Colorado
Economic Outlook
Winter 2006
Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Vectra Bank Colorado
Stronger in ?06
Colorado economic performance continues at its most vibrant pace in six years. Moreover, many signs suggest growth will actually strengthen in the New Year. Solid Colorado economic growth is a major departure from the economic decline that plagued Colorado during 2002 and 2003.
Solid Colorado economic performance is currently exceeded by stronger growth within the Rocky Mountain region. Colorado?s neighbors rank as the top four state economies in the nation as measured by employment gains over the most recent 12-month period. Nevada (as usual) ranks #1, with Arizona ranking #2. Utah and Idaho battled it out last year for #3 and #4. Wyoming currently ranks 8th in job growth, while Colorado ranks 14th.
While Colorado trailed its neighbors in economic vitality in 2004 and 2005, a reversal is likely in 2006. Colorado?s neighbors are likely to see job creation slow this year, in part tied to tighter labor availability. In contrast, Colorado?s job creation rate in 2006 is expected to exceed that of the past few years.
Perhaps it?s no surprise that the top job creation states also rank as the top states in population growth. Nevada has led the nation in population growth for 19 straight years. Arizona, Idaho, and Utah also share the top five spots. Colorado recently ranked 10th of the states, with an estimated 1.4% growth in population (to 4,665,000 residents) for the 12-month period ending June 30, 2005.
California was not the top gainer for the first time since 1995, as Florida led the way. By comparison, the U.S. population rose 0.9% to 296.4 million. The total should reach 300 million in 2007.
Colorado Jobs
Solid Colorado economic growth has led to a tightening of the Colorado labor market. The state?s unemployment rate averaged roughly 5.1% in 2005, the lowest since 2001.
By comparison, the Colorado jobless rate averaged 5.5% in 2004 and a painful 6.1% in 2002 and 2003. The jobless rate averaged 3.9% in 2001, a record low of 2.7% in 2000, and 4.4% during the 1990s. Recent declines in the jobless rate suggest Colorado companies of all shapes and sizes will face greater challenges to remain fully staffed in 2006.
The Colorado economy added roughly 42,000 net new jobs during the most recent 12-month period, a growth rate of 1.9%. Such job gains rank as the strongest since the state added slightly more than 80,000 net new jobs in 2000.
Revenue Growth
Solid U.S. economic performance of the past 30 months has contributed to large surpluses in a majority of states. State and local revenue rose 7.2% in the first nine months of 2005, the largest jump in 15 years (USA TODAY). With a majority of states now enjoying surpluses, the call for tax cuts is widespread.
A similar story is found in Colorado. Solid Colorado economic growth of the past 18 months has boosted state revenues. More importantly, a voter-approved relaxation of TABOR for the next five years will boost the level of state spending.
Greater public sector spending will lead to rising government employment. The ?good faith? lessening of TABOR spending restrictions by Colorado voters must be met with measurable, valid, and effective expenditures by state government.
Real Estate in ?06
Continuing solid economic growth is likely to lead to stronger Colorado home price appreciation in 2006. The primary source of estimated home values, the Office of Federal Housing Enterprise Oversight, recently reported an average U.S. gain of 12.02% for the 12 months ended September 30, 2005.
The OFHEO report noted an average Colorado gain of 5.55% (45th of the 50 states), with Denver-Aurora area homes up 4.11%. Home prices in the Boulder area rose 5.96%, homes in Colorado Springs rose 7.00%, and homes in Fort Collins-Loveland rose 4.03%. Homes in Grand Junction rose 10.04%, while homes in Greeley rose 2.21%, with homes in Pueblo rising 4.41%.
We expect the relationship between powerful real estate gains on both coasts (and in the Southwest) and minimal Colorado gains to reverse positions in 2006 and 2007. In fact, we expect home values within the Continental U.S. to outperform those on both coasts and in the Southwest this year and next. One factor supporting this view is the fact that the average Colorado home appreciated only 29.29% over the past five years. This compares to an average U.S. rise of 55.32% during the same time period.
The same five-year span saw an unsustainable 112.76% spike in California real estate, with homes in Florida rising 99.69%. Closer to home, the average Arizona home rose 78.87% during the five-year period, while the average Nevada home rose 99.00%.
The Colorado View
Solid economic growth is expected in Colorado during 2006, with employment gains rising. Employers will face greater challenges in finding and retaining high-quality workers.
Colorado?s tax revenues are healthy, providing more funding for critical programs. Colorado home price appreciation in 2006 is likely to pick up speed. Better days are ahead.
The Big Chair
Score one for our beleaguered President. The October announcement by President Bush of his selection of Ben Bernanke as the next Chairman of the Federal Reserve System was an extremely positive development.
Strong Credibility
Over the past four years Bernanke quickly gained the trust and respect of Wall Street and the global financial community. Prior to 2001, he was largely unknown in global financial circles and served as head of the economics department at Princeton.
He served as a member of the Federal Reserve Board from August 2002 to June 2005. He rapidly became the second most influential person on that seven-member board. In June 2005, he was selected by the President to serve as the Chair of the President?s Council of Economic Advisors.
Bernanke was the number one choice of economists in various surveys. While holding the position of Chair of the Federal Reserve may seem like some honorary title, it is one of enormous power.
Strong Influence
Many of us in the crystal-ball-gazing community would argue that no other person in the American economy, including the President, has more day-to-day impact on our lives, i.e. the impact on inflation and interest rates. As noted before, the position of Fed Chair is ?ranked? by many as the second most powerful position on the planet, behind the American President.
The ?Maestro?
Alan Greenspan will enter the financial history books as one of the most highly-regarded Fed Chiefs. His reign of just under 19 years is the second longest ever.
Greenspan took bold steps during his tenure to remove much of the Fed?s operating mystique. His push toward greater openness and ?transparency? was very favorable.
Bernanke is likely to continue in that mold, with some modifications. He has expressed support of ?inflation targeting?…i.e. announcing a targeted range for inflation pressures (say 1.2%-2.2%) and then modifying monetary policy as needed to stay within the range. This practice is closely followed by the European Central Bank.
Greenspan opposed inflation targeting, preferring the flexibility to modify monetary policy to meet his whims and those of the financial community. One policy is not necessarily better than the other.
Cheers to Alan Greenspan for a job well done. Best wishes to Ben Bernanke as he fills the Big Chair on January 31.
Inversion
An unusual interest rate development is drawing rising attention within the financial
community…the occasional inversion of the yield curve.
An ?inversion of the yield curve? sounds like something from Star Trek. The typical investment ?rule? is the longer the investment period, the higher the return. This relationship is known as a positive yield curve.
For example, an investor in bonds would typically be rewarded with a higher interest rate to invest for 10 years versus two years. This difference has averaged roughly 0.75%. The logic is the same for a depositor in a commercial bank being offered a higher interest rate for a longer-dated certificate of deposit.
At times, however, the interest rate on short-term bonds actually exceeds the rate on longer bonds. This can occur when the Federal Reserve is pushing short-term interest rates sharply higher to fend off inflation.
An inversion occurred in December, with both 2-year and 10-year U.S. Treasury yields around 4.35%. A year ago the difference in yields was 1.35%. In June 2004 it was 1.87%.
Recession Signal?
Bond historians point out that such an inversion in yields is a precursor of recession, as it can place great pressure on the economy. Current ?inversion means recession? skeptics, including me, see things differently. Even Fed Chair Greenspan suggests the relationship between inversions and impending recessions is less direct.
In today?s case, the level of interest rates is remarkably low. Following 13 monetary tightening moves by the Fed since June 2004, the federal funds rate is still only 4.25%. More tightening could push the rate to between 4.50% and 5.00% by May. Such moves would push the two-year Treasury Note yield (now near 4.30%) higher.
Long-term interest rates remain low, especially following the Fed?s tightening and the recent inflation surge. Ten-year U.S. Treasury yields have ranged between 4.10% and 4.70% in recent months, with the rate currently near 4.35%. Such rates are only marginally above the level of 19 months ago.
Why have long-term interest rates not moved sharply higher, reacting to the sharp rise in short-term rates and higher U.S. inflation? Two reasons:
The first is the enormous global flow of funds into U.S. Treasury securities. The Chinese, Japanese, Saudis, etc. enjoy enormous revenue from huge trade surpluses and high oil prices.
What to do with the money? Tens of billions of dollars monthly soon find their way into U.S. Treasury securities…still the safest and most marketable investment on the planet. Such demand for Treasury securities keeps security prices high…and yields low.
In addition, the Fed under Greenspan (and soon under Ben Bernanke) enjoys solid financial market credibility. Global investors are comfortable holding fixed-rate longer-dated bonds because their confidence in the Fed?s inflation-control mentality is high.
Not This Time Around
More frequent inversions of the yield curve will occur in coming months. Historically,
such a change has signaled recession…this time should be different.