10 Years After 9/11 – Summary of Impacts on Colorado

This is the final post summarizing the way the economy has performed in the 10 years after 9/11. The series of posts began in early August and has included a review of tourism; construction, housing, and financial activities; retail sales and personal services; high tech and the military.

Tourism

• From an employment perspective, tourism (accommodations and food services) has expanded in Colorado since 2001. Competitiveness within the industry has increased, as evidenced by the flat growth in output.

• In Colorado, the airline industry was “restructured” after 9/11.

• The impact of 9/11 was short term. These declines may have been offset by gains in emerging industries,
such as teleconferencing and other means of communications.

Construction, Housing, and Financial Activities

• Construction, housing (prices and foreclosures), and finance are all interrelated. A portion of today’s
problems can be tied to 9/11 and the 2001 recession. There was a mindset that the country could “spend” its way back to prosperity. That mindset created problems when overextended consumers lost their jobs or saw declines in the values of their houses.

• Construction output peaked in 2000 and has dropped-off since. From an employment standpoint, there was a slight decline during the 2001 recession. A much more severe drop-off began in 2008.

• Creative financing allowed financial employment to grow throughout the 2001 recession. Some of the
products that spurred that growth were problematic in the second half of the decade. In turn, layoffs in the
financial sector began in 2007 and have continued since. These declines are a function of lack of activity,
consolidation, automation, bank failures.

• Year-end equity market values are about the same in 2010 and 2000.

Retail Sales and Personal Services

• Sales of retail goods and personal services has become more competitive during the past decade, yet
employment has remained relatively flat. Increased savings in recent years may be an indicator that consumers learned from the 2001 and 2008 recessions that they have limited resources that can be allocated to the consumption of goods and services.

High Tech (Manufacturing; Information; and Professional Technical Services)

• Employment has dropped significantly as a result of increased efficiencies, outsourcing, and offshoring. At
the same time output has risen dramatically. MIPTS is the driver of the state economy. 9/11 played a role in the adoption of high technology goods and services (surveillance, security, teleconferencing, etc.)

Military
• The U.S. military has increased their dependence on Fort Carson since 9/11.The movement of troops in and out of the base have had a noticeable impact on the El Paso County economy.

The “Lost Decade” was a turning point in the structure of the U.S. and Colorado economies. While 9/11 did not cause this transformation, it played a role in accelerating the change that occurred in some industries.

For additional information, see The Colorado Economy Ten Years After September 11, 2001 at cber.co in the Special Reports section.

©Copyright 2011 by CBER.

10 Years After 9/11 – High Tech Employment Falls Off

For the past 20+ years, Colorado’s high tech cluster has been a driver of the state economy, creating high-paying primary jobs that spawn growth in other sectors of the economy. During much of that time Colorado has been recognized as one of the top states in the country for its number of high tech workers, on a per capita basis.

There is no NAICS code that reports advanced technology employment. Rather than being called an industry, it is technically a cluster because it’s companies crosses a number of sectors. They vary from goods producers and extractive industries to service providers, such as engineers and architects. The high tech cluster has varied in size from 120,000 to 220,000 workers over the past two decades. Currently it employs about 172,000 people.

Because it is a cluster, special calculations are necessary to determine employment levels. Rather than perform these calculations, a good proxy of the presence of high tech or advanced technology, from both an employment and output perspective, is the performance of the Manufacturing; Information; and Professional, Scientific, and Technical Services (MIPTS) sectors.

The two recessions during the past ten years provided advanced technology companies with motivation to increase productivity through outsourcing and investments in capital. As a result employment declined precipitously, while output showed impressive gains.

In 2000, MIPTS employment was 451,100 workers. About 87,400 jobs were lost by 2010, or an annualized decline of  -2.1%. At that point, the MIPTS sectors accounted for 363,800 workers or 16.4% of total employment.

It remains to be seen what impact the sharp decline in employment will have on Colorado’s MIPTS and the high tech cluster. There are concerns that its dropoff will adversely impact the supply chain within the state as well as the base of trained workers. Can Colorado maintain its innovative edge? Time will tell.

©Copyright 2011 by CBER.

10 Years After 9/11 – Discounted and Marked Down

The Retail Sector is a mixed blessing for Colorado. On one hand it is one of the larger sectors, providing jobs for a number of people. As well, retail sales taxes are source of revenue for municipalities and state government. In fact, taxes generated from retail sales are so important that some municipalities are strategically zoned so their borders are lined with retail facilities. It is their intent to prevent leakage from their area and increase sales (and taxes) from neighboring cities and counties.

The retail sector did not fare well during the Lost Decade.

In 2000, Colorado retail employment was 245,200. Ten years later, it was 235,900, or a decline of 9,400 jobs. In 2010, the Retail Sector accounted for 10.6% of total state workers.

During this same period, retail trade sales increased from $52.2 billion in 2000 to $61.1 billion in 2010. It should be noted that sales peaked at $67.3 billion in 2007 before plummeting in 2008. They bottomed out at $58.5 billion in 2009. While sales post an increase of $8.9 billion over this 10-year period, the gain is not adjusted for inflation.

The annualized rate of growth for sales is 1.6%. The annualized rate of growth for Colorado inflation was 2.0%. Not only did the sector lose employment during the Lost Decade, there was a decrease in sales adjusted for inflation.

In short, the Lost Decade has been difficult for both retailers and the government organizations that rely on sales tax revenues to support their operations.

©Copyright 2011 by CBER.

10 Years After 9/11 – Interest Rates and Equity Markets

In 2000, the national economy had been on a run that lasted about eight years. Interest rates were reasonable and the equity and housing markets were on an upward trend that seemed like it would never end.

Then 2001 and 9/11 hit!

The following comparisons show differences in key interest rates for December 2000 and December 2010:

Fed Funds Rate
Dec 2000 month-end 6.40%
Dec 2010 month-end .18%

30-year Fixed Rate Mortgage Fannie Mae
Dec 2000 month-end 7.41%
Dec 2010 month-end 4.47%

30-year FRM Fannie Mae FHA/VA
Dec 2000 month-end 7.20%
Dec 2010 month-end 5.06%

The following comparisons show differences in the equity markets for the same period.

S&P 500 Composite
Dec 2000 month-end 1,320,28
Dec 2010 month-end 1,257.64

DJIA (30 industrials)
Dec 2000 month-end 10,786.85
Dec 2010 month-end 11,577.51

Nasdaq Composite
Dec 2000 month-end 2,657.81
Dec 2010 month-end 2,631.56

Not only did the Lost Decade show a lack of gains in employment, it showed losses a lack of gains in financial
markets. (Source: FreeLunch.com)

©Copyright 2011 by CBER.

10 Years After 9/11 – Creative Financing Fizzles

In early 2003 a reporter posed the question, “Looking back, what did you miss in forecasting the 2001 recession?” In hindsight, there were two signals of greater problems.

1. Colorado construction output began to decline in 2001.
2. Employment in the Colorado Financial Activities Sector moved counter to total employment during the 2001 recession.

At that time, it was difficult to understand these trends because they were not fully developed. In the months prior to 9/11, the economy had slowed, but remained strong. Very few noticed the slowdown in construction output and those who did thought it to be nothing more than a bump in the road.

By mid-decade it became more apparent that the strength of the construction industry was waning. T-Rex was winding down and the only major activity was a smaller highway project in Colorado Springs, the Comanche Power Plant in Pueblo, and a mixture of school construction additions or improvements. In addition, housing permits, and valuation began to level off.

By 2007, housing construction began to slip and by 2008 it was clear that the industry was faced with more than a “bump in the road”. Between 2007 and 2009, 1-in-6 of the private sector jobs lost were either in construction or construction-related industries.

In hindsight, more economists and bank officials should have questioned why employees were being added in the Financial Activities Sector during a downturn. When 9/11 occurred, the economy came to a grinding halt for several days. Americans were encouraged to keep spending in hopes the country could consume its way out of the recession. At the time, that seemed to be the right thing to do.

Creative financing products (HELOCS, 0% financing, interest only loans, reverse mortgages, and others) were designed to stimulate consumption. Demand for these products increased in popularity because they allowed Americans to purchase whatever they wanted. To meet that demand, financial employment expanded between 2000 and 2007.

In 2007 a series of problems began to surface, the popularity of these products dropped off, and employment in the sector reversed trend – sharply. The industry experienced a complete melt-down – collapse of large financial institutions, the bailout of major banks by national governments, bank consolidations and closures, declines in consumer wealth, failure of top businesses, volatile equity markets, declining property values, foreclosures and evictions, and much lower interest rates.

In hindsight it is now easy to see that in 2002 there were signals that greater problems lay ahead. Given the circumstances, it is also easy to see why we looked past those warnings.

©Copyright 2011 by CBER.

10 Years After 9/11 – Housing Prices

Can you say housing bubble?

During the Lost Decade Colorado residents felt like Ann Hodges, the only person on record to be hit by a meteorite. While the rest of the nation was enjoying steep appreciation in their housing prices, Coloradans only saw modest gains.

Then their fortunes turned.

When the housing bubble burst in 2006, Colorado prices either remained stable or recorded a modest decline. Comparatively speaking, that is good news. Residents in many other states saw precipitous declines.

The downturn in prices meant that at one point, at least 25% of U.S. homeowners, or more than 11 million people, were underwater on their loans. They owed more than the value of their homes.

This problem can be attributed to the creative financing tools that allowed homeowners to treat their dwellings as “cash registers” during times of steep appreciation. They took on extra debt expecting the steep appreciation to continue. When prices plunged, the additional debt came back to haunt them.

Lower housing prices has theoretically made it possible for first-time buyers, those wanting to upgrade, or those previously shut out of the market to purchase a home. But, there is a catch. Underwater owners have difficulty refinancing their homes and those who qualify for refinancing may choose not to sell at a loss.

The combination of underwater owners and the high number of foreclosures has created chaos for the construction market.

It is not a pretty situation; however, in many cases, the lack of steep appreciation in the first part of the decade has worked to the advantage of Coloradans.

©Copyright 2011 by CBER.

10 Years After 9/11 – Tourism Initially Hit Hard

Over the next six weeks this blog will look back 10 years at the change in the national and state economies. In particular, it will take a simplistic look at the possible impact that 9/11 may have had on Colorado’s Lost Decade.

There are analyses that suggest Osama bin Laden inflicted extended damage on the U.S. economy. These calculations show the direct and indirect costs of fighting two wars, tracking OBL and other al Qaeda for the past 10 years, and adopting increased security measures.

Others believe the long-term financial impact of 9/11 was minimal. These viewpoints suggest the 2001 recession was a normal part of the business cycle and the self-inflicted wounds from the financial and housing crises were far greater than the impact of 9/11.

The brief comments provided in this and subsequent blogs are not intended to prove or disprove these viewpoints. Rather, the intent is to show how different sectors of the Colorado economy reacted to 9/11, the financial crises, the housing bubble, and the 2001 and 2007 recessions.  In September this blogs will be summarized and compiled at CBER.co

We’ll begin the discussion by looking at the Leisure and Hospitality sectors.

Tourism was the industry that was initially hit the hardest by 9/11, more so in states such as Nevada than Colorado. Nevertheless, the impact in Colorado was felt immediately. In 2002 there was a drop off in DIA passengers, skier visits, and park visits. This was accompanied by an obvious decline in tourism-related employment.

Sector employment remained soft through 2004. Between 2005 and 2009 the number of leisure and hospitality workers has grown at a rate similar to total state employment. Although tourism employment was hit hard in the 2007 recession, it has since recovered at a faster rate than most other sectors.

On the other hand, employment in Colorado’s air transportation industry declined over the past decade. The sharpest part of the decline coincided with 9/11. A series of industry issues (consolidation, competition, increased productivity, pricing wars, etc.) were exacerbated by the unexpected decline in business. Despite a decline in air transportation employment, the number of passengers at DIA increased from about 39 million in 2000 to more than 51 million in 2010.

©Copyright 2011 by CBER.