A look at how San Diego is rebounding from the recession.
June 21, 2012 1:25 p.m.
Marney Cox, Chief Economist, San Diego Association of Governments, SANDAG
Related Story: Economists Say San Diego Slowly Rebounding From Recession
CAVANAUGH: I'm Maureen Cavanaugh, it's Thursday, June 21st. Our top story on Midday Edition is a new report on the economic recover in San Diego. The San Diego regional Chamber of commerce says its study indicates the worst of the recession is over for San Diego. Marney Cox is chief economist with SANDAG. Welcome back.
COX: Thank you, Maureen.
CAVANAUGH: Let's start with the report's overall conclusion, that San Diego is rebounding from the recession at a faster rate than other cities in California and across the nation. Do you agree with that?
COX: No, I don't. I'd say that's an overall optimistic statement. I think I understand how they got there. But I think walking through how they measured how San Diego is doing versus some of these other area, there's probably more to the story.
CAVANAUGH: Well, how do you gauge how a city is rebounding?
COX: Sure. In fact, one of the things to try and define is are we close to the road to recovery? Here that can be defined in terms of a rate of growth in the economy. And at the national level, we need to achieve 3-plus% rate of growth in GDP. Nationally, we're at the 1-2% level. So we're not on that road yet. And it's also true here. We haven't achieved 4-5% rates of growth yet consistently over time. One of the things that the report did was compare San Diego to California. One of the variables they used for example is unemployment. The first thing they say about unemployment is that -- how fast it's come down, especially in the last quarter. Well, our numbers are not seasonally adjusted. Meaning every year when the industry begins to boost up its hiring, we go through a hiring phase here, different than what happens in the State of California. We have a highly concentrated visitor industry. If you don't take that under consideration, it might mislead you to believe that the unemployment rate is dropping more rapidly. Another good example of that is a longer trend. If you look at unemployment in San Diego, it has done better than what the state has overall. But I think one of the things that we've benefited from that the state didn't, when people started to lose their jobs here in San Diego, many of them are actually residents of Riverside or residents of Mexico. So they went home to be unemployed. And if you go home to be unemployed, you're not counted in our data. That keeps our unemployment data relatively lower than it is in the state, and it's also benefited Orange County the same way.
CAVANAUGH: Let's put this in context in the last several years. You say we're not on the road to recovery yet. But are we continuing to lose ground the way we did in the early years of the recession?
COX: This recession has -- it's hard to say whether your losing ground or gaining. It's been because it has started and slowed down. Started and slowed down. But one thing is for sure. We haven't sustained a level of rate of growth that would get us back with any assurity, back to where we were before the recession started within a specific period of time. Most forecasts that come out are optimistic. They start out at 2.5-3%. Then the second thing that happens, they postpone when the economy will actually get back to that point where it was before the recession started. Today, it looks like 2016 or 2017.
CAVANAUGH: What is our rate of unemployment in San Diego?
CAVANAUGH: And what about hard-hit industries like construction?
COX: That's bore the brunt of this, it declined by about 40%. It bore the brunt of this out of all the industries. We have seen very little job increase in the construction industry. 2011 was the first year out of the last four we've actually had positive job growth. There was 8,400 jobs, and none of those were construction. All of them in professional, educational services, and then government.
CAVANAUGH: Okay. So construction is not rebounding?
COX: No, no. If you look at -- and this is where the chamber's report comes in, if Luke at the first quarter data, it shows that employment in construction boosted by 1,500 jobs. It's important to keep in mind that one of the things that the employment development department does, it puts out these preliminary numbers, then once a year, when the real data comes in, they have to adjust them. Last year in 2011, we were tracking as if we were going to grow by 20,000 jobs in one year. After the employment development department got all the data in from the businesses, it ended up 8,400. So the same thing will probably happen this year. Once it's adjusted, the numbers we're currently tracking will be reduced substantially.
CAVANAUGH: One of the surprising findings is that hotel occupancy rates are above prerecession levels. Why do you think that is?
COX: Well, the visitor industries is a good example of a stable industry in San Diego. Remember what I said about the construction industry, how hard it was hit, the visitor industry only fell by 7%. Much more stable. So it had less to come back, right? So actually the visitor industry has turned around much quicker, and it's much closer to being back to that point to where it was before the recession started. We're within 4,000 jobs of the prerecession level.
CAVANAUGH: Is there any connection between hotel occupancy rates and the amount that hotels are charging for tourists now?
COX: Yes, they began to get a little more competitive, trying to attract people here. That didn't fall as far, so the road back wasn't as tough. But reducing your hotel rates, offering packages, because there are other things to do here in San Diego, getting together with other visitor attractions, offering packages, making San Diego a much more attractive place to visit.
CAVANAUGH: What are some of the other positive employment trends we're seeing in the region? Are there others?
COX: Sure, there are. There are a couple of positives. One is in educational services. That seems to be recession resistant.
CAVANAUGH: And what does that mean?
COX: Those would be jobs that are located in first the public sector, education, but also private sector. National universities, and trade places like that. That appears to be almost recession resistant. But part of it is, people lost their jobs, and they think they need to be retrained, learn new skills. So education is one of the areas or skills that you need to go back and learn in order to qualify yourself for another job.
CAVANAUGH: I understand.
COX: Another area that's done really well is healthcare. And healthcare seems to be adding quite a few people. It's not quite back up to the level it was before the recession started, but in the last two or three years it has had some pretty stellar growth.
CAVANAUGH: Now, you're telling me that construction is still struggling. Any other sectors that used to be strong that are still struggling in this economy?
COX: Not as bad as the construction industry. The second worst would be retail trade. It's still down. Manufacturing didn't quite fall as far but it still hasn't come back. Those three were probably having the most struggle.
CAVANAUGH: So much of people's wealth in San Diego is tied up in their houses. Is there any sign in this report or otherwise that housing prices are rebounding?
COX: I think they're beginning to stabilize. I don't know that the word is rebound yet. But clearly beginning to stabilize. There's some indication it's picked up in the plus-3% level. I expect them to be flat to down a little bit this year. It won't be till 2013 in my opinion.
CAVANAUGH: We had a segment on the real estate market last week, and everybody agreed it's still very volatile. What kind of effect does an uncertain real estate market have on our overall economy?
COX: Well, are the first thing is how much equity you might have, or how far underwater you are if you own a house. And both of those, if you don't have equity, it hurts your ability to spend, to use that house as leverage to do so. And if you're your water, you're spending more keeping up with your payments than you otherwise would, and if you're spending on housing, you're not spending it on consumption. So the overall economy is actually growing very slow, in part because of this dislocation we have had in the construction industry.
CAVANAUGH: So what you're saying is that when people are concerned about losing their personal wealth in their homes, they're not going to be spending money on other things.
COX: That's right. In fact, there was a recent report that came out from the federal reserve, and it showed where equity, the median equity in a house fell from about $130,000 down to $77,000. A substantial drop overall. And I think with that, people feel less inclined to go out and spend, less secure about their future and cushion they may have to fall back on. The problem is that probably a lot of that equity was an illusion, right? Were home prices really worth the value people were paying for them at their peak? Or was it the actual number lower? Those who counted on those prices are probably the ones who have been hurt worst.
CAVANAUGH: The State of California is still in a deep budget crunch. If we keep getting state cuts to education and social service, could that further stall our economy here in San Diego?
COX: Yes, in fact, this is a real tough call here. On the one hand, you have reduction in government spending, meaning whether it's food stamps or housing or whatever it might be that it's going into, if those go down, there's less expenditure going on in the economy. In the short-run, that means it tougher to grow. People lose their jobs who used to supply the goods or services that were being purchased. In the long run, our deficits shrink. That's important because then we owe less debt, we start saving more, those end up being invested in the economy, but that's a long-range growth trend, not necessarily a short one. So right now, it's a tough call between we're in the middle of a recession, you try to balance your budget if you're the government, or do you purposely run deficits to keep the economy chugging along even though it's at a subpar pace, knowing that what you really need to do is balance the budget once the economy turns around?
CAVANAUGH: If the state cuts back on things that San Diego needs to provide, like a certain level of social services and so forth, that does cost us money though, doesn't it?
COX: Well, we would receive less. And it's possible that those resources that we do have would have to then be spread over more people. So less resource for each person. And I think the education sector is looking at that right now, where potentially they're going to have to reduce salaries. So each person will be getting less. But if they're receiving less, they're going to be spending les.
CAVANAUGH: Some speculate that the economic recovery nationwide as stalled. What effect does that make -- give us here in San Diego? We're not an isolated little bubble, right?
COX: No, we're not. In fact, we have been trailing the national economy. That's another thing that caught my attention about the chamber report saying we were sort of out in front of not only the nation but a lot of other areas. We've been trailing the national economy. I think we're still there. A good example is to look at when the chamber shows what's happened to gross regional product. And it's showing our rate of growth faster than what's going on at the national level. Our economy is about 1% of the national economy. Rates of growth need to be taken under consideration. Your rate of growth can be faster because your economy is smaller. But the more important thing is that at the national level, real GDP is back above the level it was before the recession started. Not true here. We're still 3% below. That's almost a full year's worth of GDP growth on our part. So we're actually behind what's going on at the national level. Not in front of it.
CAVANAUGH: Interesting. One cautionary note in this report by the chamber is what could happen in China, and in the European union. How closely is our economy here tied to those international events?
COX: We're probably more tied to the Asian economies than we are to the European economies here on the west coast. But we're all interconnected. Of the other thing I would add into the European recession that's currently going on, how deep it may be, and it will definitely have ripple impacts to the U.S., but the, other, we have something called the fiscal cliff. It's a rise in taxes and a reduction in expenditures at the federal level. If both of those occur at the same time, in the short-run, it means the economy will stall out. So you'd have a recession going on in Europe, looking to demand fewer goods from the United States , including the west coast. That would push the economy down. We have fewer government expenditures as well as higher taxes, affecting everybody in the United States , pushing the economy down. So that's another contributing factor that's got a lot of people thinking that 2013 may be worse than 2012.
CAVANAUGH: Okay. I have been speaking with Marney Cox, chief economist with SANDAG. Thank you very much.
COX: Thank you.