Correction: The initial version of this story attributed the drop in the index primarily to sharp declines in residential building permits and consumer confidence indicators. But a data entry error by The San Diego Union-Tribune, which conducts the monthly telephone survey, caused Alan Gin at USD and, subsequently, voiceofsandiego.org, to erroneously report that the consumer confidence level in the region was at its lowest point in more than three years.
In fact, instead of a 1.56 percent decline, the consumer confidence survey logged a 0.09 percent increase over the previous month. The declines in other categories still caused the overall index to sustain a hit, though a few tenths of a percentage point smaller than Gin originally reported.
Friday, Nov. 10, 2006 | The county’s leading economic indicators sustained a sixth straight month of declines in September, attributed primarily to a drop of more than 30 percent in residential building permits issued compared to the previous year.
Alan Gin, professor of economics at the University of San Diego, reported this week that three of the six indicators in the index slipped in September. Along with the building permit drop, more initial claims for unemployment insurance were issued than in previous months, though Gin said that indicator is rising from very low levels.
“The thing’s been trending down for six months now,” Gin said of the overall index. “It’s more negative news for the county.”
Fewer employers solicited help wanted ads, a trend that constitutes the third indicator to dip negative in September. The remaining components – consumer confidence, local stock prices and an outlook on the national economy – edged up slightly from August’s index.
Gin pointed to gas prices falling below $3 per gallon in September as a possible explanation for a 0.09 percent increase in consumer confidence. The data for that measure is collected monthly in a telephone poll of 300 households on their current and future job and income sentiments.
Despite slight gains in three indicators, Gin said the negative indicators outweighed advances, leading him to a pessimistic outlook for the local economy. Gin predicts significant slowing in early 2007, effecting cooling job growth, a further weakening housing market and tumbling retail sales.
“Housing and real estate is one obvious place where you’ve got to look,” he said.
The building permits indicator, which measures the vitality of the housing market, sparked the greatest concern in the index. It’s more of the same for residential builders, who’ve responded to a slowing housing market by scaling back operations. The number of residential building permits issued through the end of September was 8,944, about 32 percent fewer than the same period last year, according to the Construction Industry Research Board.
Gin said the September data, compounded with the indexes of the previous five months, were cause for concern but not enough to forecast a recession, though some areas in the country face that threat.
“Usually our economy does pretty well compared to other places,” he said. “We have some built-in mechanisms that cushion us from falls.”
Such mechanisms include a “steady flow” of military contracts to the region and the lack of cyclical industries like steel and automobile production. San Diego’s relative lack of corporate headquarters seals the region from the effects of middle-management layoffs should a company have to tighten its belt, Gin said.
“What these things show is that the economy is slowing down,” he said. “It may not necessarily collapse.”
Economist Chris Thornberg said consumer confidence indexes don’t tell the whole story – he’s more concerned with the habits of those consumers.
“One of the big risks to the economy right now isn’t the direct effects of the real estate market,” Thornberg said. “It’s the indirect effect – it’s that consumers are spending more than they earn.”
Nationwide, personal savings rates have been negative for the past 18 months, according to the federal Bureau of Economic Analysis. For the quarter ending in September, consumers were spending 100.5 percent of their monthly disposable income. In 2004, consumers spent 98 percent, putting 2 percent in savings. The downfall of “saving for a rainy day” is what’s really worrying economists like Thornberg.
“The last time [the savings rate] was negative was in the Great Depression,” he said. “Consumers are spending a great deal of money right now, way more than they should be.”
Unprecedented run-ups in housing prices contributed to the problem, he said. But those loans that let homeowners borrow against their increased equity and spend the cash on cars or other goods aren’t solely to blame. Even homeowners who didn’t use their homes as an ATM can fit the category of people Thornberg’s worried about.
He said the increase in home value acted like a check on the table in some people’s minds. Homeowners who might otherwise save 10 percent of their paychecks started spending that portion and thinking of their home’s value as their savings account.
“The percent of your disposable income you think you need to save really declined over the last few years,” Thornberg said.
Neither economist expected major changes in the San Diego economy stemming from the shift in national government following this week’s election. The Democratic Party promises to push for higher minimum wages, but California’s wage floor is already higher than the national rate.
“There would be concern about what happens with military spending, with Duncan Hunter leaving his chairmanship of the Armed Services Committee,” Gin said. “But I don’t think defense expenditures will decrease significantly in San Diego.”