations. Short term rates in the U.S. have been held at zero for years and long rates artificially driven down by quantitative easing and other tricks.

All this money does not turn into inflation because the banks -- following the instructions of the Federal Reserve -- are being very parsimonious making loans. This is because the Fed knows that if the banks start lending heavily, inflation will roar.

Plutonomy (an economy based on consumption by the affluent) is now cemented in force in the U.S. Wall Street's prosperity depends on Main Street's pain -- the more Main Street misery, the more the Fed creates money and credit, driving down interest rates and driving up stocks, enriching the already-wealthy and keeping the poor and middle class under water. In short, a rising tide lifts all yachts.

Some unusual forces are keeping San Diego's performance worse than the U.S.'s. Military spending is down and consumer spending lags because of moderate incomes and a high cost of living. In-migration is also down. Weak jobs and high housing prices discourage workers from moving to San Diego. Best, Don Bauder

1

Dennis Dec. 31, 2013 @ 2:40 p.m.

"This is because the Fed knows that if the banks start lending heavily, inflation will roar."

Don, the banks are sitting on bundles of cash that they get for almost no interest from the Fed. If banks continue to set on the money and not lend that in itself should lead to inflation if there is a demand. It seems that low demand is really why they aren't lending even though rates are historically low. In order for lending to be inflationary there would need to be a shortage of cash to lend and a huge demand for loans. I've always been of the opinion that inflation is caused by the Fed increasing interest rates not by any magic of the market.

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Don Bauder Dec. 31, 2013 @ 9:57 p.m.

Dennis: Yes, the banks and banking regulators will argue that the loan demand is weak and that is why the money is not being loaned out. I do not believe that for a minute. Bankers have told me surreptitiously that the Fed has told them to be parsimonious loaning out the money. To me, it's obvious why: If lending fires up, so does the economy, and so does inflation.

This is another reason this is a plutonomy, or an economy based on spending by the affluent. For decades, adjusted for inflation, middle class and lower income people have sunk into a hole as the big gains have gone entirely to the top 10%, and greatly to the top 1%. That is exactly what our leaders want. Best, Don Bauder

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ImJustABill Jan. 1, 2014 @ 12:25 a.m.

Story on the local news says that South County retailers expect an increase in retail sales to Mexican shoppers due to a big increase in the Mexican sales tax.

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Don Bauder Jan. 1, 2014 @ 7:46 a.m.

ImJustABill: That could be possible, but currency values play a role, too. Best, Don Bauder

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MURPHYJUNK Jan. 1, 2014 @ 9:39 a.m.

so-so on paper, how about in reality ?

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Don Bauder Jan. 1, 2014 @ 11:41 a.m.

Murphyjunk: At the end of 2014, people could look back and say the year was worse than so-so, or better. Best, Don Bauder

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