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Colorado’s Bottom-Up Economic Development Strategy

February 11, 2011May 31, 2014 horvath Leave a comment

The first week in February Governor Hickenlooper (call me “John”) hosted the ninth stop in his Bottom-Up Economic Development tour across Colorado. For about two hours, the region’s top economic developers discussed job creation, economic development, and steps for increasing government efficiencies.

The most frequently discussed topic was transportation and the top priority was to complete FasTracks in a timely and cost effective manner. In addition leaders made a case for completion of the final leg of the beltway (between Broomfield and Golden) around the city, expansion of commercial air, maintenance of our bridges and highways, and reduction of congestion along I-70 into ski country.

Panelists felt that innovation and the attraction/retention of primary jobs was critical if we are to maintain our regional and national competitiveness. They also cited the need to have a well-trained workforce and an efficient, accountable, and adequately funded education system. As well, it is imperative that Coloradans work together to maintain the quality of life that makes the state so attractive. This will require leaders to address issues related to our water supplies, develop parks and recreation areas, invest in infrastructure, and utilize the state’s unique assets to attract commerce.

The metro area’s economic diversity was evident as leaders spoke in support of industries and clusters endemic to their region. For example, they addressed the need for the state to be more “military-friendly”, consider construction of nuclear power plants, understand the importance of refineries, realize the value of our construction and extractive industries, and support gaming and tourism.

As the Bottom-Up discussions continue, it would be beneficial to reflect on past economic-development successes. For example, consider the public-private partnership, the former Colorado Advanced Technology Institute (CATI). During the late 1980s, CATI was established to guide the development of science and technology and the growth of select high-tech clusters. Specifically, the group’s work laid the groundwork for the state’s photonics, materials, hardware, software, telecommunications, and bioscience clusters. While it may not be appropriate to resurrect CATI as it existed, there is merit in having the an organization that would fill many of CATI’s roles in fostering long-term growth.

Four years ago, a state job cabinet was formed, town meetings were held across the state to gather input, and plans were put in place. While that effort was well intended, it did not have the desired impact. Hopefully this Bottom-Up Planning approach with be more successful.

A well-thought out economic development plan couldn’t come at a better time. Colorado employment remains below the 2001 peak and it will be years before state payrolls return to the pre-Great Recession high mark.

1 in 6 Colorado Jobs are Construction or Construction-Related

February 2, 2011May 31, 2014 horvath Leave a comment

The following is an excerpt from Colorado’s Construction Industry – Impact Beyond the Hammers and Nails olorado’s construction and related industries employ one-in-six private-sector covered workers, yet almost 60% of the net jobs lost between 2007 and 2009 were in these sectors.

What type of economic activity is necessary to generate enough construction and construction-related activity to recoup these losses, particularly given the state of Colorado’s housing and commercial markets? (Note: this does not suggest that construction is primary or export industry or that is could or should be).

A financial analyst might suggest that the risk or volatility associated with the construction industry could be reduced if Colorado had a larger, more diverse economy. Therein lies the paradox. Because Colorado is a growth state, it is necessary to have a construction industry to support the current base of five million people and build the homes and buildings that would support a larger, more diverse economy. The Colorado State Demography Office projects continued population increases in the range of 1.5% to 2.0% for the extended future. (Population projections can be found on the State Demography Office website ).

Even with the recent reduction in state construction workers, the 2009 location quotient is 1.29, down from 1.44 in 2001. Because the industry is not considered a primary or export industry, at some point the location quotient will eventually revert to 1.0. At that time Colorado will have a concentration of construction workers comparable to most other parts of the country. Keep in mind that this correction will likely include a comparable adjustment in the related industries identified in this study.

Construction is necessary for the expansion and maintenance of the Colorado economy. It is essential that economic development, public, and private leaders understand the relationship between construction employment, its related sectors and the overall economy. That includes awareness of the volatility of the industry and the likelihood that construction employment will ultimately return to a location quotient of 1.0.

Health Care Adds 15% of Colorado Jobs in Past Two Decades

January 13, 2011May 31, 2014 horvath Leave a comment

In a state that regards its tourism and high tech cluster as primary drivers of the economy, it is somewhat surprising to note that the Health Care and Social Assistance (HCSA NAICS category) has accounted for 15% of net jobs added between 1991 and 2009. The sector has been recession proof, adding jobs every year during this period and it currently employs one-in-ten Colorado workers.

HCSA is divided into four distinct groups: hospitals, physicians, nursing homes, and social care. Physicians, or ambulatory care account for about 36% of total HCSA workers, followed by 29% at Colorado’s 90 hospitals.

Roughly 19% of workers are employed at nursing and residential care facilities with the remaining 16% in social assistance programs. The latter category includes service providers ranging from Head Start programs to commercial child care centers.

Population growth has been the driving force behind the steady expansion of the sector. Two of the four sectors are increasing at about the rate of population growth while the other half is expanding at a more rapid pace.

With continued population growth is on tap for the state over the next decade, increases in HCSA employment are likely to continue. Issues facing the sector include:
• Double-digit cost increases for health care coverage
• Change in the manner in which health care is distributed
• Increased emphasis on quality of service provided
• Changes in government health care policy
• Changing demographics
– Aging Baby Boomers
– Increased life expectancy
– Increasing number of minorities
– Rise in frequency of diseases, such as diabetes
– Increased number of lower income families
• Supply of nurses and dental hygienists
• Matching supply and demand for nurses and health care employees, particularly in rural areas
• Saturation of hospitals in some metropolitan areas
• Impact of efficiency gains on employment
• Continued population growth
• Increased demand for specialized medical care

While other sectors that have diminished in importance over time, that is not likely to happen for Health Care.

Colorado Legislative Council – State Economic Update December 2010

January 8, 2011May 31, 2014 horvath Leave a comment

The recovery of the Colorado economy continues to lag that of the nation, as evidenced in the December 20 release of Focus Colorado: Economic and Revenue Forecast , a quarterly publication of the Colorado Legislative Council . Many of the key economic indicators for the nation were revised upward while there were mixed results in the Colorado update.

The following discussion highlights revisions to key 2011 Colorado indicators:
• With Real GDP growth of 2.9% (U.S.),state employment will increase by 0.9%, slightly less than the September projection. This equates to 19,900 jobs.
• The most notable change is an increase in the 2011 unemployment rate. It was revised upward from 7.6% to 8.4% (Many economists in the state expect this rate to exceed 9.0% and possibly push past the national rate at some point this year).
• With more people on the payrolls, personal income is expected to post a modest increase of 3.1%.
• On the other hand Wage and Salary income will record a meager increase of 1.4%.
• Despite the increase in wages and personal income, projections for retail sales growth was revised downward from 3.1% to 2.5% (It should be noted that this rate of growth does not reflect changes associated with the tax reduction plan passed by Congress).
• On a positive note, the number of home permits was bumped up from 11,200 to 17,200. Continued subpar construction growth is projected beyond 2011 despite population increases in the range of 90,000 to 100,000 people per year.
• Finally, the projection for CPI growth remained at 1.9% for 2011; however, it is expected to ramp up by at least a point in 2012.

Positive factors not mentioned above include:
• Permitting in the oil and gas industry turned upward at the end of 2009 and have continued in that direction.
• While there is optimism within the industry about Colorado’s housing market, it is not yet reflected in the data. If it is any consolation, home prices are faring better in Denver than many other parts of the country.
• Foreclosures remain high, but they are on a downward path.

On the other side of the equation:
• Colorado’s financial sector is plagued with troubled mortgages.
• To illustrate that point, 27% of Colorado insured banks were not profitable at the end of September 2010. This compares to 20% nationwide.
• The state’s lending institutions have high exposure to troubled commercial real estate than other banks in most other states.

While there is good news in the most recent update, it should not be forgotten that the Lost Decade concluded with state employment at a level below the peak in 2001. Despite employment gains this year, it is likely that June 2001 peak employment will be reached again in 2012.

Colorado Forecasts In – Tax Legislation will be Game Changer

December 14, 2010May 31, 2014 horvath Leave a comment

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.

Small Business Start-Ups on the Decline?

December 8, 2010May 31, 2014 horvath Leave a comment

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.

Forecast Accuracy for the CU Colorado Economic Outlook

December 3, 2010June 12, 2014 horvath Leave a comment

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.

It all Starts with a Job

November 28, 2010May 31, 2014 horvath Leave a comment

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.

CSU Forecast – Job Growth Less Than One Percent

November 16, 2010May 31, 2014 horvath Leave a comment

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.

Job Losses Expected in 2011 – State Demography Office

November 7, 2010May 31, 2014 horvath Leave a comment

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.