YEAR AHEAD: Expect a tough 2009

By CHRIS BAGLEY - Staff Writer | Thursday, January 1, 2009 6:07 PM PST ∞

Economists expect a recession to continue in Southwest County and across the nation as consumers continue to sleep off the hangover that has followed their borrowing binge.

Economists believe the nation's economy fell into recession in late 2007 or early 2008 as falling real estate values prompted homeowners to cut back on all sorts of spending. Consumer spending has fallen particularly steeply in Southwest County and other suburban areas where the economy had been fed by booming construction industries and a large number of homeowners who were benefitting from rising home values.

Most economists expect consumers to continue cutting back this year. Economists at Chapman University in Orange, for example, foresee U.S. residents' consumption falling by 2.1 percent in 2009, pushing the gross domestic product, the broadest measure of economic activity, to contract by 1.4 percent.

Economists generally foresee California's economy beginning to grow again in late 2009 or early 2010, but the stable housing market that's needed to spark a recovery could be longer in coming to foreclosure-heavy areas such as Southwest County.

The national economy has logged growth rates of 2 to 3 percent in most recent years. Consumer spending grew even more quickly, a discrepancy that followed rising home values and growing consumer debt, economists say. But local home values began falling in late 2006. And economists say consumers have become less willing ---- and even unable, in many cases ---- to borrow more.

Total consumer debt grew more slowly last summer and even shrank in October, a somewhat rare occurrence, the U.S. Federal Reserve Board reported in early December. Economists generally agree that this "deleveraging" is good in the long run. But it also magnifies the effects of reduced spending that results from massive job cuts, economists say.

Regional economist Marney Cox said he expects Southern Californians to cut back especially deeply on purchases of big-ticket items.

"People are hanging on to old cars, refrigerators, stoves, things that they might have replaced or gotten rid of," said Cox, chief economist for the San Diego Association of Governments.

Spending on such items, known as "durable goods," had been one of the key factors in the nation's economic growth from 2005 through 2007, but consumers have cut back such purchases sharply this year, according to the U.S. Commerce Department. Durable-goods purchases fell by 14 percent in the July-September period, more sharply than any other component of the economy except for new-home purchases, the Commerce Department reported Dec. 23.

Southern California economists have said that Southwest County and other suburban areas that have boomed with real estate and construction will have to diversify in order to rebound from recession.

Joblessness in the two-county area of Riverside and San Bernardino has risen to 9.5 percent, far above the national rate of 6.7 percent.

San Diego County's unemployment rate has risen to 6.9 percent. Its relatively diverse economy has helped it to weather the damage from imploding real estate values, economists have argued.

Taxable sales, a large class of consumer spending, has fallen steeply in the city of Riverside, in Southwest County and in other suburban areas since last summer. Taxable sales have fallen less steeply in northern San Diego County and have held steady in San Diego, Los Angeles and most other large cities, a consulting firm reported earlier this month.

Economists have no formal forecasts for individual counties, but some in the region say they can foresee the Riverside-San Bernardino region's unemployment hitting 12 percent in late 2009, which would approach or equal the 12.4 percent rate that followed cuts in federal defense spending in the early 1990s. Economists said San Diego County's joblessness could approach 9 percent by the end of 2009.

Economists have argued that rising unemployment is likely to push down consumer spending further, a vicious circle. At least one has argued that economic conditions won't stabilize until home prices stabilize.

That bodes ill for the nation as a whole, whose home prices are falling more steeply and for a longer period than at any point in decades.

It may bode somewhat less ill for California, whose real estate markets imploded before those of other states, Chapman University's Esmael Adibi argued in his 2009 forecast earlier this month. Homes in Southern California have been selling at nearly twice the rate they were selling last year, according to one research firm. The pace of Southwest County home sales has rebounded more strongly from a dismal 2007 than rates in other parts of Southern California, though a continued flow of foreclosed homes would probably delay a recovery in local real estate prices, economists have said.

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 5444, or cbagley@californian.com. Bagley blogs about local economic trends at http://bizblogs.nctimes.com.

Previous coverage:

ECONOMY: Sales slump deeper in suburbs (Dec. 22, 2008)

ECONOMY: Local job cuts continued in November

ECONOMY: Forecast sees deeper state recession (Dec. 11, 2008)

RETAIL: Early birds crowd Riverside County stores

Economist forecasts 'pretty rocky' recession (Feb. 7, 2008)

Economist: U.S. recession to hit Riverside County (Jan. 30, 2008)

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 5444 or cbagley@californian.com. Bagley blogs about local economic trends at http://bizblogs.nctimes.com.