Business Leaders’ Outlook Glum : Recession: The slump in retail sales, rise in unemployment and drop in construction activity are among the negative indicators, they say.
Economists who herald an imminent economic recovery obviously have not been talking to San Diego businessmen and women, who these days are heralding little but gloom and doom.
In interviews Monday, a cross section of San Diego business leaders found little reason to hope that the current malaise will soon improve. From retailers and defense contractors to home builders and restaurant owners, all expressed unvarnished pessimism, pointing out the slump in retail sales, the rise in local unemployment and the drop in construction activity, among other negative indicators.
The gap between economists’ predictions and what businesses are experiencing in the “trenches” may explain why the economy is a hot topic of conversation these days, said Lynn Reasor, senior economist at First Interstate Bancorp. “According to the latest polls, 80% of the economists think the recession is over, but 80% of the public believes it has not ended.”
That the recession has not ended for some local businesses was made emphatically clear in interviews with several corporate chiefs:
* “Since the Price Club has been in existence, I have never seen a more difficult economy than this one in terms of consumers restraining their spending and the numbers of people who are out of work,” said Price Co. Chairman Robert Price, head of the Price Club membership warehouse chain, based in San Diego.
* “With each successive month, we are more disappointed and shocked at the building permit data we see,” said Matt B. Herndon, supervisor of economic forecasting at San Diego Gas & Electric Co., whose financial health depends to a large extent on growth in industry and construction. “In the month of August, for example, there were literally no apartment building permits granted or requested” in San Diego County, he said.
* “The issue is consumer confidence. People have seen too many industries downsizing and middle-management jobs lost. They have seen the signs that all is not well, and they are responding to that by being cautious. And being cautious means they don’t buy new cars and new houses,” said Keith Johnson, president of Fieldstone Co., one of San Diego County’s largest home builders.
The most recent statistics paint a grim picture indeed of local economic health. Unemployment in San Diego County was 6.2% in September, and will exceed 6% on an annualized basis for the first time since 1984. What’s worse, job formation in the county has ceased after a five-year period during which an average 30,000 jobs were added to the county payrolls.
Total jobs will decline this year by about 10,000 countywide from the total last year, due to declines in manufacturing, construction and retail job sectors.
With fewer jobs and higher unemployment, it’s not surprising that countywide retail sales were off nearly 6% over the first eight months of 1991 from the same period last year, according to U.S. Census Bureau figures. The drop approaches 10% after adjusting for inflation.
“With lots of layoffs in aerospace, defense and with the real estate market in tough shape, banking not in good shape, all of those things influence us. All we can do is keep our expenses monitored and be as aggressive as we can to offer new products and services that will give us extra sales,” said Price, whose company operates 72 Price Clubs in the United States and Canada.
New-car dealers have especially been hurt by the recession as sales at county dealerships have slumped an average of 10% to 15%, according to Dean Mansfield, executive vice president of the New Car Dealers Assn. of San Diego County.
Layoffs and other corporate cost reductions mean consumers and businesses have less disposable income to spend, which in turn has meant tough times for San Diego County restaurateurs. Gross receipts are down about 6% to 8% this year over last year, according to the San Diego Restaurant Assn.
“We kind of went kaput when Iraq invaded Kuwait, and since that time we have taken a dip,” association spokesman Paul McIntire said. “Early this summer, we saw some signs of recovery, and we were looking for August, our peak season, to confirm that recovery had taken place. But unfortunately, it did not, and August was lower than normal for our business.”
The restaurant industry’s difficulties are a reflection of the “direct and instantly recognizable link between the industry and the mind-set of the consumer. When times are good, we are one of the first to feel it, because people go out dining more frequently and live the good life. When people are uncomfortable about the economic climate, they stay away,” McIntire said.
The local construction industry, a key component in a recovery because of the beneficial ripple effects on the local economy, is depressed by any measure. The glut of unleased office and retail buildings has brought commercial construction contracts to a standstill. Residential unit permits in the county will fall short of 9,000 units in 1991, off from the 14,800 units permitted last year and the record 44,800 units in 1986, said Bob Morris, executive vice president of the local chapter of the Building Industry Assn.
“You get the highest roll for the dollar in the construction industry. Every dollar spent creates $2.50 spent in others. In every other industry, it’s one to one. So when construction is sick, the entire country is sick. And the bad thing is that the country cannot recover until real estate recovers,” said Alan N. Nevin, director of real estate research at HomeFed Bank.
Sales of existing homes countywide will fall short of last year’s 18,436 units sold, despite the lowest mortgage rates--as low at 8.75% currently on a 30-year fixed-rate loan--in nearly a decade and prices that have remained virtually stable for two years, according to surveys by the San Diego Board of Realtors. A stagnant resale market means fewer buyers can move up to the generally more expensive new homes sold in subdivision tracts.
Although San Diego County has been spared the base closings and wholesale aerospace layoffs that have devastated other parts of the state and nation, local defense contractors are bracing for the inevitable effects of defense budget cutbacks.
And any significant reduction in the San Diego’s defense industry will affect the local economy as a whole because the industry accounts for roughly 17% of the $58-billion “gross regional product,” the sum of all goods and services in the county.
Frank Thompson, a division vice president of operations with General Dynamics, San Diego’s largest employer, with 17,500 workers, said the issue is no longer if but by how much defense budget cutbacks will hurt local defense firms. Although it’s too early to say how companies such as his will be affected by the cutbacks, General Dynamics is sure enough of some impact that it is looking to shift into unspecified non-defense business, Thompson said.
“The perception that the defense budget will be substantially reduced is definitely what we see,” said Thompson, who is operations chief at General Dynamics’ Convair Division. “The budgets have been reducing in real dollars for three or four years now, and it will continue to be reduced. Reductions of 5% a year--or even more--are the expected values.”
SDG&E;’s Herndon attributed the drop in manufacturing jobs in some degree to the “fact that Southern California is being and will continue to be affected by the end of the Cold War with cutbacks in defense. For the next five years, defense will be a negative in contribution to San Diego’s growth.”
Although insisting that the regional economy has passed the low point, Reasor, the First Interstate Bancorp economist, also acknowledged that the economy has been flat for five months, a state of affairs that has led to feelings of a “general malaise in the business community.”
“The recovery has been so slow that we are not that very far off the low point, and we are very far from healthy levels of business and economic activity,” Reasor said.
