Blog - Colorado-based Business and Economic Research

Will the Grinch Dictate Retail Sales this Holiday Season?

October 13, 2011October 13, 2011 horvath Leave a comment

It is the time of the year when retail stores pull out their Christmas goods and decorations in anticipation of the upcoming holiday season. At the same time, trade associations and economists dust off their Grinchmeters to project consumer’s willingness to share in the spirit of giving.

Recently, the National Retail Federation (NRF) released their forecast stating that 2011 holiday sales will post a 2.8% increase over last year and the total will reach $465.8 billion. While the increase is weak compared to last year’s increase of 5.6%, it is comparable to the average for the past 10 years. Nationally, retailers are expected to hire a half million seasonal workers this season.

The following factors may point to a better than average season.
• There have been 14 back-to-back months of increased retail sales and momentum is established.
• More people are working than a year ago.
• There is a lower level of household debt, although a portion of that decline is a result of foreclosures.
• The Grinch may get lost this Christmas season.

On the other hand, the following factors may cause sales to be average or worse.
• Lack of consumer confidence.
• Lack of confidence by business leaders.
• Higher inflation, particularly higher gas and food prices.
• Lack of wage and job growth.
• A return of extreme volatility in the stock market.
• Uncertainty associated with the 2012 elections.
• Consumer shopping patterns have been altered.
o Consumers are spending less time in stores, which reduces impulse sales.
o Increased Internet sales.
o Consumers have been trained by retailers to expect sales or heavy discounting.
o Consumers have learned that lower levels of gift giving are acceptable.
o Some consumers have chosen to give gift cards rather than purchase a gift.
• In an article by the New York Times (A Contradiction in the Cargo), the volume(August imports) at the country’s 5 busiest container ports are flat or below the same period in 2010.
o Los Angeles, down 5.75%
o Long Beach, down 14.2% from August 2010; a decline of 15% is projected for September.
o Savannah, GA, down 4%.
o Oakland, down 0.9%
o New-New Jersey, imports were flat.
Fewer imports may signal that retailers are projecting only modest gains in sales this season.

In short, it will be a challenging season for retailers, but not necessarily a buyer’s season for consumers.

Note: The NRF defines “the holiday season” as November and December. Sales generated during these two months are often a significant portion of the annual total for many businesses. The NRF also states that retail sales include most traditional retail categories – discounters, department stores, grocery stores, and specialty stores. Automotive dealers, gas stations, and restaurants are not included.

Economic Development 101 – Basics Concepts of Economic Activity

October 8, 2011October 8, 2011 horvath Leave a comment

Over the past two months there have been a variety of reports about companies coming to Colorado and possible incentives offered to bring them to the state. These incentives are typically based on an estimate of the magnitude of fiscal and economic activity that will be derived by the company relocating, expanding, or staying in state.

There are many different models that can be used to measure economic impact. Impact studies can be conducted for companies, industries, or special events. One of the models frequently used in the state looks at five factors: payroll, construction, purchases, multiplier effect or secondary benefits, and visitor impacts. Economic activity is the sum these factors.

• Total payroll is a function of the number of employees and wages. In most cases, payroll is the largest
contributor to economic activity.
• Construction contributes to economic activity if new facilities are being added or if existing facilities have major or ongoing renovations.
• Purchases are a measure of the company’s local supply chain. For example, a company may purchase office supplies, cleaning services, or advertising expertise from local companies. As well, purchases may indicate the company’s contribution to the local tax base. Some incentives are based on the amount of taxes paid locally and may be granted to offset a portion of those taxes.
• Secondary benefits, or the multiplier effect, are an attempt to measure the indirect impact of the company.
Depending on the industry and company, the multiplier effect is often a significant portion of total activity. In
some cases they are considered to be “fuzzy” and some state agencies do not include them when calculating economic activity.
• Visitor impacts measure the spending of overnight visitors. They may include vendors, visiting experts,
attendees at conferences or meetings, or out of town employees. Typically, the visitor impacts are the smallest portion of economic activity; however, hotels or special events (bike races, stock shows, Super Bowls, World Series) will derive a majority of their economic activity from visitors.

There is also fiscal activity or taxes paid by the company and taxes paid by its employees. Fiscal activity is
almost always a subset of the economic activity. City, state, and local governments are particularly interested in how their bottom line will change as a result of a new company or event. Many incentives are based on a company’s fical activity.

Some impact analyses describe only the impact of a company or an event from the fiscal or economic activity
generated. It is more appropriate to also include the cost of government associated with services provided to the company or eent.

Finally, there are intangible benefits. This may include company or employee contributions to charities, donation of facilities for public meetings, or attraction of intellectual firepower that benefits the overall community.

There is merit in using a common model, such as the one described above, in evaluating economic activity; however, every project contributes to the economy in a different way and comparisons between projects and incentives are often difficult. The challenge comes in communicating the impacts of a company or event in a way that can be comprehended by decision makers.

Sectors Losing Jobs Have Higher Wages

October 2, 2011October 2, 2011 horvath Leave a comment

Through the first 8 months of the year there are 7 sectors of the economy that have lost a net total of 25,100 jobs, compared to the same period last year.

Construction                                     -8,800
Financial Activities                            -4,200
Federal Government                         -3,400
Information                                       -3,400
B-to-B (Not Employment Services)  -2,600
Local Government (Not K-12)         -1,600
K-12 Education                               -1,100

These sectors account for 33.3% of total employment. Average wages for this mix of workers is about $56,600 compared to average annual wages for all employees of about $47,900 (calculations based on 2010 QCEW data). In other words, the average wages for the sectors that are losing jobs is significantly greater than the overall state average, based on 2010 data.

The 2011 prognosis is that each of these sectors will show job losses for the year (2011) and that average annual wages for the group will remain well above the overall state average.

For a comprehensive review of the Colorado economy visit the CBER website.

After 8 Months, 7 Sectors Show Job Gains

September 26, 2011May 20, 2014 horvath Leave a comment

Through the first 8 months of the year there are 7 sectors of the economy that have added a net total of 34,900 jobs, compared to the same period last year.

Tourism +11,600
Private Education and Health Care +9,600
Professional and Scientific +4,100
Extractive Industries +3,000
Wholesale Trade +2,300
Employment Services +2,300
Higher Education +1,900

These sectors account for 40.6% of total employment. Average wages for this mix of workers is about $43,600 per worker, compared to average annual wages for all workers of about $47,900 (calculations based on 2010 QCEW data). In other words, the average wages for the sectors that are adding jobs is less than the overall state average.

The 2011 prognosis is that each of these sectors will show job gains for the year (2011) and that average annual wages for the group will be less than the overall state average. For a more comprehensive review of the Colorado economy visit the CBER website.

Is a Recession on the Horizon?

September 19, 2011May 20, 2014 horvath Leave a comment

The Wall Street Journal recently reported that The Conference Board has put the chance of a recession at 45% within the next 12 months. This is higher than other polls, which are more in the neighborhood of 1-in-3. TCB Chief Economist Bart van Ark’s projection is up from 1-in-3 in August and 1-in-6 in July. The WSJ noted, “For the last 23 years, a downturn has followed every time The Conference Board’s estimate topped 40 %.”

This news is significant because for the past year The Conference Board has unfortunately has more accurately projected the performance of the U.S. economy than such groups as Kiplinger’s, Moody’s, and the National Association of Business Economists. In some cases, these groups provided projections that pointed to a recovery.

The Conference Board’s outlook for the remainder of 2011 and 2012 is:

Real GDP
2011 1.6%
2012 1.8%
A slight improvement is on tap for the second half of 2012.

Consumer Spending
2011 2.1%
2012 1.9%
The consumer will not jumpstart the economy

Capital Spending
2011 6.9%
2012 5.5%
The private sector will be less than robust over the next 18 months.

Net Exports (billions)
2011 -$398.3
2012 -$370.6
Slight improvement in the trade deficit.

This is not a pretty picture!

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

September 14, 2011May 20, 2014 horvath Leave a comment

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.

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

September 8, 2011May 20, 2014 horvath Leave a comment

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.

10 Years After 9/11 – Discounted and Marked Down

September 1, 2011May 20, 2014 horvath Leave a comment

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.

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

August 26, 2011May 20, 2014 horvath Leave a comment

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)

10 Years After 9/11 – Creative Financing Fizzles

August 20, 2011May 20, 2014 horvath Leave a comment

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.