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Tuesday, Jun 25, 2024

Dark Clouds & Silver Linings

Even the most optimistic industry boosters are buckling down for a tough year ahead, which is expected to include more layoffs, housing foreclosures and difficulty for businesses across nearly all sectors.

San Diego’s economy , which was at the epicenter of the housing collapse , appeared initially to withstand the drag of the real estate downturn. But it probably won’t be saved from subsequent blows of the national recession.

Home prices continue to fall, losing 40 percent of their value since the market peak of November 2005, and foreclosures accounted for more than half of all home sales in November, according to MDA DataQuick of La Jolla.

The national credit crunch and loss of confidence could prolong the overall economic downturn.

“Locally, I’m not sure there’s anything we can do. It’s a national and worldwide problem beyond our local control that has to be resolved before we see economic growth or stimulus,” said Kelly Cunningham, an economist with the San Diego Institute for Policy Research, a nonprofit think tank that studies the economy. “This is clearly the worst financial market we have seen since the Great Depression.”


The county’s unemployment rate , which rose to 6.8 percent in October, compared with 4.8 percent in October 2007 , is expected to continue climbing when the November and December numbers are finalized.

In 2009, venture-backed businesses in technology and biotech sectors will find funding in short supply, forcing many to survive by trimming costs through job cuts and finding revenue through licensing deals and strategic partnerships. Some will have to merge, others will disappear.

San Diego’s tourism industry, so dependent on national travelers, is expected to see smaller profits. The San Diego Convention Center’s events calendar is booked, but downtown hoteliers are bracing for a decline in revenues as guests shorten their stays.

Retail sales will suffer as shoppers continue to cut back spending in the midst of job insecurity, falling home equity and hard-to-obtain credit. That’s likely to hurt consumer electronics manufacturers such as Qualcomm and the many local companies that supply them.

“I think we’ll see more job losses,” Cunningham said. “The year-over-year numbers in October saw a decrease of 12,000 jobs. We haven’t seen the worst of it yet.”

He expects the jobless rate to crest at more than 8 percent next summer.

Many of those who work in the financial services sector say the recession will almost certainly continue for most of next year.

Stabilizing Factors

Yet San Diego has a few life rafts. Reliable defense spending, which ironically was the cause of the recession in the early 1990s, will keep shipbuilders employed and technical engineers working on research and development.

The county’s limited supply of developable land should also position the region for a real estate turnaround once foreclosures work their way through the pipeline and prices stabilize.

There are fewer vacant new homes on the market, as builders pull back on new projects and lower home prices to get projects off their books. New home building permits fell to 87 in November, the lowest monthly total in 20 years, according to the Construction Industry Research Board.

“I just think overall, with what’s going on with the economy and individuals , it all starts with the consumer, especially with residential housing,” said Anthony Botte, who oversees the Western region for Hearthstone Advisors, which financed new home communities in San Diego. “Consumers are tapped, and now, layer on the reverse wealth effect that’s happened in the stock market , most people’s portfolios are down 40-50 percent.”

One bright spot is falling gas prices, which are averaging under $2 a gallon. According to University of San Diego economist Alan Gin, every 10-cent drop per gallon of gas typically equates to $7 million a month in consumer spending for the local economy.

That may have boosted retail sales in November, which were not as glum as some economists had expected.

Diversification Helps

The region’s diverse technology and biotechnology sectors should also keep some areas of the economy afloat.

Home to the nation’s third-largest cluster of biotechs, the county should benefit from increased federal spending in the Obama administration in stem cell research and health care, analysts say.

Kevin Carroll, executive director of the AeA San Diego Council, a technology trade group, said: “We’re pretty diverse. So other clusters can absorb one cluster’s slowdown. We’re not all telecom, or all software we’re a little bit of everything, which is good. And the fact that you don’t have Fortune 500 companies insulates us a little (from) huge worker gluts. You don’t find yourself with 1,000 engineers on the market. Layoffs here are small and easily absorbed.”

Deer In Headlights

The venture capital market , which never fully recovered after the dot-com bust of 2000 , is on life support, says Jeremy Glaser, a local attorney with Mintz Levin Cohn Ferris Glovsky and Popeo, who represents technology and venture capital companies in mergers and sales.

“Venture capitalists are like deer in headlights. They’re frozen now,” said Glaser, who doesn’t expect the venture capital market to return until 2011.

His advice to clients is to control expenses, find revenue as quickly as possible and learn how to bootstrap.

“In 2009, the first thing we’ll see is bargain sales of companies out of their VC portfolio,” he said. “Venture capitalists are going to sell some of their underperformers in order to get liquidity and get exits and build up their cash reserves.”

Once they decide on those most likely to succeed, venture capitalists will leave the weaker businesses to fend for themselves or pair two together within their portfolio.

“I think we’ll also see venture capitalists combining companies on the hopes that one plus one equals three,” Glaser said.


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