Leading Economic Indicators Down Sharply in August

The University of San Diego’s Index of Leading Economic Indicators for San Diego County fell 1.4 percent in August. This is the 16th time that it has fallen in the last 17 months. The USD Index is the local equivalent of the national Index of Leading Economic Indicators and is designed to forecast the direction of the local economy in the next 6 to 12 months. The recent weakness in the Index suggests that the local economy will continue to be weak at least through the first half of 2008. That weakness will manifest itself in slower job growth, higher unemployment, continued slow home sales, and a general decline in economic activity, including sales and income growth.  An outright downturn is not expected, but the possibility of a recession in the local economy is at its highest point in years.

There are six components in the USD Index of Leading Economic Indicators. Most of these components are the local equivalents of components found in the national Index of Leading Economic Indicators. The month-to-month change in each component is calculated after the raw data has been seasonally adjusted, standardized to reduce the impact of the more volatile components, and smoothed to eliminate odd monthly fluctuations. Due to the adjustments to the data just mentioned, any change that is more than one percent in either direction is considered a large change. Below is what happened to each component in August:

Residential Units Authorized by Building Permits (-0.67%)

Residential units authorized by building permits give a good signal of future construction activity. It also signals future activity in terms of furniture and appliance sales, as well as expenditures on home improvement. After a tiny gain in July, residential units authorized by building permits reverted back to its recent negative trend as developers cut back on construction plans in reaction to the weak housing market. While both single-family and multi-family permits remain weak, the 211 single-family units authorized in August was the lowest amount since 193 units were authorized in January 1993.

Initial Claims for Unemployment Insurance (-1.30%)

Initial claims for unemployment insurance measure the rate of job loss in San Diego County. The calculation is “inverted,” meaning that an increase in initial claims is calculated as a negative for the economy and for the Index. August’s numbers show that job loss is picking up, as reflected by weakness in initial claims for unemployment insurance. Much of that job loss is in real estate-related sectors such as construction, mortgage lending, and realtors.

Help Wanted Advertising (-2.08%)

Help wanted advertising measures the hiring side of the labor market. It is a combination of print advertising in The San Diego Union-Tribune and online advertising as measured by Monster.com. Help wanted advertising has now fallen for 12 months in a row. Print advertising is down considerably, and Monster.com reports declines in online advertising in real estate-related sectors and across most white-collar occupational categories.

Consumer Confidence (-2.03%)

Consumer confidence is significant because consumption is typically two-thirds of economic activity. Particularly affected by consumer confidence are purchases of big ticket items such as housing, automobiles, furniture, etc. Local consumer confidence is measured by a monthly survey by the San Diego Union-Tribune. Local consumer confidence fell in August to its lowest level since October 2003, with negative news about problems with subprime loans and foreclosures the likely cause of the drop.

Local Stock Prices (-1.14%)

Financial markets tend to be forward looking in terms of company performance. The measure of local stock prices used in the San Diego Stock Exchange Index calculated by The San Diego Daily Transcript. The big declines in stock prices during the summer were finally reflected in the decline in local stock prices in August as investors worried about the financial system being heavily impacted by the weak housing market and the subprime loan problems.

National Economy (-1.27%)

San Diego’s economy is more integrated with the national economy than in the past. The health of the national economy affects San Diego companies with national markets, and also the region’s tourism industry. The national Index of Leading Economic Indicators continued its 2007 pattern of alternating advances with declines the next month. As a result, there is no clear direction in terms of the outlook for the national economy, although the recent action by the Federal Reserve to cut interest rates suggests that it has concerns about the impact of the slumping housing market on the national economy and the financial system.

— ALAN GIN