If the Economy is Doing so Well, Why Doesn’t it Feel More Robust? -Take II

In the previous blog post, the topic of the economic recovery was discussed. Although it has been a solid recovery, why doesn’t it feel more robust?

The 2007 recovery was atypical in that it occurred over a period of years, as opposed to months. As a result Colorado posted accelerating job growth for four consecutive years. Essentially, the recovery from the recession was weak and gradual. At no point has the state reached a point where public and private leaders could really say, “We have arrived.”

At the national level, the U.S. will add 3.0 million jobs in 2015. Yet, the focus is on the slowdown of the global economy, not the fact that 2015 will be the fifth consecutive year of solid job growth.

Nationally, GDP growth has been subpar. It is hard to get excited when the rate of Real GDP growth is 2.0% to 2.5%. Consumer spending has increased at a similar anemic rate. In other words consumers have remained cautious, as if they are always looking over their shoulder.

The construction industry is “booming” and there is a shortage of trained workers. At the same time, the growth of the industry pales when compared to the 2000s. The good news is that housing has been built on an “as needed basis” and the chance of being overbuilt is slim.

During the recovery period, the state has suffered natural tragedies. There were multiple severe forest fires in several parts of the state, as well as flooding and drought. That was taxing on the state – fiscally and psychologically. Fortunately, Coloradans have remained resilient.

Lower oil prices have dampened growth in parts of the state that had previously experienced strong growth. It is easy to forget the risk associated with the extractive industries until the price of the commodities (oil, molybdenum, coal) drops precipitously or regulations are established that eliminate demand for these commodities.

Then there is the state government… The legislature has focused on social issues for the past couple of sessions – and that is not bad. Some feel insufficient time and resources were spent addressing issues that could improve the state’s ability to conduct business.

At one point, there was sufficient discourse to cause several counties to threaten secession from the state. At times, state government seemed dysfunctional over the past five years.

State government faces a new problem – the state economy is on solid footing and the state will generate record levels of revenue, yet the legislature will be forced to make cuts to key service areas. This conundrum is caused by the combination of Amendment 23, the Gallagher Amendment, TABOR, the initiative process, and Medicare obligations. It is difficult for legislators to govern the state in a way they feel is appropriate.

Despite the challenges and angst created by the items mentioned above, the growth of Colorado’s economy has exceeded the growth of the U.S. economy in many key areas (rate of job growth, rate of population growth, growth of Gross Domestic Product).

Unfortunately, the picture hasn’t always been rosy for the past five years, despite the many great things that have happened.

If the Economy is Doing so Well, Why Doesn’t it Feel More Robust?

The Great Recession has been over for five years, but in many ways the economy still feels like we are still in the recovery stages.

In 2001 the business cycle was coming to an end when 9/11 exacerbated the situation. Workers in most sectors were touched by the recession. Fortunately, we could blame the downturn on the terrorists.

The country rallied, and with fiscal policies such as zero percent financing we recovered – some would say it was a false recovery because we stole sales from the future. By 2007 we were confident that all would be well, but that didn’t turn out to be the case.

In both recessions many families were hit hard, regardless of race, job title, or income level. In some cases one or both spouses lost their job, establishments went out of business, people had their houses foreclosed on, and there was no place to hide. Both recessions touched nearly everyone and the fact they were back-to-back doubled the pain.

In 2007 most economists did not see the 2007 recession coming and when they realized something was wrong, they failed to acknowledge that it was for real. In fact some of the state’s leading economists were in denial. (It is almost funny to re-read newspaper articles and emails from that era talking about the economy.)

In retrospect there were some small signs pointing to the 2007 recession, such as declines in financial employment. These signs weren’t sufficient to make anyone believe a major downturn was impending. For the most part, the public did not have access to the data and information that caused the problem. Many of those who had access to the information may not have understood the ramifications of what was actually happening. In some cases those who had access to the information conveniently ignored it. As business leaders and the public learned about the cause of the recession some felt betrayed by what happened. They had a right to be upset because the 2007 recession was not part of a normal business cycle. It was self-inflicted.

Psychologically the “back-to-back” recessions changed the structure of the way companies do business. Companies had to find ways to be successful with fewer employees. As a result they became more efficient and hired fewer workers during the recovery.

It was difficult for some of the laid off workers to come to terms with the realization they wouldn’t have a job waiting for them when things got better. It was tough for older workers to be ungraciously kicked off the payrolls. At the same time, several graduating classes of college students, with hefty student loans, were passed over because there were no jobs for them.

Many of the workers who held onto their jobs felt both blessed and cursed. They were fortunate to have a job, yet at times they were taken advantage of (minimal or no pay increases, reduced benefits, longer hours, more responsibilities). Work became a necessary burden for many.

As a result of the “back-to-back” recessions consumers changed spending patterns, particularly in retail. Many people have been more discrete with their spending, they may not spent as much they once spent, and they tend to wait for items to be on sale before they purchase them. Adults with family members who had experienced the Great Depression may have benefitted from their experiences. As the Rolling Stones said, “You can’t always get what you want, but if you try sometime you find you get what you need.”

Economists are partially to blame for the feeling the economy does not feel more robust. They continually refer back to the recession in their charts and their discussions. By continuing to refer to the recession, economists are continually reminding people how bad the economy was just a few years ago. It is difficult to feel the economy is robust when you are always looking over your shoulder.

U.S. Labor Participation Rate Continues Downward Trend

As the country has recovered from the Great Recession there has been concern about why the economy hasn’t recovered more quickly. Part of the reason is the decline in the labor participation rate .

After peaking in 2000, the labor participation rate has declined steadily. The rate is the percentage of people who are either employed or actively looking for work.

Since 2000 the labor participation rate has declined from 67.3% to 62.8% at the end of 2013 – a significant drop. While there is debate about the reason for the decrease, the primary factor is an increase in discouraged workers (a weak recovery) and a change in demographics (more baby boomers retiring).

labor participation rate trends downward
After peaking in 2000, the labor participation rate has trended downward.

 

©Copyright 2011 by CBER.

Number of Colorado Business Establishments Remains Well Below 2007 Peak

The Bureau of Labor Statistics tracks the number of business establishments as well as the number of employees. An establishment is defined as a single physical location where business is conducted or where services or industrial operations are performed. By contrast, a firm is comprised of establishments.

The number of Colorado business establishments peaked at 180,934 in Q3 2007. As a result of the Great Recession, the number of Colorado business establishments declined to 168,939 in Q1 2011.

There has been steady growth in the number of business establishments since bottoming out in 2011; however, it will be several more years before a return to the 2007 peak. In other words, the effects of the Great Recession are still being felt despite the state’s job recovery.

The number of business establishments in Colorado remains below the 2007 peak.
The number of Colorado business establishments remains below the 2007 peak.

©Copyright 2011 by CBER.

SIngle Family Permits Being Added at Greater Rate than 1991-2005

Improvement in the construction industry, as measured by single family permits, has contributed to the recovery from the Great Recession.

Looking back, the number of annual permits grew steadily from 1991 to 2006.

After bottoming out in January 1991 at 587,000 annual permits and the average number of permits added that year was 751,000. In September 2005, the number of permits peaked at 1,798,000 and the average number of permits added that year was 1,685,000. Over this period of 15 years months the average number of single family permits increased at an average annual rate of 62,233 units per year.

After the Great Recession hit, the number of monthly permits bottomed out at 379,000 in February of 2011. The average number of permits issues for 2011 was 420,000. In 2013  the number of permits increased to 614,000. For this two year period, permits are being added at an average annual rate of 97,208.

The story of the construction industry continues to be one of good and bad news.  Over the past two years, the rate of new single family permits being issued is greater than during the boom years. The problem is the greater recession created such a hole, it seems like there is little construction activity.

single family permits

©Copyright 2011 by CBER.

Manufacturing Role in U.S. Recovery May be Overstated

The Manufacturing Sector has been regarded as a driving force in the recovery from the Great Recession.

A look at U.S. Manufacturing Shipments shows the sector’s contribution to the recovery may be slightly overstated. Consider the annualized growth rates for shipments for the following periods:

  • January 1992 to January 2000, 8 years at +5.6%.
  • January 2000 to January 2002, 2 years at -4.6%.
  • January 2002 to January 2008, 6 years at +6.5%.
  • January 2008 to January 2009, 1 year at -21.6%.
  • January 2009 to January 2014 (est.), 5 years at +6.1%.

As a result of the Great Recession, shipments dropped to mid-2004 levels and it took 5 years before shipments returned to 2008 levels.

While it is good news that the manufacturing sector has played an important role in the recovery, it should be noted that the annualized rate of growth from 2012 to 2014 was only about 2.0%.

What’s on tap for manufacturing in 2014?
manufacturing
©Copyright 2011 by CBER.

U.S. Job Recovery Slower than Colorado

Coloradans breathed a sigh of relief when the BLS released June data showing the state’s wage and salary employment finally returned to the 2008 peak. (For more information about the Colorado situation, click here.)

Nationally, it is a much different story. The U.S. is still about a year away from returning to the 2008 job peak.

U.S. employment topped out at 138.1 million in January 2008. By February 2010, the number of wage and salary jobs had plunged to 129.3 million, a decrease of 8.8 million workers.

At the end of July 2013, 6.7 million jobs had been added since the trough and employment had reached 136.0 million. Slightly more than 2.0 million jobs are needed to reach the pre-recession peak, or about 77% of the jobs have been recovered.

Over the past year, jobs have been added at a rate of about 190,000 per month. If they continue to be added at that rate, it will take another 10 months (May 2014) before the pre-recession peak is reached.

As a result of the Great Recession, the number of unemployed workers jumped from 7.7 million in January 2008 to 15.4 million in October 2010, i.e. the number of unemployed workers doubled. Since October 2010, the number of unemployed has declined to 11.5 million, a decrease of only 3.9 million.

For many Americans, the recovery from the Great Recession has been painful. For another group, the recovery will never happen.

©Copyright 2011 by CBER.

Recovery from Recession Led by Large Companies

Large and small companies have had different employment patterns over the past 7-8 years.

According to employment data produced by ADP, about 17.6% of total private sector workers were employed at small companies, those with 1 to 19 workers, in January 2005. Companies with 500+ workers accounted for 17.1% of private sector employment.

Between 2005 and April 2013 the small companies expanded at a faster rate. The most recent ADP data shows the smaller companies currently account for 18.3% of private sector workers and the larger companies account for 15.9%.

The small companies had the least number of workers in January 2005. Jobs were added until July 2008, when they peaked. Employment tapered off slowly until December 2010. The number of jobs has been on the rise since.

Employment at larger companies increased slowly from January 2005 until March 2006. At that time employment began to taper off and declined for six years. Steady increases have occurred since March 2010.

The Great Recession officially ended in June 2009. Since then the small companies have added about 1.03 million workers and the large companies have added about 1.58 million.  In other words, large companies have played a greater role in the recovery than the small companies.

©Copyright 2011 by CBER.

The Colorado Economy is Outperforming the U.S.*

Earlier this year, President Obama sparked a debate about the health of the economy when he said, “The private sector is doing fine.”

At the national level, the private sector began adding jobs in February 2010 and has consistently added jobs since. The private sector has regained about 48% of the jobs lost in the recession, as compared to the peak in 2008. That part of the debate is clear.

On the other hand, the number of total government jobs has been on the decline since January 2008 (temporary employment associated with the 2010 Census is excluded). Shrinking budgets have caused federal, state, and local agencies to tighten their belts.

Closer to home, Colorado leaders are proudly proclaiming that the state is recovering faster than the U.S. Unfortunately, the sense of optimism displayed in this statement requires an asterisk.

The state’s private sector began adding jobs in January 2010. It has regained about 49% of the jobs lost in the recession, as compared to the peak in 2008. By this measure of improvement, Colorado’s private sector is recovering from the recession at a similar rate as the U.S. Whether that level of growth is “fine” is a debate for a different time. (It should also be noted that current private sector employment is below the peak prior to the 2001 recession.)

Government employment is the difference maker. In contrast to the national level where there is a decline, the number of government jobs in Colorado has increased slightly since 2009. As a result, total Colorado employment has regained jobs lost in the recession at a faster rate than the U.S.*

 

©Copyright 2011 by CBER.