Tag: Economic growth

The Colorado Budget Challenge 2011 – Where to Cut?

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For the next two months Colorado legislators will be dealing with the two-edged sword known as the balanced budget amendment.

During lean fiscal times, the amendment forces state senators and representatives to make difficult choices in this zero sum game. They have been faced with similar challenges since 2001 as growth in General Funds Revenue has not kept pace with increased demand for services.

For example, if you were a legislator, which of the following would you eliminate or reduce funding for?
• Social Service – Would you reduce or eliminate funding for single moms and lower income individuals to help them defer transportation costs so they can travel to work?
• Economic Development – Would you reduce or eliminate an incentive program that would retain or bring jobs to Colorado, foster growth in state output, and generate revenue for government entities?
• Health Care – Would you cut back or eliminate funding for a health-care program that would reduce services to elderly? The reduction in state funding would also decrease federal funding by a similar amount.  It is a tough time to be a state legislator.

On a positive note, the balanced-budget amendment means that Colorado is not having to borrow money from the Federal government to continue basic operations.

The table below, highlights the source and magnitude of the challenges facing the state government as it is forced to deal with increased demand and reduced revenue. The table compares key data sets for 2001 and 2009. Highlights of the table are:
• The Colorado population increased by about 700,000 people.
• K-12 enrollment is up 76,000 students.
• Despite tuition increases, enrollment at the state’s colleges and universities has grown by more than 21,000 students.
• The prison population is up by about 6,000 inmates.
• The number of Medicaid recipients almost doubled, up 226,000.
• Employment levels were very volatile. The 2009 average was only slightly higher than the 2001 average.
• General fund revenues remained virtually flat (not inflation adjusted).
• Growth of general funds will be constrained by the severity of the Great Recession.

Clearly, the state does not have a stable fiscal model for being competitive in the global economy. The rough ride will continue well into the future.

©Copyright 2011 by CBER.

1 in 6 Colorado Jobs are Construction or Construction-Related

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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.

©Copyright 2011 by CBER.

Impact of Tax Reduction Package (Tax Holiday) on Colorado

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The recent tax cut package passed by Congress is expected to raise real GDP by .6 to 1.2% points depending on the economist making the projections. As a result, projected Real GDP growth for the nation is expected to be in the range of 2.3% to 4.0%.

The lion’s share of the benefit lies in the short-term reduction of the Social Security payroll tax rate paid by
employees. For 12 months, that percentage will be reduced from 6.2% to 4.2%.

This is often referred to as the FICA tax holiday. The federal government does not actually make payments, they simply collect less revenue.

The following is a back-of-the napkin look at the impact of this part of the tax holiday on Colorado:

Let’s start with the following assumptions:
• Colorado has a covered workforce of 2.2 million people.
• Total covered wages are approximately 100 billion.
• About 85% of the workforce (private sector + federal employees) pay FICA taxes.

From these assumptions we can derive the following:
• About 1.87 million workers will benefit from the tax cut (2.2 million *.85).
• The total wages impacted will be $85 billion ($100 billion total state wages *.85)
• The “cost” of the program to the federal government for stimulus in Colorado, or the maximum amount of
stimulus for Colorado is $1.7 billion ($85 billion *.02)
• Each worker will receive about $900 per year, or $75 per month ($1.7 billion/1.87 million workers).

To calculate the impact to the state it is necessary to make another set of assumptions.
• Because payments are disbursed over a period of a year, rather than in a lump sum; it will be assumed that
slightly less than 1/3 will be invested, saved, or used to reduce debt.
• Slightly more than 1/3 will be used to purchase services (doctors, dentists, massages, etc.).
• Slightly more than 1/3 will be used for retail purchases.
• The Colorado sales tax rate is 2.9%.
• Because Colorado is a home rule state, sales tax rates for cities and districts vary based on location. For
ease in computation it will be assumed that the average rate of combined municipal and district sales taxes is 5.1%.

From this set of assumptions the final set of calculations show the following:
• $500 million will be invested, saved, or used to pay down debt (this will benefit the consumer).
• $600 million will be used to purchase services (sales taxes are not paid on these expenditures).
• $600 million will be used to purchase retail goods (sales taxes will be paid on these expenditures).
• The state will receive $17.4 million in additional sales tax revenue ($600 million * .029).
• The municipalities and special districts will receive about $30.6 million in additional sales tax revenue
($600 *.051).

Let’s put this $1.2 billion “investment in the Colorado economy” in perspective.
• The 2009 Real GDP for Colorado was about $252.7 billion. The $1.2 billion infusion of money into the
Colorado economy is approximately .5% of the 2009 Real GDP. Total costs of the program (to the federal government)  are almost $1.87 billion.
• The state is facing a shortfall of about $1 billion. The tax holiday will generate about $17 million.

While these efforts to jump start the economy will provide some assistance in the short-term, there will be a
significant long-term cost to the federal government for the program. Will this effort to stimulate the economy
result in sustained economic growth or will it simply be a variation on past themes and only have a short term impact? How will this stimulus effort shape the discussion for the upcoming 2012 elections? These and other questions will be answered over the next 18 months.

©Copyright 2011 by CBER.

University of Northern Colorado Economic Forecast Points to Slow Growth in 2011

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The economic outlook for Northern Colorado matches that of the state – a slow but, painful recovery, according to Dr. John Green regional economist. In his annual forecast, Green pointed to 3.0% Real GDP growth this year with the possibility of a negative quarter.

On a sobering note he indicated that the labor supply will exceed demand – at least until the last of the baby boomers retires (2029). Green also indicated that the computer revolution has decreased the need for certain occupations, which will maintain a high level of competitiveness in the job market.

Green was not particularly optimistic about the housing market. He felt the housing supply was too high, further price declines are possible, mortgage rates are expected to rise, and that problems within the financial/mortgage industry will remain a problem. Finally he expects inflation to higher in both 2011 and 2012.

Locally, Green’s economic model pointed to flat employment growth in Northern Colorado. He felt that a more likely scenario was for employment to recover slowly throughout 2011 and 2012. Growth will be led by agriculture, the biosciences, clean energy, retail and the hospitality sectors. (On a positive note, NPR recently reported that Vestas plans to add 60 employees at its Windsor facility and begin operations in Brighton in 2011. The Windsor facility has a workforce of about 700 workers).

The high levels of foreclosures will prevent the housing market from gaining momentum. In addition, Green reported that houses under $280,000 are moving whereas more expensive ones are not. On the commercial side, construction is likely to resume in late 2011 at the earliest. Lastly, the number of bankruptcies are on the rise in Northern Colorado.

The NCBR  Economic Forecast was held on Jan 6, 2011 at the University of Northern Colorado campus and also featured Mark Snead, Vice President, Economist, and Branch Executive Federal Reserve Bank of Kansas City – Denver Branch  and Sandra Hagen Solin of The Capitol Solutions Team .

 

©Copyright 2011 by CBER.

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

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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.

©Copyright 2011 by CBER.

Colorado Legislative Council – State Economic Update December 2010

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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.

 

©Copyright 2011 by CBER.

Impact of Tax Reduction Package on the U.S.

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Congress recently passed a tax cut package designed to stimulate consumption. Most economists believe it will have a positive impact on the economy. In the case of the Conference Board, they recently raised their forecast for 2011 Real GDP growth from 1.7% to 2.3% based on the projected impact of this tax package. At the other end up the spectrum, economists foresee an impact greater than 1.0% points which will push output growth above 3.5%.

The most significant portion of the package is the reduction in the Social Security payroll tax rate paid by employees. For 12 months, that percentage will be reduced from 6.2% to 4.2%.

The following is a quick-and-dirty look at the cost of this part of the program:
1. Approximately 89% of US covered employees pay social security taxes (130 million workers * 89% = 115.7 million workers).
2. Total covered wages for the workers who pay social security taxes is $5,566.3 billion.
3. The total amount of the reduction in taxes, or payment of benefits, is $111.3 billion (2% *$5.6 trillion).
4. Nationally this equates to a reduction of about $960 per worker per year or an average monthly benefit of about $80.

Previous tax stimulus programs disbursed payments in lump sums. As a result, recipients often used  this distribution of funds to reduce debt or invest in savings.

Several factors will likely cause consumers to actually spend more of the current tax cuts. Because the monthly tax payments are spread over a year, the amount received each month is relatively small, approximately $80. Consumers will find it easier to justify spending this amount because the economy is in an expansion mode. In addition the equity markets have risen over the past year, which will give consumers the feeling that they are wealthier. In many cases, consumers have reduced their debt loads and boosted their savings, which will also makes it easier to rationalize spending all or most of the money received rather than saving it.

Given this rationale, it can be assumed that consumers will use 25%, or an average of $20 per person per month, of their tax reduction to increase savings or pay off debt. In other words, consumers will invest just under $28 billion to pay down debt or increase savings.

Likewise, they will spend approximately $83 billion to purchase goods or services. The portion that is used to purchase retail goods will also benefit some state and local governments through the collection of retail sales taxes. As mentioned earlier, the cost of the program is $111 billion and the payback through increased purchases is $83 billion. Time will tell whether this is a good investment.

Will employers treat this windfall to employees as a de facto pay increase and refrain from granting pay increases in a market that already favors the employer? Will this fiscal stimulus foster sustained economic growth or will it only have a short term impact on growth? How will this stimulus effort shape the discussion for the upcoming 2012 elections?

These and other questions will be answered over the next 18 months, when we can look back and see if this effort to bolster the economy really was a difference maker.

©Copyright 2011 by CBER.

Colorado Legislative Council – U.S. Economic Update December 2010

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The December 20,2010 release of Colorado Legislative Council ‘s Focus Colorado: Economic and Revenue Forecast  gives reason to be more optimistic about the performance of the national and state economy in the months ahead. Generally speaking, most key economic indicators received slight upward revisions.

At the national level the following bright spots were highlighted:
• Corporate profits have reached record levels.
• There have been 5 consecutive quarters of economic growth (GDP).
• World trade has bounced back.
• Personal income (wages and salaries, interest and dividend income, business income, rental income, and government assistance) has returned to pre-recession levels.
• Consumer spending has grown at a steady pace.
• Business investment has been a major factor in economic growth.

The following areas of concern about the U.S. have a familiar tone:
• Current economic growth is slower than mid-2009 because of decreased business inventories and the end of stimulus funding.
• Stagnant housing prices, high levels of unemployment, and volatile consumer confidence will limit consumption.
• Credit remains constrained.
• The country needs monthly job growth of 140,00ish jobs per month to keep unemployment from rising. For the past year, average growth has occurred at about half that level.
• While there is reason for optimism, it is likely that the economy will again be a major factor in the 2012 elections.

The recent update reflects minor changes to key national economic indicators for 2011:
• Real GDP remains at 2.9%. By comparison, average output growth for the 1990s was 3.2% followed by 1.8% in the 2000s.
• Employment is projected to grow at a rate of 1.1%, down from the September forecast of 1.2%.
• Unemployment will improve to 9.5%, down from 9.7% in the prior outlook.
• Inflation will increase slightly. The forecast was bumped upward from 1.5% to 1.7%.

This sets the stage for an improved outlook for Colorado in 2011.

©Copyright 2011 by CBER.

Delivering The Next American Economy

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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.

Colorado Forecasts In – Tax Legislation will be Game Changer

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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.