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Growing a Basket of Industries: An Economic Outlook

4 May 2011 No Comment

By Helen Kaiao Chang

What does 2007 hold?

A lot depends on the Fed. The housing market. Gas prices. And you – the consumer.

Most economists looking into San Diego’s economic crystal ball predict an economic slowdown in 2007 – but not a recession. This will be followed by more growth in 2008.

While some parts of the economy may languish, San Diego overall will remain resilient because of our basket of industries, economists said. Weaknesses in some sectors will be offset by strengths in others. Weak industries: housing and construction. Strong ones: defense, biotech, tourism, professional services, and entrepreneurship.

San Diego economists generally agree:

“2007 will be slower, but we won’t go into recession,” said Kelly Cunningham, economist and senior fellow at the San Diego Institute for Policy Research. He is also the longstanding author of the annual economic forecast published by the San Diego Regional Chamber of Commerce.

“I think the local economy is going to slowdown considerably in 2007,” said Alan Gin, Associate Professor of Economics at the University of San Diego and publisher of the monthly Index of Leading Economic Indicators for San Diego County. “I don’t anticipate any sort of recession.”

Ditto for Marney Cox, chief economist of the San Diego Association of Governments (SANDAG): “Because of relative weakness in the economy, overall gross regional product in 2007 will be less than it was 2006. I’m not expecting a recession.”

Generally, the US and California economies are headed south. Since San Diego tends to be a forerunner of trends, we headed south sooner than the rest of the state and country – especially in 2006. But we will also head north sooner, which means the region will outperform California and the nation in 2007, said Cunningham. “San Diego is leading the rest of California and the United States.”

THE FED

Who’s the Big Daddy here? The Fed. A lot depends on whether the U.S. Federal Reserve adjusts interest rates next year – and that means: up, down or not at all.

A quick Econ review might be useful.

The Fed’s main motivation is to stabilize the economy. Its two main goals: make sure the price of things does not get out of hand (control inflation) and keep people working (reduce unemployment). Its tools: the interest rates. If the Fed raises interest rates, making the cost of money more expensive, the economy slows down and inflation is kept in check. If the Fed lowers interest rates, money is cheaper, so businesses expand activity, more people are hired and the economy speeds up.

Since 2004 — when interest rates were at all-time lows and the economy was on overdrive — the Fed has been slowly notching up interest rates, putting the brakes on the economy. That’s why the Fed took a breather in late 2006.

“The Fed achieved what it set out to do,” said Cox.

THE INTEREST-RATE WILDCARD

Now, the question is: will the Fed keep raising those rates? Or hold steady? Or even lower the rates?

The economists differ in opinion:

Cunningham: “I think they will leave them alone, at least for the first half of 2007.”

Cox: “I think it will hold steady. If the Federal Reserve has to continue to raise interest rates, it will weaken employment and further weaken the housing market, and may push the economy into recession. It won’t take much to push it over the edge.”

Gin: “I think by the end of 2007, they’ll cut short term interest rates by a full 0.5 percent – because of the slowing overall of the national economy. My guess is that in the second quarter of 2007, the national economy is going to show severe signs of a slowdown.”

So San Diego’s economy will slow down in 2007. But total output will still break records, according to the Chamber report. And the region still runs ahead the state and national rates.

In its economic forecast, the SD Regional Chamber estimates:

San Diego’s GRP (gross regional product)

  • 2006 – $150 billion
  • 2007 – $157 billion

San Diego’s GRP growth rate, adjusted for inflation

  • 2006 – 2.9 percent
  • 2007 – 2.5 percent

If San Diego were a nation, it would be ranked the 36th largest economy in the world, based on the 2005 GRP of $142 billion, according to statistics compiled by the San Diego Regional Chamber.

Despite the slowdown, San Diego’s economic outlook is bright. “It’s still a great place to live,” said Cunningham, “as long as you have housing.”

CONSUMER CONFIDENCE

The economy is sometimes a perception game. If enough people think it’s going to slow down, it will. If enough people think it’s going to heat up, it will. In the housing market, the perception that prices will drop causes a waiting game that feeds that result. If enough people start new companies, unemployment will abait.

We are all part of a larger economy. But we also create our own personal economies. Your personal economy may slow, but it does not have to go into recession.

This article is part of a comprehensive economic outlook. See related stories:

  • The Housing Market
  • 2007’s Strongest Industries
  • Population Changes & Employment

 

Follow Helen on Twitter @helenchang.

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