S.D. Struggles in 1991 as Recession, War Take Heavy Toll on Economy : Finance: Home and retail sales drop while unemployment rises. Growth of biotechnology companies provides one of the few bright spots in an otherwise gloomy year.

Rocked by the one-two punch of the Persian Gulf War and encroaching nationwide recession, San Diego’s economy limped to its worst performance in a decade during 1991, registering sharp declines in areas that matter most: jobs, housing sales and retail activity.

The temporary loss of more than 80,000 locally stationed uniformed military personnel to overseas deployment in the war against Saddam Hussein was keenly felt on all levels of San Diego’s defense-reliant economy over the first half of the year. The second half was hurt by the deepening of the recession and the ebbing of consumer confidence.

No single event of the year carried more symbolic importance than the federal takeover in August of insolvent Great American Bank, a 106-year-old institution whose mortgage lending, subdivision development and corporate philanthropy made it one of the city’s leading corporate citizens. San Diego’s other major S&L;, HomeFed Bank, became technically insolvent and seemed headed for a takeover as well.

The few bright spots included San Diego’s growing roster of biotechnology companies clustered around the research hubs of Scripps Research Foundation and UC San Diego. Local biotech firms cashed in on a nationwide rush to go public in 1991, raising at least $550 million in total stock offerings, much of which will eventually be circulated back through the local economy.

Moreover, employment at local biotech and high-technology firms grew 19% over the year, according to a UC San Diego Connect study, a growth curve that defied the declining overall jobs trend in the county.

Overall, however, the local economic picture was exceedingly grim. More San Diegans are out of work than at any time in nine years. The county’s unemployment rate is expected to close the year at 6.4%, up from 4.5% in 1990, said Jack Nowell, labor market analyst for the state Employment Development Department.

And, after a decade of 3% to 5% annual growth in the county’s employment base, the total number of jobs is expected to decline this year by about 8,000, a 1% drop from the 995,000 total at the end of 1990, Nowell said.

The region’s economic engine slipped into reverse in 1991. The county’s gross regional product--the sum total of all goods and services produced--actually fell by 1% in inflation-adjusted, or real, dollars, worse than the U.S. decline of 0.5% in real dollars, said Max Schetter, the Greater San Diego Chamber of Commerce’s director of economic research.

“We used to pride ourselves in our economy outperforming the state and nation. We couldn’t say that about 1991,” Schetter said.

The most dramatic sign of local economic malaise was perhaps the steep decline in retail sales. According to its regular survey of San Diego retailers by the U.S. Department of Commerce, retail sales for the first 10 months of 1991 were down 5.7% in absolute dollars from the same 10 months last year. The drop was even sharper if factoring in the 4.2% inflation rate for the county.

The decline in San Diego’s first-quarter retail sales, when the Gulf War came to a mercifully brief climax, was the worst quarter-to-quarter decline seen locally in 30 years, Schetter said.

The precipitate decline in local retail sales--worse than the state and U.S. rates--was attributable in large part to consumer fears generated by the Persian Gulf War and the loss of so many shoppers to overseas deployment. But retailers who hoped a Christmas shopping surge would bail them out of a lackluster year were disappointed.

The lack of consumer confidence was also reflected in the anemic housing market, which struggled despite fixed-rate mortgages that were at their lowest rates since 1974. Although prices remained relatively stable for the second straight year, sales of existing homes through November totaled 14,787 houses and condos, a 15% decline from the number of units sold over the same 11 months in 1990, according to the San Diego Board of Realtors.

Sales of new homes in subdivision tracts and condominium developments were only slightly better, totaling about 7,000 new units for the year, or even with the number sold last year, according to Russ Valone, president of Market Profiles of San Diego, a San Diego-based market research firm. The average price of a subdivision home sold in 1991 was $240,000, about the same as 1990, he said.

Defense spending, which is the second-largest component of the local economy after manufacturing, remained about flat in 1991 at about $9.8 billion in total payroll and defense contracts. But Schetter’s outlook is ominous: defense dollars will probably shrink in coming years by an average annual rate of 5% as a result of the “peace dividend” and the end of the Cold War.

General Dynamics, the county’s largest private employer with 17,000 workers, is responding to defense spending cutbacks by refocusing on its core businesses--fighter aircraft, submarines and army tanks. As part of its strategy, General Dynamics might sell off the assets of some divisions in which does not enjoy market dominance. Analysts have suggested that General Dynamics’ San Diego-based missile and electronics operations are candidates for sale.

General Dynamics employees also are waiting to see if defense spending cutbacks will force further cuts in existing Defense Department programs. General Dynamics already has laid off 300 employees following funding cuts in an advanced cruise-missile program.

Defense cuts aren’t the contractors’ only nemesis. Rohr, Solar Turbines and other contractors have threatened to accelerate the movement of manufacturing jobs out of state because of what they view as an increasingly hostile business environment characterized by high fees and taxes.

Tourism, San Diego’s third-largest industry, also was hurt by the war and growing consumer fears.

Basic tourism indexes for October, the most recent figures available, showed tourism to be “flat” compared to the same month a year earlier, according to the San Diego Convention & Visitors Bureau. Occupancy rates for the year to date were also flat.

“Overall there was little change, but what change there was was up slightly from the previous year,” ConVis President Reint Reinders said in a prepared statement released before the Christmas holiday.

While the glut of new rooms has stalled occupancy rates, total room nights sold on a year-to-date basis rose by 3% to 8.6 million. That increase in room nights prompted total visitor spending through October to rise by 4.9% to $2.9 billion, according to ConVis.

But the past year confirmed what local tourist officials already knew: San Diego faces a glut of hotel rooms that will get worse before it gets better. San Diego Convention & Visitors Bureau officials have estimated that occupancy rates, which historically were among the nation’s highest, will fall to 58.3% during the next five years as more rooms come on line.

To make matters worse, hotel operators are dealing with that glut at a time when Americans are displaying a lack of confidence in the nation’s economy by cutting back on travel and other discretionary spending.

An unalloyed economic highlight of the year was the plethora of stock offerings by San Diego biotechnology firms that demonstrated Wall Street’s faith in what is largely a home-grown science. San Diego companies raised about $550 million through public offerings in 1991, according to Jim Pope, a partner in Ernst & Young’s San Diego Office.

Nationwide, the nation’s biotechnology industry raised $3.5 billion through public offerings during 1991, according to Jim McCamant, editor of the San Francisco-based Medical Technology Stockletter.

“It’s been a big year for raising money,” McCamant said. “I would guess that more (public) money was raised in 1991 than had been raised by the industry previously.”

Some local companies went the public-offering route more than once. Gensia Pharmaceuticals did two secondary offerings, netting a staggering $110 million. Gensia also spun off a subsidiary, Aramed, which completed an initial public offering that garnered $54 million. Employment at Gensia, which is developing drugs to prevent blood clotting, grew over the year to 226 employees, from 82 in 1990.

The rush toward the initial public offering and secondary stock window shows no sign of abating. On Dec. 24, Advanced Tissue Sciences, formerly Marrow-Tech Inc., filed with the Securities and Exchange Commission for a secondary offering of 2 million shares of common stock.

“My understanding from talks with investment bankers is that the pipeline is still full,” said Gensia vice president Martha Hough. “Some companies are waiting for the end of the year to come. . . . They’re waiting for the holidays to end, waiting to go (to market) during the first quarter of next year.”

“The local economy is going to benefit from the financing that has occurred,” Hough said. “You’ll see continued recruiting of highly skilled people, and the whole infrastructure is going to grow. But it will be good for the economy as a whole.”

Pope suggested that more and more San Diego biotechnology firms will augment their public offerings through “strategic alliances” with large, cash-rich drug companies. “That might be the next phase when the public market dries up,” Pope said.

McCamant said biotechnology executives are rushing to the public markets because “they know this window isn’t going to continue. . . . It can’t continue. So they’re all trying to give it a shot.”

Another economic bright spot was San Diego’s landing of the ITER fusion energy research project, which will bring $200 million in investment to the area over several years, Schetter said.

Biotechnology Stock Offerings This is a partial list of stock offerings by San Diego-based biotechnology companies. Dollar figures indicate gross receipts. IPO denotes initial public stock offering. Gensia Pharmaceuticals: $36 million Gensia Pharmaceuticals: $74 million Aramed: $54 million Innume Response Corp.: $27.5 million (IPO) Innume Response Corp.: $47.2 million Molecular Biosystems: $43.7 million Isis Pharmaceuticals: $25 million (IPO) Isis Pharmaceuticals: $12.5 million Cytel: $52 million (IPO) Idec Pharmaceuticals: $45 million Agouron Pharmaceutical: $35 million Amylin Corp.: $33 million (IPO pending) Genta: $25 million (IPO) Advanced Tissue Sciences: $31 million (pending) Protein Polymyer: $8 million (pending) Sources: Ernst & Young’s San Diego office, Medical Technology Stock Letter