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Mixed Messages for San Diego's Economic Outlook

Jan. 26, 2016
San Diego lags previous recessions in recovery of manufacturing jobs and troubling signs point to further economic woes.

Economists and industry experts presented conflicting outlooks at the three of the economic outlook events held in San Diego this month. I attended two of the three ─ the 32nd Annual San Diego County Economic Roundtable and the San Diego 2016 Economic Outlook by the National University Institute for Policy Research ─ and read about the third, the San Diego Business Journal (SDBJ) Economic Trends event.

The SDBJ event focused on banking, health care, insurance, commercial real estate, tax, and employment, which is why I did not attend this event. If you are involved in these industries, then you were happy to hear that experts forecast a healthy year for San Diego with the U.S. economy growing about 2.5%. Home prices have increased, consumer spending is growing, wages are increasing, and commercial real estate vacancy rates are below the 10-year average.

The other two events paid more attention to the manufacturing sector. Marney Cox, chief economist for the San Diego Association of Governments (SANDAG), participated in both events, and he and Kelly Cunningham, chief economist at the National University Institute of Policy Research (NUPR), were more cautious, forecasting a more modest 1.9% growth in the region, 2.1% in California as a whole and only 1.8% growth in the U. S.

Kelly Cunningham stated that it took us 74 months after the last recession to get back to the job level we had in 2007, which was two to three times as long as the recessions of 1980-81, 1990-91, and 2000-2001. The average GDP growth after these three previous recessions was 4-5% annual growth, but U.S. GDP has grown an average of only 2% since the Great Recession. At the SDWP event, Marney Cox opined that the regional GDP growth should be >3%.

San Diego is adding jobs faster than the rest of California, and he forecast that the San Diego unemployment rate would remain at the low of 4.8% reached in December 2015 compared to 5.8% for California. He emphasized that this is the commonly used U3 rate of employment, not the U6 rate that includes part-time and discouraged workers. The U6 rate is about double the U3 rate, and was 9.8% in December 2015. However, the U3 rate doesn't include people who have dropped out of the labor force. At the SDWP event, Marney Cox stated that 698,000 people had dropped out of the labor force in San Diego since 2005.

What concerns me is that manufacturing is only 9.5% of the regional GDP (based on 2014 data), up from the low of 7.6% of GDP in 2008. This is still considerably down from the high of 30.1% in 1980. It had slipped to 24.8% by the end of 1999, but that is less than a 6% loss in 19 years, whereas we have now dropped another 15.3% in 15 years. Also, San Diego's GDP dropped from 7th in 1999 to 17th in ranking of the top 35 metropolitan areas in the U. S.

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According to an NUPR report, San Diego has "added 7,000 manufacturing jobs back as 2015 ended. Half of the new manufacturing jobs are in non-durable goods, one-quarter in aerospace, and the rest among other durable goods production, including shipbuilding and recreational goods…" However, this leaves us with about 5% or 6,000 fewer jobs than we had in 2007 (102,400) and more than 26,000 fewer jobs in manufacturing than we had in 1999 (128,300).

Since you have to make it, grow it or mine it to generate tangible wealth, it is questionable whether or not San Diego can even maintain its level of prosperity in the future. Agriculture did not even show up on the pie chart of GDP for San Diego, and natural resources only represented 0.5% of the GDP. Thus, it is critical that San Diego maintain a strong manufacturing base. Manufacturing jobs each create 3-4 other support jobs, while service jobs only create 1-2 other jobs.

Construction dropped from 3.8% of the region’s GDP in 2008 to only 3.3% at the end of 2014, but there has been very little recovery in the number of construction jobs as the number of jobs is still down by 12% from what the number was in December 2007. The NUPR report stated, "In 2016 we do not foresee a significant increase of this part of the economy, in part because of the relatively small number of housing permits approved in the County. Absent a fundamental change of that figure, this part of the economy will continue to struggle."

Since manufacturing and construction represent good paying jobs for the middle class, this explains why middle wage jobs are decreasing. The NUPR report released at their event defines "middle wage jobs as those paying between $35,000 and $77,000 per year in 2014 dollars" and states that "in 2001 middle wage jobs accounted for 56.6% of all payroll wage jobs…the ratio continued to shrink, standing at 49.5% as of 2014."

Essentially in San Diego, we are creating six times more low paying jobs than high paying jobs and double the number of low-paying jobs than middle wage jobs. Higher wage jobs "increased from 21.2% in 2001 to 26.2% by 2014," and lower wage jobs "increased from 22.3% in 2001 to 24.3% as of 2014."

This trend is nothing new. I remember Marney Cox expressing concern over the shrinking number of middle wage jobs at economic roundtables I attended in the mid-1990s.

Another trend Cox mentioned is that the percentage of workers age 55+ has increased from 25% of the workforce to 35.1%, and there has not been a recovery in employment for those ages 25-54. Since these years are supposed to be the "golden years" of making money in a career, this does not bode well for the future for this age bracket. My own son and daughter are in this age bracket, and my son has had to work as an independent contractor since early 2010 without being able to find a permanent, full-time job in an occupation related to construction.  Neither of my children has been able to afford to buy a house because with rents as high as they are, they can never save enough money for a down payment. Their dad and I were  able to buy our first house in our mid-20s when houses cost about 3-4 times a median annual salary, but now they cost 9-10 times a median annual salary.

Status as Innovation Hub Threatened

As I have mentioned in past articles, San Diego has been an innovation hub of advanced technology for the past 30 years, and we now have many startup companies at various stages of development in the more than 45 different accelerator/incubator programs in the region. This is why I was very concerned when Marney Cox stated that venture funding being invested in San Diego companies has greatly diminished. Last year, venture fund investment was <$1 billion and represented only 2% of national investment compared to 4-5% previously.

If this trend continues, it would have far-reaching effects. San Diego's diverse industry clusters derived from technology-focused R&D have always helped the region perform slightly better than the rest of the country. However, if early stage companies cannot get venture funding beyond the angel investor stage, it will be more difficult for them to ramp up into the full production stage where the majority of job expansion occurs. As a mentor for startup technology-based companies for the San Diego Inventors Forum and the CONNECT Springboard program, I am witnessing the increasing difficulty entrepreneurs are experiencing in getting investment funds. Crowdfunding is helping more companies get off the ground, but they will not be able to succeed in the long run and scale up to full production without significant angel and venture funding.

San Diego's economy cannot depend on military/defense spending and tourism for growth in regional GDP. Tightening defense/military budgets because of sequestration have been a drag on the San Diego regional GDP growth for the past three years, and the slight increase in defense spending in the current fiscal year budget will not make much of a difference.

These considerations are why I think that the conclusion reached in the NUPR report is valid: "World and national headwinds suggest battening down the hatches with a prognosis for tightening economic conditions…San Diego will be fortunate to achieve a seventh year of continuous positive economic momentum in 2016. These indicators of economic activity, however, do not portend an acceleration, but rather uneasy movement going forward."

Based on the economic indicators I am seeing for the national manufacturing industry, I would say that these words of caution should also be applied nationally.

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