Is the Tide Rising or Ebbing?
Executives Ponder Which Direction the Economy Will Take.
BY MARTIN HILL
Editor
President Ronald Reagan was fond of saying, “A rising tide lifts all boats.” Yet with a slowing economy suddenly jarred by the Sept. 11 terrorist attacks in New York and Washington, D.C., business executives in San Diego appear to be wondering whether the economic tide is flowing or ebbing.
The results of the 12th annual San Diego Business Journal/Deloitte & Touche Economic Outlook Survey indicate local businesspeople are struggling to remain optimistic about the new year. Yet with a sagging economy, the war in Afghanistan and the continuing threat of terrorism in our own homeland, maintaining that optimism appears to be growing increasingly more difficult.
“It’s difficult to be enthusiastic about taking entrepreneurial risks when faced with basic security risks,” said one respondent, in an anonymous written comment.
For the 12th consecutive year, the Business Journal has joined with the accounting firm of Deloitte & Touche LLP to check the pulse of San Diego’s economy. More than 1,400 local business executives in 10 different industries were surveyed during November, with a total of 212 responses, or a response rate of 14.4 percent. Respondents were also encouraged to provide anonymous comments along with their survey answers.
The responses show a declining optimism about the national, state and local economy over previous years. Nevertheless, their view remains far from pessimistic.
Asked how the national economy will perform in 2002, 36 percent expected to see a decline, a substantially higher percentage than those who predicted a decline last year.
Yet, in response to the same question, 38 percent expected to see the national economy improve, up from only 17 percent who expected that last year. Another 26 percent expected it to remain the same.
Executives in the real estate and building industries, and in the service industries remained the most optimistic. Biotech and health care executives held the most pessimistic views.
Predictions about California and San Diego’s economy in the new year drew a similar three-way response.
Thirty-five percent expected to see improvements in California’s economy, up from only 25 percent last year. Thirty-eight percent expected to see a continuing decline, an increase over last year’s 12 percent who predicted a decline. Thirty-one percent expected little change.
A nearly equal percentage of respondents expected to see San Diego’s economy improve and decline. Thirty-two percent predicted improvement, the same as last year, while 30 percent predicted decline.
The latter was a substantial jump over the 14 percent who expected a slump last year. Only 38 percent expected little change in the local economy.
The survey’s respondents had bad news for Fed Chairman Alan Greenspan and good news for President George W. Bush’s economic advisers. Asked what would be most effective in reviving the U.S. economy, only 3 percent of the respondents said more interest rate cuts.
However, 57 percent of those surveyed said larger tax cuts would stimulate the economy. Another 40 percent said infrastructure improvements would help.
Despite uncertainty about the current economy, local business executives remained enthusiastic about San Diego’s economic future. Asked what they thought the outlook was for local business growth over the next three to five years, 75 percent of the respondents said it was good to excellent. Twenty-three percent said it was fair, with only 2 percent saying it was poor.
How Industries Fare
Few of the respondents were pessimistic about the nationwide well-being of their industries. Only 20 percent expected their industries as a whole to be worse off this year, with the tourism and financial industries being the gloomiest.
On a whole, 38 percent of those surveyed expected to see improvements in their industries this year, with 42 percent seeing little or no change ahead.
Those overall responses were nearly mirrored when respondents were asked to evaluate the health of their industries in San Diego. Unlike the outlook for their industries nationally, both tourism and financial executives were substantially more optimistic about the health of their industries locally.
Only 13 percent of tourism executives and 11 percent of financial executives polled predicted a local decline in their industries, compared to 40 percent and 37 percent, respectively, who thought their industries would falter nationally.
A larger percentage of executives , 18 percent , expected a drop in company sales this year compared to last year, but the vast majority predicted sales would pick up. In fact, 26 percent of those polled expected their sales to increase by more than 10 percent.
Yet a third of the respondents expect those sales to result in decreased income for their companies, and another 23 percent expected no change in their company’s income. Forty-four percent expected to see increases in company profits, with 25 percent predicting increases of greater than 10 percent.
Despite the gloomy outlook for profits, polled executives indicate massive layoffs and salary cuts aren’t necessarily in the offing.
Only 17 percent of the respondents predicted there would be manpower reductions in their companies this year, and most of those indicated the reductions would be not be greater than five percent.
On the other hand, 47 percent of the respondents expected to see employee growth at their companies. The remaining 37 percent expect no change either way.
The survey’s respondents overwhelmingly believe their employees would receive raises this year, most within the 3 to 6 percent range. Only 1 percent predicted pay cuts at their firms, while 14 percent said there would probably be no changes in compensation this year.
Energy, War Impacts Minimal
A year marred by an energy crisis followed by terrorist attacks and war appears not to have heavily impacted those firms surveyed.
The majority of respondents , 56 percent ,said rising energy costs in 2001 had only a “minor impact” on their business, with 33 percent claiming the power crisis had a “significant impact.” Tourism and biotech reported the most significant impacts.
“Energy deregulation was damaging to business and the economy,” wrote one biotech executive.
Asked what effect the Sept. 11 attacks and ensuing war had on their company policies, only 39 percent of the respondents said safety and security policies had been changed. Another 24 percent said their travel policies had been impacted, too. Another 19 percent said they had improved their data back-up and storage procedures.
The Federal Reserve Bank’s repeated prime interest rate cuts also appear to have had minor impact on local businesses. Only 14 percent of those surveyed said the cuts had had a “significant” impact on their business. Fifty-four percent reported a “minor” impact, and 32 percent said the cuts had no impact at all on their firms.
Quality of life issues seem to be a greater concern to local business executives. Asked what as the No. 1 challenge facing San Diego, 48 percent said the lack of affordable housing. Another 40 percent said it was traffic congestion. Twelve percent said it was poor infrastructure.
Despite these problems, San Diego still gets a majority approval rating for its ability to retain business, albeit a small majority. Fifty-one percent said the region had improved its ability to keep companies here over the past year.
However, 49 percent of the respondents weren’t so charitable. Nevertheless, few of those polled , only 4 percent , were considering leaving San Diego.
On the contrary, 29 percent of the respondents said their companies were planning to expand their facilities in 2002 and, of those, 84 percent said the expansion would take place in San Diego County.
“We have too much good weather in San Diego for business owners like me to seriously consider moving under normal circumstances,” said one manufacturing exec. “We live where we work, and it doesn’t get much better than here.”
Most of the respondents , 80 percent , said they considered California a good state in which to do business, down only slightly over the last two years.
