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Reaser: San Diego's fiscal fog beginning to burn off

San Diego’s future looks a little bit brighter with the military, technology and tourism sectors pulling the economy forward.

“I know it’s hard to believe, but we’re in the fourth year of economic expansion. … This should really not be surprising. Typically, after financial crises, expansions typically are sluggish, despite all the stimulus we try to throw at the economy,” said Lynn Reaser, chief economist at Point Loma Nazarene University, at the Fermanian Business and Economic Institute at PLNU’s 2013 Economic Outlook on Thursday. (video)

In early October, Reaser was named chief economist to state Controller John Chiang, who also presented at the Thursday breakfast. Reaser also received the National Association for Business Economics’ 2011-2012 NABE Outlook Award for the most accurate GDP and Treasury note yield forecasts among the panel.

San Diego is forecast to gain 29,000 jobs in 2013, which is enough to bring the unemployment rate below 8 percent for the first time in five years, according to Reaser's forecast.

“We certainly face a significant threat from sequestration, particularly here in San Diego,” Reaser said. “We can see here that if you had sequestration, it would cut spending significantly — the Navy estimating about a 9.5 percent hit to that area.”

But Reaser said San Diego should expect to receive a steady flow of defense dollars in 2013. Defense spending is expected to come off of its high, nationally, and San Diego may have the advantage to receive a greater share of spending with the Navy’s repositioning of its fleet in the Asia Pacific area, she said.

Venture capital is coming back to San Diego’s technology sector, the second key area in this economy, Reaser said. It hasn’t reached the highs of 2007, but it is “definitely on the upswing.”

Tourists, business travelers and leisure travelers are coming back to San Diego, with a record 33 million visitors expected in 2013, Reaser said.

And the turnaround story for both San Diego and the nation is the housing market.

“We see a decline in foreclosures, delinquency rates, a pickup in sales. We expect home prices to be up about 4 percent this year, and 5 to 5.5 percent in 2013. This will leave us at only about two-thirds of the peak in 2005-06, but at least we’re finally coming out of the trough,” Reaser said.

Home sales are forecast to increase about 7 percent in 2013. San Diego is expected to issue 8,500 permits in 2013, compared to an estimated 6,400 units in 2012. Of those 8,500 permits, 4,000 will come from single-family units — twice the average of the past five years, Reaser said.

There were 10,000 single-family units at its peak in 1999, Reaser said. “We are coming out of a very deep hole, but at least we’re coming out.”

It’s expected that there won’t be much commercial construction until 2014, Reaser said, but there are some signs of bottoming out in the market.

Potential growth in 2013 will be constrained by three elements: cutbacks in public-sector payrolls and spending; a struggling manufacturing sector in San Diego; and uncertainty over taxes, spending, health care, defense spending, banking and regulation may keep many on the sidelines.

Statewide, California is performing “surprisingly well,” Reaser said.

“We actually are creating jobs across a broad array of industries. And, in terms of job growth, are outperforming the nation, so a recovery is taking place,” Reaser said.

California is forecast to add about 275,000 jobs in 2013, up from the expected 260,000 jobs this year. Job growth should drive the unemployment rate down to about 9 percent by the end of 2013, according to Reaser.

The unemployment rate is still above 10 percent and above the national average, but it has come down, and Reaser expects 2013 to show more signs of recovery. The housing market is turning around, technology is one of California’s “trump cards,” tourism is expanding, international trade is growing, and agriculture is healthy, she said.

Constraints in California include budget issues, high business costs — taxes, land costs and labor costs — and the k through 12 education system, which needs a major reform, Reaser said.

The United States can expect to see some positives in 2013, including the easing of financial markets, a turnaround in housing, consumers saving less and spending more, and a pickup in hiring.

“The Federal Reserve has pushed interest rates to the floor,” Reaser said. Companies have strong balance sheets, there’s cash on the sidelines, and banks are starting to make more loans. There’s a turnaround in the housing industry, and consumers are beginning to spend more money, she said. The “game changer” in the 21st century is the opening up of reserves of natural gas.

“This could really change the whole dynamic of our economy as we have the prospect of becoming energy-independent within the next 10 years,” Reaser said.

A gain of 1.9 million jobs is expected nationwide in 2013, which should be enough to bring the unemployment rate to 7.5 percent, depending on how many people come back into the work force, Reaser said. Inflation is expected to be slightly higher in 2013, coming in at about 2.5 percent.

Uncertainties in the forecast include the nation’s "fiscal cliff" — which, if not avoided, could push the U.S. economy into a recession.

“We think that actually public and market pressures will be enough that sequestration, automatic spending cuts, will be avoided. Most of the tax cuts will be expanded with the exception — higher income individuals will be paying more in the way of taxes one way or another; and the payroll tax cut may not be extended,” Reaser said.

The nation might see a trimming of entitlement programs, including Medicare, and tax reform will be on the table, according to Reaser.

“The fiscal cliff, it is indeed a very severe risk, and at this point, bets are that maybe there’s a 40 percent chance that we go off the cliff,” Reaser said.

* Related video: Dr. Lynn Reaser's 2013 economic forecast

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