Tuesday, August 2, 2011
The deal imposed $1 trillion in budget reductions over the next decade but did not outline where cuts would be made, virtually ensuring continued hesitance among consumers and businesses that will keep them from spending. That doubt is expected to guarantee the unemployment rate in the county will remain about 10 percent through the rest of the year with very little job growth, experts said.
“It doesn’t seem like it really solved any problems. It just postponed it,” said Kelly Cunningham, economist and senior fellow at the National University System Institute for Policy. “I don’t see a big rebound or a sudden shift. The economy will continue to be pretty stagnant. The uncertainty of it is weighing on us.”
And that uncertainty is linked to what the 12-member committee, which is tasked with identifying trims by Nov. 23, will decide, even though those cuts won’t begin until 2013.
Consumer confidence and employment, already depressed, are expected to continue to drag. In June, the local Leading Economic Indicator Index fell 0.2 percent, driven by a 1.06 percent drop in consumer confidence, according to the report by the University of San Diego Burnham-Moores Center for Real Estate.
Employers are also expected to be skittish about spending, hiring and expansion because of the potential for increased taxes as the committee seeks additional revenue, experts said.
San Diego County, where the five largest employers are public entities, was already bracing for cuts to state, local and education jobs because of the state’s financial problems.
Now, federal payrolls seem to be at stake although experts are not in agreement over the impact of the potential job cuts or how quickly such a reduction would be seen. The federal government employed more than 45,000 people in the county, not counting active duty military, in June, says the California Employment Development Department.
Federal expenditures in San Diego County are in excess of $36 billion, and about 45 percent goes toward defense, Cunningham said. Inevitably cuts to the government’s budget will most likely include defense and contractor cuts, he said. According to Defense News’ rankings of the top 100 defense firms in the world, eight of the top 11 companies have a presence in San Diego, including Northrop Grumman, General Dynamics and General Atomics.
Point Loma Nazarene University economist Lynn Reaser does not expect deep cuts in San Diego County because of recent shifts in military resources to the West Coast.
Experts do agree that if the November deadline for identifying cuts is not met, automatic reductions will trigger cuts evenly between defense and nondefense outlays, which will have a significant impact on the military budget.
During the recession, it was these very defense and government jobs that helped keep San Diego’s economy afloat as private sector jobs were in free fall. In 2009, the defense industry is credited for creating nearly 27,000 jobs and pumping billions of dollars into the local economy, according to an analysis by the University of California San Diego. Another report by the San Diego Military Advisory Council pegged defense-related employment that year at nearly 355,000.
In addition to losses in military and government contracting, cuts in public construction are expected.
The ailing construction industry took the biggest hits during the height of the recession. In San Diego, 44 percent of construction jobs have disappeared since the peak in 2006.
Now, the industry anticipates losing some of the few jobs left because of the public projects that are expected to be shelved, said Ken Simonson, chief economist for The Associated General Contractors of America.
“Future projects will be smaller and less frequent,” he said.
As specific sectors brace for future cuts, experts also believe the committee will address entitlement programs, including Social Security, Medicare and Medicaid, but are concerned about how those cuts would be implemented and how costs would be passed on to consumers. If people who rely on public programs are diverting funds to health care, for example, they will have less to spend on other necessities.
In San Diego County 388,325 people, or 12.5 percent of the population, receive Medicare. Nationally, 14.8 percent of Americans are on Medicare. Social Security retirement, survivor or disability payments are sent to 415,805 people, about 14 percent of the county’s population. Nationally, 19 percent of the population receives Social Security benefits.
Other potential items that experts say may be considered include increased taxes, elimination of the mortgage interest deduction and other discretionary spending. In San Diego, for example, discretionary funding is money that supports scientific, high-tech, biotech and other types of research, Cunningham said.
The list of cuts will land in the middle of the critical holiday shopping period, which accounts for one-third of annual retail sales.
“We are in a recovery mode since the summer of 2009 that has been marked by three steps forward, two steps back,” said John Challenger, of Challenger, Gray & Christmas, a global outplacement firm in Chicago. “We may be in a two-steps-back retrenchment.”
Despite the shadow the debt deal casts on the economy, economists point to a silver lining that includes decreased oil prices due to a slowing global economy and standing lower interest rates.
“Confidence and jobs will still be the critical factor affecting consumers,” Reaser said.
Source: SignOnSanDiego
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