Economist forecasts 'pretty rocky' recession
By: CHRIS BAGLEY - Staff Writer
Optimists stress diversity of region's economy | ∞
SAN DIEGO -- Citing continued fallout from mortgage defaults and falling real estate values, an economist is forecasting a full-blown recession whose effect on San Diego County would be as severe as the one that followed cutbacks in the region's defense and aerospace industries in the early 1990s.
Imploding real estate markets have increasingly weighed on the nation's economy. Gross domestic product, the broadest measure of economic activity, grew at an annual rate of just 0.6 percent in the last three months of 2007. And more economists are saying they believe it will go into negative territory in the current quarter.
In San Diego County and elsewhere, shrinking home equity has led consumers to cut back sharply. Optimists and pessimists generally agree that's a return to earth from the freewheeling days of easy money from home equity loans and cash-out refinancing.
But an economy that has come to rely on such spending should brace for more unpleasant surprises as it readjusts this year, said Christopher Thornberg of Beacon Economics, a Los Angeles-based consulting firm.
California is already in a recession and will remain there for most of the year before pulling out strongly in 2009, he added.
"The question is, 'How rocky is the road going to be?' " Thornberg said. "The answer is 'pretty rocky.' "
Thornberg and Beacon economist Jon Haveman are scheduled to deliver the forecast to civic and business leaders this morning at the San Diego Marriott on West Harbor Drive.
Thornberg has been more consistently pessimistic than most other regional economists since Southern California's housing prices crested and foreclosure numbers began to rise in 2005. Even economists who hesitate to predict a regional recession, such as UC San Diego's James Hamilton, acknowledge that the picture has darkened considerably in recent months.
"This is not a wild or irresponsible forecast at all," said Hamilton, who studies the effects of federal monetary policy.
Economists have remained somewhat divided over whether the United States is sinking into recession, defined as two consecutive quarters of declining gross domestic product.
Consumers' pessimism and banks' increasing hesitancy to extend business loans have recently convinced more economists that the national economy is headed in that direction.
Thornberg and most others who study San Diego County's economy expect international tourists and a steady flow of government defense contracts to buoy it somewhat. Thornberg's forecast calls for the region's unemployment rate to rise from a recent 4.9 percent to as much as 7 percent, a contrast to 8 percent statewide.
The region's tourism, technology and defense sectors are far less reliant on local consumers and homeowners than most other sectors. Tourism and technology businesses, plentiful in San Diego and North County, could also benefit from a weaker U.S. dollar, which has fallen by 11 percent against the euro and by 16 percent against the Canadian dollar in the last 12 months.
Hamilton said that new lending patterns, particularly among mortgage companies, make the next year difficult to predict. One trend that has worried many economists is a growing tendency to let a house fall into foreclosure when its short-term value falls below the balance of the mortgage, even when the borrower can afford to continue making payments.
It isn't clear whether that trend will erode real estate values to the point that they trigger a recession, Hamilton said.
"I'd put the probability over 50 percent, but it's certainly not 100 percent," Hamilton said.
Kelly Cunningham, chief economist at the San Diego Institute, said the county has probably already weathered the worst effects of the mortgage mess. Home prices peaked earlier in San Diego County than in other parts of California, and the local bubble has mostly deflated, he said.
A wide range of businesses in the region are continuing to create jobs, a factor that Cunningham said will soon begin to boost demand for homes and reverse a 27-month decline in prices.
The Federal Reserve's cuts in a key interest rate, to 3 percent from 4.25 percent, should help to prod the real estate market and business investment, in San Diego County and elsewhere.
"It's a good time for taking out loans," Cunningham said.
"The (economic) slowdown seems to be driven solely by the real estate fallout," he added. "I think Chris might be overstating it."
-- Contact staff writer Chris Bagley at 760-740-5444 or cbagley@nctimes.com.
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Thanks Republicans.... wrote on Feb 7, 2008 11:50 AM:for the recession. I'm glad your corrupt days are almost over, Bushites! Of course the elite republicans won't ose any sleep over the mess they've made, they'l be nice and comfortable with their il gotten gains. Why does the Republican party hate the working man so much? All their efforts went to aiding felow richy riches and corporations. Only the democrats will take care of the working family...as they always have.
GFN wrote on Feb 7, 2008 12:23 PM:The impact of the real estate write-offs hasn't been one half of what it will end up being. Kelly Cunningham, chief economist at the San Diego Institute, is in denial. Although he is correct that it is a good time to take out a loan, it is not a good time to buy a house in San Diego yet; the market prices will fall another 10-15%. High gas prices, inflation, incredible debt at every level of individual and government...it will be a lot rougher before it smooths out.
Concerned-1 wrote on Feb 7, 2008 12:59 PM:You know what? We all know the economy is in the tank. It's bad. We ARE in a recession! What good does it do to run stories from chicken-little economists? None. What we need is some optimism and hope, not doom and gloom. NCT and these economists can go jump in a lake!
Recession yes! wrote on Feb 7, 2008 1:21 PM:Depression coming.
tevee wrote on Feb 7, 2008 1:49 PM:Cunningham:
"A wide range of businesses in the region are continuing to create jobs, a factor that Cunningham said will soon begin to boost demand for homes and reverse a 27-month decline in prices."
How many of those jobs are high paying jobs? I would like to know what is the median and the mean incomes for the new jobs. I doubt someone who's earning minimum wage can afford a house San Diego.
However, more jobs should mean a good rental market.
Escondido Reader wrote on Feb 7, 2008 2:26 PM:San Diego had better not pin its hopes to the tourism and defense industries. There are three reasons for this. First, companies that you would think have no obvious connection to housing will also be hard hit. For example, Bristol Myers (a major drug company) last month had to write down millions, due to their (ill considered)investment in mortgages. Second, economically speaking, when we sneeze, the rest of the world gets sick. The economies of the countries where international tourists come from will also begin contracting. (That has already started.) Third, as the federal government tries to deal with the deepening economic crisis, it will have to make cuts. Defense spending isn't immune, regardless of the war, and funding will be cut for any weapons programs that aren't deemed vital.
In these troubled times wrote on Feb 7, 2008 2:44 PM:it is always nice to know that you can provide your family with Global Warming Insurance. Yes we might be in a recession, but at least you will be happy to know that when the State of California is flooded with water, you and your loved ones will be one million dollars richer if you sign up for Global Warming Insurance.
to concerned wrote on Feb 7, 2008 3:05 PM:3 years of cheerleader style media put us in the dire situation we are in. The media is still not coming clean. This country is broke and has written way too many checks it can't back up. There were people telling us we can't have it all. We didn't listen and elected Democrats and Republicans who didn't care to fix it.
Concerned-1 wrote on Feb 7, 2008 4:29 PM:Cheerleader style media? I must have missed that. And I certainly wouldn't blame the media for the situation we are in. I've just read three reports from data firms tracking real estate trends, and when you break it down it comes down to the affordability index. Until average wages surpass the cost of owning a home, the market will continue to adjust. Some say that number in San Diego is 11.7 percent lower. Also, there's a plan in motion to bring in FHA loans to replace the sub primes. That could definitely help. Bottom line is it's not all doom and gloom!
WhoWhat wrote on Feb 7, 2008 4:33 PM:Its fun for the libs to point fingers when their party is as much to blame as any. It was mainly the greed of the mortgage companies with their sub prime ARM's and homeowners who didn't do their homework (or use common sense) that caused this mess. I heard no warnings or any curbing legislation from the Dems during this period of excess. So to say it was those bad ol republicans is childish. No one forced these people to make bad decisions, although some mortgage agents made the deal sound to good to be true and it was. Lets stop blaming and start fixing, its going to take more than empty promises or a 600 dollar tax rebate from politicians on either side. It will take getting back to solid conservative values and good common sense.
Real Estate Crash wrote on Feb 7, 2008 4:43 PM:Soon these economists will realize that residential real estate in Escondido has fallen 40% in the last year.
To who what.... wrote on Feb 7, 2008 5:18 PM:typical republican, deflect criticism of your ailing party at all costs with red herrings (why didn't the democrats do anything?) and outright falsehoods (its the housing market not the republican's war that caused this). Then blame the victims (its the borrowers fault/they weren't "good" enough). Then at the end appeal to common good although your party has done nothing BUT create division in the nation. Your warped views reflect the arrogance of your party.
WhoWhat wrote on Feb 7, 2008 6:43 PM:To to
I have only seen division from the left (as in your post), If stating the facts annoys you then its your problem, if you believe your politicians are pure then you are part of the herd of sheep going to slaughter. Your party is based on the people voting themselves freebies and handouts so they can tax and spend until there is nothing left. The true conservatives are alway going to save this country from itself you should be grateful we don't let the children run the candy store. Good ol Ronnie is watching over you and your little friends.
James wrote on Feb 7, 2008 7:00 PM:We already know its a recession. the news is how bad and long will the depression last?
WhoWhat wrote on Feb 7, 2008 7:16 PM:Wasn't it a grand day when the Dems TOOK the house and Senate and promised wonderful changes? Well we're having some changes all right.
Are we having fun yet?
mikrofon wrote on Feb 7, 2008 8:39 PM:Nothing anyone is doing now is going to stop the decline in home prices that is now occurring. Some think lower rates or FHA conforming loans are the answer but if one looks at the point where the RE market faltered, 2005/06, easy money loans(subprime) were still available and crashed much later in August 2007. Even with the easy money loans still available the RE market was unable to attract enough buyers to sustain the price increases past the 2005/06 period. It should be painfully clear, as some here have pointed out, that wages have not kept up with rising home prices and THAT along with more stringent lending practices is the adjustment that is now occurring in the market. There is little doubt that prices will fall to pre-boom levels, around 2001, before the artificial stimulation of cheap money caused prices to rise dis-proportionately to wages. It's really that simple.
Roberto1 wrote on Feb 7, 2008 9:06 PM:Water always seek its own level...The sky isn't falling and this huge correction in the real estate market should bring us back in line with reality. Real estate will always be the best part of any diversified and balanced investment porfolio IMHO.
Bubble wrote on Feb 7, 2008 9:44 PM:The mortgage market is in process of collapse. It started with subprime Mortgage market, now it is spreading to Alt-A and prime mortgagees. We are in a Credit crisis, the secondary Mortgage-backed securities market is now essentally illiquid.
When the big Bond insureres (Ambac, MBIA) are downgraded which is all but certain now, we will be seeing huge addition writedowns by the banks, further contracting credit.
NET RESULT: It is getting harder to get a mortgage. More downward pressure on housing prices. More people underwater, more foreclosues, lower prices, etc. This is a self reinforcing downward spiral.
Normal consequences wrote on Feb 8, 2008 9:59 AM:The mortage market isn't in crisis, its just gone back to normal standards. Compared to the go-go anythings goes days it just seems illiquid. With the right collateral and down payment a loan can be had. You may not like the terms, but the loan is available. Lowing the short term rates like the Fed is doing just pushes the snooze button on the liquidation of these bad loans and extends the period of time that we'll be in a recession. It punishes people on fixed incomes and debases our currency making things appear more expensive. And no, negative talk doesn't make recesssions, years of poor judgment build up the problems until they collapse under their own weight. Politically speaking, the democrats open the opportunities (easy terms low income people, non recourse loans, tax free capital gains on houses, government insurance for loans, home mortgage deduction) and the republican types get rich on the resulting market gyrations these kinds of interventions in the market cause. The disruptions are used as further justification for yet more intervention, which create yet more unintended consequences for the rich to capitalize on.
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