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Forecasters:

By   /   Friday, November 6th, 2009  /   Comments Off on Forecasters:

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The San Luis Obispo County economy won’t get much worse this year and will likely start improving next year. But the scope of that recovery will depend on decisions coming down from Washington, D.C., and Sacramento.

That was the message delivered Nov. 6 to nearly 500 attendees at a 2010 economic outlook conference in San Luis Obispo hosted by the University of California, Santa Barbara, Economic Forecast Project. Brad Kemp, director of regional research for Beacon Economics, told the crowd that SLO County unemployment will peak this year at 9.3 percent with about 6,000 jobs lost.

But while the group predicted a recovery next year, the extent of the rebound is hard to predict “because of policy considerations” such as California’s budget and how the financial sector reacts to new federal rules, said Chris Thornberg, founding principal of Beacon Economics. Thornberg also ticked off a list of lingering concerns for California and SLO County: a continued struggle in the commercial real estate market, more home foreclosures for California and an unsustainable consumer savings rate.

It all began, the economists said, with housing prices. In the report issued at the conference, economists noted that SLO County median home prices skyrocketed to $583,000 before the market collapsed.

“Like the rest of California, the county rode the euphoria of the rising housing bubble,” Kemp wrote, noting that the bubble wasn’t as bad in SLO County as in other parts of the Golden State.

But when the downturn started in 2007 and crescendoed last year, it hit the county hard, pushing unemployment up from a late 2006 figure of 3.8 percent to 9 percent in the second quarter of this year. The county started losing jobs earlier than the rest of the state because it is more dependent on consumer spending, which took a nosedive, Kemp wrote.

While the rise in unemployment is likely to stop later this year, the climb back to better figures will take longer than the tumble, Kemp wrote.

“It is unlikely that after only one quarter of profits employers will jump into a long-term labor investment,” Kemp wrote. “Instead they will wait for several quarters of sustained profit before making that commitment,” he wrote, adding that the county’s jobless rate likely will slowly drift downward through the end of 2013.

Housing prices, already down and forecast to drop another 12 percent by 2011, are also a big problem for the county. As with many areas that built quickly to take advantage of meteoric prices, there’s too much housing stock.

“California still has a large number of foreclosures that have yet to be processed, and despite pent-up demand for homes, Beacon Economics estimates that pent-up supply is greater,” Kemp wrote. “That supply will continue to exert downward pressure on prices.”

But perhaps the largest looming systemic problem is the nexus of woes in the banking and commercial real estate sectors, problems linked at the hip because banks’ capital and liquidity become constrained when the value of commercial real estate underlying their loans goes down. Commercial real estate is beginning to follow its residential counterpart into a market decline, the forecasters said, which could have a ripple effect on employers’ credit lines.

“San Luis Obispo County avoided the commercial [real estate] crunch in the early 90s, but won’t be so lucky this time,” Kemp wrote. “Moreover, with the industry licking its wounds, and highly risk-averse, a lack of commercial credit will continue to squeeze the region’s employers (especially small ones), who have already gone through most, if not all, of their cash cushion.”

Consumer spending is also a problem, forecasters said. Many of SLO County’s private sector jobs are in sales or services, and its large proportion of government jobs depend on tax revenue generated by that stream of commerce. But the average per-capita income has declined by $600 in the county, the forecasters wrote, much as consumers across the state and country have lost ground.

“[Leisure and hospitality] have been significantly hammered by the lack of consumer spending,” Kemp wrote. “Since its peak in the third quarter of 2007, leisure and hospitality has lost over 1,090 jobs, the third-largest employment reduction following construction and retail trade.”

But despite the gloom, Kemp wrote that there is “light at the end of the tunnel.”

“Beacon Economics can confidently forecast that the worst is behind us,” Kemp wrote. Retail sites like the new Lowe’s in Paso Robles could bring private-sector jobs, and prison expansions could bring public-sector ones.

“Add to that stimulus dollars hitting Main Street over the next year, and the county has a good recipe for recovery,” Kemp wrote.

Henry Dubroff and Stephen Nellis contributed to this report.

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