Local companies are finding positive signs amid the unknowns the nation faces in 2013.
“I want to start by, instead of talking about the 'fiscal cliff,' speaking about the ocean below. That is really a sea of liquidity these days,” said Lynn Reaser, chief economist at Point Loma Nazarene University.
Local professionals across industries ranging from banking and the military, to clean tech and communications, discussed the future of the economy at a recent roundtable discussion at The Daily Transcript sponsored by Point Loma Nazarene University.
The Federal Reserve launched quantitative easing (QE) 4 and will be buying mortgage-backed securities and Treasury securities accumulating to more than $1 trillion in the next year, Reaser said, all with newly printed money.
“That has a lot of implications, actually positive in the short-term for our economy, including that in San Diego,” Reaser said. “For the housing market, it provides further support with record low mortgage rates. We’ll see more homebuilding, more home sales and higher prices in the coming year. For consumers, it means continued low interest rates for consumer loans, including auto loans. For businesses, it means low borrowing cost. And for all kinds of areas of the economy it will provide support. For investors, it means that the bond market will not look attractive — but the Federal Reserve is basically pushing us to take more risks, likely to help the stock market.”
Reaser expects San Diego to outperform the nation with about 29,000 jobs created, which will drive unemployment somewhat lower.
The risks to the sea of liquidity result from not only the Federal Reserve printing money, but also the Bank of England, the European Central Bank and the Bank of Japan, Reaser said.
“This really poses two risks down the road: another bubble of some sort, perhaps in the bond market, land prices or inflation down the road,” Reaser said. “Right now I think we’re seeing the real benefits of this ocean of liquidity, but how this will all end is not totally clear at this point.”
Lou Smith, chairman at the Port of San Diego, said the economic recovery is uneven.
“Maritime has shown a recovery, but it’s mixed,” Smith said. “We found our regular, mixed cargo can go up anywhere between 10 and 16 percent. Autos — one in every 10 automobiles in America is imported through the Port of San Diego — are only going to be about a 4 percent growth for us this year.”
Also, project-specific cargo will be up 23 percent this year, according to Smith, and construction materials will be up 4 to 5 percent — “because the housing market is still slow in San Diego and that whole sector is slow to recover,” Smith said.
The port expects 77 port calls this year, and each cruise ship brings about $2 million to the local economy, Smith said. Hotels and restaurants on the waterfront are “doing well,” he said, and sport fishing revenue is up 17 percent for next year.
“I see things getting better. I don’t know if the cup is half full or not, but I definitely see improvement out there, and sensitivity out there by people solving these problems,” Smith said.
Despite the unknowns the military faces, Yancy Lindsey, chief of staff for the Navy Region Southwest, said the pivot to the Pacific for the Marine Corps will help San Diego. He said he expects more ships to arrive, more helicopters at North Island and those stationed in San Diego and around the world to train in San Diego and use the area’s facilities.
“We’re not going anywhere soon, and in fact we’re growing. And I think that’s a positive thing for San Diego,” Lindsey said.
Robert McNamara, senior vice president at Torrey Pines Bank, said he expects to see some consolidation in the banking industry.
“We’re staring at a lot of consolidation in the future, due to higher capital requirements. There’s uncertainty even on some of the rules for these higher capital requirements that are still being written right now. And in some ways, it’s a ‘wait and see’ until those rules are written and implemented,” McNamara said.
Leah Swearingen, president of Swearingen Communications, said regulations including the Dodd-Frank Wall Street Reform and Consumer Protection Act have left her feeling like the government has more impact on her ability to plan for taxes than it ever has.
“We’re in a period where people feel like we’re so out of control and there are so many regulations,” Swearingen said.
Jim Waring, president and CEO of CleanTech San Diego, said a freeze on regulations may help to “calm people down.”
“We have had a series of regulations one after another that have just taken people’s confidence and energy away,” Waring said.
Smith said the economy is still fragile, but consumer confidence may be a solution.
“If consumer confidence returns, I think a lot of things will be self-correction,” Smith said. “We’re starting to be able to export things. Solar Turbines — 80 percent of their work product gets exported — as we increase exports, that means we’re doing well globally. We have products that people want overseas and, again, it’s a balance of payments.”
Consumers are two-thirds of the economy, Reaser said.
“After the recession, there was an increase in the savings rate, but that’s starting to decline again. Consumers seem to be, if they have a job, they are out spending,” Reaser said. “We actually need to have a rebalancing in the world economy. The Chinese need to spend more, we need to save more. But government policy is basically, ‘Yes, we would like the Americans to save more, but not right now. We need them to spend.’ They seem to be carrying the water along with housing. Right now, they are carrying this economy, which is why the whole tax increase issue is very important.”
Phil Rath, president of Public Policy Strategies, provides consulting services to entities, companies and associations that have issues with local government.
“Our business is non-cyclical, if not counter-cyclical, because the government never runs out of time or money to mess with businesses. In fact, when the economy gets bad, they almost seem to do it more,” Rath said.
Two risks Rath has noticed are financial market instability and government regulatory instability, he said. He noted one project that relies on production tax credits (PTC) from the federal government to subsidize wind. That PTC hasn’t been reauthorized, Rath said, and the project has been brought to a halt in the past because of Congress not moving forward.
“It doesn’t mean that they couldn’t build their project. It just means that it changed the economics so severely that they’d have to market it in a different way,” Rath said. “What I’m arguing is the instability is what kills things, not necessarily a bad outcome or a good outcome.”
People don’t know how to prepare for the next year because of the uncertainty in the economy, Reaser said.
“Companies basically are not preparing because they’re waiting, which I think could be a problem in 2013 because we may get a sort of partial way to avoid the cliff with more issues of tax reform and other budget cutting delayed and put off — the can partially addressed but partially kicked down the road for at least a few months,” Reaser said. “You have to manage around that uncertainty. You can’t just go into a freeze, but I think, unfortunately, a lot of companies are sort of in wait mode.”
Two of McNamara’s customers sold their businesses within the past nine months, he said — one was a cabinet maker and the other a medical device maker.
“You would think in the health care industry they should feel comfortable, but the owners of the 25-year-old company, they finally said, ‘There’s too much uncertainty out there and we’re going to pull the trigger now and sell the baby we’ve been raising since it was born,’” McNamara said.
Companies leaving the area aren’t as big of a threat to California job growth or job destruction, as where companies choose to expand and where new businesses start up, Reaser said.
“We need to pay a lot of attention to these companies that are sort of in their midlife or trying to figure out, ‘What do we do now, can we expand and if we do, is it in California and San Diego?’” Reaser said.
Potential cuts in federal research grant funding could have a direct impact on the technology sector, said Steve Hoey, director of business creation and development at Connect. There are more than 80 research institutions and universities in San Diego, which is an “enormous resource for us,” Hoey said. A decrease in funding could result in a drop in San Diego’s regional competitiveness, he said.
“The access to capital and the time it takes to raise the capital is a major determining factor of whether these companies are able to survive their valley of death,” Hoey said. “Even if the technology is good, the management team is strong, they still face an uphill battle in terms of capital because investors are looking at the deal that is going to work for them best in terms of risk and reward.”
Companies are having to “bootstrap longer,” Hoey said, relying on friends, family and grant money where available.
Steve Hoey, Director of Business Creation & Development, Connect
Yancy Lindsey, Chief of Staff, Navy Region Southwest
Robert McNamara, Senior Vice President, Torrey Pines Bank
Phil Rath, President, Public Policy Strategies
Lynn Reaser, Chief Economist, Fermanian Business & Economic Institute at Point Loma Nazarene University (sponsor)
Lou Smith, Chairman, Port of San Diego
Leah Swearingen, President, Swearingen Communications
Jim Waring, President & CEO, CleanTech San Diego