by Calculated Risk on 11/10/2006 11:29:00 AM

"... the [San Diego] economy is slowing down. It may not necessarily collapse."
Alan Gin, Economics Professor, USD.

From the Voice of San Diego: Local Economic Slowdown Continues

The county's leading economic indicators sustained a sixth straight month of declines in September, attributed primarily to drops in residential building permits and consumer confidence.

Alan Gin, professor of economics at the University of San Diego, reported Thursday that four of the six indicators in the index slipped in September. Sharp drops in residential building permits, initial claims for unemployment insurance and consumer confidence played large roles in the decline.

"The thing's been trending down for six months now," Gin said in an interview. "It's more negative news for the county."

Fewer employers solicited help wanted ads, a trend that constitutes the fourth indicator to dip negative in September. The remaining components, local stock prices and an outlook on the national economy, edged up slightly from August's index.

"The changes on the downside are significantly larger than the advances by the positive components," Gin said in the report. Those factors lead to a pessimistic outlook for the local economy, which Gin predicts will slow significantly in early 2007, effecting cooling job growth, a further weakening housing market and tumbling retail sales.

San Diego was the first to see the housing bust, and now San Diego is the first to see the spillover from the bust into the general economy.

Also from the article, Professor Thornberg discusses MEW, the wealth effect and the negative savings rate:

"One of the big risks to the economy right now isn't the direct effects of the real estate market," [UCLA Economics Professor Christopher] Thornberg said. "It's the indirect effect -- it's that consumers are spending more than they earn."
...
"The last time [the savings rate] was negative was in the Great Depression," he said. "Consumers are spending a great deal of money right now, way more than they should be."

Unprecedented run-ups in housing prices contributed to the problem, he said. But those loans that let homeowners borrow against their increased equity and spend the cash on cars or other goods aren't solely to blame. Even homeowners who didn't use their homes as an ATM can fit the category of people Thornberg's worried about.

He said the increase in home value acted like a check on the table in some people's minds. Homeowners who might otherwise save 10 percent of their paychecks started spending that portion and thinking of their home's value as their savings account.

"The percent of your disposable income you think you need to save really declined over the last few years," Thornberg said.