Last year, the San Diego economy did poorly, although it was picking up a bit in the final several months. This year, it should do moderately better. Alan Gin, economist at the University of San Diego, says the U.S. economy will grow by about 2 percent, “and San Diego will do about the same.”
Every month, Gin compiles the leading indicators of the San Diego economy. They have been creeping up since early 2009, indicating a modest recovery. “In the first couple of months of 2010, the San Diego unemployment rate could approach 11 percent, but then it will start coming down, and I think it may be under 10 percent at the end of the year,” says Gin. “We will have a slight rebound in construction, and tourism and retail jobs will stop falling.”
To get a handle on the local economy, you have to look at what industries provide the most output and employment. According to Kelly Cunningham, economist for the National University System Institute for Policy Research, financial activity accounted for 24.6 percent of the local economy in 2008. That included jobs in the financial industry (stockbrokers, bankers, etc.), insurance, and real estate. The overwhelming portion is in real estate, which in 2008 accounted for 20.1 percent of the entire local economy.
This is a bit scary: San Diego is dominated by real estate. In fact, the two other metro areas that had larger real estate percentages in 2008 were Orlando (24.8 percent) and Miami (20.8 percent). Real estate has collapsed in Florida and California, so those percentages are probably lower today. Last year, San Diego’s real estate, rental, and leasing jobs dropped by around 2 percent.
This year, real estate will be spotty — bad in some categories, good in others. Last year, permits for new single-family homes were dismal. But interest rates and prices have come down sharply. In 2009, single-family permits were around 2000 — “the lowest since World War II,” says Alan Nevin, economist for MarketPointe Realty Advisors. This year, “I would be stunned if it hit 2000,” he says. “There will be no condominiums started, but there could be as many as 1500 apartments. These are projects being built on land meant for condo development.” There are also what Nevin calls “broken projects” — originally intended as condos but now containing both condos and rentals.
With prices having taken a bath, “The resale market is booming,” says Nevin. “The problem is that there is virtually no inventory because owners of homes that are not in trouble are not listing them. We are down to less than a three-month inventory, and typically you would want a six- or seven-month inventory.” Last year, half the sales were foreclosures or so-called short sales, transactions in which the bank agrees to take a hit on the home price. This year, foreclosures and short sales will be about one-third the total, says Nevin. All told, it appears that there won’t be a big gain in real estate jobs this year.
The second-largest sector of the San Diego economy is government — 17 percent. That compares with 13 percent nationally and 12 percent in California. This includes the presence of the military (uniform and nonuniform personnel, for example). These figures do not include money that pours into San Diego in aerospace/ defense contracting, including shipbuilding. However, employment in aerospace manufacturing was off more than 9 percent last year. The county once had much more aerospace contracting and military presence than it does now. From an economic standpoint, I would rather see San Diego be a Navy Town, as it used to be, than a Real Estate Town, which it is now. Once a building is constructed, it doesn’t add much to the economy other than taxes (hopefully). Construction employment has been sinking for some time and last year was down more than 9 percent.
Government employment tends to be steady, and the military contribution should be relatively stable. One of the biggest battles locally is over the extremely generous pay and pensions of government employees. With the City teetering on the brink of financial disaster, many say that government pay and fringes should be slashed. But there are laws protecting the benefits, and politicians don’t want to battle with politically potent government employees.
In the United States and in San Diego, manufacturing has fallen dramatically in the past 50 years, replaced by various kinds of service jobs. In San Diego, business and professional services make up 14 percent of the economy, third highest. This trend is serious because manufacturing jobs tend to have higher wages than service jobs. In the U.S., manufacturing has dropped from 28.3 percent of the economy 50 years ago to 9.25 percent. It’s worse in San Diego — the plunge has been from 27 percent to 7.6 percent over roughly the same period.
From 2001 through 2008, San Diego had one of the fastest-growing economies in the nation, says Cunningham. The major reason was the growth of technology, including biotech. But last year, employment in technology-manufacturing areas such as computers and peripherals, electronic instruments, and audio and visual manufacturing dropped between 3 and 7 percent. “For the first time in a long time, that business was down,” says Gin. “But that will be one of the strongest in 2010, with biotech research and development the strongest.”
Leisure and hospitality services are 4.5 percent of the local economy. Through October of 2009, the total number of visitors to the county was down 5.5 percent from 2008 and down almost 8 percent from the same period of 2006, according to Convention and Visitors Bureau figures. Employment in tourism took a hit last year. Hotels were particularly vulnerable, says La Jolla tourism guru Jerry Morrison. Through November of 2009, occupancy was down 9.7 percent and revenue per available room down 21.1 percent, according to Smith Travel Research. Hotels that were built or refinanced in the past five years are underwater financially, says Morrison. “I’m afraid that 2010 will wind up the same as 2009,” says Morrison.
Agrees Skip Hull, vice president of CIC Research, “Discretionary leisure travel depends on spending, and you have to have jobs to have income for travel.” And most economists believe that U.S. unemployment will remain high all year. Potential visitors won’t have the funds, and companies slash travel, including convention attendance, in bad times. “I hope I am wrong, but I expect a flat year — bumping along a bottom. We might get some growth in the third and fourth quarters, but it would be modest. Our hopes are pinned on 2011, but it will take a couple of years beyond 2011” for San Diego to get back to levels before the industry took a big pratfall.
Ah, but there is some good news. Gin predicts San Diego will add 2000 to 3000 jobs this year. That doesn’t sound like much, since total nonfarm employment is 1.25 million. But some other economists are predicting further job shrinkage, says Gin.