UNIVERSITY OF SAN DIEGO / Summer 2009
[downturn]
Plain Talk
Economics guru Alan Gin saw it coming

Since 1991, associate professor Alan Gin has been releasing the Index of Leading Economic Indicators for San Diego County; the monthly report has made him a popular news source. In fact, he’s given hundreds of interviews to local and national media. Gin came to USD in 1988. He has taught courses in subjects ranging from the Principles of Economics to Statistics to Public Finance to the Economic Development of Asia and beyond. In 2001, he was awarded the USD Parents Association Award of Excellence after being nominated by one of his students and was voted “Professor of the Year” by USD graduate students for the 2002-2003 academic year. USD Magazine recently asked him questions about his take on the state of the economy.

WHAT IS THE INDEX OF LEADING ECONOMIC INDICATORS? It’s a monthly report on the local economy that’s modeled after the national Index of Leading Economic Indicators. It’s called ‘leading’ because it’s supposed to change ahead of the economy. So if you see this thing turning downward, that’s going to signal that the economy is going to turn downward in a certain number of months.

DID THE INDEX PREDICT THE DOWNTURN? I think it did. It’s been down for 34 out of the last 35 months. It might have signaled early that something bad was happening in terms of the local economy. But in particular, it’s accelerated on the downward side in the last five months. And that gave us a slight projection that the job situation has just deteriorated severely.

WHAT DOES THE INDEX SAY ABOUT THE CURRENT ECONOMIC SITUATION? It’s saying that there’s no upturn in sight right now. The last five months have been the five biggest drops ever that we’ve had in the index, including the biggest drop ever in February. It’s stunning how fast things have deteriorated. That’s the surprising thing to me.

HOW MUCH WORSE DO YOU THINK THINGS ARE LIKELY TO GET? I don’t think things can get much worse, but they are likely to remain bad for a while. 

CAN THE BLAME FOR THE ECONOMIC CRISIS BE LAID AT ANY ONE INDUSTRY OR GROUP? I think there is a lot of blame to go around, but I think most of it has to go on the financial institutions that made the bad mortgage loans to people who should not have gotten the loans. Also, some of the blame belongs to the other financial institutions that purchased these loans and created exotic financial instruments with them.

WHERE ARE WE HEADED? I think this signals that at least locally, we’ve got difficult times for the rest of the year. We’re really going to need the national economy to turn around to help pull us out of this situation.

I’m thinking that the stimulus package that was recently passed will help. I’m thinking that these rescues — bailouts of the financial institutions — will help. I think efforts to shore up the housing market will help as well. We’re seeing some signs that at least sales will start to pick up. Housing is what got us into this problem in the first place, so if you can get some stability there, that will help the financial institu tions and everybody should benefit from that.

WHAT DO YOU EXPECT THE STIMULUS PACKAGE TO DO TO JUMP-START THE ECONOMY? All aspects of the stimulus package are important: spending on infrastructure to directly create jobs, getting money into people’s hands through tax cuts and increased payments to the poor and unemployed so they can spend it, and relief to the states so they won’t have to lay off as many people due to budget problems. 

WILL THE STIMULUS ‘TRICKLE DOWN’ TO THE AVERAGE CONSUMER? Most consumers should get something, such as lower taxes. The major benefit will be that the stimulus package may end up saving their jobs.

HOW DOES THE NATIONAL ECONOMY AFFECT THE LOCAL ECONOMIC PICTURE? In San Diego, we’re becoming more connected to the national economy than we were, say, in the early 1990s or even before. So if the national economy is doing well, that means that San Diego companies are selling more products because now we deal in more products sold nationwide. Also, our tourism industry benefits as well. San Diego is more of a destination when people are doing well.

WHAT COMPONENTS ARE YOU PAYING PARTICULAR ATTENTION TO? Right now, there are four components that have been particularly troublesome. We’ll start off with building permits. Basically, construction activity has just dried up. We’ve had the two worst months ever in terms of the number of residential units authorized by building permits in San Diego County. We had 87 in January and 80 in February. Just as a contrast, during the peak of the building boom in the 1980s, we at one point in one month had 5,000 units authorized. Even recently, we’ve been more in the range of 1,200 to 1,500 as an average. Now we’ve had less than 100 for two months in a row. And that’s important because that signals what’s going to happen in terms of construction employment. We’ve already lost around 27,000 jobs from the peak in construction employment, and this means that people are not going to be building houses.

A second thing I’m looking at is consumer confidence. That has dropped to historic lows. That’s important because consumer activity is typically two-thirds of economic activity. It particularly affects big-ticket sales. If people are worried about their jobs and incomes, they’re not going to be going out and buying homes and buying cars. And we need them to do it at this point.

The other two components that have been problems are related to the labor market. Initial claims for unemployment insurance have surged, so that’s a negative for the index, and there are more people losing their jobs now. And help-wanted advertising, a measure of hiring, is down. More people are losing jobs, and we’ve got less hiring. So that’s caused the unemployment rate to hit 8.8 percent in February in San Diego County, and it could easily hit 10 percent by the time this is over. I don’t think it will go much higher than that, but still it’s pretty bad.

WHERE ARE WE HEADED THIS SUMMER? Things should pick up because of our tourism. That’s going to be an important aspect this year because of the tough economic shape we are in. What’s that going to mean for San Diego tourism? Are we going to get less people coming from out of town or is that going to be counterbalanced by people staying in San Diego and going to the zoo instead of taking a big trip elsewhere?

I think you’ll see continued activity in housing. Sales have already gone up; that’s because there are so many homes that have been foreclosed on. There are a lot of bargains out there. So some people are starting to nibble. Interest rates are at historic lows. It’s a good combination to buy a home: prices have come down significantly, and interest rates are at record lows. The combination has pushed the region’s affordability index to a record high, meaning a greater proportion of local households can now afford to buy a home than has ever been the case. I see the housing market possibly bottoming out at the end of the year, although I don’t expect it to rise until 2010 at the earliest.

WHAT ARE YOUR PREDICTIONS FOR BOTH THE LOCAL AND NATIONAL ECONOMY? I think the national economy will reach a bottom in the latter part of this year. The rebound from the bottom is expected to be weak and may take a while to manifest itself. Job losses and a high unemployment rate are likely to last through the end of this year. Retail sales will likely remain weak, but home sales are expected to continue at a relatively high level. All of this is the expected outlook for San Diego too. I usually don’t do long-run projections, but I would expect San Diego to rebound nicely and move back to a position where it is outperforming the national economy.