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Delivering The Next American Economy

In early December the Brookings Institute sponsored the Global Metro Summit – Delivering the Next American Economy . The purpose of the event and webinar was to discuss their vision for long-term growth to occur in the U.S.

The foundation of their vision for short-term job growth and long-term economic success is better utilization of the strengths of our top 100 cities. To illustrate this point they cited a series of statistics. For example, two-thirds of the U.S. population lives in the top 100 metro areas, three-fourths of the GDP is generated there, and 94% of venture capital funding occurs in these focal points of business.

Bruce Katz, Brookings Vice President identified the following as the means for better utilizing the U.S. centers of commerce:
• Innovation is essential in delivering the “next economy”. The development and implementation of new ideas is essential for positioning the U.S. as a global leader, both in economic and social reform. On the economic side of the equation, this will allow American companies to develop distinct competencies. From a social perspective, innovation also has the potential to raise the standards of individuals with lower incomes. American innovation is most likely to occur in our top metro areas.
• Increased global demand and the growth of third world countries will result in increased exports. Today, the top U.S. cities will have a chance to develop strategies with other cities (rural and metro), states, and regions to take advantage of this opportunity.
• The energy revolution will bring about change through the use of alternate energy sources. It is essential for the world to develop cleaner and more diverse sources of energy, particularly for use in the top 100 cities.

While Katz’s notions are well conceived and thought out, time will tell if they will become the driving force of the next economy or if they are great ideas that will be celebrated by urban leaders, scorned by rural communities, and ignored by political leaders because they are perceived as too self serving.

©Copyright 2011 by CBER.

Money Museum to Open at Denver Fed

The Denver Branch of the Federal Reserve Bank of Kansas City recently announced that it will open a “Money Museum” and conference center in downtown Denver in early January. The museum will highlight exhibits discussing the responsibilities of the Federal Reserve. For example, information is provided about how the Fed establishes monetary policy with the intent of maintaining a stable economy.

In addition the museum will include displays that show how to detect counterfeit bills and the amount of space that is needed to store $30 million. Visitors may also receive samples of worn out or historical currency that has been shredded.

An important function of the museum is to provide education opportunities for K-12 students and teachers. The museum website indicates that class visits include a 30 minute presentation of personal finance concepts. More extensive sessions are available for K-12 teachers that demonstrate how to meaningfully incorporate economics and financial principles into the classroom.

The Denver Branch is located on the 16th Street Mall in Downtown Denver, between Arapahoe and Curtis streets.  Published hours for the museum are 8:30 a.m.-4:30 p.m. weekdays except bank holidays. Additional information can be obtained by visiting the Kansas City Fed website (www.kansascityfed.org/moneymuseum).

 

©Copyright 2011 by CBER.

Colorado Forecasts In – Tax Legislation will be Game Changer

A review of the various Colorado economic forecasts for 2011 is encouraging. On a comparative basis, they are generally upbeat. The outlook is for continued improvement in the national economy and ultimately more jobs in Colorado.

Over the past 25 years, the Colorado economy has more closely resembled the U.S. economy (the world’s most diverse). As a result the state’s fortunes have mirrored those of the nation.

For that reason, much attention is given to projections for Real GDP growth. While output is not a leading indicator, Real GDP forecasts provide insight into the factors that will drive change in the national economy in the months ahead.

Overall, most expectations for 2010 have been raised slightly over the past month. The justification for these increases is the buildup of inventories, increased consumption, and improved consumer confidence. These are positive signs that will carry over into 2011.

To review briefly… Currently, most output projections for 2011 are in the range of 1.7% to 3.5%.

On the employment side of the equation, the 2011 outlook range varies from flat, or slightly negative, (Colorado Demography Office, November) to growth in the range of 33,000 employees, or 1.8% (Jeff Thredgold, September). Both OSPB and the Colorado Legislative Council, the two agencies that provide forecasts for the state government, will present their updated forecasts for the state during the second half of the month. CBER takes a middle ground with 15,000 jobs added.

This past week, Congress introduced a potential game-changer.   Legislation has overwhelmingly passed the Senate that would extend the Bush tax cuts, reduce payroll taxes, and extend the unemployment insurance benefits. If passed, this legislation has the potential to increase consumer confidence, spur additional spending, strengthen demand, and ultimately add jobs. (At the state level, this may have the potential the push job growth to the upper end of the above mentioned range – 30,000+.)

The downside is that the legislation will significantly increase debt, potentially worsen income equality, increase dependence on financing from foreign lenders, and reduce potential funding for other essential investments that might stimulate long-term growth such as financial support for aerospace and technology, other scientific research, education, homeland security, infrastructure, and health care.

There are two schools of thought. On one hand, it is believed that addition stimulus is necessary and that this legislation along with the recent quantitative easing will make the difference. At the same time, it has been said that the leaders are determined to buy a good economy without regards to the long-term cost at a time when the only solution is time.

Time will tell.

©Copyright 2011 by CBER.

Small Business Start-Ups on the Decline?

During a typical recession, the number of new or start-up businesses increases as some individuals start their own firms when they lose their jobs. As these start-ups become successful, job creation occurs, thus shortening the recovery periods. Unfortunately, the Lost Decade is not your typical recession.

On December 8, Aaron Smith of Moody Analytics reported that an analysis of BLS  data shows that the number of self-employed people fell from a peak of 15.5 million in December of 2006 to 13.7 million in October of this year, or a decline of 1.8 million. He went on to say that over the past decade, the self-employed have comprised 9.5% to 10.5% of the U.S. workforce, and today that percentage is closer to 9.5%.

Both Smith and others agree that small business sentiment is improving. For example, Vectra Bank’s Colorado Small Business Index has posted miniscule, but steady gains for the period of July through October. Despite increased optimism, small businesses do not appear to be thinking about expansion of capital expenditures, hiring, and increased inventory.

Assuming there is not a major revision in the data, this analysis raises a series of questions:
• Is this problem driven by a lack of demand or availability to credit? While both have been a problem, NFIB  research suggests that lack of demand has been more problematic.
• Is this reduction in startups tied to cutbacks in manufacturing and high tech jobs or might it be a function of increased dependence on imports?
• Has there been a structural change in our economic infrastructure that has diminished demand for start-ups?
• Is this a sign that the U.S. has lost its edge in competitiveness or innovation?
• Does this downward trend in firm creation exist in small-business-friendly states such as Colorado?

Hopefully this downturn in small business activity is just a brief hiccup, and that there will be a resurgence in start-ups in the near-term.

©Copyright 2011 by CBER.

Forecast Accuracy for the CU Colorado Economic Outlook

In early December the Colorado Business Economic Outlook Forum (CBEO) will be held in Denver for the 46th consecutive year. The event, sponsored by the Leeds School of Business and BBVA Compass is a forecast of state employment based on the expert opinions of estimating groups for each of the NAICS sectors. Each year, one of the most common questions about the event is, “How accurate are the numbers?”

Reasons for Analysis

In the fall of 2008, I presented a simplistic analysis of the accuracy of the CBEO at the annual AUBER conference (this blog post updates that presentation to include the period 1972 to 2010). The original presentation was motivated by curiosity from estimating group members who wanted to know how accurate their forecasts were.

Questions were also raised from an academic perspective.
• Which is more accurate, a forecast calculated by an econometric model or one determined by committees, based on expert opinion?
• Does financial sponsorship of a forecast by a publicly traded financial institution increase the chance of bias in the forecast?
• An academic paper by Owen Lamont (2001) asked, “Does an experienced research team, with a wealth of knowledge, produce a more accurate forecast or does the added knowledge result in an “arrogance” which may reduce the accuracy of the forecast?

While this simplistic analysis provides insight into some aspects of the forecast accuracy, additional research is necessary to address these issues.

Jobs Gained or Lost

The first test of accuracy measured whether jobs were added or lost (+ or -).

Because an employment forecast is intrinsically a growth forecast, its real value occurs if it can identify the years when jobs are lost.

Colorado employment recorded increases in 34 of 39 years.
• The CBEO accurately predicted growth for all 34 years; however, it inaccurately forecasted growth for three years when jobs were lost.
• Said differently, jobs were lost in five years. The CBEO accurately forecasted 2 of the 5 years, or 40%, when job were lost.

Turns (The key is to accurately predict them)

A second test for measuring the accuracy of the CBEO is to evaluate its ability to recognize turns. A turn is defined by a change in the slope or direction of the trend line (upward or downward). For example, it may change directions from positive to zero or negative.

• There were 17 actual turns in 37 years. During those 17 years, the forecast accurately projected turns 12 of 17 times (12 correct turns, 5 incorrect turns). These errors occurred in 1979, 1987, 1990, 1995, and 1998.
The forecast projected 6 turns during the remaining 20 years when turns did not occur (0 correct turns, 6 incorrect turns). These errors occurred in 1973, 1988, 1989, 1993, 1999, and 2009.

• The CBEO accurately forecasted turns 52% of the time – 12 correct/11 incorrect.

This analysis illustrates the difficulty in preparing an employment forecast. There are clearly challenges in accurately predicting turns, as well as the magnitude of each of the turns. This has been demonstrated by most economists in their projections during the Lost Decade. In the case of the CBEO, its value derives more from the discussions associated with projections for each of the sectors, than the projected changes in total employment.

©Copyright 2011 by CBER.

It all Starts with a Job

A mantra common to economic developers, high school counselors, and politicians is that “it all starts with a job”.  Jobs come in all shapes, sizes, and pay rates, as evidenced by the employment and occupation data produced by Colorado Office of Labor Market Information (LMI).

For example, the average entry level pay rate for Coloradans is $9.98 per hour while the average rate for experienced workers is $28.18. On average, hourly wage earners receive $22.11 per hour.

On the salary side of the equation, average annual entry level wages are $20,767 with experienced workers receiving $58,606. Average wages across all sectors are $45,993 per year.

The most recognized LMI data is the employment and unemployment numbers. In addition; the group also tracks occupational data, such as types of jobs, short-term and long-term growth rate, areas of the state where jobs are most prevalent, and compensation information.

A simple example of some of the data can be found by looking at the seven categories of occupations in the legal profession.  There are approximately:

• 14,298 Lawyers
• 4,486 Paralegals and Legal Assistants
• 4,006 Compliance Officers, Except Agriculture, Construct
• 3,965 Claims Adjusters, Examiners, and Investigators
• 1,782 Detectives and Criminal Investigators
• 627 Judges, Magistrate Judges, and Magistrates
• 298 Law Clerks

A similar breakdown is available for each of the key industries that comprise the Colorado economy. These data can be used by community colleges, workforce centers, and private educators to establish training and education programs. Parents and guidance counselors may use them as a tool for guiding their children into certain occupations. Employers may evaluate the data to understand pay ranges or areas where they may expect labor shortages.

 

 

©Copyright 2011 by CBER.

REO – Bright Light in the Down Economy

Although Colorado’s high tech cluster has been hit hard during the “lost decade” there are some bright spots. On November 17 the Colorado Photonics Industry Association (CPIA)  recognized Research Electro-Optics, Inc. (REO)  as one of those bright spots when it named it the 2010 Colorado Photonics Company of the Year.

REO is a precision optics and thin film coating company founded in Colorado in 1980. It services small to medium to high volume OEMs including manufacturers of defense and aerospace systems, laser systems, semiconductor tools, medical systems, life sciences instrumentation and telecommunications equipment.

In recent years REO has expanded its staff and increased its new manufacturing and technology assets. REO officials indicated that they have been profitable for all of the past six years, with double-digit growth in several of those years. The company is privately held, with 2010 annual sales projected to be in the neighborhood of $40 million.

The Colorado photonics cluster received a boost during the mid-1980s, around the time REO was started. At that time, the Colorado Advanced Technology Institute (CATI) provided a small matching grant for at National Science Foundation Center of Excellence at CU and CSU. That grant ultimately led research that was commercialized to form 20 companies.

As an enabling technology, photonics touches many industries, such as aerospace, renewable energy, homeland security, biomedical devices, telecommunications, and defense. This allows companies, such as REO to diversify their product line and clients, thus insulating them from turbulent economic times.

Congratulations to REO!

©Copyright 2011 by CBER.

CSU Forecast – Job Growth Less Than One Percent

On November 16, the Colorado State University ‘s Economics Department held its Colorado Employment Outlook for 2011. This event featured employment forecasts for various regions throughout Colorado as well as an overall forecast for the state.

Like many other forecasting groups, the CSU team accurately predicted the downturn; however, they did not project the full magnitude of the recession. The state forecast stated that employment growth would be less than 1% in 2011, or about 19,000 workers. The Denver metro area will record positive job growth, although the Boulder area will show weaknesses based on their high concentration of manufacturing and high tech. Mixed results are on the horizon for the state’s resort counties and rural parts of the state.

The forecast team worked with the staffs of the Denver Branch of the Kansas City Federal Reserve  as well as the Colorado Office of  Labor Market Information , the state agency that prepares labor and employment data for the Bureau of Labor Statistics .

For additional information contact Dr. Martin Shields or Dr. Harvey Cutler.

©Copyright 2011 by CBER.

Growth in Colorado Exports Bodes Well for Recovery

Recent export numbers provided a glimmer of hope that both the global and Colorado economies are slowly improving. As reported by Rita Wold in the November 12th issue of the Denver Post , Colorado exports through the first 8 months of the 2010 are about 10% higher than for the same period last year. This growth was driven by gains in the top agriculture category and each of the top four manufacturing groups.

Colorado exports, as calculated by WISER , peaked at almost $8.0 billion in 2006, followed by a series of declines to $5.9 billion last year. Total exports in the neighborhood of $6.5 billion are on tap for 2010.

The top agricultural export is, “Meat of Bovine Animal, Fresh or Chilled;” as beef sales are Colorado’s top meat export. In 2005, meat exports bottomed out at about $152 million as fears of Mad Cow disease caused many of the state’s trading partners to block sales of beef imports.. As concerns about the disease subsided, the markets for Colorado beef and other meats increased over the next several years to $400 million in 2008. Demand has declined with the global recession and Colorado meat exports should exceed $330 million this year.

On the manufacturing side of the equation, the top export category is electronic integrated circuits and microassembly parts. In 2006, exports in this category totaled $1.3 billion, and accounted for 16% of the state total. In 2010, this category will account for about 6% of total exports, or $430 million. The loss of the Intel plant in Colorado Springs several years ago, along with the restructuring of the computer storage industry brought about the precipitous decline in Colorado manufacturing exports and employment.

The increase in Colorado manufacturing exports bodes well for the recovery of the Colorado economy, however, it is not likely to drive a strong short-term increase in employment. Over the past decade, manufacturers have increased productivity and output at the expense of a larger work force.

The Colorado Office of Economic Development and International Trade  and the World Trade Center  provide a variety of programs and assistance to Colorado exporters. Many of these services are particularly valuable to first-time exporters or to business exporting to countries for the first time.

 

 

©Copyright 2011 by CBER.

Job Losses Expected in 2011 – State Demography Office

The 2010 Annual State Demography Meeting kicked off on a somber note, when staff economist David Keyser;  announced that the state’s recovery from the Great Recession will be painfully slow.

Some of the key points from Keyser’s review of the past year (2010) were:
• Job gains occurred in health care, government, and education.
• Ongoing losses in manufacturing continue to hinder the recovery because they have a high multiplier effect.
• Low wage jobs were hit harder.
• Access to credit provided a challenge for many companies.
• Small businesses saw significant setbacks.
• Rural counties that relied on oil and gas or tourism (such as the Western Slope) suffered greater losses, while agriculture-based economies were more stable.
• The loss of basic jobs, such as manufacturing, will have a long-term effect on the state because these jobs are likely to be relocated elsewhere.
• On the other hand, the loss of non-basic jobs, such as retail, food and beverage, or personal services will return in the same location.
• Colorado will remain a popular place to live and work and net migration will remain positive, but slightly below previous years.

Looking ahead, key points from Keyser’s presentation for 2011 were:
• Non-farm wage and salary employment will decline slightly and a best case scenario is that it will be flat. Wage and salary job losses should not exceed 22,000 (1%).
• Agriculture and small businesses are likely to post a slight increase, offsetting declines in wage and salary employment.
• Construction won’t come back in the immediate future.
• Health care will continue to add jobs.
• Colorado will continue to be closely tied to the US economy.
• Many of the effects of the 2007 recession could be permanent.

Keyser’s forecast for 2011 is slightly lower than what cber.co projected in late October, but the basic analysis of the current state of the economy is similar.

©Copyright 2011 by CBER.