County's growth falls to 2.9%

Area drops below state, national figures
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER

November 2, 2006

For the first time in six years, San Diego County's economic growth is lagging the rest of the state and nation, according to a report released yesterday by the Greater San Diego Chamber of Commerce.

San Diego's gross regional product is growing by an estimated 2.9 percent this year, the second-slowest growth rate in the past decade. In comparison, the report said, California has shown 3 percent growth this year and the United States 3.2 percent.

Next year's growth will be even slower, although San Diego will resume its position of outperforming the state and nation, the chamber predicts. The forecast projects that next year the county's economy will grow 2.5 percent, compared with 2.4 percent for California and 2.1 percent nationwide.

“San Diego has really been the harbinger for the state and national economy,” said economist Kelly Cunningham, who prepared the forecast.

“For the early part of this decade, San Diego led the nation in growth and now we are leading the nation in seeing our growth slow down.”

One of the chief culprits for the slowdown is the decline in home construction and growing softness in prices. In San Diego County, median home prices have dropped 4.4 percent since last year, according to the latest figures from DataQuick Information Systems.

Cunningham – who once worked full time for the chamber and now works as a consultant – predicted that prices could decline an additional 5 percent over the next year.

“The biggest declines will come in condominium prices,” he said. “We're really overbuilt in condos. And I'm concerned about the growth of condo conversion.”

Cunningham noted that the weakness in home prices may have led to a cutin consumer spending. After adjusting for inflation, retail sales have been close to flat since the end of 2004, he said. He estimated that the sluggishness will continue through at least mid-2007.

Jon Haveman, co-founder of Beacon Economics, a forecasting and research firm, said, “I hate to be bearish, but I have to be.” With a decline in home prices and a rise in foreclosures, “Consumers are going to start cutting back their spending, and if they cut back too dramatically, it could lead to a recession.”

On the other hand, Haveman said, a good omen for California is that all of the state's regional economies – except for the areas around Santa Rosa and Fresno – are still growing relatively well. And if California businesses increase their spending, they might make up for pullbacks from consumers.

“Corporations are sitting on pretty large war chests right now,” Haveman said.

James Hamilton, economist with the University of California San Diego, said there are signs that housing may be bottoming out. Since July, he said, mortgage rates have dropped by almost half a percentage point, which could be enough to bolster the market.

He noted that it typically takes up to 16 weeks for home prices to reflect changing interest rates, which means that the market could improve soon.

However, there are several factors that could keep prices declining, he said. A spike in loan defaults and foreclosures “could give us a much uglier scenario.” And home buyers might be slow to enter the market, hoping that the longer they wait to buy a house, the cheaper it will get.

“I think it's a little more likely than not that we have reached the bottom (in housing prices),” he said. “But there's still a very significant possibility – maybe 30 or 40 percent – that things could get much more frightening.”