Paul Rochette, Senior Partner
Some new and persistent downside (and a few upside) international risks can affect our economy.
New risks are emerging. These include China’s housing bubble which, in terms of the number of units, makes ours look miniscule. China, to stimulate their economy, built entire cities only to find no one showed up. As a result, the Chinese economy, which has served as a global engine of growth, is slowing. While the latest figures show it not slowing as much as feared, the latest projection of growth in the 7.5% range is still a significant drop from the plus 10% range of the past decade.
In addition there is the potential for currency wars as the world attempts to stimulate their economies and support central government spending by devaluing their currencies – AKA printing money. The new Japanese Prime Minister Abe has stated that the Japanese are specifically trying to stop deflation by increasing the money supply, and that the slide of the yen is a result, not a reason, but few in Europe or the U.S. believe that. Coupled with aggressive money supply policy in the U.S. and continued challenges to the faith in the euro, a currency war may slowly emerge. The Chinese, while moving towards encouraging increased domestic consumption, are still heavily influenced by state owned enterprises (SOE’s) that wish to continue to export, and want the yuan to remain undervalued as well. All of the forces keeping other currencies weak will provide some further softening of U.S. prices, but at the cost of higher U.S. trade deficits, especially if the U.S. recovers sooner than others.
The European Union continues to be a cause for concern. After beating back the fears of a Greek default, the markets for Spanish, Italian and other southern tier debt stabilized, at least until this past week when Cyprus moved to center stage. For the first time in the euro crisis, depositors are being asked to contribute to the bailout. This is hitting depositors with more than 100,000 euro in Cyprus’s largest two banks, a large percentage of them Russians who have found Cyprus to be both a tax haven and a retirement center. The ramifications of depositors being hit means that now depositors in other southern European nations may no longer be so sanguine about the safety of their deposits, which both contributes to the growing southern European resentment towards Germany and also the growing sense that the crisis is not over. Perhaps depositors in Italy and Spain should be worried should the banking crisis not abate there. We will see if panic disintermediation hits this Thursday (3/28/13) when Cypriot banks reopen.
There are a few positive notes as well. The U.S. has entered trade talks with Japan and other Asian nations under the Trans Pacific Partnership, and is beginning talks with the EU over reducing trade barriers. Many economists agree that lowering trade barriers has net beneficial effects. With agricultural exports being one of the U.S.’s (and Colorado’s) strengths, continued global economic prosperity suggests more U.S. and Colorado exports of foodstuffs.
Canada, the EU and Mexico are Colorado’s three largest export destinations. While the EU is in the doldrums, Canada and Mexico are looking at respectable economic growth rates. Combined with China and Japan as our 4th and 5th largest export destinations, exports look to be a strong contributor to the U.S., the State and the region.
Not only do we anticipate 2012 continuing modest growth, but 2011 was better than originally reported according to the Bureau of Labor Statistics’ updates on the preliminary data releases they issued in 2011. Given we had forecasted a return to growth for 2011 in late 2010, we were surprised with BLS’ originally reported declines in Colorado Springs wage and salary employment. As it turns out our original forecasts for 2011 were reasonably accurate. The two graphs show labor and salary employment as originally reported and then as updated.
Hopefully our 2012 forecast will be accurate as well. Despite rising energy prices, we see continued growth, consistent with 2011 locally and better nationally. Nationally, the growth is being fueled by:
- Optimism of an election year,
- Lack of Federal austerity,
- Low mortgage rates,
- Stabilizing housing markets,
- Growth in U.S. manufacturing,
- Consumers feeling bolder.
On the state and local levels, non-residential construction is strong at military installations, the Southern Delivery System, and data centers. The Multi-family apartment market is robust with construction which will accelerate into 2012-13. The commercial real estate market will see improvement in the Denver metro area, but not much in Southern Colorado
The bottom line is Colorado continues to grow despite slow job growth. It’s all a matter of relativity – Colorado relative to the nation. Peyton Manning’s interest in the Denver Broncos because of the quality of life is indicative of our most fundamental strength.
The real concern is for 2013 and beyond. Federal austerity is a given at some point. The time to focus on economic development in Southern Colorado is now!
The KC Federal Reserve District’s economy is relatively more focused on commodities and national defense. The region encompasses Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and portions of western Missouri and northern New Mexico. Job growth in the region during and after the last eight national recessions is consistent with the nation; however, the region is consistently late to fall into recessions and early to recover from recessions.
FNC Residential Index
One should not assume that just because Denver has done so well (relatively speaking of course) during thr housing bust that the entire state has performed the same way. However, regions do tend to generally move together with economists’ favorite assumption of ceteris paribus.
by Mike Anderson
The Colorado Public Employees’ Retirement association (PERA), like most state and local government pension funds, has become a subject of much media attention and often a source of political debate. Oddly missing from the public discourse, however, has been any discussion of the economic impact and importance to the economy of the benefit payments made by pension funds to their retirees.
PERA retirement benefit payments, like military and other public and private pension plan payments, represent deferred compensation to the retiree. The retiree often spends a large share of that deferred compensation purchasing necessary goods and services in the community in which they reside and thus contribute to local economic activity.
In 2011, there were nearly 9,800 PERA retirees living in El Paso County. PERA retirement benefits paid to those retirees in 2011 totaled $348.9 million, or roughly $35,600 per retiree. It should be noted most PERA members do not participate in Social Security and, therefore, the PERA retirement benefit is designed and funded to provide total retirement monies consistent with the private sector where retirement is based on a combination of a private plan and Social Security. Of the 53 Colorado counties, El Paso County had the second largest number of retirees and benefits paid, being surpassed only by Jefferson County.
A recent study titled, “The Economic and Fiscal Impacts of Colorado PERA”, produced by the Colorado based economic consulting firm Pacey & McNulty, attempts to quantify the relative importance of benefit payments to PERA retirees in Colorado. The report can be found at: http://www.copera.org/pdf/Impact/Impact2011.pdf . It contains an analysis of impacts on the Colorado economy as a whole, and for each of its regions and major metropolitan areas including Colorado Springs (El Paso County).
In their study, Pacey & McNulty utilized an input-output based impact model known as IMPLAN. IMPLAN is a widely recognized model that Summit Economics has also successfully applied in a number of its impact analysis projects. The model is used to measure the multiplier effect of additional dollars introduced into a region’s economy as a result of some type of economic event. As Pacey & McNulty succinctly point out in their report: “when a household receives PERA benefit payments, it represents an infusion of income into the local economy that creates a chain of economic activities whose total impact is greater than the initial benefit payment. That is, these payments have substantial “ripple” or “multiplier” effects where one recipient’s spending becomes someone else’s income…The impact of the PERA benefit payments reaches well beyond those who receive the initial benefit payments as the recipient can fulfill obligations such as purchasing groceries, apparel gasoline, etc.”
Some of the key findings of their study include:
• In 2011, PERA provided benefit payments of $3.03 billion to Colorado residents.
• In Colorado, the $3.03 billion in payments resulted in $4.31 billion in output (all goods and services transactions), $1.87 billion in value-added (State gross domestic product), $1.01 billion in labor income (worker wages), and 23,400 jobs.
• When the statewide results are analyzed on an industry sector basis, there are five industries in which the economic impact is greatest: Finance and Insurance, Health Care, Retail Trade, and Real Estate and Rental and Leasing.
• “PERA payments are a critical source of reliable, predictable income and provide an “automatic stabilizing” effect on state, regional and local economies, especially in economic downturns as these monies provide important stimulus in maintaining market activity.”
Digging deeper into the study, there is also some revealing data for the Colorado Springs area:
• PERA benefit payments to Colorado Springs metro area residents totaled $348.9 million in 2011.
• The $348.9 million amounts to approximately 3.9 percent of total payroll in Colorado Springs.
• PERA benefit payments in Colorado Springs resulted in about $436 million in output, of which $253 million is value-added above the benefit payments.
• Labor income (workers wages ) in Colorado Springs supported by PERA benefit payments were estimated to be $85.1 million in 2011, which sustained a total of 2,204 jobs in the area.
• Since PERA recipients pay a portion of their benefit payments in income taxes and also pay sales, use and property taxes as well as fees for licenses and permits. In addition, there are taxes and fees paid on the additional spending resulting from the multiplier effect. Total State and local tax revenue attributable to PERA benefit payments are estimated at $21.1 million in Colorado Springs. For Colorado as a whole, total tax revenue is estimated at nearly $232 million.
While the participants in the debate over PERA have found it difficult to agree on many points, all should be able to agree that protecting the financial health of PERA and its sustainability to preserve the flow of benefit payments to retirees throughout Colorado is important to the vitality of the state’s economy and and employment base.
No doubt the number of military retirees residing in the Colorado Springs area and the associated retirement benefit payments is many times larger than the number of PERA benefit recipients residing in the area. Imagine what proportion of total economic activity is attributable the expenditures of retirees when one adds to those amounts the retirement benefit payments made to retirees by other local government and private pension plans, and perhaps, social security payments to local residents. That will be a good topic for discussion in the future.
It’s always somewhat shocking to hear the Colorado unemployment rate is higher than the nation. This has been the case lately as unemployment news was getting better nationally while in Colorado, like much of the Rocky Mountain West, the unemployment rate was increasing. It appears we are generally lagging the nation (just like we did going into the recession).
The last two quarters did bring positive job growth to Colorado. It’s about time! Hopefully this positive trend will continue and will accelerate. We think it will in the private sector for the remainder of 2011 as population continues to move to Colorado and oil prices are pushing fossil fuel exploration and development in the northern Front Range. The agriculture economy is doing very well and manufacturing is seeing an increase in new orders.
If high energy prices persist, a renewal of oil shale activity could occur in the Grand Junction region and preliminary exploration is occurring in the southern half of the Front Range as well.
The biggest risks to Colorado’s recovery will center on energy prices dampening consumer confidence and demand as well as out-of-state tourism this summer. Housing will continue to be depressed, but will the bottom hold on prices? What will the rate of federal fiscal adjustment be and to what degree will it impact State budget cuts. Unfortunately, even under the best of circumstances recovery will not be robust.
The good news for longer term prospects centers on the early Census results. Colorado continued to outpace the national population growth rate along with Florida and the southeastern States, the Rocky Mountain Region, and Texas. The non-working household sector continues to provide an economic impetus with their retirement incomes (in many cases) making up for slow employment growth going back to 2000. In addition to the younger retirees, Colorado continues to attract the young and educated new entrants into the workforce. This alone is promising for the State’s future as an educated workforce attracts knowledge based industries. Downtown Denver is becoming quite the place to be for all active age cohorts, but it’s especially impressive to see the number of young people trying to make a go of it in Denver.
United Western Bank of Denver was closed by the FDIC last week, representing the first Colorado bank to be closed since three were closed in 2009. Overall, Colorado has fared relatively better than the nation since 2007, in terms of bank closures with about one percent of the closures and two percent of the banks. However, Colorado has 31 problem banks (23% of all banks in the State) as compared to 14% of all FDIC insured institutions nationally being problem banks and 17% of banks overseen by the Comptroller of the Currency. The problem banks are being watched especially closely by regulators and have been issued decrees of one sort of another for corrective action that must be taken. (For a list of the problem banks go to calclatedriskblog.com.)
According to the FDIC only about 5% of problem banks eventually fail and the vast majority that do fail are merged into other institutions with the FDIC covering shortfalls between the assets and liabilities of any failed institution. In Colorado, 75% of the cases of problem banks result from those banks relatively high share of commercial real estate and development loans.
The problem banking list has grown by about 12% nationwide in the last year to 937 institutions. On a per capita, constant dollar basis, FDIC insured banks had the worst year of net income in the last 40 years (see graph). The Colorado banking industry barely broke even with earnings of $5 per person in the state. The U.S. did a little better at just over $35 per person. In the third quarter of 2010, banking earnings had improved dramatically from 2009 – growing from $2 billion among all FDIC institutions nationally to $14.5 billion. Still, 20% of all institutions had a loss in the third quarter.
In Colorado loans decreased 6% from 67% to 61% of assets in 2009. There was a corresponding shift to cash and securities. Anecdotally, this trend continued in 2010. Real estate lending and leases grew from 80% to 84% of all loans during the recession in Colorado as business loans are easier to get off the books by non-renewal on an annual basis. Within the real estate category, land and development loans dropped 8% in relative share while longer term loans grew in share.
The Federal Reserve’s 3rd quarter, 2010, survey of senior loan officers shows slight easing loan requirements. Despite this very slight easing of credit, demand for loans dropped significantly — especially among small borrowers. This is to be expected as small borrowers often put up the real estate equity for collateral and that equity has taken a serious hit. Besides, everyone is still looking for commercial investment opportunities in a risk adverse world.
While much of the focus in the last two years was on residential real estate, the next two years will focus in commercial real estate and even some select new development opportunities. The key element to watch is whether or not the regulators put pressure on banks to continue to reduce their commercial and development real estate exposure by not renewing loans when the balloons come due at terms investor borrowers can afford. If too much commercial real estate ends up in the banks’ real estate owned portfolio and the banks are required to liquidate quickly, a higher percentage of the problem banks will become bank failures and commercial real estate values will face significant downward pressure. The good news is that there will be plenty of investors waiting to buy — if they can get a great deal.
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We are encouraged by the economic prospects for 2011 — namely private sector job growth. We do not see much improvement in the published unemployment rate and think the government sector could lose jobs. The official unemployment rate will likely stay high as previously discouraged unemployed workers who quit looking for work return to the labor force and begin looking again. So even if we have much better job growth, those people leaving the ranks of the unemployed for a new job will be replaced by people who return to the labor force seeking work after being discouraged. In addition, we have lots of young people entering the labor force for the first time and in Colorado we have people moving here to at least enjoy the scenery while seeking better times.
While the future looks promising relative to the recent past, the economy still has a long way to go. Everyone seems to have lowered their expectations for a robust recovery and now realize that slow, but steady, is a decent outlook. Inflation should remain low except in certain commodities where prices might be driven up by speculation as opposed to fundamentals. If the developing economies, which have been leading the recovery, cool off, there will be less pressure on commodity prices.
Watching the longer term debt markets and the world of politics will certainly be interesting in 2011 as investors and central banks continue to deal with the over leveraged public sector in the industrialized world with an even more watchful eye on the U.S. treasury, White House, and Congress which will begin sipping tea in the coming year.
In the meantime, have a good glass of wine and enjoy the last days of the holiday season.
The Western Blue Chip Consensus Forecasts changed very little from last month. Summit Economic’s forecast is slightly lower than other forecasters, more consistent with the Colorado Legislative Council and the Governor’s Office of State Planning and Budget.
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Consensus forecasts for Colorado in 2011 are shown to outperform most other western states in population growth, underperform in forecasted change in building permits, and be in the middle of the pack for personal income and employment growth.
The best news – all states are forecasting job growth next year, with the exception of Nevada. But then again, these are forecasts. (For the complete forecast Click Here)
As depicted in the Bureau of Labor Statistics graph below, the Rocky Mountain Region consistently out performs other regions in the nation in terms of GDP growth.
Click on the graph to see the full image
A curious question is why does the unemployment rate in the region, while lower than the nation, seem to be lagging the nation in terms of the degree of improvement (or lack thereof). The key factor centers on employment growth versus population growth. The Rockies continue to attract new households from around the nation, albeit probably at slower rates as migration has slowed in current economic malaise. Since 2000, Colorado has only added 1 new job for every 8 additional people in the state. That compares to a labor force participation rate of 1 job for every 2 person.
With new people comes consumption and investment thereby raising GDP, but not necessarily adding jobs at a rate sufficient to lower the unemployment rate.
What is the unemployment rate? The official rate as referred to by the Bureau of Labor Statistics and the press averaged 9.7% nationally and 8.4% in Colorado in the last year. If we add discouraged and marginally attached workers who have quit actively looking for work, the rate climbs to 11.1% and 9.3% respectively. Add to that more than 6.6% of workers who are employed part-time for economic reasons, and the unemployment rates rise to 16.8% in the U.S. and 14.8% in Colorado.
Some more details as of October, 2010, include:
- The unemployment rate
- among teenagers in the labor force is 27.1%.
- among people 25 years and over who do NOT have a high school diploma the rate is 15.3% while those with at least a bachelor’s degree is 4.7%.
- Among the unemployed
- 8.6% are young people entering the labor force for the first time.
- 41.8% have been unemployed for 27 weeks or more.
- Among the employed 19.9% are part-time workers — 13.1% are part-time for non-economic reasons and 6.6% are unemployed for economic reasons.