Colorado Legislative Council – Momentum Building

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.

Manufacturing, Information, and Professional Business Services Drive Colorado Economy

All industries play different and important roles in our economy. Some pay high wages or create new jobs, while others provide services that generate tax revenue.

Economic developers welcome the creation of any job, but they emphasize the recruitment and retention of companies that have primary jobs. A primary job brings in money from outside the local community and often pays higher than average wages. As a result, these jobs create wealth and other local jobs.

In Colorado most primary jobs are in the Manufacturing, Information, and Professional Business Services sectors. They account for about 29% of total state private sector employment and 35% of the state’s private sector Real GDP. Colorado’s Advance Technology cluster is a subset of these three sectors.

In recent years, the Mining and Logging sector has employed about 1.5% of total private sector workers, yet it has accounted for about 6% of the state’s private sector output. The Real Estate and Finance group of sectors are also small from an employment perspective; however, they make a significant contribution, 23%, to the state’s private sector output.

Tourism and retail are important for different reasons. First, they touch the economies of all 64 counties.
Colorado’s scenic mountains provide the state with a distinctive competency, that cannot be replicated. Sales tax from the retail sector are a funding source for special districts and state and local governments. These sectors are important because they employ about 1 out of every 4 workers. Combined, they are responsible for about 11% of the state’s private sector output.

Finally, industries such as health care, personal services, utilities and the remaining sectors are important
because they add to the quality of life. These and the remaining sectors employ 35-40% of private sector workers, while being responsible for about 25% of private sector output.

The above analysis is based on 2009 data. The Bureau of Economic Analysis is scheduled to release its 2010 data within the month. Watch for more in-depth analysis at www.cber.co.

©Copyright 2011 by CBER.

The Conference Board – Increased Optimism for the Global Economy

The Conference Board continued its series of upward revisions in its most recent update of its global and U.S. economic forecasts. Key points from their update follow:

• The global economy is projected to grow 4.3% this year. This rate reflects a slight uptick supported by increasing momentum in the U.S. and other major economies. The outlook for Japan is for slower growth, as a result of their triple disaster. While these tragedies will have long-term impacts, the affect on their economy will be short-lived. The Chinese economy remains strong, but previous projections appear to have been overstated, hence a slight downward revision.

• Real Q1 GDP for the U.S. is projected to be 2.1%, driven down by lower capital spending and slower consumption. Output will increase by 2.5 to 3.0% for the remainder of the year, as employment increases and stronger consumption resumes. This will push Real GDP growth for 2011 to 2.6%. While this projection is particularly conservative, it is worth noting that the Conference Board has gradually bumped it upwards, by about a point, over the past six months. It is safe to say that we are now looking at the Great Recession in our rear view mirror.

• Headline inflation will surpass 5% in Q1, temporarily driven up by energy and food costs. Year-end CPI will be just under 3.0%.

• There are signs that producers are beginning to pass on price increases to consumers. It is not known whether these higher prices will hold.

• Companies will continue to benefit from productivity gains, as opposed to investing in labor. For the moment, this is good news for companies and bad news for workers. This relationship between labor and capital is likely to change in the months ahead.

• Sales growth is the top challenge for business leaders; followed by finding talent, cost optimization, and innovation.

• The triple disaster in Japan is likely to have a minimal and temporary impact on the U.S. economy. These tragic event may cause supply chain disruptions to the automobile industry, electronic equipment, or manufacturing industries that rely on semiconductors. The magnitude of the impact is based on exposure and location.

The Conference Board highlighted three assumptions that provide the foundation for  sustained growth in the U.S.

• Continued gains in U.S. employment of 200,000+ workers per month.

• The housing market is currently experiencing a double-dip “of sorts”. No further contractions will occur beyond current levels.

• Inflation will be contained.
If employment decreases, the housing market dips further or remains in the doldrums, or inflation is unchecked then all bets are off regarding the recovery.

This forecast update is particularly good news, as the Conference Board has been notably conservative in their assessment of  the strength of the recovery. While there are certainly risks associated with this forecast, it is encouraging to finally hear that the word momentum is being used in discussions about the national economy.

©Copyright 2011 by CBER.

Colorado Legislative Council – Outlook for the State Improving

The Colorado Legislative Council (CLC) recently released its quarterly update of the state economy Focus Colorado: Economic and Revenue Forecast. The report was released in mid-March, at a time when it appears that Q1 2011 employment will be approximately 15,000 jobs higher than Q1 2010. It is great to hear that net employment is again trending upward; however, state employment remains below the peak 2001.

Increased employment is good news for the state coffers!

The Q4 2010 forecast pointed to a budget shortfall of $1,015 million. Because Colorado is required to have a balanced budget, it became necessary to significantly reduce spending for K-12 education and other programs.

Over the past year, there has been an increase in consumption and private sector employment that now appears to be sustainable, hence justification for adjusting the revenue forecast  upward. Projections for FY 2010-11 were raised by $116 million, while revenues for the subsequent two years were upped by $99 million and $105 million respectively.

The combination of budget cuts and revenue increases point to a much lower projected shortfall, $450 million, for FY-2011-12. This is good news, but…

Nationally, CLC is calling for real GDP growth of 3.2%, similar to Q4 2010. After three years of net job losses, employment will increase by 0.4% to about 130.3 million jobs. Unfortunately, average annual unemployment for the year will be 8.7%.

At the state level, CLC projects population growth of 1.6% or about 78,000 people. This reflects a reduction in net in-migration to less than 40,000.

Wage and salary employment will post gains of 0.7%, or about 16,000 workers. While this growth is encouraging, it is not enough to significantly lower the rate of unemployment. Unemployment of 8.8% will be slightly higher than the national rate.

Retail sales are projected to record gains of 4.2%; however, inflation (2.3%), will account for more than half of that gain. Retailers will remain challenged to maintain profitability. Finally, single family building permits will be 15,300, slightly higher than in 2010.

The risks to continued growth remain significant. Consumer confidence is fragile and talk about a double-dip has resurfaced. Constraints facing Colorado include a painfully slow housing recovery, rising food and energy prices, and continued concerns about the banking system.

While the picture painted by CLC is certainly not a bright one, it is clearly much more encouraging.

©Copyright 2011 by CBER.

Impact of Tax Reduction Package on the U.S.

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.

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.

Real GDP and Colorado Employment

Over time, there has been a strong correlation between the values of Real Gross Domestic Product and Colorado employment. Logically, this makes sense because both are growth variables that follow similar paths.

Employment data for Colorado was first recorded in 1939. In 4 of the decades since, (50s, 60s, 70s, 90s) there has been a strong correlation between changes in the U.S. economy and Colorado employment. In three of the decades, the tie between the two variables was weaker. This can be explained by a variety of economic disruptions:
• 1940s – World War II and the post-war effect caused the two variables to be out of sync.
• 1980s – Colorado experienced regional issues including an oil and gas boom and bust, savings and loan crisis, overbuilt housing market, and net out-migration for 5 years.
• 2000s – The primary and secondary effects of two recessions hit Colorado harder than other regions of the country.

Since 1939, Colorado has experienced net job losses 8 times. On 5 of these 8 occasions, the U.S. recorded positive Real GDP growth.

Colorado experienced job losses 4 times during the past 8 years:
2002    42,700 jobs lost.
Real GDP = 1.8%.
2003    31,400 jobs lost.
Real GDP = 2.5%.
2009    106,300 jobs lost.
Real GDP = -2.6%
2010    35,000 jobs lost.
Real GDP = 2.6%.
There was positive expansion in output in 3 of the 4 years that job losses occurred.

Recent forecast updates suggest that the U.S. will experience below potential output growth through 2011. This raises the question, “Has the fragile state economy recovered to the point where it can add jobs in such a volatile economic environment?”

 

©Copyright 2011 by CBER.

NABE Downgrade of Real GDP Bodes Ill for Colorado

The National Association of Business Economists (NABE) released its fall consensus forecast in early October. NABE revised its outlook for output from 3.2% (in May) to 2.6% based on lower than anticipated economic activity during the summer months.

In addition, NABE indicated that modest growth in consumer spending is on tap through 2011. Consumers will remain cautious as a result of continued high unemployment and weak gains in employment. As well, minimal growth is expected in household net worth, i.e. small gains are expected in equity portfolios and home prices

Finally, NABE opined that the downward revision in the forecast reflects “a greater appreciation of the importance of stimulus policies in countering forces holding down the economy’s performance.”

While it is not surprising that NABE lowered its expectations for expansion of the economy, the amount of the decrease is reason for concern. In simplistic terms, the May forecast suggested that the U.S. would see above potential growth this year while the October forecast now says that growth will be well below potential.

Were the NABE panelists overly anxious to see a recovery or did the positive impact of the stimulus package on Q1 Real GDP cause them to be overly optimistic in their May outlook? Clearly panelists missed indicators of the summer slowdown in their May forecast; are there other factors, favorable or unfavorable, that panelists may have missed in their October update?

The revisions in the NABE forecast illustrate the challenges that economists and business researchers face in evaluating and forecasting the performance of the economy. Many of the econometric models that have worked well during periods of growth have proven to have limitations caused by the volatility of the economy over the past decade. This is not intended as criticism, but rather an illustration of the challenge our public and private sector leaders face when they are forced to make decisions without perfect information.

While Colorado is a great place to conduct business, the underlying message from the NABE forecast bodes ill for Coloradans. Lackluster growth at the national level translates into an extended recovery for the Colorado economy, i.e. there will be limited job growth on the horizon.

©Copyright 2011 by CBER.