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Roundtable discussion

Global economic outlook weighs against positive local trends

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Things aren’t booming in the San Diego economy, but they’re showing steady improvement since the end of the recession.

Yet, immediate and long-term outlooks for local business and income growth are tempered by the uncertainties of the eurozone and next year’s presidential election.

As a result, according to a panel of local business leaders and economic experts, 2012 is expected to look a lot like 2011: a modest annual improvement that doesn’t approach the level of growth needed to beat back an unemployment rate stuck near 10 percent, increase tax revenues to boost public budget shortfalls or revive a housing market plagued by foreclosures.

The hope, according to the panel, is that pent up demand of this and next year manifests as robust growth come 2013 or 2014.

Lynn Reaser, chief economist at Point Loma Nazarene University, said she had just met with Federal Reserve Chairman Ben Bernanke, and that he expressed concern about the health of the global economy.

Ripple effects from the eurozone crisis could have serious effects on the American economy, according to Reaser.

“The region appears headed to recession,” she said. “Incomes have not kept up with prices, they’re facing fiscal austerity programs, and the banks are tightening credit because they’re expected to boost capital significantly by next June.

“They have to have some kind of fiscal-union discipline imposed and, second, the European Central Bank is going to have to step up to the plate and by bonds of these various countries. Those two things have to happen, and they have to happen in that order.”

The European situation, according to Brent Wilsey, president of Wilsey Asset Management, doesn’t really have any material effect on the performance of local companies, however.

Consumers in the county clearly aren’t reacting to the news, he said. For instance, the Wal-Mart in Poway reached capacity during Black Friday and was forced to close for a period, something it had never had to do before.

“I don’t think it does affect San Diego,” he said. “If we can turn off the news, our economy is doing OK. I always tell people, it’s not a boom economy but we have been doing OK.”

He went as far as to say that it could end up benefiting the local economy.

“Other countries might be afraid to buy from Europe, so they might decide to buy from us and it could end up being a positive effect in San Diego,” he said.

That hasn’t been the case — at least not yet, in the defense industry, one of San Diego’s largest economic engines.

John Pettitt, corporate lead executive at Northrop Grumman, said many large-scale deals between American security contractors and NATO countries are now distinctly in doubt.

“On the defense side, Euro countries that we had deals with, those are a big question mark,” Pettitt said. “Defense has been chopped with belt tightening in NATO countries. Buying less, of what I call good stuff, made in the U.S.A.”

Many of the metrics Ruprecht von Buttlar, director of business creation for CONNECT, uses to measure the pace of business creation in San Diego aren’t reflecting the fears supposedly emanating from the global economy.

“I think this slows us down in SD but it hasn’t reversed the trend,” he said.

There were 76 new businesses built in the innovation sector in the second quarter. More surprisingly, mergers and acquisition activity tripled in the quarter after having been down previously in the year. Venture capital funding has increased of late as well.

Mike Green, a partner with Squar Milner, pointed out that as long as developments affect the public stock markets, they also affect consumer confidence and venture funding.

“With the speed of information today, things can change in a blink,” he said.

Since the dawn of the Great Recession, businesses have been plagued by weak demand caused by both low consumer confidence and deleveraging of homes, and businesses to repair their credit situation.

“The thing that’s been surprising is the stubbornness of downward pressure on demand,” said Vincent Mudd, president and CEO of San Diego Office Interiors, who is also chairman of the board of directors for the San Diego Regional Chamber of Commerce.

Ultimately, businesses have stopped hoping for things to suddenly improve.

“Successful businesses stopped believing in unicorns a long time ago,” Mudd said. “Faith-based management is not something that’s ever been sustainable. So what we’ve seen is companies have such a laser-like focus on becoming more efficient that they’re paying the lowest lease rate they’ve ever paid before, lowest cost for land that they’ve ever paid before, paying least for subsidies than they’ve paid before, while investing in software and technology to make their business better long term.”

Because San Diego’s economy is diversifying, and is, according to Mudd, a “serial cluster creator, he says he’s bullish on San Diego and what he calls the mega region, including southern Orange County, Tijuana and Imperial County.

Von Buttlar agreed, identifying high-volume manufacturing options in Tijuana as a luxury that allows San Diego-based startups faster entry to market than competitors in other cities.

The housing market in San Diego, however, has continued to flag, even while some of its fundamental drivers have improved on an annual basis.

Both major measures of foreclosure activity — bank repossessions, and initial notices of default — have fallen 10 percent through the first 11 months of the year, compared to the year-ago period, according to the San Diego County Assessors’ office.

And home construction, though on pace for the third-worst year on record, is steadily climbing as well. Through 10 months, county municipalities have issued permits for the construction of 4,280 homes, up 47 percent from a year ago, according to the Construction Industry Research Board (CIRB).

Despite that, home prices have shown no such upward movement.

According to the Case-Shiller Home Price Index, property values in San Diego fell just less than a percent in the third quarter, and are now 5.4 percent below their year-ago level.

“If you need real estate to recover for San Diego to recover, then we’re in real trouble,” Mudd said.

The peaks and valleys of the economic cycle are sometimes needed, he said. And in this case, the downturn has in part corrected the issue of affordability in San Diego. Previously, Mudd said he’d worked with a large-scale employer who wanted to relocate to the area, but opted not to, out of fears that expensive housing would make it too difficult to place a full work force.

“We won’t see the return of the construction jobs that we saw during the housing boom,” Reaser said. “And the foreclosure-recycling process that we’re in takes time.”

A positive in real estate, she said, is that commercial real estate has been far less traumatic than some had feared. The concern for widespread bankruptcies for commercial real estate companies hasn’t materialized.

Also, new construction of multifamily housing has been a bright spot this year, according to Mudd. That’s backed up by CIRB’s numbers, which show a 130 percent increase in permits for multifamily units over the year-ago level.

Nonetheless, Reaser said current new-home construction levels don’t meet the region’s future housing needs. If production doesn’t increase, the region’s next housing bubble may result.

Roundtable Participants

Mike Green, Partner, Squar Milner

Bud Leedom, Publisher, California Stock Report

Vincent Mudd, President & CEO, San Diego Office Interiors

Kathleen Pacurar, President & CEO, San Diego Hospice & The Institute for Palliative Medicine

John Pettitt, Corporate Lead Executive, Northrop Grumman

Lynn Reaser, Chief Economist, Point Loma Nazarene University (sponsor)

Ruprecht von Buttlar, Director of Business Creation & Development, CONNECT

Brent Wilsey, President, Wilsey Asset Management

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