Economists: things could be worse in SB County

By COLBY FRAZIER — April 24, 2009

In the center of the worst economic storm to hit the nation in decades, the Central Coast, while not exempt from the punishing impacts of skyrocketing unemployment and home foreclosures, has remained an “island of stability,” according to economists with the UC Santa Barbara Economic Forecast Project.

While the overall unemployment rate in the U.S. is expected to remain cemented in the double digits, Santa Barbara County’s will remain well under that total, said Bill Watkins, executive director of the Economic Forecast Project.

Watkins, who is leaving UCSB after 10 years for a job at California Lutheran University, said the county should expect to see a roughly 2 percent decline in economic growth, and 1.5 percent decline in jobs, two statistics he feels are good news of sorts when compared to the rest of the country.

“If the rest of the economy was looking like Santa Barbara, we’d be in a little recession,” Watkins told hundreds of business and political leaders yesterday during the annual Santa Barbara County economic outlook event at the Granada Theatre. “It’s a very mild recession for Santa Barbara County [and] even milder for the Central Coast.”

Watkins cited the county’s strong tourism industry, which while taking hits has remained relatively strong, and the perceived stability of the county’s largest employers like UCSB and Vandenberg Air Force Base, as some reasons why the county has and will continue to weather the recession.

But that’s not to say there will be smooth sailing.

With retail sales expected to plummet for at least two more years, Watkins said small and large businesses alike must act quickly to cut the fat from their budgets.

“Don’t procrastinate,” he said. “The person who makes adjustments faster is going to survive. Cut back on the dummies, keep the bright ones.”

Neither Watkins nor the other speakers who took part in the forecast event harped much on Santa Barbara County.

The majority of the three-hour event was spent on California’s embattled economy, which at times sounded barely salvageable.

Watkins said the state’s unemployment rate will rise sharply to 15 percent, while retail sales have been in decline for three straight years.

The state was hit hard by the housing crisis, and the legislature’s failure to enact a balanced budget without hedging its bets on six ballot propositions complicates matters, he said.

By the time the recession starts to recede, which Watkins said he feels won’t occur on a wide scale level until sometime in 2010, he believes the state will have lost a decade worth of job growth.

While businesses close their doors on a daily basis, the state has responded by raising the sales tax by 1 percent, which he feels makes retailers even less competitive with the Internet.

One of Watkins’ paramount concerns at the state level, he explained, is a cut to education. He said historically workers in California are 2 percent more productive than their counterparts in other states, and the university and college systems here are part of the reason.

He said the technology boom, largely responsible for the state’s prosperity in the latter part of the 20th century, could in part be credited to a quality higher education system.

Watkins said the economic situation from the county level on up wouldn’t improve much until something is done about the flagging banking industry, which despite nearly $1 trillion in government bailouts, has largely refused to open the credit floodgates.

A large part of the banks’ reluctance to resume lending, Watkins said, is due to their lack of capital security, not lack of money. He said the large banks are currently sitting on a $1 trillion reserve, which in a healthy economy hovers around zero.

Since bailouts failed to do the trick, Watkins said two options remain: one is to allow the banks, or the most unhealthy part of the banks to go bankrupt and reorganize; or a route Watkins called the “Swedish” approach. This would involve the government taking over the banks, polishing them up, and then selling them off.

Watkins said he doesn’t care much about what happens, just as long as it happens soon.

“We need to just get on with it,” he said, adding that one of the long-term benefits of a recession is to take capital assets from failed institutions and pass them along to healthier ones.

Instead, he said the government has “rewarded bad behavior” by bailing out firms that officials say are too big to fail and are riddled with problems.

On the real estate front, UCSB real estate economist Kirk Lesh said for the first time in years, he had good news.

He said Santa Barbara County has gone through a “paradigm shift,” where the trend of free-flowing credit and a thriving economy has shifted to the exact opposite.

While this has stifled growth in most instances, Lesh said the wave of foreclosures in the county, which ballooned to 1,600 in 2008, has created an opportunity.

Lesh said home sales in the county increased by 20.4 percent in 2008, the largest increase since 1999.

However, he said the majority of these sales were distressed properties, many of which had been foreclosed — a trend that helped ensure sinking home prices.

In 2008, Lesh said the median home price on the South Coast dropped by 15 percent and will likely fall by 5 percent in 2009.

After three straight years of what Watkins dubbed a full-fledged recession in North County, Lesh said it’s no surprise that new development in the county came to a grinding halt in 2008.

With the exception of the 200-unit Sumida Gardens apartment complex in Goleta, Lesh said the county can expect to get 25-30 new single-family homes in 2009, a number he characterized as an “all-time low.”

Lesh said interest rates are expected to stay low, around 6 percent, possibly even less, while rebuilding homes lost in the Tea Fire will help lift some builders through the recession.

“That is going to help a little bit,” he said.

The outlook for commercial real estate is worse. Lesh said current vacancy rates in Santa Barbara are roughly 2.5 percent, and could rise to 5.5 percent before the recession ends.

“We have some serious concerns for these folks,” he said. “As sales decline [retailers] could truly struggle to make it through this downturn.”

While the economy in Santa Barbara features some glimmers of hope, the state is faring much worse.

Sacramento Bee political columnist Dan Walters zeroed in on the state’s growing economic woes, which he says have been exasperated by a “crisis of government.”

The state’s ridiculed solution to its budget fiasco includes six complex propositions that voters are being asked to approve during a May 19 special election.

“I can’t even understand them, truthfully,” Walters said. “Some of the ramifications of them aren’t even in the measures themselves.”

Two of the propositions, 1E and 1D, would divert money from past voter approved propositions that fund services for the mentally ill and children, to the state’s general fund — a shell game many have said is laced with deception.

If these and the other measures aren’t approved, Walters said the state would be in worse shape than it was before it approved its budget. And if this happens, he warned there is no plan B.

“If California does not pass those measures in May, the whole thing just collapses,” he said. “This is a monumental crisis and those chickens are going to come home to roost very soon.”

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