Bill Watkins, executive director of the UCSB Economic Forecast

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Contrary to earlier predictions, Santa Maria will not function as Santa Barbara County's economic engine, and a growing underclass may create difficulties for the tourist economy. This was some of the bad news for business and government leaders who gathered at the Lobero Theater for the 27th Annual UCSB Economic Forecast on Thursday, April 19. The report's author, Bill Watkins, also told the assembly that the county's gross regional product last year—the total amount of money made—was $21 billion. That translates into $51,300 per capita, which after adjustment for inflation is just .02 percent higher than the previous year's per capita gross. Meanwhile, the 2006 average salary, at $40,103, was .5 percent lower than the previous year's.

Watkins praised small high-tech companies using university talent as one of Santa Barbara's most promising industries, saying that California's technology sector is primarily responsible for making the state's workers "more productive [of wealth] than workers anywhere else in the world."

Funded by a numerous corporate sponsors in the tri-county area—Santa Barbara, Ventura and San Luis Obipspo—the Economic Forecast Project operates as a self-supporting administrative department at UCSB. It collaborates with students and faculty in the Department of Economics, though it is not part of the university's academic program. Spearheaded by the Santa Barbara Bank & Trust almost three decades ago, it is overseen by boards of directors representing the business communities of various regions. Watkins, who previously worked as a research economist at the Federal Reserve in Washington D.C., has authored the fact-and-chart-filled report since 2000.

Last year at this time, Watkins bucked the general trend among economic forecasters in the state by predicting that Santa Barbara County's home prices would rise nine percent in real terms while others predicted they would fall. Home prices did rise, according to Watkins, though only by 2.3 percent after adjustment for inflation, 6.6 percent before adjustment. Home prices are unlikely to collapse, he said, but he predicted that next year home prices will decline by 0.7 percent with most of the decline in the relatively lower priced homes rather than the upper end.

In 2006, the rate of home sales fell 24 percent despite the modest gain in prices. Watkins theorized that the slowdown may also explain a retail sales drop because new home buyers tend to purchase such goods as paint and carpeting.

The death of subprime mortgages may drive more young families out of Santa Barbara to places where they can afford to buy homes. The flight of the middle class is tempered by the presence of UCSB and Vandenberg Air Force Base, which are the county's two largest institutional employers. Apartments are housing some of those who would otherwise be using the subprime loan products to buy homes, with a consequent increase in apartment rents.

Commercial real estate remained hot in 2006, according to the report, with sales prices growing ten percent and vacancy rates low, especially in retail, where the year-end vacancy was 1.4 percent.

Unemployment remained low, at 4.1 percent, but fully a fifth of households made less than $25,000 per year. Watkins discussed the tension between the often conflicting goals of providing housing and job opportunities on the one hand, or preserving a luxurious quality of life on the other hand—counting clean air and natural beauty among the luxuries. His analysis of the tourism-based economy overflowed with irony as he referred to the recent gang slaying on State Street. Hotel room rates are rising again almost to an average of $140 per night, with 70 percent occupancy rates. However, Watkins warned, "You have to keep those kinds of headlines off of the front pages of the newspapers. If you have an underclass that doesn't see a way to rise," Watkins said, "They do silly things. Usually, they do it to each other," Watkins noted, "but a tourism economy cannot afford representations as unsafe. Preventing crime and social unrest while withholding opportunity is difficult business," Watkins said.

Watkins has been predicting for several years that the City of Santa Maria, and other North County communities, would graduate into centers of economic activity in their own rights after a period of serving as commuters' bedroom communities. However, he decided this year that the North County is unlikely to evolve in that way so long as it is surrounded by the "no-growth" economies of the South County and the City of San Luis Obispo.

Former Lompoc Mayor Joyce Howerton, who currently serves on the staff of the Fund for Santa Barbara, which focuses on social justice and environmentalism, commented that slow growth can provide opportunities for community building, potentially empowering people to make political and economic gains who might otherwise be lost in the shuffle.

"I agree with [Watkins] about some of the problems; I don't agree about what to do about it," commented Santa Barbara City Councilmember Das Williams. "The forecast has drummed for additional housing for a long time," he said, "But if it's market rate housing I don't think that would solve the problem, because there is too much competition with high-end folks who want a second vacation home." Workforce housing is part of the solution, said Williams, who also favored encouraging the emergence of a sustainable energy sector to expand the economy.

The program ended with an appeal from moderator Ed Heron, chair of the project's overall board and a vice president of Coldwell Banker, who directly addressed the high school students in attendance, saying, "We want a safe community for you to grow up in, not just the perception of a safe community, and we want you to come back to Santa Barbara after your education—or to stay in Santa Barbara after you are educated here."

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