A crystal-ball view into San Diego’s 2018 economy

Three months ago, San Diego economist Kelly Cunningham was concerned that San Diego might lead the state and nation into a recession in 2018. Back then, he thought this year’s local economy would grow by a mere 0.2 percent, following a meek 0.3 percent in 2016.

Now Cunningham is feeling much better. He is predicting that the local economy will rise by 1.8 percent in 2018. The difference is in military spending. Both military presence and defense contracting had been declining. Now, increased military spending will be the engine of San Diego growth, says Cunningham.

Local aerospace contractors are in booming fields: cyber security, intelligence surveillance, defense-related electronics and software, and unmanned aerial systems.

Overall, jobs will go up 1.8 percent, compared to 1.6 percent this year, as the unemployment rate “remains about the same — about 4 percent,” says Cunningham.

Lynn Reaser, former chief economist at Bank of America and Wells Fargo, and now an adjunct professor of economics at Point Loma Nazarene University, hasn’t made her forecast yet but says that the San Diego economy “will be favorable next year. The military will benefit from the increased number of ships coming to San Diego. There will be increased demand for medical care, and tourism should benefit from a softer dollar and strong currencies overseas. Technology should benefit from more demand for biotech.”

She is concerned about one thing: a labor shortage. Farm and construction jobs could be hurt by a tougher immigration policy, for example.

Phil Blair, executive officer of Manpower San Diego, which connects employers with potential workers, says there is a shortage of workers in “skilled information technology and engineers across the board.” Light manufacturing jobs can be tight, too. The East Coast weather disasters have created a lot of high-paying jobs for construction workers such as drywallers and roofers. And peripatetic construction workers have always done what Watergate sleuths did: follow the money.

Somewhat surprisingly, there is a shortage of people making between $11.50 (the current minimum wage) and $14 an hour. Recreational pot becomes legal on January 1st. Only 10 percent of Manpower’s clients don’t give drug tests. From experience in other markets his company serves, Blair suspects the failure rate for potential employees will rise to 25 percent. The local Manpower branch is sending out letters to 3800 associates saying that on January 1, “It is your right to partake socially if that is your choice, but we will continue with drug tests. Marijuana stays in your system 30 to 45 days. We want people who are stable, can commit to long-term assignments, can go to work every day.”

San Diego County hotel guru Jerry Morrison says tourism should have a good year. The hotel occupancy rate may dip very slightly, from 78.5 percent this year to 78.4 percent. But the average daily room rate should rise from $160.82 this year to $164.55 in 2018. Revenue per available room should rise from this year’s $126.24 to $129.06. Still, we lag behind San Francisco and Los Angeles in key stats. The occupancy rates in those two markets should be more than 81 percent next year. San Francisco’s average daily room rate should be a whopping $238.40. “San Diego will do well, although not dramatically so,” says Morrison. “We should have a 2 percent to 2.5 percent rise in rates, but occupancy will be pretty much flat.”

There are almost 200,000 jobs in leisure and hospitality fields, and that figure should continue rising next year, says Cunningham. Visitor spending this year is 4.7 percent above spending in 2016 and should continue rising next year.

One negative concerns the North American Free Trade Agreement (NAFTA). President Trump wants to renegotiate it. If the United States leaves the agreement, San Diego would get hit hard, says Cunningham. In particular, there is a lot of electronics trade between the United States and Mexico. “Backing out of NAFTA would slow that down,” says Cunningham, and would also hurt the nation’s auto market.

A big question mark is housing. San Diego’s median home price is $530,000, up almost 10 percent from the previous year. The House and Senate have not yet agreed upon the new tax law, but it is certain that housing will lose some tax breaks. For example, one purpose of the proposed legislation in Washington is to have fewer people take itemized deductions. That could result in a decline in housing prices. If the mortgage interest deduction is lowered or eliminated, housing values could drop. “The housing market could be impacted with changes in the tax law,” says Reaser, “at least at the higher end.” And compared with national markets, other than coastal California areas, San Diego’s home prices are at the high end.

Cunningham takes a different view: less generous deductions “could make housing even less affordable,” says Cunningham. High-tax states such as California will be hit hardest. “It’s kind of frightening. It will discourage building — there will not be as much profit motive in building. With all the bureaucratic hassle we have already to build, there will be even fewer reasons to build. Housing prices will probably go up even more. There will be a limitation on supply, and already we don’t have enough supply.”

Of the 35 largest markets in the nation, in only 4, including San Diego, do renters pay more than 40 percent of their incomes for rent. “That percentage may even go up in a tight market,” says Cunningham, although there could be more commuting to Mexico and Riverside County, as well as people doubling and tripling up.

In recent years, 14,000 people a year have been leaving San Diego (domestic migration), “but with better employment prospects, it will go down to 9000,” says Cunningham. On the other hand, even higher housing prices could keep people moving out.

Where should you put your money? You get almost a zero return from banks, savings and loans, and money market funds, and bond yields are also very low. Playing commodities is like going to Las Vegas, in my opinion.

“The Federal Reserve will be raising rates three times, maybe four,” says Reaser. Higher rates should make bonds and bank savings more attractive. “The stock market should benefit from higher after-tax profits [a result of the dropping of the corporate tax rate]. The stock market is likely to see a more modest gain. There is bigger risk,” she says. “All asset prices are at lofty levels.”