Monday, August 1, 2011
San Diego -- on the road to recovery or a long road ahead? With debt ceiling taking the spotlight locally and nationally, we ask, how is San Diego's economy doing.
San Diego -- on the road to recovery or a long road ahead? With debt ceiling taking the spotlight locally and nationally, we ask, how is San Diego's economy doing. What areas are rebounding, which have a long way to go.
Marney Cox, Chief Economist, San Diego Association of Governments (SANDAG)
The vote on the debt ceiling deal expected later today in Washington. Analysts say the bill would cut about $2†trillion from federal spending over the next decade, but it's unclear what it might do for the economy now. Many in Washington were leak elected on promises to create jobs and stimulate the economy. Today we'll be looking for signs of that in San Diego's economy. I'd like to introduce my guest, Marney Cox is chief economist with the San Diego association of governments. Known as SANDAG. Hi Marney.
COX: Hi, good morning, Maureen.
CAVANAUGH: Hello. Have you been keeping close tabs on the debt ceiling deal that they've apparently reach indeed Washington?
COX: Yes, we have.
CAVANAUGH: And what is your assessment? How might it affect us here in San Diego?
COX: Well, I think two things. One, I think they waited right up to the last moment. And so many of the economist were thinking they wouldn't get anything done. There was a lot of comments out there today about no deal getting done whatsoever. It looks like they will get something done. And so there will not be any reason for either default or a reduction in federal expenditures in order to pay for services and goods that they currently buy. With that being said, I think there are a couple left over am items that will impact the economy. First of all, I think that there is going to be less spending than there was before. Somebody's going to have to take a haircut. And with that less spending depending upon where it actually hits in the United States , those areas will be impacted. Of.
CAVANAUGH: Now the congressional budget office analysis says the initial spending cuts in the deal include tight caps on the operation budget of departments like the Department of Defense. What would that mean to us?
COX: Yeah, the Department of Defense is being singled out in a couple instances here. Even under the deal, the first almost trillion dollar cut probably close to 40% of that could impact the Department of Defense. It's for a broad range of security agencies including the Department of Defense. So we could get hit there. Then the second piece of that which could be anywhere between 1.2†trillion and 1.5†trillion could -- almost 50% of that could be from the Department of Defense. When you add those two pieces together, the worst case scenario for the department of District Attorney's Office might be a 15% reduction over ten years. Because San Diego is an area where we have a lot of defense located here, highly concentrated. It probably would share in that decline. The only way we would miss is if the share of the decline was primarily army and air force and left the Navy and the Marine Corps sort of out of the major cuts. But typically, they share them across the board. So I would expect San Diego to be sort of equal impact, it might cost us as much as between 2 to 3% of our defense expenditures here in San Diego if those worst than expected cuts go through.
CAVANAUGH: Just last week on this program, we were talking about the fact that the defense industry and San Diego's reliance on defense contracts and the subsequent trickle-down effect in the civilian sector of defense contracts, buffeted our region slightly from the full impact of the economic recession. I wonder if you could talk to us a little bit about that and how you see it playing out in the future if indeed defense contracts are cut back.
COX: Yeah, almost lost in the story of the recession was some expenditures that were taking place here in San Diego from the Department of Defense related to Navy and marine installations we have. And they created probably close to 28,000 jobs during the worst part of the recession where we were losing a lot of civilian jobs. But again they were sort of lost in the shuffle. That increase wasn't nearly sufficient to offset the decline that occurred here in civilian jobs. But that's the kind of counter cyclical activity that can come about because of a high concentration of something like the military being in your area if they're spending. Of course, the reverse is also true when you begin to tail off from military activity and reductions occur, then your area is hit hardest. But in this case, the timing of the extend tour was perfect. It's when the civilian economy was doing poorly the Department of Defense was increasing expenditures, helping off set the impact.
CAVANAUGH: And so I guess what we can hope for down the line is that the civilian economy might be able to offset any cutbacks that we see in defense playing out in our area.
COX: Yeah, and I think what some people are concerned about is that the civilian economy really doesn't appear to have rebounded completely from the decline, the last couple months in a row job growth on average have been about 20,000 jobs nationwide. And we typically get about one% of the nation's employment growth. So over the last couple months we could look at something like 200 jobs being generated here over that time period per month. That's not a lot of strength. And it comes at a time when people are thinking that the civilian economy doesn't appear to be strong, and at the same time we may be cutting back on military, which is heavily concentrated here, doubling up on our losses.
CAVANAUGH: I'm speaking with Marney Cox, he's chief economist with SANDAG. And I referred to this in the open. Many legislators in Washington got there by the promise of jobs, jobs, jobs. Do you see any job creation coming out of this debt ceiling deal?
COX: No, not primarily job generation. You have to sort of think about this is a deficit reduction. So the amount of savings taking place here is money that had to be borrowed. If you were cutting money that someone else was going to spend, if you were just cutting a budget at the federal level and allowing you to keep more taxes, and then you could spend it, that wasn't necessarily going to say there was going to be a Los. You just might spend your money differently than the federal government might spend it. So the impacts would be differently. Here what we're doing is cutting deficits, money is that we're having to borrow in order to spend. So the impact here is going to be significant. It's like when you stop spending money using your credit card, retail outlets do get impacted. Right? Because they'll have -- sell fewer goods or your Starbucks, if you happen to buy there, there's going to be fewer expenditures out there. But the money -- it's a real loss that way. There will be jobs lost. But hopefully in the end, by not having to borrow to spend, there are some people who think that we need to make that correction, get both the federal government and consumers back into a point where they have balanced budgets as opposed to having to borrow for it and put the economy back on a more stable trajectory as opposed to an unstable one that we're on today spending far more money than we actually have available to spend.
CAVANAUGH: Speaking of jobs, as you said, you're seeing that really sort of minimal growth in San Diego when it comes to jobs. What areas are having a harder time rebounding when it comes to employment?
COX: It's almost easier to identify the three areas that up until, through December of 2010, were contributing most to the economy, including during the recession. That was business services, education, healthcare, and the government was actually contributing, especially local government. Now all other categories were highly not contributing. Instead you saw job losses. What most people are concerned about is that government is now going to start losing jobs. So you have only a couple areas left that are holding up the job growth for all the rest of the economy. And so it becomes very narrow based, in terms of its diversification of strength. And I think we've begun to see that in the last couple months at the national level where jobs are just request not keeping pace. They're beginning to slow down people are now fearful of a double dip recession.
CAVANAUGH: Just a couple of weeks ago, we did a rather large program about the San Diego real estate market. And the consensus was it is not rebounding, sales remain sluggish, home prices are not rising. How big an impact does real estate have on our economy?
COX: Real estate is very important. There are evidence to suggest that of the 11 recessions and recoveries we have had that take us back to World†War†II, all about one of those started out construction accounting for about 50% of the first year's growth. And the reason for that is because construction industry is highly leveraged, meaning I go and buy a very large asset and borrow a lot of money to buy that, a new house. Then when you develop or build that new house, it puts a lot of people to work. And the resources for that mostly come for your area or nearby your area. And so it has a tremendous what's called an employment multiplier attached with a lot of jobs are created through that one activity, buying a new house. This time around without the construction industry playing a leading role, the economy's having a tough time getting started because of that.
CAVANAUGH: Are there some good sides? We do hear that tax revenues have picked up a bit.
COX: I'm sorry, what picked up?
CAVANAUGH: Tax revenues?
COX: Some tax revenues here? We have seen some growth. But I think you have to keep in mind a couple things. Up until this past fiscal year, we had three years of decline, so we were down about 20% in terms of, say, sales tax revenue. Then we did get a boost last year up region wide of about 80%, differed by jurisdiction, but on average about an eight% increase. We're still far below where we were when we started. We've made a lot headway on the way back. We're still not completely back up to budget levels where we started. And most of the concern right now is about the coming fiscal year, the one we're in. And some people are predicting as low as 0, but somewhere between 0 and 4% growth as opposed to the eight% growth we saw this last year. So although it's growth and it's positive and it's in the correct direction, still be a lot less strong than this last fiscal year.
CAVANAUGH: Which industries are moving forward?
COX: Right now as I mentioned earlier, we probably have just a couple that are really strong. That's in the business services area, and then education and health services. Those are the two areas that seem to be carrying a majority of the job growth, both locally, and they've also contributed nationally. At the national level you've probably got a couple other contributors rather than just the business services area in select areas throughout the United States technology, for instance, in northern California is beginning to rebound strongly. Some places back in Boston. It's just that they haven't taken off here in San Diego.
CAVANAUGH: Many people have said the debt ceiling crisis was a manufactured problem by politicians. Do you have the feeling Washington is doing what it needs to do to happen economies like San Diego get back on their feet?
COX: Well, maybe two comments here. One, in terms of -- manufactured crisis, I think if I may be interpreting what some people think about this, typically what you try and do is when you set your budget for the coming year's extend tour, you try to figure out what your revenues and costs will be, and you equalize them before you set your budget. And I think that's the argument here. When the federal government is setting their budget, it's setting its expenditures above what it has to spend. By doing that, it creates problems later on. Because it knows it has to go back in and either raise the debt ceiling so it can spend more, or it has to cut down to that level. So in that sense, it did manufacture it.
CAVANAUGH: And my other question is, do you have a feeling Washington is doing enough to help economies like San Diego get back on their feet? We had wall to wall media coverage about the debt ceiling crisis. That's all we've been hearing about for the last week and a half, and yet the idea that we're going to be producing 20,000 jobs last month in the entire nation, it leaves people I think with the feeling what's going on here?
COX: And I think that gets to the heart of the effectiveness, I think, of the strategies that have been brought forward. Some argue at best, most of the strategies that have been presented by the federal government have at most stabilized and kept the economy from doing worse. But they haven't done as promised, which is to create jobs, lower the unemployment rate and start growth growing again. So a lot of people are disappointed. And because it was sold as a stimulus program, it was sold as a growth and development, and instead at best all it's done is stabilize. And there in lies the problem. And I think the American tax pay maybe some elected federal officials are getting a little frustrated with the direction that the programs have been going. And they're trying to look to see if there are other things that need to get done. Maybe we do need to start to incorporate strategies that bring in private sector employers as opposed to trying to do it solely with either tax rebates or stimulus spent by the federal government. Let's try a different approach to see if we can't get the economy started again.
CAVANAUGH: And finally, Marney, is there anything that we can do personally, pay down our own debt, to try to buffer ourselves from what looks like anion economic hard times ahead at least for the foreseeable future?
COX: This is the tough part right now because as households, we still have probably about 100 and 20% of our personal income in debt, meaning that there's still 20% more of debt than we could pay off on what we receive annually. We're still under water that way, more debt than we're actually earning. But each time we cut back in order to get below that level where we actually earn what we're spending, we're spending less out there, there's less goods being bought, less services being provided, and that means there's less jobs available. This is a tough one where the consumer needs to get its balance sheet back in order again, but if as a consumer does that and it's 70% of the economy, that means there'll be less jobs available. So I think we have still some tough times ahead of us in terms of job generation. And high unemployment ratings until we get not only the federal budget back in order, but also our own budgets as households and consumers back in order.
CAVANAUGH: Marney, you've given us I really great over view. I've been speaking with Marney accident co, chief economist with SANDAG. And thank you so much.
COX: Thank you Maureen.