Colorado
Economic Outlook
Summer 2005
Written
by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Vectra Bank Colorado
Solid Growth
Colorado economic performance continues at its strongest pace in five years.
In addition, the Rocky Mountain region again leads the nation in employment
gains and overall economic vibrancy.
The
Colorado economy was hammered by the U.S. recession of 2001 and the horrific
events of September 11 of that year. A painful and extended Colorado
recession soon followed. Economic weakness was also found among Colorado?s
neighbors, with recessions in Arizona and Utah.
Idaho, Nevada, and New Mexico struggled with weakness, while energy-rich Montana and Wyoming maintained modest growth. Better news today finds the Rocky Mountain region again the nation?s job creation leader, led by powerful job gains in Arizona, Nevada, and Utah.
Revenues Up
Colorado tax revenues have risen sharply, with measurable surpluses now the
norm. Colorado?s surge in tax revenue is in line with similar developments
across the nation. All states collectively saw revenues rise by more than
7 percent in 2004, as compared to 2003, the largest rise in four years. In
addition, many states are reporting double-digit gains in 2005.
Elected officials in most states note rising revenues will be needed to meet numerous mandates and previously underfunded programs. However, the ability to return some portion of excess revenues to taxpayers in many states, or provide tax relief, should not be squandered. Colorado?s political leaders must seek to modify the painful restrictions of TABOR, with an eye towards greater financial flexibility.
More
Jobs
The Colorado economy added roughly 46,000 net new jobs over the most recent
12-month period, a growth rate of 2.1%. These gains compare very favorably
to the net loss of nearly 75,000 jobs in 2002 and 2003. Colorado added 28,000
net new jobs in 2004.
Colorado job gains were found in nine of the state?s 11 major employment sectors, led by solid gains in professional and business services, construction, government (local), and education and health services. The ?information? sector lost more jobs, while manufacturing employment was flat.
Solid Colorado job additions have led the state?s unemployment rate to its lowest level in four years. The state?s jobless rate has averaged 5.1% in recent months, down from the 5.5% average of 2004, and down sharply from the 6.1% average in 2002 and 2003. By comparison, the state?s jobless rate averaged a tight 3.2% in 1999-2001.
No Colorado "Bubble"
Considerable discussion has taken place about the possible housing bubble now
forming across the nation, especially on both coasts and in the Southwest.
In the opinion of many, prices have been pushed higher by homebuyers and
speculators to unrealistic levels.
While ?froth? (Federal Reserve Chairman Greenspan?s description…akin to bubble) has likely developed in numerous markets, such is not the case in Colorado. The state is now experiencing stronger demand and higher prices for attractive new and existing homes in desirable communities.
At the same time, however, Colorado home price gains of recent years have trailed those of the nation. The latest report of the Office of Federal Housing Enterprise Oversight for the 12-month period ending March 31, 2005 saw Colorado home prices rise an average of 4.75%, versus 12.50% for the nation. Colorado?s gain ranked 47th of the 50 states.
The five-year period ending March 31, 2005 had the average Colorado home price rising 31.47%, again trailing the 50.53% rise for the nation. A longer time horizon (since 1980) saw Colorado home prices rise an average of 238.77%, in line with the national average rise of 248.83%. Given the current disparity between Colorado home prices and those in many U.S. markets, Colorado homes are reasonably priced and should register solid gains over the next 24 months.
Costs Of…
One aspect of doing business and living in Colorado is the cost associated
with both. The latest (April 2005) ?cost of doing business? in Colorado is
estimated at 105% of the U.S. average, as measured by Economy.com. Similar
costs for Denver are estimated at 102%, with Colorado Springs at 97%.
The ?cost of living? estimate of Economy.com for Denver is 109% of the U.S. average, with Colorado Springs at 101%. The widely followed ACCRA cost of living index for first quarter 2005 is 101.6 for Denver-Aurora, with Colorado Springs at 95.7 and Grand Junction at 97.4 of the U.S. ?average? of 100.0. Greeley and Pueblo are estimated at 92.5 and 88.9, respectively. Glenwood Springs (119.4) and Gunnison (109.0) were also identified.
The Colorado Outlook
The Colorado economy continues to improve, with five-year highs now being registered
in employment gains and income creation. The state?s current growth pace
is expected to continue, even as the national and global economies slow modestly.
Colorado remains competitive with higher population states as a place to do business, with a reasonable cost of living. More impressive home price gains are expected over the balance of 2005 and throughout 2006. Solid growth is a major improvement from the painful experience that characterized the 2001 to 2003 period.
$48,530,000,000,000
…another new record
As American consumers, we are frequently scolded by the media regarding the massive amount of debt we have irresponsibly accumulated in recent years. We are told that we have a major need for instant gratification. We must have that new car, or those new golf clubs or skis, or take that exotic vacation NOW…even if we have to borrow money to cover the cost.
Because of this constant media reinforcement, it is gratifying when information emerges that tells a different story…a story about millions of Americans who are conscientious spenders…millions of Americans who are saving for their children?s educations…millions of Americans who are saving aggressively for retirement.
The
Federal Reserve reported recently that U.S. household net worth at the
end of 2004 was $48,530,000,000,000. This is the highest total on record!
The yearend 2004 total was up 9.3% from yearend 2003. Household net worth represents the value of assets we have, such as homes, cars, stocks, and retirement funds MINUS debts (or liabilities) we owe, such as home mortgages, other loans, and credit card debt.
The total had declined in 2001 and 2002 from the prior $43.58 trillion peak in 2000?s first quarter. The meltdown of the stock market had severely hurt many investors, particularly those who were the most aggressive. Total net worth had fallen to roughly $40 trillion in 2002 (see chart).
The new record high has been driven by two primary factors. The first has been the ongoing increase in home values across the country. The second has been the modest rebound of the American stock market of the past three years.
Nearly 70% of American families now own their homes and have, in most cases, enjoyed sizable increases in their home values in recent years. An estimated 52% of American families now own stocks, many through their participation in employer-provided 401(k) programs. This figure is up sharply from 37% in 1992.
Theory supports the idea that when our home and/or stock prices are rising, we feel wealthier. We are more willing to spend, a process known as the ?wealth effect.? Movements of home prices have a greater influence on consumer spending decisions than do moves in stock prices.
Solid gains in home values and stable stock prices should continue to support reasonable U.S. consumer spending. The ongoing improvement in corporate spending also bodes well for solid U.S. economic growth.
Oil Pain
High oil prices have been a major economic pain during the past 18 months.
We identify below four primary reasons for the move to $60 per barrel oil of
more recent months.
1. stronger global and U.S. economic growth. The basic premise of ?the dismal science? of economics…supply and demand…actually does work on occasion. More vibrant economic activity simply increases the demand for many commodities, including oil, steel, copper, aluminum, etc.
One estimate suggests that strong global economic growth last year boosted oil demand by the largest annual rise since the late 1980s. The global community now uses an estimated 85,000,000 barrels of oil daily, the highest usage ever. The U.S. share of that total is roughly one barrel in four.
2. the relative weakness of the U.S. dollar of the last 36 months. OPEC has made no apologies for dropping their commitment to keeping oil prices in a range of $22.00-$28.00 per barrel.
The reason? Global oil prices are denominated in U.S. dollars. The Saudis and other producers are complaining that they need to keep prices higher to offset sizable losses when dollars are converted to euros, yen, etc. While strengthening this year, the dollar has fallen more than 20% versus the euro over the past 36 months, with a smaller decline versus the yen.
The dollar has recently stabilized, with slight declines versus the euro and the yen expected during the next 12 months. While the Europeans may let such a development occur, the Japanese are likely to actively fight dollar weakness—and yen strength—by aggressively buying dollars (and therefore buying U.S. Treasury securities) to keep the yen from appreciating. The Japanese fear? A stronger yen/weaker dollar would hurt their fragile export-led recovery.
3. the strong demand for oil, steel, and many other commodities by China. Oil imports to China rose roughly 35% last year, after rising by one-third the prior year. Strong oil demand is also coming from India and other emerging nations. Given strong growth by these and other countries, oil dynamics could change for years to come.
4. an oil price premium tied to terrorism anxiety. Perhaps $8.00-$14.00 of current oil prices reflects an anxiety about potential disruption of oil flows. Two terrorist attacks on Saudi petrochemical plants last year, combined with ongoing attacks on Iraqi oil pipelines, have raised the odds of further disruptions. More recently, we have seen strikes in Nigeria, political battles regarding oil giant Yukos in Russia, supply disruptions tied to hurricanes in the Gulf of Mexico, etc.
Saudi Arabia, the dominant member of OPEC, has raised production to record levels. Most members are currently running flat out…and making a whole lotta $$.
Prices could temporarily move higher, especially if oil-related terrorism scores a ?success? or two. Over time, we still expect oil prices to return to the mid $40s. A reason? OPEC simply does not want to provide the incentive for more research and implementation of non-oil sources of energy that $60+ oil prices would represent.