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Modest rate of growth is expected to continue

Declines in building permits and consumer confidence have weakened the economic outlook for San Diego County, according to the latest index of leading economic indicators released yesterday by the University of San Diego.
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Four out of the six leading indicators - building permits, consumer confidence, help-wanted ads and the outlook for the national economy - took a slide in August, pushing the index down 0.1 percent.

On the other hand, the county's unemployment rate continued to improve and local stock prices rose in August, partly balancing the downward factors.

"The outlook for the local economy is for continued modest growth through the end of the year and into the first half of 2006," said USD economist Alan Gin, who compiles the report.

Despite last month's slight downturn in the economic indicators - which point to where the economy is heading rather than its current status - San Diego still outperforms the nation with its low unemployment rate and long-running economic stability.

But Gin added that there are a number of potential trouble spots for the economy in the months ahead, including the slowing of the housing market, softness in the national economy and the uncertainty surrounding the city of San Diego's fiscal crisis.

For the past four months, the economic indicators have been relatively flat - moving only slightly up or slightly down.

The biggest movement in the August indicators came from consumer confidence.

Although confidence about the current economic situation - measured by polling conducted by The San Diego Union-Tribune - remains at one of its highest points in the past year, San Diegans are increasingly apprehensive. Optimism about the future dropped 3.2 percentage points during the month to 86.3 points - its fifth-lowest score in the past five years.

Gin's report is based on a "moving average" of consumer confidence, which averages survey figures from several months in a row. The moving average has dropped for eight consecutive months, although the pace of the decline is slackening a bit.

"This mirrors the trend at the national level, where high gas prices, the conflict in Iraq, and concerns about the response to Hurricane Katrina appears to have damaged the national psyche," he said.

Nationwide polls by the University of Michigan and the Conference Board in New York also have registered large drops in consumer confidence, tied in part to the rising price of energy and the ramifications of Hurricane Katrina.

"Historically, shocks have had a short-term impact on consumer confidence, especially on consumers' expectations," said Lynn Franco, chief researcher for the Conference Board, a corporate-sponsored think tank. "Fuel prices remain high, though they have retreated in recent days, and when combined with a weaker job market outlook, will likely curb both confidence and spending for the short run."

Franco predicted that as the Gulf Coast recovers from the recent hurricanes and job growth gains momentum, consumer confidence should rebound and return to more positive levels by year-end or early 2006.

The decline in confidence has coincided with a slowdown in hiring.

Gin's help-wanted advertising index declined 0.2 percent in San Diego in August, which mirrors a national trend in hiring. For instance, a survey released this week by SurePayroll, which tracks small-business hiring nationwide, reported a 0.13 decline in small business hiring last month.

"We've only had two down months in the past 20 months, so there's no big cause for alarm," said Michael Alter, SurePayroll's president. "If we see five or six months in a row of decreased hiring going forward, that will be the time to start worrying."

Despite the slowdown in hiring, however, the jobless rolls in San Diego County continue to go down. In August, the unemployment rate in San Diego County slimmed to 4.3 percent from 4.4 percent in July. The decline in the unemployment rate was the brightest spot in the USD index, followed by a jump in the local stock index, which rose 0.87 percent in August.

Housing construction - reflected by building permits for residential units - declined in August as San Diego's formerly red-hot housing market softened. Although permits for multifamily units rose slightly during the month, permits for single-family homes dropped substantially.

A growing number of economists warn that the housing market is slowing nationwide. This week, Standard & Poor's issued a report warning that housing prices seem likely to stop accelerating nationwide until wages begin to catch up with mortgage debt.

S&P chief economist David Wyss, who compiled the report, warned that in the nation's most overvalued markets there is a possibility of deep, disruptive price corrections.

"In urban areas on both coasts, for instance, housing costs have risen 30 percent or more above the normal home-price-to-income ratio, all the more alarming considering that in these regions this ratio was about twice the U.S. average before prices soared," Wyss warned. "This could make such places particularly vulnerable to economic shocks or rising interest rates."

Copyright © 2005. San Diego Union-Tribune.