What do the Los Angeles Lakers, Arizona Diamondbacks and San Diego have in common? This year, all are defending champions after advancing to the head of their leagues. San Diego moved up seven places to rank first in the annual Forbes/Milken Institute survey of regional economies and is likely to remain in that rarefied air.

“San Diego will stay in the top five. That’s easy enough to predict,” forecasts Perry Wong, research economist at the Milken Institute who contributed to the survey. “It’s no accident that San Diego is ranked as No 1. San Diego is one of the few regions that has diverse, very balanced growth. The strategy the region has — smart growth — eliminated a lot of speculative buildup,” explains Wong, who expects San Diego to outperform more volatile regional economies like Seattle and Silicon Valley.

The Forbes/Milken Institute survey ranks America’s 200 largest regions based on their comparative attractiveness as a place to do business. The research measures numerous criteria, including wage growth, salary growth, business costs, levels of entrepreneurial activity and quality of services, as well as the momentum built by historical growth.

San Diego As The New Model

“We were excited to see San Diego’s ranking, but it was a surprise to us. We are slowing down, but the rest of the nation is suffering more,” observes Kelly Cunningham, who heads the Economic Research Bureau at the San Diego Regional Chamber of Commerce. “The difference is how diversified our economy is. This just took place in the last 10 years with the downsizing of defense to electronics, telecommunications and software. Golf club manufacturing and biotech are flourishing here as well, and the aerospace and defense jobs have become more R&D oriented. Also, we’re not dominated by large companies. At this time, that seems to be more in our favor.” Cunningham says other regional chambers of commerce now see San Diego as the model for optimizing a regional economy.

Tom Lieser, who monitors the California economy for UCLA’s Anderson Forecast, confirms the San Diego Chamber’s favorable outlook. “Until early 2000, California was performing much better than the rest of the U.S.; now it’s below average,” Lieser reports. “Much of that was due to the collapse of the IT business. The Bay Area has an unhealthy concentration in a sector that has been the weakest. Greater Los Angeles and San Diego are areas of strength. San Diego has the lowest unemployment rate in the state. The Bay Area has been hurt with wages that are 50 to 60 percent higher. San Diego’s lower average wages are not necessarily a bad thing. When you are growing faster than average, you add more entry level jobs at lower wages.”

Lieser commends San Diego’s good performance over the past year, noting continued growth in finance, insurance, health services and real estate. The region has continued to outperform the state and national economies. San Diego’s regional economy actually grew by 6 percent last year, while the nation as a whole experienced its first recession in a decade. San Diego’s per capita income also was up by 4.2 percent, as services and construction continued steady growth. San Diego’s gross regional product surpassed $120 billion, equaling the entire state of Oregon. Relocations from other areas continue to spur growth, with 42,000 new residents moving to the area in 2001 and an additional 38,000 expected this year.

The chamber’s latest forecast shows the gross regional product reaching $126 billion this year and total employment moving forward by 2 percent. More good news is expected on the inflation front, with the regional rate dropping to 3.5 percent compared to 4.8 percent last year.

San Diego’s unique position on the Baja California border also contributes to the region’s growth. “The San Diego/Tijuana region has grown tremendously,” observes Cunningham. “Tijuana is growing twice as fast as San Diego. It is just a matter of time before Tijuana passes San Diego in size. The regional economy has grown tremendously with cross-border manufacturing and NAFTA.”

Over the long term, however, San Diego’s advantage in trade could be limited by its aging air transport venues. Lieser points out that the value of exports shipped by air is now higher than goods transported by surface, making a 21st century air cargo hub critical in the future.

San Diego also must rise to the challenges posed by the statewide energy crisis and nationwide slowdown in travel and tourism. Higher electricity rates are dampening consumer spending as well as adding pressure to the state’s budget deficit. And despite San Diego’s many attractions, spending by business and leisure travelers actually declined in 2001, with only modest gains expected for this year.

Fall Forecasts

Economic experts are cautiously optimistic the regional economy will strengthen in the coming year. The chamber’s Cunningham finds that “it would appear we have bottomed out and the second half of this year will be stronger. We’re still adding 20,000 jobs a year,” a factor he sees as contributing to continued strength in residential real estate prices. UCLA’s Lieser concurs. “The worst is behind us. We’ll see an expansion by the end of this year and growth in 2003-2004.” But Lieser also cautions that “the locomotive lately has been construction, but we can’t depend on that going forward. We need an improvement in capital goods. So it will not be a boom.”