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U.S. and San Diego economies muddling through

Only 1.8 percent this year for our town

The United States and San Diego economies should muddle through in 2012 — growing very slowly — unless an economic civil war of sorts erupts in Europe. It’s already rumbling and could cause a global recession that would be a rerun of 2008. New Jersey economist A. Gary Shilling calls this looming war the Teutonic North versus the Club Med South.

While the Northern European countries have generally built economies based on hard work and prudence, the Southern European countries, by and large, have built welfare states on piles of debt, while citizens evade taxes. In 1999, the countries banded together in the eurozone with one currency and one central bank but no common fiscal policy. This meant that money could be shoveled out to both the disciplined and undisciplined, and the former, it should have been obvious at the time, would one day have to bail out the latter. Now it’s happening: the northern countries have to rescue their profligate member nations to the south, and northern voters don’t like it.

If struggling Greece withdrew from the European Union and defaulted, Portugal, Spain, and Italy would probably follow. Banks would crumble; some of them might be American banks. Troubled Club Med countries account for much of eurozone economic activity: Germany is largest with 27.3 percent of the zone’s output, but when combined, ailing Italy (16.7 percent) and Spain (11.4) add up to more than Germany. Some say there isn’t enough money to bail out Italy.

Economist Ross Starr of the University of California San Diego explains that Germany once had rigid labor laws; it was extremely difficult to lay off a worker. Ten years ago Germany went through a restructuring and now has fluid labor markets. Generally, the Club Med countries in the south have not done that. “The conventional view is that Greece and Italy have thoroughly irresponsible policies, including not introducing German reforms,” says Starr. This imbalance threatens the economy. “Europe is definitely going into recession.” The questions are how deep it will be, how long it will last, and how much damage it will do to the world financial system.

Starr’s University of California San Diego colleague James Hamilton also warns that Europe could upset apple carts all around the world. “The biggest problem is financial,” says Hamilton. American banks have loaned money to European nations, hold derivatives that could set off a chain reaction, and are intertwined with European banks. “I am deeply concerned. This won’t be confined to Europe if things blow up there.”

In Europe, leaders are kicking the can down the road — avoiding real solutions (if there are any) until current officeholders step down. There is an election in the United States — historically, no time for risky initiatives. So the world might bounce along the bottom this year — not go into another 2008. But stay alert.

If there is a European recession, but only moderate conflagrations in the world banking system, the United States and San Diego should struggle through this year without major trauma. “I don’t think [eurozone woes] will have that much impact,” says Kelly Cunningham, chief economist of the National University System Institute for Policy Research. Europe is not a big market for San Diego goods and services, he points out.

The San Diego economy will grow only 1.8 percent this year, adjusted for inflation. That’s the best in six years “but not enough to bring unemployment down,” he says, predicting that the jobless rate will average 9.8 percent, just a hair down from last year’s 10 percent. “We are adding jobs, but they are not middle-wage jobs; they are low-end, low-skilled, or high-end, such as in technology or management.”

Housing will not provide oomph. In 2009, and again in 2010, the number of housing units approved for construction was the lowest since the Great Depression. Last year, housing units leapt 42 percent, but the number was still the third lowest on record. Cunningham doesn’t see much of an improvement this year. Population growth will continue to be slow.

He says that the presence of the military is our largest industry, followed by manufacturing (including defense manufacturing), biotech, and tourism. Both defense and tourism could be somewhat vulnerable, he says.

Susan Bruinzeel, senior director of planning and research at the Convention and Visitors Bureau, says 6 percent of San Diego’s overnight travel is from abroad (not including Mexico). Britain is the largest market. The possibility of European woes “is on our radar,” she says. In June, British Airways started a direct flight from London to San Diego, and it is bringing in visitors from a number of countries. “So far, it’s been successful; we’re not worrying about it going away,” she says.

Alan Gin, economist at the University of San Diego, also thinks European megrims will not make a big dent in San Diego this year. “The probability of another downturn in San Diego is about 30 percent,” says Gin. He believes unemployment will average around 8.5 percent, with industries such as health care, administrative services, leisure and hospitality, and biotech showing strength. However, if there is Europe-generated turmoil in the finance industries, biotechs could have problems raising capital.

Cunningham and Gin are not bullish on consumer spending. Between 2006 and 2009, it dropped by 17.4 percent, the biggest plunge in 70 years, notes Cunningham. Sales rose in 2010 and last year, but spending is slowing.

That’s why Gin, in assessing commercial real estate, thinks retail is a weak spot, partly because of the growth of online marketing. But Gin thinks office and apartment markets will do well.

But all economists warn to keep your eye on Europe, its banks, and possible further strains on banks throughout the world. Are you ready for more Wall Street bailouts? I didn’t think so.

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The United States and San Diego economies should muddle through in 2012 — growing very slowly — unless an economic civil war of sorts erupts in Europe. It’s already rumbling and could cause a global recession that would be a rerun of 2008. New Jersey economist A. Gary Shilling calls this looming war the Teutonic North versus the Club Med South.

While the Northern European countries have generally built economies based on hard work and prudence, the Southern European countries, by and large, have built welfare states on piles of debt, while citizens evade taxes. In 1999, the countries banded together in the eurozone with one currency and one central bank but no common fiscal policy. This meant that money could be shoveled out to both the disciplined and undisciplined, and the former, it should have been obvious at the time, would one day have to bail out the latter. Now it’s happening: the northern countries have to rescue their profligate member nations to the south, and northern voters don’t like it.

If struggling Greece withdrew from the European Union and defaulted, Portugal, Spain, and Italy would probably follow. Banks would crumble; some of them might be American banks. Troubled Club Med countries account for much of eurozone economic activity: Germany is largest with 27.3 percent of the zone’s output, but when combined, ailing Italy (16.7 percent) and Spain (11.4) add up to more than Germany. Some say there isn’t enough money to bail out Italy.

Economist Ross Starr of the University of California San Diego explains that Germany once had rigid labor laws; it was extremely difficult to lay off a worker. Ten years ago Germany went through a restructuring and now has fluid labor markets. Generally, the Club Med countries in the south have not done that. “The conventional view is that Greece and Italy have thoroughly irresponsible policies, including not introducing German reforms,” says Starr. This imbalance threatens the economy. “Europe is definitely going into recession.” The questions are how deep it will be, how long it will last, and how much damage it will do to the world financial system.

Starr’s University of California San Diego colleague James Hamilton also warns that Europe could upset apple carts all around the world. “The biggest problem is financial,” says Hamilton. American banks have loaned money to European nations, hold derivatives that could set off a chain reaction, and are intertwined with European banks. “I am deeply concerned. This won’t be confined to Europe if things blow up there.”

In Europe, leaders are kicking the can down the road — avoiding real solutions (if there are any) until current officeholders step down. There is an election in the United States — historically, no time for risky initiatives. So the world might bounce along the bottom this year — not go into another 2008. But stay alert.

If there is a European recession, but only moderate conflagrations in the world banking system, the United States and San Diego should struggle through this year without major trauma. “I don’t think [eurozone woes] will have that much impact,” says Kelly Cunningham, chief economist of the National University System Institute for Policy Research. Europe is not a big market for San Diego goods and services, he points out.

The San Diego economy will grow only 1.8 percent this year, adjusted for inflation. That’s the best in six years “but not enough to bring unemployment down,” he says, predicting that the jobless rate will average 9.8 percent, just a hair down from last year’s 10 percent. “We are adding jobs, but they are not middle-wage jobs; they are low-end, low-skilled, or high-end, such as in technology or management.”

Housing will not provide oomph. In 2009, and again in 2010, the number of housing units approved for construction was the lowest since the Great Depression. Last year, housing units leapt 42 percent, but the number was still the third lowest on record. Cunningham doesn’t see much of an improvement this year. Population growth will continue to be slow.

He says that the presence of the military is our largest industry, followed by manufacturing (including defense manufacturing), biotech, and tourism. Both defense and tourism could be somewhat vulnerable, he says.

Susan Bruinzeel, senior director of planning and research at the Convention and Visitors Bureau, says 6 percent of San Diego’s overnight travel is from abroad (not including Mexico). Britain is the largest market. The possibility of European woes “is on our radar,” she says. In June, British Airways started a direct flight from London to San Diego, and it is bringing in visitors from a number of countries. “So far, it’s been successful; we’re not worrying about it going away,” she says.

Alan Gin, economist at the University of San Diego, also thinks European megrims will not make a big dent in San Diego this year. “The probability of another downturn in San Diego is about 30 percent,” says Gin. He believes unemployment will average around 8.5 percent, with industries such as health care, administrative services, leisure and hospitality, and biotech showing strength. However, if there is Europe-generated turmoil in the finance industries, biotechs could have problems raising capital.

Cunningham and Gin are not bullish on consumer spending. Between 2006 and 2009, it dropped by 17.4 percent, the biggest plunge in 70 years, notes Cunningham. Sales rose in 2010 and last year, but spending is slowing.

That’s why Gin, in assessing commercial real estate, thinks retail is a weak spot, partly because of the growth of online marketing. But Gin thinks office and apartment markets will do well.

But all economists warn to keep your eye on Europe, its banks, and possible further strains on banks throughout the world. Are you ready for more Wall Street bailouts? I didn’t think so.

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Comments
20

I think everyone is too focused on the EU and they are not paying any attention to the peripheral countries that orbit and rely on the EU that cannot cook their books. I suspect when the EU folds the winds of change will be blowing from the former eastern bloc.

Jan. 11, 2012

You may be right about Eastern Europe. Hungary has deep problems. The Czech Republic has strains. Bulgaria is always in trouble. They bear watching. Best, Don Bauder

Jan. 11, 2012

According to Kelly Cunningham "the presence of the military is our largest industry, followed by manufacturing (including defense manufacturing), biotech, and tourism" Don, I think you recently wrote in an article that manufacturing in SD was below 10%. How can it be tthe second largest industry in SD at that rate?

Jan. 11, 2012

I believe I was talking about employment in the earlier reference. Manufacturing is around 7.5% of employment in the county. Cunningham may have been talking about industries' contribution to gross domestic product. Or possibly I got it wrong. Private sector services are huge in employment. I will check Cunningham Thursday a.m. and we can sort this out. Best, Don Bauder

Jan. 11, 2012

PARAGRAPH CORRECT: I got to Kelly Cunningham. The paragraph that poster Dennis questioned is correct in the column. The presence of the military is San Diego's largest industry, followed by manufacturing (including defense manufacturing), biotech and tourism. Cunningham is referring to monetary value that the industries add to the San Diego economy, not employment. It is true that manufacturing is only 7.5% of local jobs. Best, Don Bauder

Jan. 12, 2012

Is that monetary value "total enterprise value," or some other measure?

Jan. 13, 2012

Cunningham didn't call it total enterprise value. He called it production value -- contribution in dollars to the local economy. Best, Don Bauder

Jan. 13, 2012

If we look at the biggest recent frauds, AIG, MF Global, Madoff...they all have one thing in common.

LONDON

That's where the biggest frauds are occurring, though the perpetrators may be physically located on Wall Street. So even though the UK is not part of the Euro-Zone, expect a major crisis there soon as the frauds begin to unravel.

There has never been a greater need for the so-called Tobin-Tax on these speculators and parasites whose greed sucks the life out of the real economy. They should be grateful to just pay a huge tax...angry mobs with pitchforks, torches, and guillotines is the other alternative if they refuse to come clean and pay back what they've stolen.

http://en.wikipedia.org/wiki/Tobin_tax

Jan. 15, 2012

Yes, London is a huge fraud center. Look at some of the other Britain-connected offshore tax and secrecy havens and fraud centers: Cayman Islands, Isle of Man, Isle of Wight, Jersey, Guernsey. I would like to see a transaction tax; I devoted one column to that. Whether it would be a Tobin-type transaction tax is a point that should be considered. Best, Don Bauder

Jan. 15, 2012

What percentage of a tax are you talking about and have you thought about the law of unintended consequences? What are you hoping this tax will do? Social engineering? Punishment?

Jan. 18, 2012

Don, can you provide some information on the monetary value of manufacturing to the SD economy? How is this calculated, does Cunningham provide dollar figures? I can see how manufacture of say Predator drones could generate a large income to the manufacturer but does that money actually stay locally or go to DOD companies headquartered elsewhere? This seems to be contrary to how the SD economy is usually discussed and creates confusion.

Jan. 16, 2012

I believe I have that number but I'll get to Cunningham for a fuller explanation. Best, Don Bauder

Jan. 16, 2012

CUNNINGHAM EXPLAINS: The total annual monetary value for manufacturing in San Diego is $45 billion. That comes from the U.S. Department of Commerce and the Bureau of Economic Analysis, which is within the department. "The confusion is like the difference between net income and total sales," says Cunningham. "Monetary value is the same thing as sales." The $45 billion is the total amount of money flowing from manufacturing annually. Much of that money does go out of the county, of course, particularly if the headquarters of the manufacturer is based elsewhere. Best, don Bauder

Jan. 17, 2012

I got part way through it. When I got to Trilateral Commission I started getting queasy. Then I stopped reading. Tone is terribly paranoid. Best, Don Bauder

Jan. 17, 2012

Ok, did you detect any cooking odors coming from a pot boiling? Was there a familiar ring or thud that would place this site into a genre to you/all?

Jan. 17, 2012

I detected a pungent odor but it was not a cooking odor. Best, Don Bauder

Jan. 17, 2012

So in an article about the local SD economy Cunningham's inclusion of data on total sales of manufacturing is basically useless. It says nothing about local employment or the local economy and certainly will not have an effect on the tepid 1.8% growth that he is predicting. This really seems to be an apples/oranges comparison.

Jan. 18, 2012

I disagree strongly. Cunningham's Economic Ledger is very valuable and based on sound economics. I suggest you call him at 858-642-8008. Best, Don Bauder

Jan. 18, 2012

Here's an interesting summary: http://www.playboy.com/magazine/playboy-interview-paul-krugman However, don't get too distracted by the site's decorations.

Feb. 17, 2012

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