Downtown’s posh Sè Hotel sold out of bankruptcy for a third of its original cost
We may not suffer an economic double dip, but we’re in for double trouble, and it could last several more years. Both in the nation and San Diego, recent signs of weakness portend more years of high unemployment, receding home values, anemic construction, soft consumer spending, slow manufacturing, pain from excessive debt, and only moderately improving tourism.
San Diego enjoys one advantage: growing employment in tech, particularly biotech. On the other hand, one-fifth of the San Diego economy is tied to the military (both weaponry and payroll), and there is talk of cutbacks. Remember the early 1990s? The nation got a peace dividend; San Diego got a piece of poop in the kisser as aerospace companies closed down and engineers were laid off en masse.
There are a number of long-standing problems that have come together to bring the American economy down. Beginning in the 1980s, consumers, governments, and financial institutions piled up far too much debt. Wall Street went on a speculative binge. Then came the 2007–early 2009 crash. Washington came to the rescue of the financial institutions, handing them trillions of near-zero interest rate dollars for a record length of time.
That caused a double whammy. The stock and bond markets thrived on the cheap money. But the value of the dollar plummeted as the Federal Reserve, in effect, kept printing more bucks. Commodities, which are denominated in dollars, soared in price. So American families were hit with higher food and fuel prices. The big rise of financial asset prices boosted the wealth and incomes of the richest 10 percent, who control 80 percent of stock and bond wealth, but the lower 90 percent suffered from inflation and sagging incomes.
Thus we suffered a two-tier recovery. The wealthiest 10 percent were gleeful; the rest were glum as the gap between the rich and the rest widened. Not surprisingly, consumer confidence polls show Americans’ mood stumbling along at 25 to 30 percent below the normal level. And consumer spending is 70 percent of the economy.
Economically, San Diego has been doing somewhat more poorly than the nation as a whole. The unemployment rate in the county has generally been above 10 percent while the nation’s has been a notch below double digits, although recent local joblessness has slipped a bit below double digits. American housing values are down about 30 percent from their 2006 peak. San Diego is down 38 percent from its 2005 peak to a median $321,000, which is still high by comparison with other metro areas. The Pacific region consumer mood surveys are slightly below the nation’s, according to San Diego Workforce Partnership.
San Diego tourism is picking up, but it trails other major California metro areas. For the year to date, the local hotel occupancy rate is 65.9 percent, up from 63.3 for the same period last year. But San Francisco’s rate this year is 71.6 percent, Orange County’s is 68.3, and Los Angeles’s 69.8, according to Smith Travel Research. “It is important to remember in comparing cities that Los Angeles, San Francisco, and [Orange County] are international destinations,” says La Jolla tourism guru Jerry Morrison. The weak dollar is helping those markets more than it helps San Diego. Many downtown hotels remain underwater. The posh Sè San Diego was recently sold out of bankruptcy for one-third of its original cost.
Through the years, San Diego household income has grown at 2 percent a year. In both 2009 and 2010, it fell by 2 percent. “[Yearly] incomes could drop further — not 2 percent but maybe 1 percent,” says Marney Cox, chief economist of San Diego Association of Governments. Employment will only go up half of 1 percent this year, and housing prices have another 5 to 10 percent to fall, he feels. “It will take another five years to get the jobs back that we lost in the recession.”
San Diego retail sales were up 8 percent from July of last year through March of this year, but that was greatly as a result of higher gas prices, says Cox. “People are not consuming; the savings rate remains high,” he says. “There is way too much commercial space. We have to figure out what to do with the excess retail space. Strip malls are going to have way too much space.”
Kelly Cunningham, economist for the National University System Institute for Policy Research, notes that San Diego County retail sales peaked at $47.8 billion in 2006, and the estimate for 2010 is $40.7 billion. He thinks it will be 2021 before local retail sales get back to their 2006 levels, adjusted for inflation. “It’s astonishing,” says Cunningham. “We used to have population growth of 50,000 a year. Now it’s 30,000, or less than 1 percent, annually.” Babies keep getting born, and births outnumber deaths. “But for the last several years we have had an exodus of residents.”
In theory, shoppers are supposed to pay tax on internet sales, but that is not a reliable expectation. Beset by reluctant consumers who check the internet before they buy anything in a store, communities have to raise their sales taxes to survive. The San Diego rate is 8.75 percent. La Mesa’s sales tax is 9.5 percent, and National City and El Cajon are at 9.75, says Cunningham. (Those aren’t tops in the state. South Gate, in the Los Angeles area, has a whopping 10.75 percent rate.) “High taxes are a disincentive to spend,” depressing sales tax receipts, says Cunningham — one of several reasons, along with excessive pension commitments, why communities continue to cut public sector employment.
San Diego has a potential problem: the military, directly and indirectly, accounts for 19.9 percent, or $33.5 billion, of the county’s total yearly economic output. This figure includes such things as military pensions. The Pentagon prefers to slice payroll, such as medical benefits, rather than cut back on weaponry. “The military is telling us it is going to shift its focus to the West Coast, but if there is a cutback we would see a pretty big setback in our economy such as what we saw in the early 1990s,” says Cunningham.
The positive story is in tech. Biotech jobs have grown from 18,000 in the first quarter of 2008 to 21,000 in the same period this year, although venture capital going into the field is coming down moderately. Software jobs are increasing, but some other areas such as telecommunications are soft.
Manufacturing, which enjoys higher salaries, “is only 7.5 percent of [San Diego] employment,” compared with 9.2 percent nationally, says Cunningham. “If you go back to World War II, [manufacturing] was 50 percent in San Diego.” Today, “Consumer spending is weak; job growth is weak. I would expect a bigger rebound, but we are not seeing it.”