Index hints at decline, but positive signs remain

The Northern Colorado Business Report Index of Leading Indicators fell into negative territory in October, pulled down by declines in the number of single family housing permits issued (off 15.9 percent from October 2003), motor vehicle registrations (down 9 percent) and formation of new retail businesses (down 21.3 percent). Charts showing monthly annual changes in these and other indicators over the past 15 years accompany this story.
Growth in the national economy has held up much better than I expected. I expected growth of 3 percent or less but it?s held about 1 percent higher than my expectations. I detailed the preponderance of negative factors weighing on the U.S. economy in my October column and I still think they will be a very serious drag on the national and local economy in 2005. The U.S. economy will be especially hurt if China floats its currency and it increases rapidly vis-à-vis the dollar. This will trigger additional inflation and interest rate increases.
The local economy has been, is being, and will be held up by the construction sector. Economists describe the ?competitive advantage? of nations or regions and measure the amount of ?clustering? around competitive sectors. Northern Colorado enjoyed a clustering of industries around the technology sector in the late 1980s and 1990s, but that competitive advantage has greatly diminished.
Replacing it, however, is an emerging dynamic health-care sector. The regional hospital at the crossroads of Interstate 25 and U.S. Highway 34 is the trigger that will again boost construction and related sectors and the technology-supported human health industry in Northern Colorado. This will stimulate the demand for nurses and related caregivers, doctors, medical technology, physical therapy and related services. The move to boost university training of these persons in Northern Colorado is one example of stimulation that is already taking place.
As stated above, the regional growth rate moved into negative territory in October. Nationally, retail sales were weak in November and I and other economists do not expect the Christmas retail season to be robust. Locally, I expect retail sales increases in the range of 6 to 8 percent. With inflation running at 3 percent and population growth at 2 percent, that?s no better than a real increase of 1 to 3 percent real increase in sales.
Employment growth in Northern Colorado has been about 1.25 percent annually. That is down from approximately 2 percent in the 1997-2001 period. Northern Colorado has been affected by jobs moving overseas. Job movement overseas will slow as China?s and India?s currencies appreciate vis-à-vis the dollar.
The total value of construction being put in place in Northern Colorado is easily greater than 10 percent per year, although the rate is highly variable from month-to-month. Commercial construction around The Ranch is a significant stimulus, taking over from residential construction as mortgage rates have increased.
Housing values continue to increase, however, creating new wealth that is constantly being tapped by consumers to increase their purchasing power. As a result, retail sales increase. The agriculture sector has had a good year, boosting the ability of farm and ranch families to make purchases of needed equipment and consumer items.
As growth in employment has slowed, so has growth in motor vehicle registrations. Also, fewer new vehicles are being sold as consumer sentiment has fallen.
The drop in consumer sentiment drastically reduced the number of new retail sales tax accounts issued to Northern Colorado businesses. In just the past three months, the trend line has stopped growing, leveled out, and turned down. Entrepreneurs are very reluctant to start new businesses in the current economic climate.
Bankruptcies continue to increase, slower than the peak early in 2004, but above the 2003 level for the same months. Bankruptcies are currently running above the one-per-2,000 population-per-month rate and are 50 percent higher than at the depth of the 1991 recession.
So stay tuned. Will the negative growth rate of October persist through the end of the year and into 2005? The preponderance of negatives in the international and national economies is impressive, but the local economy just may weather the storm because of the emerging health sector and continued strength in construction