Almost always, the deeper an economy plunges, the more vigorously it springs back. But this Great Recession is different. Therefore, it’s time for a reality check. Economic growth — in the United States and in San Diego — will almost certainly be very slow for the next several years. Unemployment will remain high. Consumers won’t be spending. Their savings will go up, even though they will get piddling returns on certificates of deposit and money market funds and will likely pay higher taxes on corporate stock dividends.
Federal Reserve chairman Ben Bernanke, a professional liar, looks for moderate growth of around 3.5 to 4 percent the next two years, but he admits that won’t be enough to bring jobs back. “We’ll have a continued recovery, but it won’t be terrific,” he allows. Most economists look for 3 percent during the same period.
The wise person will cut those professional forecasts in half — or more.
And be prepared for the bleakest possibility: a second recession. Happily, it’s only a minority of economists — not including Bernanke — who see this so-called double dip. But Kelly Cunningham, economist for the National University System Institute for Policy Research, says, “I would not be surprised by a double dip in California.” San Diego would do better than the state, as it usually does, but economic life wouldn’t be pleasant, he says.
There could even be another financial panic, but that, too, is a long shot. However, Carlsbad’s E. James Welsh of Welsh Money Management thinks that there will be a secular (long-term) bear market in stocks until 2014 or 2016. There will probably be cyclical (short-term) bull markets inside that bear, but Welsh expects another drop of 20 to 30 percent. That might not officially be called a panic, but it would certainly cause some folks to push the panic button.
Don’t be fooled when the stock market rallies and TV talking heads effervesce about the recovery. The market, which has been flat for 11 years, may surge from time to time because of the weak employment picture. Companies aren’t rehiring, and many are still slashing jobs; this is one factor pushing profits and stocks up. Bernanke says he will keep giving money away free to big banks as long as unemployment remains high. So Wall Street is feasting on Main Street’s pain. The Federal Reserve has printed so much money, and the federal government has built up such huge deficits, that a brisk economic rebound would cause inflation and high interest rates. The last thing Bernanke wants is a brisk rebound, although he won’t admit it.
Why the economic megrims? We lived beyond our means for decades. Now we have to go in reverse gear. Household debt (mortgage, credit card, installment debt, etc.) as a percentage of the nation’s total annual economic output was 44 in 1982, says Welsh. Then it ballooned to a grossly unsustainable 98 percent in 2007 when the bubble burst. It has since come down slightly. During that period, people were borrowing off the inflated value of their homes and stocks. That game is over.
“Consumption is going to remain weak,” both nationally and in San Diego, says Alan Gin, economist at the University of San Diego. “Unemployment is high. There is less equity in homes to draw [borrow] on. There is a shift in consumer attitudes. The downturn is so bad that consumers are ratcheting down consumption habits.”
Meanwhile, governments have been spending and borrowing excessively too — particularly in the last couple of years, when the U.S. federal government has been applying Keynesian remedies to the recession. And “spending by states has increased by 6 percent annually for the last 30 years,” says Welsh, but it will come down sharply. States such as California and Illinois are at the edge of the abyss. The federal debt has ballooned from $5.8 trillion only two years ago to $8.4 trillion. Nations of Europe are vastly overleveraged, but U.S. deficits as a percentage of the economy are almost as bad, and worse in some cases.
“We have to get that debt down to sustainable levels,” says Marney Cox, chief economist for the San Diego Association of Governments (SANDAG). “The State of California deficit is $20 billion, so the state is taking money from local jurisdictions, which are then cutting services.”
Jobs are hard to find. “I’m looking for half a percent to one percent job growth in San Diego this year — 6000 to 12,000 jobs,” says Cox. Cunningham, however, points out that local tech employment is holding its own, and “biotech employment has actually increased in the last two years. You don’t want to be laying off highly skilled workers.”
San Diego has a high cost of living but not a high level of personal income, such as Silicon Valley enjoys. That means local consumers might cut back on spending more than in some metro areas. California taxes are inordinately high. Voters in cities such as El Cajon, La Mesa, National City, and Vista have approved even higher sales tax rates. And higher taxes inhibit consumer purchases.
In November, voters will consider an $11 billion water bond. “I don’t know where they think the money will come from,” says Cox.
The housing crisis is not over. San Diego prices plunged more than 40 percent from their November 2005 peak and are still down 36 percent, although they have risen for 11 consecutive months. “High housing prices were an illusion,” says Cox. Then came the foreclosures. But they have stalled, partly because of federal and state relief programs, but greatly because banks don’t want to take more homes over. They are loaded with them. Many people are simply not paying their mortgages, knowing the banks don’t want those homes.
“We have to slog our way through all those foreclosures,” says Cox, who expects home values to drop again. Cunningham and Welsh agree.
Says Gin, “There will be more foreclosures but not necessarily another dip in housing prices — possibly just a slow market.” But he is sure of one thing: “Commercial real estate is not coming out of its slump.” More and more people are working from remote locations. That hurts the office market. “By one estimate, there is 20 percent too much retail space,” partly because of consumers not buying and partly because they do so much shopping online.
San Diego is the third most real-estate-dependent metro area in the country. In 2008, real estate was 20.1 percent of San Diego’s economy, says Cunningham. The percentage was 24.8 in Orlando and 20.8 in Miami. Real estate has fallen apart in both Florida and California, so those percentages are no doubt down considerably. That’s one reason the San Diego economy has taken a beating.
Cunningham keeps track of what’s called the gross regional product, or the total annual output of goods and services, in San Diego County. “In 2009, there was an actual decline in gross regional product,” he says. “We will see some growth in 2010, but it will be weak growth, and if you take out inflation, it will be just 1 percent. In 2011, it will probably be a little stronger,” unless, of course, there is that double dip in the state.