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Economy improving, but with less bounce than previous recessions

The economy is slowly improving, but the nation still is not bouncing back like in previous recessions, local experts said at the 2012 San Diego Beacon Economics Conference.

“We didn’t have the recovery that we normally do,” said Christopher Thornberg, founding partner of Beacon Economics. “If you go back to the middle part of the 1970s, the early 1980s, the last two recessions we had — when those recessions came to an end, the U.S. economy grew by something in the order of 6 to 8 percent per quarter until we got back on the trend lines. The reason we feel so bad about our economy today is we never had that bounce. We never had that recovery, period.”

Thornberg presented his information as “The return of the pointless panic — An economic horror story, part II” and touted himself as, “less pessimistic than many of my peers on the economy today.”

Jordan Levine, economist and director of economic research for Beacon Economics, said he forecasts 2 percent employment growth by 2013 and 2.2 percent by 2014, with California’s unemployment rate to reach the single digits by the end of 2013. He expects home prices to increase 3 to 5 percent, and he expects these numbers to be slightly better in San Diego.

San Diego should see 3 percent growth in employment next year and home prices to increase 3 to 4 percent over the next couple years and home sales to increase 4 to 5 percent.

“We forecast labor markets are going to continue to grow and improve 2012 and beyond. [It’s going to] leave something to be desired, but it’s going to be growth nonetheless,” Levine said.

Any positive employment gains are positive for real estate, said Norm Miller, professor at the Burnham-Moores Center for Real Estate at the University of San Diego.

If there are 115,000 new jobs added, that equates to 10 million square feet of absorption of space that’s vacant right now, he said.

Real estate

The best news in the second half of 2012 is in residential real estate, Thornberg said. Prices are a lagging indicator while inventories start to show the first signs of improvement in the market.

“The real estate bubble clearly came to an end in 2005 through 2006, yet it wasn’t until 2007 that prices fell off the cliff. What leads the real estate market? Inventories,” Thornberg said. “Inventories absolutely collapsed over the last year, both for new homes as well as existing homes as well as REO units. All those numbers have been shrinking as inventories become tighter. It’s inevitable that prices will start to rise, and over the last three months, that’s exactly what happened.”

California saw its 14th consecutive month of year-over-year increase in home sales, Levine said. Foreclosures and defaults are still high relative to historical norms, but they continue to go down.

“If inventory remains under three months, we consider that a hot market. Three to six months, we consider normal, above 12 we consider weak, above 15 we consider distressed,” USD's Miller said. “We were distressed but we’ve been coming down rapidly in terms of inventory.”

In the beginning of August, San Diego had about four months of inventory, and that dropped to slightly more than one month in October for houses priced less than $500,000.

High-priced homes saw a decrease from 10 months to seven months in that same time period, Miller said.

“Underwater borrowers are inhibiting supply. I kind of like that. I think that’s a good thing, because that means that they’re actually honoring their contract instead of walking away,” Miller said. “Mortgage underwriting is still tight, [which is] inhibiting the market.”

The price per square foot is close to bottoming out, if it hasn’t bottomed yet, Miller said. New homes are starting to see prices increase, partially induced by low interest rates.

Housing costs play a “huge role” in what it costs to do business in California, Levine said, adding that he often hears, “If only we could be more like Texas.” However, the median home price in Austin, Texas, the state’s most expensive market, is $200,000 — which is comparable to California’s most inexpensive market, the Inland Empire, he said.

“So when we talk about what it costs to pay your employees a decent wage, recruit the best and the brightest, these housing costs really play into it,” Levine said. “California just doesn’t have enough housing, [which] raises the cost of living, raises the cost of doing business — [it’s the] chief culprit of the business climate.”

While many new households have been shifting into the rental markets, that trend will start to shift, said Thornberg. He said, according to the Federal Reserve, it takes about two-and-a-half years for a household that was foreclosed upon to get back into owner-occupied housing.

“That process will start to accelerate over the course of the next couple years and I expect you’ll see a lot of this reverse itself,” Thornberg said.

Between 1995 and 2007, the U.S. economy grew by 3.2 percent per year, and over the past two years it has grown by 2 percent. However, the private sector has been growing by 3.2 percent over the last two years, compared to 3.4 percent between 1995 and 2007, Thornberg said. The public sector is what’s bringing that number down, he said.

Consumer spending is a leading indicator, according to Thornberg.

“Consumer spending, as a percent of economic output, has never been higher than it is right now — 71 percent of GDP,” Thornberg said.

There was a slowdown in consumer spending in the second quarter, Thornberg said, but he expects it to pick up and come in at a 3 percent growth rate in the third quarter.

“The recent slowdown we had during the summer months nationwide never really came home to roost here in California, suggesting there’s some underlying strength here locally and there are bright spots out there,” Levine said.

California saw 7.5 percent growth in the second quarter, which is “not a huge number, but way more than enough to keep up with demand,” Levine said.

Net worth per household today is higher than it has been at any point before 2004, Thornberg said, and the 2007 levels weren’t sustainable.

“The only way we’re going to go back to 2007 is if you’re prepared to accept another 2008 and 2010, because the economy was out of whack then,” Thornberg said.

California has outpaced the nation in almost every quarter in terms of income growth, Levine said. Over the last 10 years, San Diego County outpaced California in terms of income growth, with most cities at or around 100,000 residents seeing at least 2 percent growth per year.

The labor markets “are not very good,” Thornberg said. Unemployment is at 8.1 percent nationwide and relative to two years ago, the unemployment rate is down two percentage points, he said.

“These people aren’t all going to go back to work overnight. It’s a slow process. It’s a painful process, but it’s a process that takes time and we have to have patience,” Thornberg said.

The nation is adding about 100,000 to 110,000 jobs and incomes are rising, when they were flat last year, Thornberg said. And California has the third fastest-growing private sector in the nation over the course of the last 12 months.

California’s core strengths are in the professional business services and information, which includes the software sector, Levine said. The employment gains have been broad-based, with gains in construction, retail trade and other sectors. The government and manufacturing sectors lost jobs.

California has added almost 590,000 jobs since it hit the bottom, when it had lost about 1.4 million jobs.

“San Diego is leading the charge,” Levine said. “San Diego has been the fifth fastest-growing economy in the state.”

He said the county has added about 45,000 jobs, outpacing the state, which is outpacing the nation. San Diego lost 7.9 percent of its jobs, compared to 9 percent in California and is 4.5 percent below its pre-recession peak, Levine said.

San Diego has experienced about a 2 percent drop in unemployment over the last year or so, Levine said, despite the fact that an increasing number of San Diegans are moving back into the labor force.

The payroll survey represents how many workers employers report having, while the household survey represents how many residents report having a job, according to Levine.

The household survey shows about 16 million jobs while the payroll survey represents 14.3 million jobs.

“During the downturn, 2009 to 2010 … more folks were moving out of traditional employment into this informal work sector,” Levine said. “In the last couple months, we’ve seen that green line start to plunge — folks are actually moving back into traditional forms of employment.”

The problems in the economy revolve around construction and the trade deficit, according to Thornberg. Construction is typically 7.5 percent of GDP and is now at 5 percent, he said.

“There are too many homes, too many office buildings. Until we absorb the excess supply, those parts of the market are going to continue to languish,” Thornberg said.

The nation is also exporting less than it’s importing, and is consuming 4 percent more than it's producing, he said.

The biggest worry Thornberg said he has is the upcoming fiscal cliff, or fiscal hill, that will result in a $400 billion increase in taxes. He refers to it as a hill rather than a cliff because the effects won’t take place immediately — but they will if political leaders can’t come to a compromise by March, he said.

“Will that create a recession? Absolutely. Will that create a recession by Jan. 2? Absolutely not,” Thornberg said. “It’s a fiscal hill. On Jan. 1, taxes go up, spending goes down. But that shock will not have an immediate impact on the U.S. economy. For that fiscal shock to the system to actually push us into a recession, it has to stay there for a number of months.”

San Diego also faces the looming sequestration cuts, which will not only affect the military bases but also the secondary industries that support defense.

The cuts could cause San Diego a loss of 30,000 jobs, Levine said. But those cuts may not have an immediate effect, due to contracts that are already in place.

“We don’t necessarily think all of these cuts are going to go into effect. We think it’s politically unviable to let these things spiral out of control. That said, they remain a concern,” Levine said.


Related video: Beacon Economics' Jordan Levine on the region's economic outlook

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University of San Diego, Burnham-Moores Center for Real Estate

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Norm Miller

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