San Diego County: Robust Fundamentals will Grow Economy, Although New Risks Abound Today

The San Diego region’s economy displays robust fundamentals and will continue expanding in 2019—although probably at a slower pace. However, certain risks could impact local businesses and consumers going into 2020 and turn into a recession.

That’s according to local experts and organizations recently presenting a slew of economic forecasts in January, including the San Diego Association of Governments (SANDAG), the School of Business at University of San Diego, the Fermanian Business and Economic Institute at Point Loma Nazarene University, and the San Diego Business Journal. The keynote speakers’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

Click here for the entire archived forecast report, or view the synopsis below:

San Diego County Forecast

  • If a recession is forming on the horizon for San Diego County and the nation, it hasn’t come into sight just yet—especially as the region’s “local GDP” will probably hit a record this year. Experts say there is too much positive business and consumer activity in the pipeline to throw the economy off course in 2019—although sometime in 2020 is a possibility (the question is whether it happens sooner versus later in the year, if at all). Nonetheless, the county’s Gross Regional Product (similar to the most widely used national economic measurement of U.S. Gross Domestic Product or GDP) will hit a record $253 billion in 2019 (up 46 percent from a low of $173 billion in 2009).

  • Although San Diego County’s economy will continue expanding in 2019 and outpace the nation, local growth is slowing down. After averaging nearly 31,000 new positions in annual job growth from 2012 – 2018, the region’s yearly employment expansion will drop to about 17,000 – 19,000 in 2019. Some employers are having the most trouble than they’ve had in a long time finding workers to fill positions. As 2020 approaches, employment growth will continue slowing down since the economy has already entered what many experts say is the “late” stage of its current expansion. With unemployment very low (3.2 percent in the county), only so many more individuals can be employed out of those wanting to be employed (labor force participation rate). The region hit a record 1.53 million non-farm company payroll jobs in 2018, rising 24 percent from a low of 1.23 million in 2010 (and surpassing the prior peak of 1.33 million).

  • Even as San Diego County’s economic growth downshifts in 2019, its diverse number of industries and active business climate provide a good foundation to fall back on. Technology, cybersecurity, computer science, tourism, military, and defense make up the region’s top dependable sectors. Also, local companies bringing Initial Public Offerings (IPOs) to the investment marketplace have made waves in the San Diego region within bio-technology and life sciences, showing economic diversity.

  • What could counteract the positive economic pipeline is slower global economic growth, higher interest rates for consumers, and a housing market that’s downshifting. Headwinds against the U.S. economy (and San Diego County) include the changing global, geopolitical and economic environment. Foreign trade tension will negatively affect global growth, and so will a tightened monetary policy by the Federal Reserve. Also, a slowing housing market possibly signals an upcoming “reverse wealth effect,” where consumers begin to tighten their spending habits. Additionally, total non-financial corporate debt has reached a historic high as many large corporations have leveraged low interest rates (downside risk to an upside economy).

  • The San Diego region’s tourism/hospitality sector is heavily marked by the cruise industry, which is expected to experience its “best year” since the 2009 – 2010 season. “Passenger counts are projected to reach 295,000 (from 2018 – 2019) and nearly 360,000 in 2019 – 2020,” states a San Diego Business Journal article (still down from the peak of 800,000 in 2009). “Overall, the economic impact of the cruise industry on the San Diego region has grown from $82 million in 2014 to approximately $131 million in 2018.”

  • The San Diego region’s hourly worker wages (adjusted for inflation) from 2007 – 2018 have mostly benefited the 75th percentile of workers—until recently. After the Great Recession of 2007 – 2009, wages for all levels of employees rose, but they especially skyrocketed for high earners before finally starting to slow down in 2017. Meanwhile, after growing in 2010, middle and lower-income worker wages eventually started dropping in 2011, with the middle-income tier flattening out from 2014 – 2018 to nearly exactly what they were earning in 2007. The lower-income tier fell dramatically from 2011 – 2014 before bottoming out that year and then shooting up from 2015 – 2018. On a nominal basis (not adjusting for inflation), all income tiers have risen significantly since 2007—but this does not take local rising costs (inflation) into account.

  • Although local population growth is slowing, San Diego County’s 3.3 million residents will reach 3.5 million by 2025 and 4 million by 2050. This addition of 700,000 new San Diego County residents over the next 32 years will also come with 400,000 new housing units and 360,000 new jobs. However, in general, population growth across California is projected to continue its multi-year trend of downshifting. Due to foreign immigration and natural births (but not domestic migration), the state’s population will hit 40.6 million by late 2020 (from about 40 million today). The major year-over-year influx of new residents that the state experienced from the late 1970s to early 1990s (and then again from the late 1990s to mid-2000s) is dwindling as natural births and domestic in-migration continues to decline.

  • As San Diego County’s population rises, the age composition of residents in 2050 compared to 2016 will remain similar except for one caveat: the number of 65 – 95 year-olds will triple. In 2016 the county was home to 445,000 individuals in this age group—about 14 percent of the county’s total population. By 2050 that number will hit 1.3 million (about 33 percent of the county’s total population, or one-third). It means this older age group will account for 81 percent of the region’s population growth over a 34-year period (2016 – 2050).

  • The commercial real estate market in San Diego County is poised to remain strong, but residential real estate (housing) looks like it’s softening. The question is whether the local housing market (especially home prices but possibly home sales as well) flatlines sooner rather than later versus slowing down in a more moderate, measured way. Many are predicting a “flat” year. The possibility of rising mortgage rates will play into this issue as well. Moreover, the markets for office and industrial space are strong as vacancy rates remain low.

  • San Diego County has a housing shortage of 56,000 units, but only 8,000 – 9,000 building permits will be pulled/issued in 2019 (about the same number annually for several consecutive years now). From 1970 – 1989, the average number of annual residential building permits issued was about 25,000. From 1990 – 2008 it was 11,000. From 2009 – 2018 that number has dropped even further—to about 8,000 annually.

  • The median price of an “existing” single-family home in San Diego County hit $637,000 in 2018 and may quite possibly reach $650,000 by late 2019. As of late 2018 it had started to soften just a little. This is an 87 percent increase from a low of $340,000 in 2009 (and surpassed the prior peak of $620,000 in 2006). About 23 percent of local workers could afford a median-priced home in the county in 2018 versus 46 percent in 2012 (versus only 9 percent from 2004 – 2008). Meanwhile, quarterly home sales in the region have been dropping since early 2017 (from 9,000 to 7,700). Sales hit a quarterly-average peak of 9,500 from 2003 – 2006 before dropping to a low of 4,500 in 2008 and recovering since then.

  • San Diego’s military presence and surrounding companies are expected to bolster the local economy this year. About 22 percent of San Diego’s regional economy is connected to military spending by the U.S. Department of Defense, and defense spending is projected to increase 5 percent in 2019 (to nearly $10 billion). Meanwhile, total spending on salaries, benefits, pensions, and other expenditures will hit nearly $27 billion this year. Additionally, San Diego’s ship count (U.S. Navy) is expected to rise from 57 in 2018 to 62 in 2019, bringing economic benefits.

    Click here to view the “2018 San Diego Military Economic Impact Study,” which outlines facts and data behind why the U.S. military is a mega-economic cluster in the San Diego region and the largest driver of the local economy.

    Click here to view “Mapping San Diego’s Defense Ecosystem,” which gives key takeaways and information regarding the San Diego region as the second largest recipient of defense procurement dollars, contracting more than 5,600 firms and 62,000 employees. “From telecommunications to robotics, aerospace to cybersecurity, San Diego’s defense cluster is the driving force behind the region’s innovation economy.”

  • U.S. Gross Domestic Product (GDP), the broadest measure of economic growth, will slow down to approximately 2.5 percent in 2019. This comes after hitting approximately 3 percent in 2018 (estimated) and averaging 2.4 percent annually from 2013 – 2017. “Positives” for the economy include employment gains, the low unemployment rate, worker wage increases, and a “cautious” Federal Reserve (monetary policy/interest rates). “Negatives” include slow economic growth in other countries, trade tariffs, the waning of U.S. fiscal stimulus (congressional/federal tax breaks), less pent-up consumer demand for products and services, and worker skill shortages.

  • Many traditional U.S. economic indicators point to a recession taking place in the near future, but “time elapsed doesn’t have any economic meaning,” one keynote presenter noted. If our economic expansion is still intact by July 2019, this current period will tie the 1990s economic boom era for first place in length. The second-longest period was in the 1960s (about 106 months) and the third-longest was in the 2000s (about 73 months). Regarding the current period, “The best leading indicators signal a low but rising probability of a recession in fall of 2019”—but this isn’t guaranteed (and many economists say the risks are higher sometime in 2020).

  • Global economic growth that started ramping up in late 2016 and peaked in early 2018 has been declining over the past six months—especially in Europe and China—which can impact California and the San Diego region. A large part of this worldwide slowdown is being driven by China's downshift in Gross Domestic Product (GDP) from 7.5 percent annual growth in 2013 to 6.5 percent in 2018, and an even lower estimated figure (6.3 percent) for 2019. Regarding foreign trade tension, the United States has an estimated "trade deficit" with China of $402 billion in 2018, about 7 percent higher than the $376 billion experienced in 2017. Year over year, the value of exports from the United States to China slightly dropped (to $125 billion) while imports slightly rose (to $526 billion). Chances of a full-on "trade war" between the United States and China probably stands at 30 percent, while in actuality there is still a greater chance (70 percent) of a bilateral agreement.

  • About 49 percent of CFOs at U.S. corporations currently feel a recession might hit the domestic economy by late 2019, while 82 percent think it will happen sometime in 2020. This comes in the face of the U.S. unemployment rate moving lower (and also estimated to drop to 3.5 percent in 2019); the labor force participation rate hitting a floor and edging upward (to 63.1 percent); average hourly wages rising year-over-year (3.2 percent in 2018); and job-hopping by workers (the "quit rate") noticeably rising (2.3 percent in 2018).

  • U.S. Consumer Price Inflation (CPI) has edged slightly up over the past seven years but will remain low in 2019 by historical standards. After registering 2.2 percent in 2018 (estimated), the nation will remain at about 2 percent in 2019 (after averaging 1.3 percent annually from 2013 – 2017). Recently, year-over-year inflation is “close” to the Federal Reserve’s short-term CPI target of 2 percent. The Fed is balancing a relatively healthy economy against other risks (trade tariffs, a fading U.S. fiscal stimulus, slowing global economic growth, a strong dollar, and stock market volatility). The current federal-funds short-term “target” interest rate is 2.25 – 2.5 percent (and poised to hit 2.75 – 3 percent sometime in 2019). The 10-year U.S. Treasury bond is yielding about 2.75 percent (poised to reach 3.1 percent sometime in 2019). Meanwhile, the Fed’s balance-sheet program (“quantitative tightening”) will continue rolling off treasury and mortgage assets into the financial markets (bonds).

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