Commentators are currently speculating whether a national recession is either imminent or under way. Economists from California-based Beacon Economics were in San Diego last week proclaiming California and San Diego are already well into recession.
With all due respect to these outside observations, San Diego is not necessarily falling in line with the rest of California or even of Southern California. Over the past decade, San Diego’s economy has become much more independent from the shadow of the Los Angeles megalopolis and acts much more on its own momentum and strengths. Likewise, San Diego is positioned differently from the rest of the nation when it comes to the factors that are leading to the national downturn.
While it would be foolhardy to proclaim the local economy fully recession-proof, San Diego is much more resilient than many give it credit. As we have asserted for sometime now, San Diego is leading the rest of the state in economic activity. We have already had our slowdown in 2007, ahead of the rest of the state, and may already be seeing a slight acceleration of economic activity as we proceed into 2008.
Modern recessions for industrialized economies are largely brought about by the need to balance overly speculative growth spurts. Booms are inevitably followed by busts here as well as anywhere else and will always be necessary anytime growth outpaces real economic production.
Despite San Diego being subject to these economic cycles of growth and correction, the region has shown an exceptional resiliency during recent economic downturns experienced in the rest of the state and nation. Particularly in the past decade, San Diego’s economic fortunes are increasingly independent not only from the rest of California, but from Los Angeles. San Diego can no longer be thought of as an extension or suburb to the Los Angeles mega-economy. While ties with Los Angeles certainly remain, particularly in certain sectors of finance and real estate development, the drivers for San Diego’s economy are much less correlated to Los Angeles than ever before.
Historically, San Diego’s economy was said to be balanced upon a three-legged stool of aerospace/transportation manufacturing, defense related expenditures, and tourism. Further in San Diego’s past, fishing and agriculture were dominant industries as well, but their influence has waned as our region’s population grew along with the expansion of other industries.
Over the past two decades, a fourth leg for local economic prosperity became prominent in San Diego’s fortunes, which can be labeled as “high-technology driven research and development services”, including biotechnology, telecommunications, and computer/software as key sub-sectors among these entrepreneurial driven industries. This fourth major pillar of San Diego’s economy gives the region greater economic prowess with the dynamic power to sustain and stabilize the region’s overall economic fortunes, independent from the rest of California.
San Diego’s technology driven industries are largely research driven endeavors based upon scientific discovery, innovation, and development. Funding is necessary for these industries to thrive and investment dollars flow into San Diego’s economy from around the world. The success of technology-driven industries is largely determined by business and government investment, and less dependent upon the vagaries of consumer spending.
Similarly, the defense industry is another factor helping to create a certain autonomy for San Diego from the rest of the state’s economic fortunes. Historically, the concentration of the defense industry in San Diego county made our region much more vulnerable to federal decisions about military expenditures and especially spending on individual weapon systems. More recently, however, the local defense industry has also become much more diversified among technology-driven R&D sectors in communications, surveillance and weaponry.
The rise of Tijuana and Baja California manufacturing adds another pillar of economic strength for the bi-national regional economy. While the Mexican industries are subject to and driven by consumer-driven production, with significant ties to the rest of Southern California and the U.S., the presence and prominence of these bi-national industries provide the local region with another important source of economic prosperity.
The technical definition for a recession is defined by a retraction of economic growth and year-to-year decline in number of jobs. Because regional economic growth below a “national level” is only defined on an annual basis, it is difficult to see negative economic growth for one or two quarters. Quarters of negative growth balanced by higher growth in other quarters may be somewhat apparent when the average for the year is anywhere from 0.0 to 2.0 percent. San Diego has not had annual economic growth below 2.0 percent since the early 90s when the region suffered a severe multi-year recession. The San Diego economy is estimated to have 2.1 percent “real” or inflation-adjusted growth in 2007 and the outlook for 2008 is 2.5 percent. (See November 2007 San Diego Economic Ledger report on “San Diego’s 2008 Economic Outlook”, http://www.sandiegoinstitute.com/economic_ledger/) While the San Diego economy has clearly slowed as shown by these relatively low rates, it does not necessarily indicate the economy was or is in recession.
The other significant indicator of a regional economic recession is annual job losses. Since the early 90s recession, San Diego’s annual job growth remains consistently positive. Job gains reached a high of 57,000 year-over-year in the later 90s. Growth slowed thereafter to only a few thousand by mid-2003, before accelerating again to well over 20,000 per year in 2004, 2005, and 2006. During 2007, annual job growth slowed again reaching a low point of only 2,900 over the year in July 2007, but since last summer, San Diego’s job gains actually accelerated to 14,100 annually as of December 2007.
If not for the job losses sustained in construction and real estate sectors, San Diego’s job growth during 2007 would show more than 20,000 jobs being added. This is a significant indicator showing San Diego’s economy continues to grow. Furthermore, the acceleration of growth since last summer indicates job gains are actually picking up, not slowing down. This suggests San Diego’s economic momentum is moving forward, ahead of whatever slowdown the rest of California and the nation may be currently experiencing.
Obviously the nation’s economic performance will impact individual San Diegans in numerous ways. The weakness of the residential real estate market is creating real hardships. But the underlying reasons for San Diegans growth and economic performance remain healthy. While San Diego is enduring a slowdown, the pessimists need to take a step back and understand our region’s unique strengths.
Reader Feedback
rich t Says:
Hi Kelly - You make some good points in your article. I have a question, though, about what metric is used to qualify an industry as as a "stool leg." It doesn't seem to be employment -- when I last checked a few months ago, the four biggest BLS employment supersectors in SD were professional services, government, hospitality, and retail (the only overlap with your four stool legs being hospitality). If it's not number of employees, is it contribution to RDP, or something like that? I hear a lot about the influence of biotech, telecom, etc. out here but I have not seen any hard data on how big a piece of the pie these industries actually comprise, and I think that such data would be very interesting. Thanks!
February 16, 2008 at 1:28 PM
rich t Says:
Many thanks to Kelly who answered my question in great detail over email. If any readers were wondering the same thing, here is my brief and probably oversimplified summary of what Kelly told me: the important industries are judged by how much external-to-San-Diego money they bring into the region, as opposed to how many internal dollars are circulating through them (and this latter would tend to correlate with number of employees, so employment isn’t the right metric to look at).
February 23, 2008 at 6:12 PM
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Hi Kelly - You make some good points in your article. I have a question, though, about what metric is used to qualify an industry as as a "stool leg." It doesn't seem to be employment -- when I last checked a few months ago, the four biggest BLS employment supersectors in SD were professional services, government, hospitality, and retail (the only overlap with your four stool legs being hospitality). If it's not number of employees, is it contribution to RDP, or something like that? I hear a lot about the influence of biotech, telecom, etc. out here but I have not seen any hard data on how big a piece of the pie these industries actually comprise, and I think that such data would be very interesting. Thanks!
Many thanks to Kelly who answered my question in great detail over email. If any readers were wondering the same thing, here is my brief and probably oversimplified summary of what Kelly told me: the important industries are judged by how much external-to-San-Diego money they bring into the region, as opposed to how many internal dollars are circulating through them (and this latter would tend to correlate with number of employees, so employment isn’t the right metric to look at).