Tag: US economy

Risks to Recovery from Great Recession

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The recovery from the Great Recession has now been in place in Colorado for about a year! Spin-masters have labeled the expansion as moderate, manageable, and modest. More accurately, the return to positive territory is less than robust, it is well below average, it is fragile, but it is gaining momentum.

Putting the Thesaurus aside, it is great to again report that job growth is positive. Year-over-year Q1 2011 wage and salary employment is likely to be about 15,000 jobs greater than a year ago.

While there is reason for optimism, the following risks have the ability to derail the expansion, or at least reduce its strength.

• Nationally, Q1 manufacturing employment is about 185,000 net jobs ahead of the same period last year. While the nation added jobs, Colorado manufacturers had mixed results and the bottom line was continued jobs losses for the year. Colorado’s woes are likely to continue as manufacturers post another loss in Q1.

• The story in the construction sector has a similar ring to it. Other states have begun their recovery, yet Q1 Colorado construction employment will drop to levels last seen in the mid-1990s. Although the number of single-family permits is expected to increase this year, Q1 Colorado construction employment will be about 7,000 lower than last year.

• Between February, 2006 and February, 2008, the S&P/Case-Shiller Home Price Indices for Colorado housing prices declined by about 12%. In 2009, they regained about half their losses before leveling off. This has an impact on individual homeowners who may be under water or forced to sell for other reasons. As well, the coffers of local municipalities will see flat or reduced revenue streams because property values have not increased.

• Between 2000 and 2010 inflation rose by an annualized rate of 1.6% (Denver-Boulder-Greeley CPI). Looking more closely, this rate is deceptively low. For the period mentioned, the annualized rate of growth for the following categories has been:
o Fuel 5.6%
o Electricity 3.9%
o Medical 3.9%
o Recreation 3.0%
o Natural gas 1.9%
Housing, the dominant component of the headline indicator, came in at 1.3%. For some families, price increases at these levels are an inconvenience, while for others they are problematic.

• Job creation is critical! Net changes in employment are the difference between gross job gains and gross jobs losses. Average quarterly job gains have been fairly constant for the upturns as well as the downturns during the past two decades. On the other hand, fluctuations in average quarterly job losses has been more volatile. In simplistic terms, the changes in net employment have usually been determined by the levels of job losses, rather than the levels of job gains. While this sounds very intuitive, the creation of jobs is clearly much more difficult than it sounds!

• There are external factors such as the triple disaster in Japan; the disruptions in Egypt, Libya, Yemen, Ivory Coast, and Syria; and the wars in Afghanistan and Iraq. The former will clearly be distractions, but they will likely have minor short-term impacts on the U.S. economy.

• Debt!

• President Obama introduced a final possible deterrent to the economy when he announced that he is running for re-election. This is not intended to be a political statement for or against the President, rather an observation that election campaigns, particularly those that are bitterly fought, often put the economy in a holding pattern.

These are significant risks! At the same time, there is reason to be optimistic. The upside will be examined in an upcoming post.

©Copyright 2011 by CBER.

Colorado Legislative Council – Outlook for the State Improving

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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.

The Economy Has Been Tough…

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Over the past two years, 150,000+ Coloradans have lost their jobs, the value of many 401Ks decreased by 40 to 50%, home owners have lost their mortgages and businesses have shut down. Rather than belabor this and other dismal data, the following quips have been pulled from a variety of sources to provide a lighter and less rigorous view of the country’s economic fortunes.

The state economy has been so bad that…

• A woman on the Western Slope ordered a hamburger at a fast food restaurant and the clerk behind the counter chimed in, “Are you sure you can afford the fries to go with that?”

• Coloradans have begun to receive pre-declined credit card offers in the mail.

• A farmer on the Eastern Plains received a note from the bank with a check marked “Insufficient Funds.” He called the bank to ask if that meant him or them.

• Two college students on the Auraria Campus were actually seen talking to each other, they couldn’t afford the cell phone plan that allowed them to send text messages to each other.

• A major corporation held a conference at one of Colorado’s finest mountain resorts. The recreational activities included a water balloon toss and squirt gun fight instead of river rafting; as well, the company golf tournament was held on the front nine at the miniature golf course. Awards were handed out at a wiener roast (that included smores) that evening.

• Parents in Denver’s wealthier suburbs have had to fire their nannies…in the mean time they learned how many children they had, what their names were, what grade they are in, and what schools they are attending.

• A resume-toting job applicant in Boulder was actually reported wearing a tie to a job interview – it matched his shorts and Birkenstocks. Despite the extra effort, he didn’t get the job.

The Great Recession officially ended in June 2009. In the 18 months that have passed, unemployment rates have risen (as expected), but other indicators suggest that better economic conditions lie ahead. Hang in there.

©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.

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.

Money Museum to Open at Denver Fed

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The Denver Branch of the Federal Reserve Bank of Kansas City recently announced that it will open a “Money Museum” and conference center in downtown Denver in early January. The museum will highlight exhibits discussing the responsibilities of the Federal Reserve. For example, information is provided about how the Fed establishes monetary policy with the intent of maintaining a stable economy.

In addition the museum will include displays that show how to detect counterfeit bills and the amount of space that is needed to store $30 million. Visitors may also receive samples of worn out or historical currency that has been shredded.

An important function of the museum is to provide education opportunities for K-12 students and teachers. The museum website indicates that class visits include a 30 minute presentation of personal finance concepts. More extensive sessions are available for K-12 teachers that demonstrate how to meaningfully incorporate economics and financial principles into the classroom.

The Denver Branch is located on the 16th Street Mall in Downtown Denver, between Arapahoe and Curtis streets.  Published hours for the museum are 8:30 a.m.-4:30 p.m. weekdays except bank holidays. Additional information can be obtained by visiting the Kansas City Fed website (www.kansascityfed.org/moneymuseum).

 

©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.

Real GDP and Colorado Employment

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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.