San Diego officially in recession

Let’s quit the caviling and cut to the chase: the U.S. is in a recession, and so is San Diego. On the last day of July, the U.S. revised its numbers and said the economy contracted in the final quarter of last year; employment has dropped for seven straight months, and average hours worked are down sharply. Economists are still arguing whether this is a national recession, but the final arbiter is the National Bureau of Economic Research, and its éminence grise and president emeritus, Harvard’s Martin Feldstein, says America has been in a recession since the end of 2007 and no end is in sight. It looks all but certain that the U.S. economy will meet the official recession definition of a significant decline in economic activity lasting more than a few months.

Ditto San Diego. Indeed, the local economy began sliding downhill shortly after the housing bubble popped in late 2005. Inflation-adjusted retail sales began declining in the second quarter of 2006, and the drop has been intensifying, says Kelly Cunningham of the San Diego Institute for Policy Research. “It’s a clear indication we are sliding into recession,” says Cunningham, because consumer spending is two-thirds to three-fourths of the local economy. As the real estate bubble expanded, people maintained their spending by borrowing money against the rising value of their homes. When housing prices started going south, the game ended. The new game is foreclosures. “It was a fragile way to build an economy. Clearly things have slowed down more than I anticipated.”

Alan Gin, economist at the University of San Diego, publishes monthly lead indicators of the local economy. They are designed to give an advanced look at where the San Diego economy is headed. They have been doing a good job. “They have been down 26 of the last 27 months,” says Gin. Like Cunningham, he earlier believed the economy was weak but that the county might narrowly avoid recession. But no more.

“For the first six months of 2008, average employment is down compared with the same period of 2007,” says Gin. “Given those numbers, you have to say that we are in a recession. We probably started on a mild path toward recession in June of 2007, when the unemployment rate started spiking up. You need two quarters of information to verify a trend.”

Cunningham points out that job growth has been below zero in three of the last four months.

The federal government’s $168 billion rebate program no doubt pumped up consumption for a while. Such gimmicks may stave off further contraction until the election, but in the long run they expand the federal deficit and take back the buoyancy they fleetingly provided. Inflation is already rising, despite housing deflation. Because of the credit crunch, it is going to be more difficult to get a loan.

In assessing the health of the San Diego economy, it’s generally best to watch employment trends. The data come out every month from the state’s Employment Development Department. Figures on household income usually come with a lag of about a year. Those data will probably show contraction, says Cunningham. There is also an estimate of annual economic growth for each major U.S. metropolitan area, published by a division of the Department of Commerce, but it’s two years behind.

So how long will San Diego’s pain last? “If we can see a little bit of growth by this time next year, we will be doing well,” says Cunningham.

Says Gin, “I see continued weakness through the end of this year and probably through the first half of 2009. There is no sign of a turnaround; the problems could continue beyond that.”