The year 2014 will likely be the year the Federal Reserve begins to take its training wheels off the economy to see if it can move forward on its own power, economist Lynn Reaser told a forum at the Liberty Station Conference Center on Friday.
But despite the challenges that will create -- including a rise in mortgage rates -- the national, state and regional economies are poised to move forward at a relatively robust pace, said Reaser, chief economist at Point Loma Nazarene University's Fermanian Business & Economic Institute.
Reaser said that over the next year, the national economy will likely rev up to a growth rate of nearly 3 percent, with the jobless rate in both the United States and San Diego County dropping from their current levels of 7 percent to 6.5 percent by the end of 2014.
California's jobless rate is higher, largely because of continuing problems in the Central and San Joaquin valleys. But the overall jobless rate is projected to drop from the current 8.7 percent to 7.5 percent by the end of next year as the state adds 265,000 jobs, including 28,000 in San Diego County, Reaser said.
"California appears to be building economic momentum, despite all the people who have despaired about the state, saying that it would never recover and that everything was pretty much doom and gloom," she said.
Reaser's views echo similar findings to other economic reports released this week, including UCLA's Anderson Forecast and Wells Fargo's California Economic Outlook.
Statewide, "nearly every major industry has seen job growth over the past year, with the exception of manufacturing and government," said the Wells Fargo report, which was released on Friday.
The Wells Fargo report added that San Diego's economy should "continue to gradually gain momentum" through 2014, driven by rises in such areas as tourism, health care and construction, although federal spending cuts will likely hamper other areas of the economy, including manufacturing and shipbuilding.
Reaser said economies throughout the world are beginning to bounce back from the Great Recession, prompting central banks to scale back their stimulus programs. In the United States, she said, the Federal Reserve will likely reduce its purchases of U.S. Treasury bonds and mortgage-backed securities.
As a result, Reaser predicted, mortgage rates will likely rise to 5 percent by the end of next year -- low by historical standards, but a large increase from where they've been in the past several years. But she doesn't expect the rise to put much of a dint in the rebound in the housing market.
"San Diego's real estate and construction sector has shaken off the ravages of the Great Recession and will be a driver of the region's economy instead of a drag during the coming year," Reaser said.
Reaser predicted that the median home price will grow 9 percent in 2014. That's down from an estimated 20 percent in 2013, but still enough to support new construction. Residential housing permits in San Diego County, dominated by multifamily projects, will grow from 6,400 units in 2013 to 7,000 in 2014, she said.
The Wells Fargo report noted that while single-family building activity "has not picked up in any meaningful way," apartment construction "has remained strong, reflecting strong rental demand."
In the long-ailing office market, Reaser predicted that vacancies in both Class A space and the broader market will dip to 10.5 percent in 2014, close to the point where rents will stabilize without the need for major concessions. Leasing rates for retail space will likely rise by 4 percent in 2014, following a 3.5 percent gain in 2013, she said.
Beyond the real estate sector, Reaser said the local economy would be propelled forward In 2014 by growth in biotechnology, wireless, software, tourism and health care. But budget cuts in Capitol Hill, as well as the winding down of the war in Afghanistan, will take a bite out of military spending, which is tied to 22 percent of the county's jobs. Reaser predicted that the total number of San Diegans employed by the Defense Department will dip from 139,000 this year to 136,000 next year.
Reaser said the biggest threat to her forecast comes from Capitol Hill, with the likelihood of more budget cutbacks, such as a second round of across-the-board sequestration cuts or another government shutdown.
"The impact of the ripple effects of spending reductions and uncertainty could more seriously affect the economy than last October's government shutdown," she said.
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May 4, 2015 -- George Chamberlin and Dr. Lynn Reaser, chief economist for Point Loma Nazarene University's Fermanian Business & Economic Institute, discuss the university's report on affordable housing.
Dec. 5, 2014 -- George Chamberlin speaks with Dr. Lynn Reaser, chief economist for Point Loma Nazarene University's Fermanian Business & Economic Institute, about how the economy fared in 2014 and what we can all expect to happen in 2015.
Nov. 20 1014 -- George Chamberlin speaks with Dr. Lynn Reaser, chief economist for Point Loma Nazarene University at the Fermanian Business & Economic Institute, and Leslie Kilpatrick, 2014 president of the Greater San Diego Association of Realtors, about recovery in the local real estate market.
Dec. 6, 2013 -- George Chamberlin speaks with Dr. Lynn Reaser, chief economist for Point Loma Nazarene University's Fermanian Business & Economic Institute, about the details of the institute's 2014 economic outlook report.
Sept. 26, 2013 -- George Chamberlin and Dr. Lynn Reaser, chief economist for Point Loma Nazarene University at the Fermanian Business & Economic Institute, talk about the San Diego Military Advisory Council's recent report on the military's economic impact on the San Diego region.