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.
Updated economic forecasts for the second quarter of 2011 and quarterly for one year thereafter, will start coming out shortly. Summit Economics contributes to the USA Today consensus forecast. As we reflect of the coming year and a half, the best analogy comes from the healthcare field. How will the patient react once removed from the life support systems known as Quantitative Easing 2 (QE2) and almost a $1.5 TRILLION federal deficit?
The Federal Reserve’s QE2 will end by summer and thus far there is no talk of a QE3. What impact will this have on longer terms asset markets like bonds, stocks, and real estate? Logic tells us asset values should drop a bit initially. In fact, this may have already happened as markets anticipate the future.
Washington agreed to budget cuts totaling almost $40 billion – a drop in the bucket compared to what is needed long-term. More cuts are likely when the debt ceiling is raised. Beyond that, both the White House and Congress appear to be serious about laying out a plan to get the fiscal house in order. Standard and Poors helped out a bit today be mentioning a possible downgrade of U.S. government debt, basically stating “Get the financial house in order.” While these are needed changes, what makes sense for the long-term may send the patient back into temporary shock.
Overall, we were impressed with the magnitude of job gains nationally in the first quarter, especially given fiscal strains faced by state and local governments. The private sector performed better than expected which is great news given the looming changes in life supports. As a result of these recent trends, we have increased our employment growth forecasts, but are sticking with our slightly more pessimistic forecasts of GDP growth staying closer to 3.0% to 3.4% for the first half of the year and then declining over the next year into the mid 2% range. While this is not where we want to be, it’s better than where we were a couple of years ago and demonstrates stability with slow improvement.
We don’t see much change in the unemployment rate in terms of improvement as we move into the second half of this year. With government spending dropping at all levels of government the private sector will have to make up for the difference to sustain growth. Can it?
In addition to the curtailment of support from the Federal Reserve and the federal government, events in the Middle East, Northern Africa, and Japan have increased oil prices. In our prior forecasts we were seeing oil price stability in 2011, but that has changed. Most oil industry analysts see higher oil prices as being the norm long-term. Similar to the other changes noted above, accepting the new reality and getting on with the challenges ahead will be painful on the short-term, but beneficial in the long-term as the U.S. changes its energy portfolio and focuses more on production closer to home using both traditional fossil fuels and new emerging technologies.
Given this reality, the economy could face a triple whammy – lower asset prices due to no more quantitative easing, less government spending, and higher energy prices. These likely events will stymie consumer spending which leaves private non-residential investment and export growth as the two primary sources of pushing GDP higher.
What’s the good news? Housing price declines seem to be waning and could be at the bottom. Regions in the U.S. with oil and gas will see increased investment and job growth. Innovation in the automotive industry in terms of fuel efficiency may lure buyers back into that market. The agricultural sector is booming. U.S. manufacturing continues to improve. Inflation, which will be significantly higher due to volatile energy and food prices, will remain low at its core (due to a weak economy). The Millennial generation is entering the labor force in large numbers helping drive up consumer demand as Baby Boomers lower consumption while preparing for retirement in an increasingly uncertain world.
- The bond market – will longer term rates increase significantly or stay steady? Quantitative Easing 2 (QE2) will end by mid-year keeping demand for 10 year Treasuries up (pushing down yields), but will investors react even more negatively to long-term debt prospects and price in greater risk. Also will they factor in the trend in long-term oil and commodity prices – thereby adding in greater inflation expectations into their desired yield?
- Emerging market economies, especially in China, and how aggressive they are in attempting to curtail inflation in their country — possibly putting them in a recession. Higher levels of inflation in China should keep their currency weaker, but that’s assuming the Yuan were freely traded on markets as opposed to being pegged to the dollar. If the Chinese cool down their economy to control inflation, worldwide demand for oil and other commodities will weaken, hence reducing inflationary prospects around the world.
- Aside from increase commoditiy demand in the developing world, will development in the northern Africa and the Middle East cause oil supply disruptions and an increase in prices?
- The degree of price stability in US real estate market – will bonds and mortgage interest rates stay low, thereby providing support for real estate prices. QE2 seems to have been primarily designed to do this.
- The trade-off between dramatically growing state and local government spending which can result in higher taxes like we saw in Illinois or substantial layoffs as we are more likely to see in Colorado. The municipal bond market could be problematic as state, local government and school districts run short on cash.
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)
If one considers the average rate of single family housing starts in the United States since the late 1960s (the red line in the below chart from calculatedriskblog.com) and thinks in terms of mean reversion (the tendancy for extreme experiences to move back to the long-term average), one could conclude that persistent excess housing starts above approximately 1.150 million units as experienced in the beginning of this century, shifted longer-term demand for new housing into the first seven years of the past decade. In other words builders were able to sell to homebuyers between 2000 and 2006 who might have not purchased until later years. The run-up took 5 to 6 years reaching a historical peak in late 2006.
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A strong new home market played a significant role in clouding some underlying weak fundamentals in the overall U.S. economy at the turn of the century. Robust demand for new homes was comprised of second home purchases by baby boomers and investors who are thinking of retirement and were watching prices escalate. This source of demand was supplemented by Generation Xers and Millennials who, due to very easy qualifying, were buying into the American Dream. A key ingredient to all of this was cheap money flowing into the United States from savings generated by booming economies in the developing world. This flood of money kept long-term interest rates low, thereby stimulating housing demand.
Given the notion of mean reversion, we should expect slow demand for new single-family homes until 2014 or 2015 on a national basis. Given the importance of housing investment to overall economic activity, this is yet another indicator of the time to recovery.
Traveling to Washington DC to visit museums and our national landmarks is thought provoking. One can always find waste of our tax dollars and it’s somewhat disturbing that Washington DC has the best regional economy as the U.S. economy struggles. On my Thanksgiving trip to the our Capital, I certainly saw many more ARRA (American Recovery and Reinvestment Act) funded projects there than I see in Colorado, but that’s one of the laws of life (and theories in geographic economics) – the closer one is to the bounty, the more access they have to that bounty and the better off they tend to be.
What really struck me this time was the history of debate and democratic deliberation. It’s amazing our nation survived over 200 years of fierce disagreement on how to move forward as one nation and only experienced one civil war. As a general rule progress is slow at best, except in times of true crisis such as WWII. The pendulum certainly swings left and right, republican – democrat, federal – state’s rights, freedom of the press – restrictions of the press, corporate rights versus regulation, free markets vs government intrusion. But in the end, the pendulum spends more time in the middle where it might take decades to come to sufficient consensus to enact major legislation or constitutional amendment.
Put into a historical context, remembering our grandparents’ grandparents, if in the U.S. in the 1860′s, experienced the Civil War first hand, when the White House was lit with gas lamps and Lincoln wandered the streets, unprotected, by horse carriage, it’s astounding how far the technological side of life has changed in 5 generations — along with the population. And through it all democratic institutions still rule. It’s humbling how young we are in this grand experiment in governance and comforting to think we have faced far greater challenges than the current economic doldrums.
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.
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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.