San Diego unemployed workers soar 14.3 percent

Tourism's low-pay jobs growing

— The San Diego economy is like the chap sitting in a restaurant waiting for his sausage sandwich: the wurst is yet to come. The local economy suffers from mild dyspepsia, with employment barely growing, but the ripple effect from real estate woes threatens to bring on a bellyache that could impact such industries as retailing.

Over the past year, employment has risen just 0.3 percent, while total unemployed workers has soared 14.3 percent, and the unemployment rate has jumped from 3.7 percent to 4.2 percent, according to the California Employment Development Department. (Because of the way the unemployment rate is calculated, it can rise at the same time employment is going up.)

A 4.2 percent unemployment rate is considered very good, but it could get a lot worse. Over the past 12 months, construction jobs have dropped 7.3 percent and real estate jobs 7.5 percent. That doesn't reflect the true weakness in the real estate market, which is likely to see tougher times. "Adjustable-rate mortgages are hitting people," says Kelly Cunningham, senior economist at the San Diego Institute for Policy Research. "Up to now, foreclosures have been pretty minimal. Now they are starting to increase. People had gotten into trouble with exotic financing schemes, and now that rates are adjusting [upward], and the housing market has slowed, they can't sell their homes."

The lenders who made the exotic loans are tightening up borrowing standards (and also getting hauled justifiably into court). Say good-bye to "liar loans," in which people didn't have to state their true incomes. And "appraisers have been scared into giving honest appraisals," says Robert Campbell, publisher of the Campbell Real Estate Timing Letter. People were seduced into snapping up mortgages with teaser (extraordinarily low) initial rates, and now those rates are going up to realistic levels. "All of a sudden there are new underwriting standards, while houses are falling in value. It's a tidal wave," says Campbell. "When mortgage payments go up 20, 30, 100 percent, and people paid too much for the home in the first place, they are so far under water it is hopeless." He accurately called the peak of the market in August 2005, and it may be three or four years before his statistical model flashes a buy signal, he says.

New homes aren't being built. The valuation of residential construction dropped 8.1 percent in 2005 and 30.6 percent last year. The valuation of new single-family homes plunged 40 percent last year. This year could be even worse, depending on how many homes get dumped on the resale market and whether mortgages are available. "Nonresidential [commercial and industrial] building has picked up, but not enough to keep construction and real estate-related employment going up," notes Cunningham.

As unsold homes pile up on the market, and families can't meet their higher mortgage payments while being unable to borrow against their homes' values, consumer spending can suffer, says Alan Gin, economist at the University of San Diego. And consumer spending is more than two-thirds of the economy. Beware of a double whammy. Even people who can afford their houses are no longer borrowing against home values to get money for everyday living, Gin says. "There are some problems with auto and home-improvement retailing because there is less cash-out financing going on, but I don't see big drops in those areas yet. The fact that refinancing is down should have an effect, but how big an effect is uncertain," says Gin.

He compiles a monthly index of leading indicators of the San Diego economy. It has a good forecasting record. "In 12 out of the last 13 months [through April], the indicator has been down," he says. Building permits and help-wanted advertising have trended fairly steadily negative, while stock prices and consumer confidence have been mixed. The national economy -- a good predictor of the local economy -- has been strong but is now weakening. "The indicator has been flashing negative, but it hasn't reached the point where there will be negative job growth. Job growth is already going at half the rate of a year ago. The slowdown has started and is likely to continue as long as housing is in a slump."

Cunningham also keeps an index that is meant to be a barometer of the economy. It, too, has been pointing down. City of San Diego new business licenses -- often a good measure of entrepreneurial confidence -- were down 27.2 percent in February and rebounded in April, "but the annual average is still down," says Cunningham.

"We're seeing out-migration," he says. Many of those leaving are discouraged workers who can't get a job in the county and are fleeing to Phoenix, Las Vegas, and other areas where jobs are still fairly plentiful. The San Diego unemployment rate is kept artificially low because of these people departing and not actively seeking work in the county, he says.

Consumer confidence, as measured by polling firm Competitive Edge Research and Communication, has improved from the beginning of the year but is still in the hole, says Cunningham. "Consumers say their own situation is better, but the figure for the overall economy is still negative," he says.

All in all, the future indicators compiled by both Gin and Cunningham portend a severe slowdown but not a recession.

High-tech jobs are slipping, but there are some strong spots in the local economy. "Health-care jobs are growing, and there are decent numbers in certain business and professional categories," says Gin. The big gainer is the leisure and hospitality industry. It has accounted for about 70 percent of the job gains over the past year. The gains are across the board: hotels are doing well, and so are restaurants, bars, and lounges.

"Trouble is, so many of these are low-pay jobs," says Jerry Morrison, a hotel consultant in La Jolla. The hotel occupancy rate is down slightly from a year ago, but "the average room rate is up a lot, to $135.18 from $127.16. We're becoming a more expensive tourist destination." San Diego is high in the top 25 hotel markets, but it trails Anaheim, New York, Oahu, Orlando, and Phoenix. Hotel owners here are making more money, but many of the facilities are owned by out-of-town chains, so the money doesn't stay in San Diego.

Paradoxically, San Diego tourism often does well when gasoline prices rise. People cancel a long motor trip they were planning and drive a shorter distance to Southern California. Also, the slumping dollar will help. Not only will foreign tourists come here, but people who planned to vacation abroad may cancel and take a trip to San Diego.

Tourism is a good business, but because of the low wages, it can't carry the local economy on its back.

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