Lower Gasoline Prices Save $45 in 2014

In mid-April 2012 the price for a gallon of gasoline was just under $4.00. It slowly declined through mid 2014 to about $3.80 in the U.S. and Colorado. At that point it went into a freefall and closed the year at about $2.40 per gallon.

The Savings
• For 2014 the cost to purchase 15 gallons of gasoline per week in Colorado was $2,659 compared to $2,704 in 2013. In other words, the “savings” was $45 for the year.
• For 2014 the cost to purchase 15 gallons of gasoline per week in the U.S. was $2,696 compared to $2,788 in 2013. The savings was $92 for the year.
• For 2014, the cost to purchase 15 gallons of gasoline per week in Colorado was $37 less than the U.S.

The Good News – Lower gasoline prices may increase discretionary income for consumers. It may decrease the cost of other goods, if businesses pass along their savings for lower fuel costs. In Colorado, the thought of greater discretionary income may be nothing more than a dream for many as inflation, particularly for housing costs, has risen.

The Not So Good News – Typically, the impact of lower oil and gasoline prices on the state is negative. In other words, consumers will benefit; however, state coffers will not be as full because tax collections will be lower.

There is no free lunch!

gasoline prices

Colorado Jobs and Economy Remain Strong

On December 20th the BLS will provide their final 2014 Colorado jobs report.

Given the strength of the U.S. job growth reported earlier this month (321,000 jobs added), it is reasonable to think there will be solid job growth for November. While the economy has had its ups and downs, job growth remains solid, and is trending upwards.

The upcoming press release is somewhat irrelevant because the BLS will release the 2014 benchmark revisions in early March of 2015. That data is expected to show that the number of Colorado jobs increased by about 73,000, or 3.1%, during 2014.

The BLS began producing state employment data in 1939. The Job growth of 73,000 jobs in 2014 will be the tenth best year in terms of absolute job growth (the number of jobs added). On the other hand, 2014 will be the 38th best year in terms of relative job growth (percentage of job growth).

This year marks the only time that Colorado jobs have increased at an accelerating rate for four consecutive years. Between 2011 and 2014, Colorado has added about 231,000 workers (36,300 jobs in 2011; 54,400 jobs in 2012; 68,100 jobs in 2013; and 73,000 jobs in 2014.)

Looking ahead to 2015:
• The price of oil has declined precipitously because supply exceeds demand. As a result the price for a gallon of gasoline has dropped well below $3.00 per gallon. To date, the short-term impact of lower gas prices has been minimal. If prices remain low, Colorado’s frequent fuelers will realize savings of about $500 to $600 next in 2015. Because wage growth has been weak over the past four years, most people will not use the savings for discretionary purposes. Rather they will pay for rent, food, medical costs, and other necessary expenses that have risen at a rate faster than their wages.
• In the short-term (first half of 2015) lower oil prices may not have a significant impact on production and the number of workers in Colorado’s extractive industries. If prices are suppressed for an extended period, then production will fall. Initially, contractors and engineers will be laid off and production workers will be furloughed. Eventually smaller companies and suppliers will be impacted. The extractive industries have a comparatively small direct workforce; however, they indirectly touch many industries. They have a much bigger role in the Colorado economy than most people realize.
• A slowdown in the economies of China, Russia, and parts of the European Union may impact Colorado companies that export products and services globally.
• Wage growth has been extremely weak, particularly given the decline in the rate of unemployment this year. Although the unemployment rate is below 4.5% (the natural rate of unemployment), upward wage pressure has been felt in only a few industries, such as construction and finance.
• Retail sales have remained solid because of increased employment and in-migration. Stronger wage growth is needed to support significant growth in retail sales.
• The downward trend in the unemployment rate is a mixed blessing. It is great that more people have jobs, but labor shortages will occur  in more industries during 2015 as the supply of trained workers is reduced.
• Health care costs will continue to be an issue in 2015. Participants in the Connect for Health Colorado program will not see minimal increases in their 2015 premiums. Unfortunately, the subsidies were reduced, which will cause costs for insurance to increase significantly for many families.
• Colorado’s housing prices continue to rise, which is good news for existing home owners. It is not such good news for renters and people moving to the state.

Despite these headwinds, there are plenty of reasons to be optimistic about the growth in the number of Colorado jobs and the overall economy in 2015.

Healthcare, Extractive Industries, and Wages

Looking ahead to 2015 there are three issues that will impact the economy in 2015: healthcare, extractive industries, and wages.

Healthcare
The healthcare industry may play an important role in the economy in 2015.
• First, there are shortages of workers in many key positions. This may affect the care consumers receive from their service providers and it may increase the costs of doing business.
• Second, providers are being pushed by Obamacare and insurance companies to reduce the fees they charge. In turn, this may reduce their margins.
• Third, it was recently announced that Colorado employers will face an 8% increase in the cost of insurance. Likely, a portion of that increase will be passed on to workers. That could reduce that amount of discretionary income, which in turn could reduce retail consumption.
• In addition, it has been announced that Connect for Health Colorado, will reduce subsidies. In other words, many Coloradans will have to pay significantly more for coverage, go without healthcare, or pay a fine to the government. Coloradans will face sticker shock when they get their health insurance bills in 2015.

Extractive Industries and Prices of Oil and Gasoline
The extractive industries will continue to face challenges in 2015. Fracking is still an issue in Colorado that will not go away. Local governments are pushing to have greater control over the way the extractive industries operate in their jurisdiction.

In addition, the price of oil has trended downward for the past six months. If these trends continue, it may impact production in Colorado, which will hit the smaller companies first. It will also impact severance taxes paid to the state government.

At the same time consumers have enjoyed lower prices at the pump. Their gasoline bills for 2013 and 2014 will be similar. If lower prices continue into 2015, consumers may notice a reduction in their annual gasoline bill in the range of $400 to $800 for the year.

If prices at the pump continue to decline Colorado consumers will be the benefactors, but state coffers suffer. Typically the negative impact for the state outweighs the positive impact on the consumer.

Wages
Typically, when unemployment dips below the natural rate of employment, 4.5% to 5.0%, there is usually upward pressure on wages. Overall that has not been the case in Colorado.

Between 2007 and 2014
• The Denver Boulder Greeley CPI  (DBG) increased at an annualized rate of 2.4%
• The Private Sector Average Weekly Wages (AWW) increased by an annualized rate of 1.7%.
Inflation for this period grew at a faster rate than private wages for this period.

Between 2013 and 2014
•  The DBG CPI is projected to increase by 2.8%/
• The Private Sector AWW will increase by 2.0%.

The Construction and Financial Activities are isolated sectors that have seen strong wage growth in the last couple of years because the demand for qualified employees has exceeded the supply of workers.

Construction Wages
• Between 2008 and 2012 AWW declined. In 2013 it increased by 11.0% followed by an increase of 11% in 2014. Construction businesses have found that it has been necessary to raise wages this amount to attract workers. Ultimately these labor costs will be passed on to consumers.
Financial Activities
• The financial activities sector has also had strong wage growth, 5.0% annualized growth, from 2007 to 2014. Between 2007 and 2010 Average Weekly Wages decreased, but they have increased significantly since.  AWW will increase by 7.3% in 2014

On the other hand, 2014 inflation growth will exceed the change in wages for Manufacturing, Tourism, and Professional and Business Services. These three industries are critical to the state economy for different reasons.

Watch for healthcare, extractive industries, and wages to impact the Colorado Economy in 2015 – and the impact may not always be positive.