Economy for 2013: San Diego worse than state, nation?

Ross Starr: Spending is sluggish
  • Ross Starr: Spending is sluggish

Are you tired of sluggish economic growth? Well, you could live in Europe, which is in a recession, or Japan, which has been struggling since 1989. Local economists look for slow growth in the United States, California, and San Diego next year, amid continuing global woes — and maybe even a sharp slowdown in booming China.

Problem: our slow growth won’t be good enough to improve our festering unemployment problem significantly. Our central bank, the Federal Reserve, will continue to drive interest rates lower, supposedly to combat joblessness. This could make Wall Street happier, as stock and bond prices rise with more money floating around, but won’t help Main Street much except in one important way: housing could continue its rebound.

Ross Starr, professor of economics at the University of California San Diego, says the United States economy will grow by about 2 percent, although inability to fix fiscal cliff problems could have us in a recession by midyear. Europe “could hit bottom, but will be recovering from an immensely depressed level,” says Starr. “Japan is in stagnation but may be perking up.” Both Europe and Japan need cheaper currencies, but there are institutional roadblocks. “China has had immensely rapid growth,” but its attempt to transition from an investment to a consumption economy could slow it down sharply.

James Hamiltion: Growth will be sluggish

James Hamiltion: Growth will be sluggish

Kelly Cunningham: San Diego economy will be sluggish

Kelly Cunningham: San Diego economy will be sluggish

In the United States, both consumer and capital spending have been slowed down by uncertainty about taxes and government spending. Happily, “the remarkably low long-term interest rates” engineered by the Federal Reserve will prop up housing, which has been a drag for years, says Starr.

“In the U.S., the sluggish growth of the last three years is a reasonable forecast for 2013,” says James Hamilton, professor of economics at the University of California San Diego. He thinks the economy could grow by possibly 2.5 percent, but he warns that to create jobs growth “we need in excess of 2.5 percent before we could say we have turned the corner.” He is concerned about declining consumer confidence.

Both Kelly Cunningham, economist for the National University System Institute for Policy Research, and Marney Cox, chief economist for the San Diego Association of Governments, look for a sluggish San Diego economy next year. The military — including personnel as well as contracting — has accounted for as much as 25 percent of the economy in recent years, but that’s coming down and could drop almost to 20 percent, says Cunningham.

“Starting in the fourth quarter of this year, there have been military declines; some contractors have sent out notices of layoffs,” says Cox. The biggest impact thus far has been in contracting, but “we could lose 10,000 to 20,000 uniformed military personnel, mostly in the Marine Corps, in 2013,” says Cox. “This could possibly be offset by the shift of the military from the East Coast to the West Coast.”

San Diego’s Northrop Grumman and General Atomics Aeronautical Systems are the nation’s big builders of drones. There are rumors of possible drone cutbacks — but also rumors of expansion of that business.

Cox thinks the county will add only 12,000 jobs next year — a 1 percent gain over 2012, when the same number of jobs was added. There will be declines in local government employment but stabilization in state government jobs. There should be more teacher openings. Healthcare employment will do well, as usual. “One of the places we will see employment growth is in construction,” says Cox, as residential business picks up. Home values will probably rise 5 percent, greatly because of the low interest rates. (Keep in mind that home values plunged by more than 40 percent beginning in late 2005 and are still down by about 35 percent from that peak. Median home values are above $360,000, among the highest in the nation.)

In its heyday, real estate, including construction, represented 23 percent of the San Diego economy, says Cunningham. Only a couple of sizzling Florida markets had higher percentages. San Diego’s percentage has gone down, says Cunningham.

In 2013, “consumer spending will slow,” says Cunningham. Higher taxes will definitely impact spending. Coming out of the 2008–2009 debacle, “we were showing consumer-spending increases, but on a per capita basis we are far below where we were before.” One problem is that internet purchases haven’t been counted in taxable sales. But that began changing in September, when, the biggest online merchant, started collecting sales taxes on purchases made by California buyers. Those tax receipts will help local governments. But whether sales are brick-and-mortar or online, “people are just not spending,” and the tightfistedness may intensify next year.

“There is not much income growth,” says Cox. “There are more people with jobs, but they are not earning as much.” On the other hand, some are doing very well — particularly in tech. Investment capital is pouring into San Diego far more rapidly than in recent years, notes Cox. A December report by the Bay Area Council Economic Institute indicates that tech jobs are 11.1 percent of San Diego County jobs. That puts the metro area 13th in the nation. The average San Diego tech salary is $110,408, topping the United States average of $95,832.

Tourism is recovering, says Cox, but employment is not back up to pre-recession levels. Travel expert Jerry Morrison of Encinitas notes that the San Diego occupancy rate and average daily room rate still lag comparable 2007 levels. But San Francisco, Los Angeles, and Orange County have done much better recovering.

In 2011, the San Diego economy grew by 2.1 percent adjusted for inflation. This year, it will grow by 1.7 percent. Next year? Even lower — 1.5 percent, says Cunningham. That would be worse than California’s 1.6 percent and the nation’s 2 percent. Cox thinks San Diego’s inflation-adjusted growth could be 2 to 2.5 percent, but the gain would largely be coming from productivity, or output per worker hour.

So you may be told to do more work for the same amount of pay — or less. ■

Contact Don Bauder at 619-546-8529

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Yes, work harder, collect less, do not pass GO and do not collect $200. Making recovery more difficult are those companies that still run lean and mean, even when they are growing, profitable and have a big pot of cash in the bank! They still follow the Gordon Gekko "Greed is good!" school of capitalism. Why hire more when it's cheaper to buy whips and cattle prods?

dwbat: No argument there. Emphasize that workers are underpaid and overworked so top management can rake in ethically indefensible pay. We have a worse maldistribution of wealth and income than we had in robber baron days. And today's robber barons have just as much or more political clout as those a century ago. Best, Don Bauder

I would respectfully disagree that we have a worse maldistribution of wealth than in the Robber baron days. Hell, guys like Fiske, Gould, JP Morgan, Rockefeller et al controlled a much larger percentage then the present 1% does. That single reason is precisely why the progressive movement got started and we ended up with presidents like T Roosevelt and Wilson, who promised to level the playing field but instead started us down this road to perdition.

Jeff: In a way, it's like comparing apples to oranges, because Morgan, Rockefeller, Carnegie et al were fabulously wealthy individuals who controlled a high percent of GDP through corporations they dominated; today, it's widely-owned companies that dominate the economy, along with the heirs of some of those corporations (Waltons, etc.) with the wealth. I have heard reputable economists say that the distribution of wealth and income is now worse than it was in robber baron days, but I would have to dig those statements out. I disagree that either Teddy Roosevelt or Woodrow Wilson led us down to the road to perdition. We would have gone much further down the road if T.R. had not broken up the trusts, for example. T.R. and Wilson helped to moderate the virulently anti-business radicalism of the Bolsheviks, Wobblies, etc. Best, Don Bauder

Jeff: Yes, Waltons are relatively new money. Best, Don Bauder

guys like Fisk, Gould, JP Morgan, Rockefeller et al controlled a much larger percentage then the present 1% does.

You will NEVER see wealth concentration like you did with the top 3-10 richest Americans, like #1- Rockefeller #2 Carnegie or #3 JP Morgan- ever again, because they controlled the Congress and Presidency, at least until Teddy Roosevelt became president busted their companies up, when President McKinley was shot and killed. President McKinley was in the pocket of the trusts/corps back then. JP Morgans business model was to not to have any competition, same for JD Rockefeller. I do question if the wealth of the overall top 1% is more concentrated today than then, certainly not in the top 3-10 individuals. No one will ever match JDR overall net worth (adjusted for inflation).

SurfPup: As I told Jeff, I remember a couple of reputable economists saying that the concentration of wealth and income at the top now is worse than it was at the peak of the robber baron days. But I will have to fish out the statement and don't have time now. Best, Don Bauder

Don, I think you are closer to the mark than Jeff. While the top 1-10 richest individuals back then were FAR wealthier than the Buffets and Bill Gates of today, I think the top 1% (3 million) have more today in overall wealth. But when you get to the top 1/10th or top 1/100th (30K-300K) of the top 1% then there is no comparison, the robber baron days win hands down....But, alas, I am guessing, I hope you can find hard data.

But then guys like JP Morgan, while quite wealthy, were not rich. Morgan's estate was only 45 million or so. His influence though, covered 90% of the economy. Hell,, he controlled a syndicate that bailed out the US government. But your contention of greater overall wealth today makes one ponder the size of the pond then and now..

Jeff: I will try to get some reliable data today (Friday) and post it. Best, Don Bauder

Morgan's estate was only 45 million or so. I have no idea what JP Morgans estate was worth, but considering he bought Carnegie Steel (US Steel) for close to $500 million ( $500M over 100 years ago) the $45M number sounds low........that would qualify as rich today, and most certainly rich at the turn of the 19th century. When I think robber barons I think Rockefeller, Carnegie and JP Morgan, in that exact order. Vanderbilt would be 4th.

SP: Adjusted for inflation, the robber barons would have been fabulously wealthy. Best, Don Bauder

Morgan was an expert at using other people's money and put together US Steel, didn't own it outright.. Notice how he never left a public legacy like Rockefeller or Carnegie et al. His legacies were the succeeding companies upon his death That's because he was influence rich and capital poor, the quintessential deal maker. I have another source showing that JP Morgan's estate was probated at 68.3 million, which is more accurate than the one I quoted. Remember, he was merely a partner in the bank that bore the Morgan name. When he died in 1913, the gross domestic product was 39 billion so 68 million was a chunk of change.

Jeff: When Morgan was an investment banker, Wall Street was actually doing a lot to push the economy forward. Today Wall Street is a gambling casino, playing zero sum games. So much of Wall Street's concentration today -- derivatives speculation, most mergers and acquisitions, trading, private equity, many IPOs, etc. -- detract from the economy, rather than help it move forward. Best, Don Bauder

You really need to read Henry Clews who was a player during those times who's entire thesis would really weaken your contention. The general public got a better deal from a rigged roulette wheel than what they got from Wall Street.back in the robber baron age. And Wall Street, the primary dealers, and the Fed are keeping our government on life support right now. It;s the governments policies that have made this recession particularly nasty, Furthermore, Wall Street is not a zero sum game. Ostensibly, futures are supposed to be a zero sum game but they are not as commissions and taxes make that impossible.

Jeff: The robber barons, while crooks, at least were producing goods and services that helped move the economy -- steel, railroads, autos, etc. J.P. Morgan's financing activities helped, too, except when he went astray. Best, Don Bauder

SurfPup: Two economists, named (I believe) Piketty and Saenz, have done some excellent work on this. I file their key findings away. I will try to fish it out today (Friday). Best, Don Bauder

SP: make it Piketty and Saez, not Saenz. Best, Don Bauder

....but won’t help Main Street much except in one important way: housing could continue its rebound.

Housing is NOT in a rebound, and never will be until the job creation increases 10 times what it is today. That is a fact. The ONLY reason we are seeing ANY rise in ANY real estate (homes-residential/Commercial or farm land) is because of the idiot named Ben Bernanke running the Fed who invented ZIRP. Zero Interest Rate Policy. Take out that phoney baloney artificial pumping and we have 1% or even negative growth. 2.5% growth?????????? Hahahahhahahaa, Hamilton is off his rocker. Again, the ONLY reason we have any growth whatsoever is ZIRP, allowing large financial institutions and high net worth individuals rape the depressed markets-as they are the only ones with any cash.

SurfPup: You are correct. The Fed's constant attempt to bring down long term interest rates by buying paper with long maturities is propping up housing, as expected. But that can't last forever. And much of the housing activity is by speculators taking advantage of those low rates. But I do think that in 2013 the Fed will continue buying long paper, sending long rates lower, and stimulating the housing industry -- if artificially. Best, Don Bauder

Actually, the Fed can keep buying paper forever. After all, they are the biggest customer at the treasury auctions right now,....what's a little more fiat money? This article was 6 months ago and it's getting much worse., now it's up to around 80% with QE3+ and that extra 65 silent billion a month tweaking the short end of the curve(to add liquidity of course). But then again, what the Fed really wants you to do is to buy the 10 year note with overnight money. No sane person would buy the 10 year note at these levels, so the Fed is offering a kicker, an inducement so to speak. You can get your brokerage firm to loan you all the overnight money you want for 39bps(the broker or bank is paying 19 bps today). The 10 year is yielding 171 bps right now, so one can buy the 10 year, and either hedge it in the futures market or get a repo agreement with a bank, either of which will cost around 60-80bps, depending.An idiot should be able to make around 25 bps from this carry trade. Or, if the 10 year keeps going up, you can sell the damn thing and worry about capital gains in April. The Fed is artificially rigging the interest rate market, and that's why they are allowing this carry trade(which incidentally is responsible for a large portion of the profits of the banking system right now). One caveat about carry trades, although they usually work for years, when they stop, they crush you like a bug..

Jeff: No question the Fed is artificially rigging the interest rate market. Overnight speculators are helping the Fed do this, as you explained. So how long can this last? It is partially propping up the housing market because it is seducing speculators in. But when do we get a REAL market? Best, Don Bauder

It will last as long as the Fed creates fiat money and purchases the treasuries. What do they care? And anyways, even though this market is rigged, it is still a real market with liquidity and a firm, narrow bid/ask. It's easy to enter either side of a position and put on size. What I think disturbs you is that you are more concerned with prices then the actual mechanics of whether there is a market or not. Just because one is unhappy with the price one's asset is going for doesn't mean that there is not an active market trading in said asset. I know a lot of soybean speculators who are very unhappy with the price because they paid $17 for their beans which are now worth $14. Yet if they looked at the big picture, beans were $6.00 a few years ago. Those same guys are saying that this is not a real market.

Jeff: When I said this is not a real market, I was alluding to the housing market. I wasn't talking about stocks, bonds, or commodities markets. Whether those markets are real is a definitional question. When I think of a real soybeans market, for example, I think of whether the market is aiding the production of food products. You are thinking of a real market as one that functions well -- speculators in the pits can make money on their long and short positions. We're talking two different things. Best, Don Bauder

The housing market is a real market. Part of the result of a competitive market is to transfer positions from weak hands to strong hands. Sagacious investors with strong hands are buying up real estate on the cheap. This proves the system works and is a good thing. If you think something is too cheap, don't you buy it? Do you pay premium prices for everything hoping for the "Greater Fool Theory" to kick in? I like paying pennies on the dollar myself. .

Jeff: Are the real estate flippers borrowing money cheap and buying homes cheap really sagacious? There might be a better word. Best, Don Bauder

Of course they are, why wouldn't they be? Anytime one can identify a profit opportunity, make money creatively, using one's wits and courage, one should be applauded. Just remember, real estate flippers don't always make money flipping property. I knew people in 07-08 that ended up owning 65-100 houses each that they bought at the top. They were stuck with big ARM's and were completely ruined. One could ask, was Ben Graham or the Oracle of Omaha sagacious because they bought good undervalued stocks cheap and sold them when they became dear? If there was such a thing as easy money, everyone would jump on the bandwagon, and the margins(and edge) would disappear overnight.

Jeff: Oh yes, many real estate flippers were wiped out, at least temporarily, by the housing crash. The banks got stuck with property they did not want. Wall Street, which had securitized the mortgages, took a hosing -- for awhile. The institutions that had lost their shirts on derivatives got bailed out. The banks that lost their shirts on the housing market got bailed out (zero interest rates can cure many ills.) The families that lost their homes did NOT get bailed out to any significant degree. Many people joined the Occupy movement, which was ruthlessly crushed by the FBI, local gendarmes, ad nauseam. And we wonder why there is unrest? Best, Don Bauder

The real estate market got screwed over by Alan Greenspan and insane fiscal policy by the feds, that is the reason. It was in fact NO DIFFERENT from the savings and loan fueled commercial bubble of the late 1980's. People using other peoples money, with no skin in the gamer, buying/speculation as much real property as they could get their hands on with OPM. Alan Greenspan, AKA Mr Bubble should have never left interest rates for so low for so long, and NO ONE should be able to purchase real property without a minimum down payment, of at least 20%...I wouldn't give a rats ass if people speculated with OPM as long as the taxpayers didn't get stuck with the losses thru bailouts. Yet we all know tha is what happens in the end. The absolute saddest part f the property bubble/Freddie Mac/ Fannie Mae is that they are still doing no money down loans. My 25 y/o cousin just graduated from a dental hygiene program, a 2 year certificated program, and makes surprisingly good money as an independant contractor, $1500 a week. She bought a $250K Fannie Mae REO with NO MONEY DOWN (Fannie Mae loan). Insane. Completely insnae after what just happened.

SurfPup: Greenspan not only kept interest rates too low for too long. He also completely missed the bubble in real estate assets. And he also missed the 1990s bubble in stock prices. Best, Don Bauder

And now Krugman and Bernanke, and Greenspan(the fake PhD keep calling for a new bubble. But then again Don, Bubbles, like bear markets only exist in hindsight. Charles Mackay wrote about bubbles and other mass delusions 160 years ago and it's still germane today. Here's a copy of Mackay's book if anyone is interested.

I loved that Greenspan bash.....he certainly will go down as one of the worst in history........

SP: Krugman took a punch at Greenspan a couple of columns ago. The Fed is a dismal forecaster, and remains so under Bernanke. Best, Don Bauder

Don, this is the benchmark for Bernanke, it NEVER fails to make me chuckle at how wrong/stoopid he is;

SP: The Fed has elaborate computerized models of the economy that are usually wrong. They don't get Greenspan and Bernanke off the hook, though. Best, Don Bauder

Jeff: Mackay's book is not only a classic on bubbles, it is THE classic. Best, Don Bauder

For lack of a better term "immigrant" run small businesses seem to do well, dealing in cash and under reporting profits.

prime example are the small gold shops, sell very little gold jewelry, but make the real money on high interest loans to the asian community.

Murphyjunk: Interesting today that some make money on high interest loans when banks can get overnight loans for almost nothing from the Fed. Best, Don Bauder

Overnight right now between banks is 19-20bps with a target of 25 bps. And you the private citizen speculator are not borrowing it from the Fed, and are paying 39 bps for as much as you can carry from your clearing house. Funny thing is that the clearing houses are just shoveling out the cash, begging the players to take it, at least on the trading end of things. Maybe it's the tail wagging the dog, I don't know, but this is how the cheap money is playing out. They are desperate for you to own that 10 year note. Is this a game of musical chairs, I don't know? The Fed is sending out signals via the yield curve that they are actively discouraging thrift, and that's a fact.

Jeff: It seems axiomatic that the Fed is discouraging thrift. Printing money has that effect. The Fed has an inflation target. Clearly it wants to stimulate spending, thereby discouraging saving. Best, Don Bauder

Well, as Milton Friedman said about times like this, the only thing you can do is participate in "High Living." I think I sent you that St. Louis Fed working paper where it stated that it is their intent to slowly, orderly devalue the dollar 33% within the next decade. I suspect that the market might beat them to it when the currency specs get tired of the dollar. But right now, where are they going to put it, the euro? Yen? Those two currencies are the only ones with enough liquidity that a 100 million dollar trade won't budge the currency. Try buying 100 million in Canadian Dollars and you might move the market three quarters of a cent.

Jeff: It appears the Japanese are finally doing the same thing -- flooding the money supply, depreciating the yen, and driving up their stock and bond markets. I have a Japanese stock I am ready to buy when things shake down here. Best, Don Bauder

I've thought that the Japanese market has been poised for a huge rally for over a year. I can smell it, but now (for me) is not the time to pull the trigger. Incidentally, there are some really nice carry trades in the Japanese money/bond markets. The only extra risk is the fx risk and one can design strategies on minimizing that risk......although anytime you minimize risk by hedging, it's similar to taking out an insurance policy, and insurance costs money.

Jeff: The Nikkei peaked out around 39,000 in 1989. After languishing around 8,000 or so in recent years, it has moved above 10,000. Despite the weak economy since 1989, and the nagging problems such as the huge debt overhang and an aging population, the yen remained one of the strongest currencies. Go figure. Now the new government is going to print money as we have been doing for four years. Best, Don Bauder

But I still smell a rally in Japan.....when, I don;t know, but one is coming sooner rather than later. And it's obvious to anyone with an IQ over 50 why the yen has been strong, and that needs no further comment.

Jeff: I guess I have an IQ below 50, because I still cannot understand the yen's strength. Yes, they owe almost all the debt to themselves, and they have huge savings. But those factors only partly explain the yen's strength, according to this dumbbell (me). Tell a sub-50 IQ dolt like me what the reason is. Best, Don Bauder

Don, ran across this stat in today's LAT;

The aggregate net worth of the world's top 100 stood at $1.9 trillion at the market close Dec. 31, according to the index.,0,6160422.story

If Rockefeller and Carnegie were worth $700 and $500 billion each (guess) then they alone cover 66% of today's top 100 richest people.

SP: Yes, but were Rockefeller and Carnegie worth $700 billion and $500 billion, respectively, adjusted for inflation? Best, Don Bauder

Even adjusted for inflation, their net worths were still a huge % of GDP. If JDR had a cold, the entire economy would sneeze.

Jeff: No argument there. The robber barons, including Rockefeller and Carnegie, had net worths that were an enormous percentage of GDP, adjusted for inflation. Best, Don Bauder

Excellent point on the GDP/Net worth ratio. I did not even think of taking into account the size of the GDP 100+ years ago and today. I wonder if the net worth of either JDR or Carnegie exceeded the GDP (GNP back then) in that period??

OK, here is an interesting stat from 1999 stating GDP was $300 billion in 1900, and the reference to Greenspan is particularly hilarious looking back. I have no idea if the stat is accurate.

"In 1900, GDP was just under $300 billion. Today, as we enter the new millennium, it is over $9 trillion. As of February, we will be in the middle of the longest expansion in our history, in war or peace time. And I want to thank Chairman Greenspan for all he has done to help give America this steady, upward growth."

Interesting table here. And that 300 billion mark was in 1992 dollars, I believe. But then again, nobody measured GDP until 1934 anyways, and anything before was just an educated guess, like it still is today.

"(Keep in mind that home values plunged by more than 40 percent beginning in late 2005 and are still down by about 35 percent from that peak. Median home values are above $360,000, among the highest in the nation.)"

Keep in mind that "the peak" was the apogee of the bubble, and returning to it is a condition greatly to be feared.

Keep in mind that the bulk of the local rise in RE sales is to speculators, who plan to rent to those who can't qualify for a loan.

Keep in mind that, as speculators drive RE prices up, they reduce their competition from home-buying families by edging the market higher.

Keep in mind that, as Internet sales rise, brick-and-mortar commercial vacancies will rise and commercial rents will have to come down.

Keep in mind that a rising tide sinks all anchored boats.

But as speculators drive up RE or any other prices, they signal to the producers to produce more product. When speculators see too much inventory of anything, they sell, driving prices down, and again signaling the producers to not produce as much product. This is for anything, not just RE, stocks, bonds, commodities, anything with a market will have speculators. It's not a perfect system, but is the best there is, certainly much better than central planning.

I dont like Krugman and disagree with his column, but his oast paragraph was on the money;

The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.

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