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10 Years After 9/11 – Housing Prices

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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 – Construction

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Colorado construction employment declined from mid-2001 through 2004, in part due to 9/11 and the recession. It rebounded between 2005 and 2008, but plunged in 2008. Employment in 2011 dropped back to levels last seen in 1995.

State single family building permits peaked in 2004 at 40,753 and plunged to 7,231 in 2009. A slight recovery was seen in 2010 and 2011.

Total construction valuation for Colorado peaked at $16.8 billion in 2006 and fell to $6.2 billion in 2010.

Colorado’s Construction Sector Real GDP peaked in 2000. It declined at an annualized rate of -5.9% between 2000 and 2010.

In short, the Construction Sector got hammered.

For additional information, see the reports The Colorado Economy Ten Years After September 11, 2001 and Colorado’s Construction Industry – Impact Beyond the Hammers and Nails at cber.co.

©Copyright 2011 by CBER.

10 Years After 9/11 – Tourism Initially Hit Hard

horvath

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.

State Economic Blueprint Released

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On July 22, Governor Hickenlooper’s Office of Economic Development and International Trade released its business development blueprint for the state. The document is the culmination of seven months of surveys, meetings, and information gathering.

Reaction to the blueprint is mixed. Coloradans feel the strengths of the plan are:
• It has received input from people in all parts of the state and all walks of life. As such it allows various regions to have customzied plans focused on their unique strengths.
• Various groups have openly provided support for the “bottom-up” approach.
• The plan focuses on what some think are some of the state’s natural strengths, such as tourism.
• The plan gives OEDIT staff an opportunity to take actions that they feel are appropriate because it has been mandated by the people.

As well, there is trepidation about parts of the plan. A sampling of some of the concerns are:
• There is not enough attention given to innovation.
• While there is talk about innovation, there is no clear-cut definition of what it is.
• There is a lack of attention given to strengthening the infrastructure.
• Lack of sufficient attention given to the development of primary jobs.
• Input from the masses lacks the vision gained from the expertise of strong leaders.

As with any plan there are a multitude of questions and opinions. An example of these questions follows:
• Who will be accountable for achieving the various goals within the plan – state or local government?
• Since the planning process involved significant local input, will the local organizations be responsible for funding its strategic initiatives or will that responsibility fall on state government?
• What is the proposed economic impact of the plan? How many jobs will it create? What types of jobs will be created?
The good news is that there is now a plan and the state will have a direction for moving forward.

For information about the blueprint go to the OEDIT website or call 303 892 3840.

©Copyright 2011 by CBER.

Economy Struggles as Debt Ceiling Debate Nears “Deadline”

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As the August 2 “deadline” for the debt ceiling approaches there is an abundance of articles, discussions, blogs, and editorials discussing the future of the economy. Most are dismal.

Housing – In 50 words or less, the housing market is dismal. Gary Shilling, Forbes economist, says it will drop another 20% next year. While that may not be the case in many locations, it is unlikely that Colorado will see appreciation in housing prices next year. Time, not stimulus, is the solution to the problem. Unfortunately this points to continued budget woes for schools, special districts, and local governments.

The 2012 Elections – Part of the posturing related to the debt ceiling debate has been centered around the creation of sound bites for the 2012 election. Get your wading boots on for a campaign season that will make previous ones look like a walk in the park. The advertisements and campaign speeches for the upcoming elections are likely to leave the electorate with even greater angst for our elected officials.

Investment Options are LImited – QE2 propped up the stock market for a few months, and temporarily raised consumer confidence. For the near-term, interest rates are miniscule, return on investments are low, commodity prices have fallen off. Did we mention that the housing market has tanked? There are few investment options for consumers.

Fuel Prices, One Example of Inflation – Fed Chairman Bernanke was correct when he said that the price of oil would drop. He forgot to mention that it would occur at summer’s end and it would be accompanied by a decline in the price of other commodities. The price for a tank of gas remains well above $60. Gasoline prices are just one example of inflation that will constrain consumer confidence in the months ahead.

China – The Chinese economy remains strong, but it is slowing. As their consumption decreases, there will be a corresponding decline in the demand for American goods. Like it or not, we are in a global economy and the expansion of U.S. output hinges on foreign consumption.

Unemployment Rate – In Colorado the rate has declined, which is good news. Unfortunately, there are about 230,000 people who are still not working. This is a double whammy. They are receiving financial assistance to reduce their chances of becoming destitute and they have reduced their consumption. As well, older workers are remaining in the workforce because of uncertainty about such federal assistance programs as Medicare and Social Security. This has reduced job opportunities for younger workers, which has multiple negative implications on future economic growth.

At times the dismal news makes it sound like the world is coming to an end tomorrow, fortunately that is not the case. As bad as the economy may seem, the country remains in a growth mode (barely). Despite our current economic and political challenges, the U.S. and Colorado continue to be a great place to live, work, and play.

©Copyright 2011 by CBER.

Recession or Continued Weak Growth?

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Employment data released in July showed that June marked the 9th consecutive month of job growth for the U.S. Over the past 18 months almost 1.8 million jobs have been added, yet total employment remains about 7.0 million below the January 2008 peak. From an employment perspective, the recovery has yet to gain traction.

Gary Shilling, economist and contributor to Forbes and other major business publications, has now indicated that a recession is on tap for 2012 On the other hand, the Conference Board feels the chances for a recession, based on the business cycle, are currently less than 1-in-6.

Shilling has cited the following factors as possible reasons for concern about the economy:
• Economic expansions typically last about three years and the U.S. is currently two years from the end of the last recession.
• Stimulus efforts have not had their intended impact.
• Weak job growth (mentioned above). The magnitude of layoffs has tapered off; however, hiring is on an as-needed basis.
• Solid corporate profits are not translating into solid wage growth.
• Personal consumption has not fully recovered. Wealthy consumers are the only group to have resumed previous spending patterns.
• Housing inventory is too high – there are 2 million homes on the market that aren’t moving. This in turn has reduced housing starts.
• A 20% decline in home prices is on tap for next year. If this happens, 40% of mortgages will be underwater and consumer will pull back.

Assuming that the Mayan’s doomsday projection doesn’t hold true, Coloradans can only hope that the Conference Board has a better pulse on the 2012 outlook than Shilling.

©Copyright 2011 by CBER.

U.S. Employment Situation – The Good, The Bad, The Ugly

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The recent labor report from the BLS brings back memories of the Clint Eastwood classic, “The Good, the Bad, and the Ugly.”

The Good – In February, March, and April an average of 220,000 jobs were added each month.
The Bad – In May the original estimate was that 54,000 jobs had been added. It was hoped that the downward trend would simply be a bump in the road.
The Ugly – The number of jobs created for May was revised downward to 25,000 with an addition of 18,000 in June.

These are not the kind of job gains that economic recoveries are built on. It is estimated that 100,000 to 125,000 jobs must be added each month to prevent unemployment from rising. If you account for the number of older workers who have remained in the workforce, that number might be bumped to 150,000 to 175,000. It is necessary to add between 200,000 and 225,000 jobs each month, on a sustained basis, to lower the unemployment rate.

The private sector posted gains of 57,000, while budget strapped governments reduced their payrolls by 39,000. The net is +18,000 employees.

The financial sector declined by 15,000 followed by construction at 9,000 workers. In addition, the temporary help services sector shed 12,000 workers. The sector, which is often considered a harbinger of broader hiring, declined for the third consecutive month.

On the positive side of the ledger the most significant sector gains were as follows:
• Leisure and hospitality 34,000 employees
• Health care and social assistance 17,400 employees
• Professional and business services 12,000 employees
• Wholesale trade   7,100 employees
• Manufacturing   6,000 employees
• Retail trade   5,200 employees
• Other services   5,000 employees
• Transportation and warehousing   3,600 employees.
Note: Not all sectors are included in the above overview.

While there is optimism for improved economic activity in the second half of the year, the reports cast doubts about job expectations. Employment growth appears to be nothing more than a necessary evil in the new economy that is driven by technology, globalization, a housing bust, and struggling financial markets.

Clint Eastwood, where are you when the country need you the most?

©Copyright 2011 by CBER.

Contribution of Consumer to Real GDP Continues to Increase

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There are an abundance of data sets that are useful in evaluating the performance of the U.S. economy. If only one could be used to measure overall performance it would be Real GDP, or the inflation adjusted output of the economy. The current Real GDP is approximately $13.4 trillion.

There are 4 components of the GDP. Mathematically speaking GDP= C+I+G+X.

The following analysis briefly looks at the change in the composition of output for each of these four components over the past two decades. As such, it is not intended to depict the total amount of output or changes in that output.

Consumers (C) are the primary drivers of the U.S. economy. As can be seen, the importance of the consumer has increased:
• Q1 1990 Personal consumption was 65.8% of Real GDP.
• Q1 2001 The go-go 1990s treated the consumer well – too well. Consumption rose to 69.4%.
• Q1 2003 Consumers were encouraged to keep spending as a way to pull the country out of the 2001 recession. Consumption rose to 70.2%. Creative financing helped sustain auto sales and allowed home owners to use their dwellings as ATMs. As a result consumers saved less, spent more, and  became overleveraged.
• Q1 2008 The Great Recession and the accompanying housing bust caused sharp declines in Investment (I). That decline increased the importance of government and consumer spending (70.3%).
• Q1 2011 The reliance on consumers continued as housing markets remained weak and government spending tapered off. Consumption rose to 71.1% of Real GDP.

Investment (I) includes business spending and the housing markets. The ups and downs of the contribution of investment follow:
• Q1 1990 Investment was 15.4% of Real GDP.
• Q1 1992 After the 1991 recession, investment dropped to 13.1%.
• Q1 2000 Investment rose during the go-go 1990s to 17.4%.
• Q1 2002 The 2001 recession pushed investment down to 15.5%.
• Q1 2006 With the recovery, business activity increased and investment rose to 17.7%.
• Q1 2009 Investment dropped to 11.7% as a result of the Great Recession and the fallout in the housing market.
• Q1 2011 With the recovery, a slight rebound has been seen. Investment has risen to 12.5% of Real GDP.

Government (G) spending was 20.3% of real GDP in Q1 1990. Shortly after, expenditures related to the first Iraq war and the 1991 recession temporarily drove the percentage up slightly. For the remainder of that decade, the strength in personal consumption and investment decreased the relative importance of government spending. Its percentage of real GDP declined to 17.5% in Q1 2000. Since then, it has risen steadily as a result of the wars in Iraq and Afghanistan and efforts to offset the effects of two recessions. Government spending was 20.2% of real GDP spending in Q1 2011.

Finally, net exports (X) have subtracted from Real GDP, i.e. there has been a trade deficit for over 20 years. In Q1 1990, Real GDP was -1.6% of Real GDP. As the trade deficit increased, net exports reached -5.9% of Real GDP in Q1 2006. In Q1 2011, net exports were -3.8% of Real GDP.

This zero sum analysis illustrates how declines in the relative importance of one GDP component require increases in the relative importance of other components. In short, this analysis shows the role of the consumer (C) in the recovery and the drag placed on the economy by the decline in the contribution of investment (I), particularly the housing market.

Looking to better times in the months ahead and an economy that has more balanced output.

©Copyright 2011 by CBER.

Colorado Legislative Council – Momentum Building

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In late June the Colorado Legislative Council (CLC) released its quarterly update of the state economy Focus Colorado: Economic and Revenue Forecast. The report included mixed economic news – most of it good.

Nationally, there was reduced optimism compared to the CLC March forecast, with output growth revised downward from 3.2% to 2.6%. The Conference Board and Kiplinger have recorded downgrades of similar magnitude for real GDP. Other revisions include stronger employment growth and improved wage and salary projections.

The analysis of General Fund Appropriation budgets for FY 2010-11, FY 2011-12, and FY 2012-13 illustrates the fiscal challenges facing the state legislature. While funds from various sources are projected to increase, general fund appropriations will remain in the range of $7.2 to $7.3 billion for each of these periods.

On a positive note, CLC has upgraded its 2011 employment outlook from 0.7% to 1.1% or 24,400 jobs. They expect just under 40,000 jobs to be added in 2012. The forecast also points to slightly improved retail trade sales, income growth, and construction activity. On the down side slightly higher inflation is on tap.

The risks to continued growth remain significant. Consumer confidence remains low, constrained by concerns about debt, inflation, monetary policy, and weakness in the housing and construction markets. Despite these concerns, it is generally believed that these are factors that will prevent the economy from growing at a faster rate in the near term. Finally the chances of a recession are thought to be slim, less than 1-in-5.

At last, the majority of indicators are pointing to gradual improvement for the remainder of the year and solid job growth in 2012.

 

©Copyright 2011 by CBER.

Colorado’s Construction Problems Date Back to 2000

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Colorado’s construction industry has struggled for more than a decade!

Between 2007 and 2009 the construction and related industries accounted for the loss of 1-in-6 private sector jobs. Many believe that construction began its tumble in the middle of the decade. Employment and total valuation peaked in 2006 at 167,800 and $16.8 billion respectfully.

A closer look at Real GDP data shows that the downturn in Colorado’s construction sector actually began in 2000 and has been on a steep downhill path since. At that time the construction industry’s contribution to state output was $15.5 billion, or about 9% of the state’s private sector Real GDP (in 2005 chained dollars). Last year that contribution had dropped to $8.2 billion or about 4% of the private sector output total. From 1997 to 2010 the sector posted an annualized decline of 2.8%.

This decline in output is relevant for two reasons. First, the construction industry affects all of Colorado. More than half of the state’s counties have a higher than average concentration of construction workers. Second, a case can be made that the industry hasn’t bottomed out yet.

Unfortunately, about the only viable solution is time.

©Copyright 2011 by CBER.