Colorado
Economic Outlook
Winter 2005
Written
by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Vectra Bank Colorado
Best in Four Years
The Colorado economy continues to strengthen, with gains in total employment
a welcome change following two years of severe economic pain. Colorado?s
job gains of the most recent 12-month period were the strongest in four years.
More importantly, we expect even stronger employment gains in 2005 and 2006.
Colorado?s economic growth is in line with stronger rebounds of other
states in the Intermountain area. As is usually the case, Nevada is leading
the nation in job gains, while Arizona, Idaho, New Mexico, Utah, and
Wyoming are also performing better. 
Each state in the region is benefiting from the strongest U.S. and global economic growth in a generation. Colorado, in particular, has also benefited from U.S. dollar weakness versus other major currencies to push exports to higher levels.
The Colorado economy added roughly 30,000 net new jobs over the most recent 12-month period, a growth rate of 1.4%. Not since 2000 has the state enjoyed job growth as strong as the current period.
We expect job gains in 2005 of 2.5%-3.0%, an addition of roughly 55,000-65,000 net new jobs. Softer, but still solid employment gains are likely for 2006. During 2005, Colorado will finally ?regain? the 75,000 jobs lost in 2002 and 2003 alone, with total state employment expected to reach an all-time high.
Quality and Quantity
Various voices have acknowledged the stronger level of job gains in both Colorado
and the nation of the past 12 months. They have suggested, however, that
while the quantity of jobs has improved, the quality of new jobs is somewhat
poor.
We beg to differ?
Most new jobs added in Colorado and around the nation during the past year have been in professional and business services, construction, health care, natural resources (energy), and financial activities. Manufacturing employment has also increased across the nation. Job additions in retail trade and the leisure and hospitality (tourism) sectors, typically lower wage jobs, have actually been modest.
Colorado?s
unemployment rate has averaged 5.0% during the past nine months, a major
improvement from the 6.0% average of 2002 and the 5.7% average of 2003.
A slightly lower jobless rate is likely in 2005 and 2006, although a
surge of new entrants into the labor market could limit such declines.
Housing Activity
The state?s residential construction sector has continued to perform well.
Extremely attractive mortgage interest rates have allowed thousands of Colorado
residents to purchase their first homes, while also providing the ability
for second- or third-time homebuyers to move up the housing ladder. However,
the same low financing costs have also contributed to higher vacancy rates
in multi-family properties across much of the state.
One change to be expected is stronger home price appreciation across Colorado. By various measures, Colorado real estate experienced some of the weaker price appreciation in the country in recent years, following solid gains during much of the 1980s and 1990s.
The Office of Federal Housing Enterprise Oversight (OFHEO) calculates the average Colorado home appreciated 4.90% (44th in the nation) during the one-year period ending September 30, 2004 and 36.19% during the five-year period ending on the same date. By comparison, the U.S. average was 12.97% for the one-year period and 48.46% for the five-year period.
Over a longer time frame, Colorado?s average gain of 232.79% since 1980 was in line with the average U.S. gain of 234.14%. The OFHEO has a data base of nearly 30 million existing homes in the U.S. where numerous sales transactions have been recorded. As a result, their information is considered one of the best measures of U.S home price appreciation.
A combination of much stronger Colorado job and incomes gains, and the fact that Colorado real estate is somewhat ?bargain priced? when compared to real estate in parts of the West, should lead to the strongest home price appreciation since the mid-to-late 1990s. Many realtors now talk of Californians ?cashing out? of sky-high priced real estate and buying much more home for much less money across the Front Range and throughout Colorado.
In addition, 2004 will enter the history books as a more impressive year in the commercial real estate sector. Stronger levels of absorption and declining vacancy rates were very welcome after three years of weakness.
Convention ?Biz?
The expanded Colorado Convention Center now open and new hotel space to be
available in 2005 should add substantially to the state?s and Denver?s convention
hosting activity. Various studies suggest that more spending is now taking
place in the convention and meetings industry nationwide after two years
of downsizing. Denver?s attractive new facilities will help bring more of
those events to the Mile High city.
More Tax Dollars
A positive by-product of stronger Colorado economic performance will be a replenishment
of state and local tax coffers. Higher revenues will be extremely critical
in meeting both the state?s funding requirement for a rising school-age population
and in continuing efforts to rebuild the state?s transportation system.
Colorado in 2005
Stronger economic growth now underway should lead to more vibrant performance
in 2005 and 2006. Colorado?s private sector companies are eager to expand
again, following the painful performance during 2002 and 2003. More vibrant
real estate activity should also return, with home price appreciation closer
to national norms. Colorado?s return to economic growth is a very welcome
change.
Something about Harry
I am fortunate to be a very active professional speaker, with presentations
mostly in the South and the East. I market myself as an ?economic futurist?
(which sells better than ?economist?).
Since I express a positive long-term outlook for the stock market, I am frequently asked about what will happen when large numbers of ?baby boomers? start to sell stocks to finance their retirements. Many questions revolve around the views of futurist Harry Dent.
His late 1990s view was that the Dow Jones average would go straight to 41000 by the end of this decade and then?roughly in the spring of 2011?a recession lasting between nine and 13 years would begin. The problem? The median age of the baby boom generation would reach a point where we massively dump stocks and drive financial asset values?and the economy ?into the tank.
Harry?s back! His latest book is The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2005-2009. Harry says we are still on track for Dow 40000 (now near 10800) by 2009?with the NASDAQ as high as 20000 (now near 2175) by 2009 as well. His views are based on five major trends (CBS.MarketWatch.com).
?the third and final bubble of a bull that started in the early 1980s. We are about to see the ?greatest bull market and technology bubble of the last two centuries.?
?the technology revolution regenerated: ?We are on the brink of the tech revolution?s second phase, as new technologies move fully into the business mainstream.?
?the ?decade hangover cycle?: Corporations are just now wrapping up the consolidation phase following the late ?90s bubble that led to the 2000-2002 correction.
?the 80-year technology cycle. Dent is also predicting a rapid assimilation of new technologies similar to the 1920s.
?baby boomers move into high gear. Dent expects the ?incredible earning, spending and productivity cycle of the massive baby boom generation? to continue driving the world as the ?unprecedented economic boom of the past 25 years? races to a frenzied peak in 2009?before another bust.
When faced with the question regarding a simultaneous selling of stocks by aging baby boomers late in this decade, I have always argued the following:
First, baby boomers will inherit an estimated $11 trillion from our parents, the largest generational shift of wealth ever, which will help fund retirement.
Second, as some baby boomers are selling, others will still be investing. Baby boomers today range from 40 to 58 years old. We will not all be selling!
Third, Generation X behind the boomers is saving more aggressively for their futures than boomers ever did. Why? They are dubious about Social Security?and the 401k program has been there for them since Day 1.
However, I always point out to audiences that Harry Dent gets up to $50,000 a speech?and I don?t. Harry Dent also owns his own Caribbean island?and I don?t.
?draw your own conclusions
Five?and Counting
As widely expected, the Federal Reserve?s Open Market Committee (FOMC) tightened
monetary policy on December 14 for the fifth time since late June 2004. More
tightening moves are expected in 2005.
The focus of financial market players was on the accompanying statement. On occasion, the statement will provide 1) a glimpse as to a change in policy to come, or 2) wording to the effect that current policy will remain.
The latter was the case this time around. ?The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.?
More visual terms can be used?
- The Fed is slowly lessening pressure on the economy?s gas pedal, after pushing the pedal to the floor between June 2003 and June 2004. The foot is nowhere close to the brakes at this point, but putting ?the pedal to the metal? is increasingly less in play.
- The Fed is removing the punchbowl from the party. The Fed felt the need to provide some spiked ?punch? during 2001-2003 to get the economic party moving. Now that the ?party? is clearly more raucous (the strongest U.S. economic growth in 20 years) the Fed can replace the spiked ?punch? with something less so.
Fed officials find satisfaction in the fact that U.S. economic growth has been strong, while inflation pressures have largely remained muted. The oil spike that did aggravate inflation seems to have run its course, with less painful energy prices likely in 2005.
Additional monetary tightening is in the cards during 2005, with most forecasters expecting the federal funds rate?now at 2.25% (after being at a 46-year low of 1.00% between June 2003 and June 2004)?to rise to perhaps 3.25%-3.50% a year from now. The key to how high the rate moves is highly correlated to U.S. job creation in 2005.
Average net employment gains of 200,000 per month (in line with the 185,000 average monthly net gain in 2004?s first 11 months) would allow the Fed to continue tightening at a steady, predictable pace that has been the Fed?s game plan since last summer. Conversely, weaker job gains or major unexpected global or U.S. political/economic/military/terrorist shocks could limit tightening moves.
The Fed?s ultimate objective is to return the federal funds rate to ?neutral? ?a level estimated between 3.00% and 4.00%?where it neither stimulates? nor hinders?U.S. economic growth. We could be there by this time next year.