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Sunday, Aug. 17, 2008

Forecast for county: Not grim, not good

A national research firm says the local economy fits the description of a recession, but others disagree

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Even if the slower-growing national economy is not officially in recession, one nationally known economics research firm says San Luis Obispo County is because of its rising unemployment.

And conditions aren’t expected to improve appreciably anytime soon, according to analysts at Moody’s Economy.com. The good news is that the county’s large agricultural industry, its accumulation of wealth per capita and a relatively small subprime mortgage problem have managed to offset diminishing returns, at least compared to many other areas of the country.

“It’s not that we expect the San Luis Obispo County metro area to fall off the cliff,” said Chris Lafakis, associate economist at the West Chester, Pa.-based arm of Moody’s Investors Service. “We just don’t expect it to rebound sharply with the next year and a half.”

Differing opinions

But economist Bill Watkins, executive director of the UCSB Economic Forecast Project, said his organization’s recent estimates show no recession here, based on data showing the local economy has not contracted.

Even if Moody’s conclusions might technically be wrong, Watkins noted that there is often disagreement in economic circles about what constitutes a recession.

And by all accounts, the debate is beside the point when people are losing their jobs and businesses are growing very little, if at all, he said.

“In some sense, it’s just a silly quibble,’’ Watkins said. “For most people, it feels like a recession, whether or not it meets the technical definition.”

Michael Manchak, president and chief executive officer of the Economic Vitality Corp. of San Luis Obispo County, also is not convinced that the assessment by Moody’s Economy.com is correct. A recent business survey by the EVC shows that economic conditions are posing challenges for local businesses and industries, many of which reported a decrease in revenues this year.

But Manchak said that could be interpreted as a slowdown, not a recession.

He noted that people seeking to start businesses have recently approached the EVC.

“Traditionally, this area has been insulated and isolated,’’ he said. “This is no different. We’re seeing worse things happening in other parts of the state.’’

Lee Ferrero, president and chief executive of the Private Industry Council of San Luis Obispo County, said that an erosion in the confidence of the economy is only the beginning of what he believes is a recession.

“Businesses that were thinking about new directions or new product lines — they might think this is the wrong time to jump into that,’’ he said. “I also just think we’re all feeling the softening of everything. When you have that happen, that is when an economy suffers.’’

Defining a recession

Two straight quarters of shrinking gross domestic product— the total value of the nation’s goods and services — is often cited as the definition of a recession.

Moody’s Economy.com defines recession at the metropolitan- area level as a clear contraction in employment and manufacturing activity, according to Steve Cochrane, an economist with the firm. Moody’s relies on employment and production numbers supplied by state and federal agencies and research organizations that track the economy.

Cochrane said that job losses in the housing market—including construction and real estate-related services—and in the tourism industry are the biggest factors dragging down the San Luis Obispo County economy.

The National Bureau of Economic Research declares a recession when there is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real (gross domestic product), real income, employment, industrial production and wholesale-retail sales.”

Based in Cambridge, Mass., the nonprofit economic research organization is considered by economists and the government to be the official arbiter of recessions.

Rising unemployment

The unemployment rate in San Luis Obispo County was 6.2 percent in July, up from a revised 5.7 percent in June, and above the year-ago estimate of 4.7 percent, according to figures released Friday by the state Employment Development Department.

This compares with an unadjusted unemployment rate of 7.6 percent for California and 6 percent nationwide during the same period.

While there was no breakout of jobs related only to the housing industry, the construction and natural resources and mining category was down 2.7 percent, according to Moody’s Economy.com. That could be attributed to decreased building activity, with residential permits for construction down 30 percent.

Personal income strong

San Luis Obispo County has a per-capita yearly income of nearly $38,000, according to Moody’s figures.

While that number is about $750 less than the national average, the county has grown faster in per-capita income than the national average — with the exception of 2005 — every year since 1995.

That should help keep the local economy stable, Lafakis said.

Since 2005, personal income has gone up 6.4 percent in the county, compared to 4.8 percent nationwide.

San Luis Obispo County also might fare better than many parts of the country over the long haul because of its large number of employers in health care and education, which prove to be a stable environment for long-term job growth, Cochrane said.

Technology might also generate upside potential, particularly with Cal Poly leading advances in research and the solar industry proposing to build plants on the Carrisa Plains, in the eastern extreme of the county.

Key employers struggling

Tourism, which has frequently outperformed other sectors of the local economy, is now proving problematic.

Employment in leisure and hospitality services dropped this year by almost 6 percent.

And Pacific Gas and Electric Co.—the county’s top private employer—shrank its workforce by more than 100 employees this year.

That contributed to a 9.8-percent drop in the transportation and utilities category this year.

While government jobs have grown by 6.2 percent this year, they have started to drop in recent months. Job numbers in the public sector are expected to shrink in the coming year because of state budget cuts.

“Although there’s often a lag behind other industries, government does well in the good times, and bad in the bad times,” Lafakis said. “I expect more weakness to materialize in the next year.”

The state and local governments employ about 20 percent of workers in the county, according to Moody’s numbers.

Nonetheless, San Luis Obispo County’s doldrums are being offset somewhat by burgeoning, albeit fuzzy, employment numbers in agriculture.

Although Moody’s payroll survey of businesses and institutions showed a 1 percent drop in employment, that survey did not factor in agriculture.

On the other hand, a recent household survey by the U. S. Bureau of Labor Statistics included agriculture-related jobs, and that survey showed a 0.1 percent uptick in job growth.

Therefore, agriculture appears to be shoring up employment in the county, Lafakis said.