Vectra Bank Colorado Small Business Index for Colorado
January 2011 Release

Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Vectra Bank Colorado

COLORADO’S SMALL BUSINESS SECTOR TO BENEFIT FROM STRONGER U.S. ECONOMIC GROWTH

HIGHLIGHTS

• The Vectra Bank Colorado Small Business Index for Colorado measured 112.9 in January 2011, up from a revised 106.3 in December 2010

• Colorado’s unemployment rate was estimated at 8.8% in the latest month, up from the prior month’s 8.6% rate. Total employment grew by 5,200 jobs during the past 12 months

• Stronger U.S. economic growth during 2010‘s final quarter is likely to be followed by more of the same. Improving U.S. economic performance is a positive sign for Colorado’s small business sector

• The U.S. economy added an estimated 36,000 net new jobs in January, much weaker than expectations of a 145,000 job rise. Better news saw data of November and December revised to show 40,000 more jobs than initially reported. Severe winter weather across much of the nation greatly distorted the employment measure. The U.S. unemployment rate dropped to 9.0% in January, versus December’s 9.4% rate. Solid employment gains as measured within the household survey accounted for much of the decline, while annual benchmark revisions to employment data also played a role

A STRONGER U.S. ECONOMY

The U.S. economy is now showing more signs of self–sustaining growth. Such growth is opposed to the somewhat artificial growth during late 2009 and in early 2010 tied in part to massive government stimulus. The American economy (GDP) grew at a 3.2% real (after inflation) annual rate during 2010’s final quarter, the best performance since 2010’s first quarter. GDP is the most all-inclusive measure of goods produced and services provided on U.S. soil.

U.S. economic growth during 2010 came in at a 2.9% rate after inflation, the strongest performance of the past five years. Such growth compares to a 2.6% real rate of decline during 2009, the depths of the recession. The swing in performance from 2009 to 2010 was the widest since 1983, a period of 27 years.

Better fourth quarter economic growth was led by stronger consumer spending. Consumer spending, which accounts for roughly 70% of the overall economy, rose at a 4.4% real annual rate during 2010’s final quarter, the strongest performance in four years.

The most surprising detail within the report was the plunge in the accumulation of business inventories. GDP is a measure of what is produced, not what is sold. Businesses added to their inventories of goods at a $7.2 billion annual rate, down sharply from the $121.4 billion annual rate in the prior quarter.

The swing in inventories actually subtracted 3.7 points from fourth quarter growth, the largest impact since 1988. Had inventories of manufactured goods accumulated during the fourth quarter at the same pace as in the July–September period, the U.S. economy would have grown at a red hot 7.1% pace in the fourth quarter, the strongest in 26 years.

Moreover, the sharp decline in inventory building during the fourth quarter creates a need for greater manufacturing output during the current and subsequent quarters. Many economists have increased their GDP forecast for the current quarter to near 4.0%, or even higher, as a result of the inventory data. Various growth estimates for the second quarter have also been raised slightly.

The pace of U.S. economic performance is a component of the Small Business Index for Colorado. Stronger growth is a positive contributor to the Index, as it suggests greater outside stimulus impacting small business opportunities within the state. Regional and global economic performance are also components of the Small Business Index.

IN COLORADO

The Colorado unemployment rate—the most heavily weighted component of the Vectra Bank Colorado Small Business Index for Colorado–was estimated at 8.8% in the most recent month, up from the 8.6% rate of the prior month. The 8.8% rate compares to the 7.3% rate 12 months ago. A higher Colorado jobless rate is a positive contributor to the Index as it suggests increased access to labor for small businesses. Other associated factors typically tied to a higher unemployment rate, such as lesser job creation, lesser income gains and lower retail sales, pull the Index lower.

The state’s unemployment rate averaged 7.7% during 2009, 4.9% in 2008, 3.9% in 2007, and 4.4% in 2006. Colorado’s jobless rate averaged 4.6% between 1990 and 2005.

The last 12 months saw an estimated increase in Colorado employment of 5,200 jobs (up 0.2%), which compares to a revised loss of 9,500 jobs in the prior year–over–year period. Colorado lost 106,300 jobs in 2009, added 19,000 jobs in 2008, added 52,200 jobs in 2007, and added 53,100 jobs in 2006.

These job totals compare to gains averaging 46,500 net new jobs annually between 1990 and 2005. Until the most recent period, job declines, leading to slower income creation and weaker retail sales, have had a negative impact upon Colorado small businesses and therefore the Index.

NATIONAL EMPLOYMENT

The U.S. Department of Labor reported a net gain of 36,000 jobs in January 2011, much weaker than the 145,000 net gain expected. The rise of 50,000 jobs in the private sector was also weaker than expectations. Better news saw November and December job data revised to show the addition of 40,000 more jobs than originally reported. Severe winter weather across much of the nation prevented an estimated 886,000 people from going to work during the measurement week of January 9, 2011, leading to uncertainty as to the quality of the data.

The U.S. unemployment rate dropped to 9.0% in January, versus December’s 9.4% rate. The decline from November’s 9.8% rate to 9.0% in January was the largest two–month decline since 1959. A strong gain in new job creation within the household survey (from which the unemployment rate is derived) accounted for most of the rate decline. Annual benchmark revisions to population also impacted the data. The current 9.0% jobless rate compares to the 9.7% rate of one year ago and greatly exceeds the 7.8% rate of January 2009.

Goods–producing employment rose by 18,000 jobs in January. Manufacturing employment rose by 49,000 positions, the largest monthly rise since August 1998. Construction lost 32,000 jobs, while mining and logging employment rose by 1,000 jobs.

Private–sector service–providing employment rose in January by 32,000 positions. Professional & business services added 31,000 jobs, while retail trade added 28,000 jobs. Transportation & warehousing lost an estimated 38,000 jobs, tied to poor weather. Financial activities employment fell by 10,000 jobs. The education & health services sector added 13,000 positions, while leisure & hospitality lost 3,000 jobs. Overall government employment fell by 14,000 jobs during the month, tied to weakness at the state and local level.

The U.S. economy suffered a net decline of 3.6 million jobs during 2008, the worst year since 1945. A revised net loss of 5.1 million jobs during 2009 easily surpassed the 2008 total. The most recent recession was the first since the Great Depression to see all net job gains of the prior expansion eliminated.

The American economy added a revised 909,000 net new jobs during 2010, or 76,000 per month. Roughly 130,000 net new jobs need to be added monthly just to meet the needs of a rising population, and just to keep the unemployment rate stable.

The February 2011 Vectra Bank Colorado Small Business Index for Colorado will be released on March 10, 2011.

Jeff Thredgold
Thredgold Economic Associates
Economic Consultant to Vectra Bank Colorado
(801)614-0403

©Copyright 2011 Thredgold Economic Associates