San Diego's Economy Looks Promising For 2013, But Challenges Still Ahead

CAVANAUGH: Our top story on Midday Edition is a glimpse into San Diego's economic future. As the nation has been focused on Washington DC and fiscal cliff negotiations, local economist have been busy forecasting San Diego's economy in 2013. And as one of my guests puts it, while there are still hazy skies ahead, the fiscal fog is clearing. I'd like to welcome doctor Lynn Reaser with the economic business institute of Point Loma Nazarene university. REASER: Good afternoon, and happy new year. CAVANAUGH: Happy new year to you! I'd like to get your reaction to the deal struck in Washington that avoids the most severe effects of the fiscal cliff. REASER: It certainly was an enormous relief. I had thought all along there would be a last-minute major effort to avoid the worst of the fiscal cliff, and we all welcome not having to deal with enormous tax increases. Some increased on their taxes, the 2% reduction in the payroll tax rate will now go away. But the worst of the tax hikes are avoided. CAVANAUGH: I'd like to welcome Alan Gin, professor of economics at the university of San Diego and author of index of leaders. Welcome to you, Alan. GIN: Thank you. CAVANAUGH: Let me get your reaction about the deal that avoided the fiscal cliff in Washington. GIN: One thing is that it's called a fiscal cliff. I call it more like a fiscal sand do you know. Of the economy wasn't going to collapse if nothing was done immediately. But they did do something, as Lynn indicated, the worst of the tax hikes have been dealt with. And so I think that'll help as far as keeping the economy going. CAVANAUGH: Lynn, you mentioned the fact that the payroll tax cut is going away. How do you see that affecting San Diego's economy? I heard on a national news program on KPBS this morning that it may take away about $1,000 a year from an average person's paycheck. Do you see that? Do you agree with that figure No. 1? And No. 2, how does that impact the economy? REASER: We look at a big picture. Higher income individuals will also see an increase in their taxes. Overall the tax increase will amount to about 0.40 of 1% of our GDP, so not an enormous impact. But certainly some drag. The good news is that that could be offset by some improvement in the stock market and also by home prices. The big uncertainty is that the automatic spending cuts which are target said to amount to about $110 billion this year have still not been addressed. We've kicked the can down the road a couple of months, and that could still hit San Diego very hard, particularly in terms of defense cuts, and also cuts in medical and scientific research. CAVANAUGH: So in much of our discussion, remaining discussion, we'll have to talk about if the spending cuts go into effect, and if they don't, we'll have to kind of couch it in those terms when we're looking forward to seeing how, for instance, our defense industry is going to prosper in 2013, etc. So I guess we'll just have to do that as the discussion continues. Alan, what do San Diego's economic indicators tell us about how our region faired throughout the last year in 2012? GIN: Well, things were mixed. But generally positive. Which basically reflects what's happening as far as the local economy is concerned. We've got positive growth in terms of employment, not spectacular, but that mirrors what's going on at the national level. At the national level, we've got positive GDP growth, and similar situations here in San Diego. Of CAVANAUGH: What are the factors still dragging down the economy? GIN: I think there's a lot of uncertainty. There was a lot of uncertainty out there. The fiscal cliff was one thing attributing to that. I think a big thing that's impacted the economy is in the downturn, a lot of really good-paying middle class jobs were lost. And so those have not come back. And as a result there's not the consumer spending that we normally see driving a rebound in the economy. CAVANAUGH: Lynn Reaser, what factors -- you talked about clearing the fiscal fog in San Diego, and you're hopeful that some of that clearing will take place next year. Where are the hopeful signs in 2013? REASER: Well, first we have still expansion in technology, we have biotech, sports technology, the overall increase in telecommunications and wireless. We have an expanding tourism industry now. That's picked up some speed. We'll probably see a record number of tourists here in San Diego in 2013, and also the defense industry, we still have a large number of military personnel, and actually the number of Navy personnel stationed here will be increasing this year as we see the return of the Ronald Regan carrier. CAVANAUGH: Let's talk first about employment. And Alan, I think now it's down to the lowest level -- unemployment is down to the lowest level since 2008; is that right? GIN: I think that's correct. We hit a high point in the economy where the unemployment rate was about 11%. And now we're down below 9%. Still pretty bad, but given where we were, it's an improvement. CAVANAUGH: And you're predicting the downward trend in unemployment is going to continue? GIN: Right. I think we're going to get probably into the midst sevens in 2013. I think we're going to have relatively good job growth, not spectacular, but I think it'll be enough. CAVANAUGH: And where are these jobs coming from? GIN: Lynn indicated some of the areas that we have in the low economy. Ones I'd like to add is it looks like the construction industry is rebounding. We had a rebound in housing prices, and as a result of that, there's been more construction activity. If we see it holding firm in housing prices and a decline in foreclosures, we'll see growths in construction as well. CAVANAUGH: And Lynn? Where do you see the new jobs coming from? REASER: They should be quite broad-based in retailing and technology and the overall areas of healthcare, financial services, construction as Alan suggested is going to see a significant improvement. The major areas of potential weakness, manufacturing. We've just not seen the jobs come back there, and also the government sector is likely to be at best flat. CAVANAUGH: And when you see across the board, Alan was just talking a little while ago about the fact that we lost a number of middle class jobs, good-paying jobs in San Diego during the recession. Will we see a bounceback in those types of jobs? REASER: I think we'll see them in low skill, middle skill, and higher skill jobs. We probably still will not retrieve all of those middle management jobs that have been lost as companies have tried to improve productivity and economize, but I think there will be an improvement pretty much across the board. CAVANAUGH: Alan, you mentioned construction. What about the real estate industry and housing prices? What do you see happening in 2013? GIN: I think 2013 will be a good year for housing prices to rebound. They rebounded this year, and I think they will continue into 2013. That's been a lack of construction in single-family in recent years. And a lot of those foreclosures that were on the market have not been cleared up. So the inventory is shrinking. Given what we've got some job growth, I think that's a good combination for the housing market in 2013. CAVANAUGH: Lynn, a lot of people have been waiting to see the value of their homes rise before they put them on the market. Whether they decide to do anything in the real estate market. Will we see the value of homes begin to rise significantly in 2013 do you think? REASER: They have started to rise already, significantly, Maureen. CAVANAUGH: Uh-huh. REASER: In 2012 as Alan suggested, and I think we'll see further increases in 2013. For many homeowners, however, home prices will still be below the peaks that they reached in 2006, early 2007, but I think we will see improvement. Some homeowners will still be waiting for those peak prices to be returning, but that could be quite some time. CAVANAUGH: I'm speaking with economist doctor Lynn Reaser, and Alan Gin, and we're talking about their economic forecasts for 2013 here in San Diego. And you referenced, Lynn, San Diego as still a town that's heavily dependent on military spending. And we talked about that's still a question mark, even the way the fiscal cliff has been only partially resolved in Washington DC. Is San Diego still a military town? How much of our economy is actually dependent on military and defense spend something REASER: Well, the study we did last year suggests that about 1-4 jobs is directly or indirectly tied to the military. So we do have significant diversification, but the defense industry is very important to our region. And some of this kicking the can down the road is still going to cause a lot of defense contracts which unfortunately have to stay on the fence. Deferred capital spending employment until they see exactly which way the budget flows. CAVANAUGH: But isn't there an emphasis even more so from the federal government on the military here in San Diego because of an increased focus on the Pacific? REASER: Yes, we do see the Navy now shifting from a split of 50-50 east coast west coast to basically 60% on the Asia Pacific region. So there is a big shift that will benefit San Diego. In addition the whole emphasis on unmanned vehicles and weapons, cyber security, a very large area of air space training facilities. So we have a lot of benefits, but we still are vulnerable to possible cuts. CAVANAUGH: And Alan, shouldn't that new emphasis help San Diego no matter what happens in Washington DC concerning sequestration? GIN: Well, what that'll do is if the sequestration goes through, the shift will mitigate it somewhat. But we're still going to be affected. I heard one estimate where some people think that up to 30,000 jobs could be impacted as a result of the sequestration. CAVANAUGH: Let's talk about technology a little bit, Lynn, too. Because this is one area that you cite as a key factor in San Diego's economy in 2013. I've often heard it said that San Diego and its biotech and other technology companies are good at coming up with breakthroughs, but they don't really manifest themselves in terms of job growth. Do you see that turning around? Do you see jobs coming to San Diego because of technology? REASER: Well, we already are seeing significant numbers of jobs coming to San Diego. The key would be whether or not some of these start-up ideas can get venture capital, but we see operations like Connect very successful, and helps companies bring ideas to fruition. And I think we'll see more venture capital coming to San Diego. Technology is still our Trump card. It's California's Trump card. And I think we'll see it continue to advance. CAVANAUGH: Now, Alan, what are the areas of concern outside of what may happen in Washington DC? Where do you see the potential soft spots in our economy? GIN: One area to look out for is the developments on the international front. Europe continues to have difficulties in terms of their financial situation. Then we also have to look in the other direction. The Chinese economy is slowing somewhat. The slowdown in China has been what's -- growth in China has been what's been driving a large part of the international economy. They will import les stuff, and as a result of that, our manufacturing industries could be hurt. CAVANAUGH: Same question to you, Lynn. REASER: The greatest concerns relate to one, healthcare reform. A lot of companies are worried about how high healthcare costs will rise, how many of their individual employees will want to have additional coverage by the employer versus the so-called exchanges. That's one concern. Second, we have short-term solution to the state budget issue with the tax increases, but that will have some negative effect and also there will be probably some state budget cuts pushing down costs to the local governments. And third, a lot of companies are still worried about the burden of regulation. National, state, and local. And that seems to be a real concern of a lot of companies. CAVANAUGH: As you mentioned, concern and uncertainty and so forth, so much of our economy seems to be driven by people either feeling fearful or hopeful about their situation. Let me ask you both starting with you, Lynn, which idea do you think is going to predominate in San Diego this year? REASER: Well, I think a lot of companies will still go with their creativity, their innovation, and will show a little more courage in going forward with their businesses as they see sales starting to show a little bit more momentum. But we still do need to resolve some of these uncertainties and government burdens. CAVANAUGH: Okay. And Alan, what do you think? Fearful or hopeful? What do you think is going to characterize the San Diego economy this year? GIN: I think the positive will win out as far as I'm concerned. I do think we have a little bit of momentum locally. I think we'll actually do better in the local economy than the national one. So I think that momentum will have a reenforcing effect on itself, and that'll help drive the local economy ahead in 2013. CAVANAUGH: But a protracted debate, let's say, in Washington DC, over the debt ceiling. That may impact the way people feel about whether or not to go forward with their economic plans. GIN: I think we saw that when it last happened. So yes, that is something to be concerned about. Not only the impact on individuals but on the financial markets. The financial markets could take that very badly, and that will impact consumer confidence and sentiment as well. CAVANAUGH: Okay. Well, I thank you both for looking into your economic crystal balls for us. [ LAUGHTER ] CAVANAUGH: Thank you both very much. REASER: Thank you. You're welcome.