OurCity San Diego March/April 2013 : Page 50

ECONOMIC BAROMETER How sequestration could lead San Diego into a recession San Diego’s economy is bracing to take the brunt of the federal government’s spending cuts under sequestration. And economists are concerned that, without a long-term resolution, the local econ-omy could fall into recession as a result. The cuts will remain in place unless Congress and the president can reach an agreement on less sweeping methods to reduce spending, versus these across-the-board reductions that are hitting the military, which, of course, has a huge presence in San Diego. “Our population is 1 percent of the national population,” said Kelly Cun-ningham, economist at the National University System Institute for Policy Research. “But we get about 3 percent of federal spending. So the impact of sequestration is tripled here.” National University estimates seques-tration will have a negative $5 billion impact on the local economy. Since the local gross domestic product is $187 bil-lion, that would represent a 2.7 percent reduction in growth. The San Diego economy has been growing the last two years by a tepid 2.3 percent. That means sequestration could wipe out gains in other industries and –10% ...– 9% MO N T ..– %...0....2%.. .4% 4..–2 6..– ...6 EASON AL ...– A N G E S % Y % H A D .. 8 ANNU C LY AL CH SAN DIEGO STOCK INDEX A J .10% %. ..9 D 8% T E U H S NG E– ..........–15% ..... .... . –1 0% .... % .–5 .... ........0............5 %. .... ... .. . 0% .1 ... . ...........20% ..15% ..... ..... .... 25 8.5% January 2013 Monthly Change –0.7% (seasonaly adjusted) .... % 25 % .–20 ..... –3 2% Monthly Change Monthly Change RESIDENTIAL BUILDING, ANNUAL CHANGE, 33% UP Units authorized for const. in S.D. Co. NEW BUSINESS LICENSES, ANNUAL CHANGE, UP 27% Issued by City of San Diego 50 Our City San Diego | Mar/Apr 2013 % SAN DIEGO UNEMPLOYMENT – 9 % .6

Economic Barometer

How sequestration could lead San Diego into a recession

San Diego’s economy is bracing to take the brunt of the federal government’s spending cuts under sequestration. And economists are concerned that, without a long-term resolution, the local economy could fall into recession as a result.

The cuts will remain in place unless Congress and the president can reach an agreement on less sweeping methods to reduce spending, versus these acrossthe- board reductions that are hitting the military, which, of course, has a huge presence in San Diego.

“Our population is 1 percent of the national population,” said Kelly Cunningham, economist at the National University System Institute for Policy Research. “But we get about 3 percent of federal spending. So the impact of sequestration is tripled here.”

National University estimates sequestration will have a negative $5 billion impact on the local economy. Since the local gross domestic product is $187 billion, that would represent a 2.7 percent reduction in growth.

The San Diego economy has been growing the last two years by a tepid 2.3 percent. That means sequestration could wipe out gains in other industries and Push the local GDP into a decline.

“Other parts of our economy are still healthy,” Cunningham said. “But to take that kind of a hit could really hurt San Diego.”

Mark Cafferty, CEO of San Diego Regional Economic Development Corporation, said the sequestration cuts would have a significant impact.

“The impact to our military economy is significant,” he said in a letter to board members and others. “The impact to our innovation economy is troubling. The impact to our tourism economy compounds the problem we already have with the region’s TMD (Tourism Marketing District) standoff. Effects throughout the local economy will be felt in the coming months and thousands of jobs are at risk, quickly making this a harsh reality for families and businesses across the region.”

The San Diego unemployment rate has dropped from a peak of 10.9 percent in December 2009 down to 8.5 in January. That’s an increase from the December 2012 rate of 8.1. Economists, however, do not expect that rate to go up by much due to the cuts. The reason is that most federal employees will be furloughed and not terminated.

The Department of Defense will furlough 25,000 civilian military employees one day a week — resulting in a 20 percent pay cut — beginning in late April. Other federal employees, including FBI agents, will see a 10 percent reduction starting in April. The reductions will mean less discretionary spending for thousands of San Diego families.

The impact will be even greater on defense contractors.

“Defense contractors are going to be the first ones let go — and we know some of them are already starting to receive pink slips,” said Larry Blumberg, executive director of the San Diego Military Advisory Council.

Blumberg said it has been notified of 1,321 job losses in the shipbuilding industry. The aerospace and SPARWAR industries are also expected to get hit hard. SPARWAR is the Navy laboratory that researches, develops and tests a number of communications, intelligence and surveillance projects.

But even though the defense industry is an estimated one-fourth of the local economy, other industries will be impacted – including medical research that relies on federal grants.

“These cuts have the potential to set back medical research and our innovative economy by a generation or more,” Cafferty wrote.

Cunningham said the federal government needs to reduce spending but that sequestration is not the intelligent approach. He said if the government focused instead on core strength and only cut nonessential areas, San Diego would fare much better.

“If they did it right, the San Diego defense industry could come through well,” he said. “We are shifting our military focus to the Pacific, which bodes well for San Diego. And we are the epicenter of the development of unmanned aerial vehicles. The stupid thing is cutting everything, especially the essential things.”

Cunningham said defense contractors are placing everything on hold and only a long-term resolution would avoid any negative impact on the local economy.

“If Washington pushes this off again, defense contractors will have to keep everything on hold,” he said. “A black cloud hanging over us would slow the economy alone.”

Read the full article at http://www.bluetoad.com/article/Economic+Barometer/1343729/150551/article.html.

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