Negative factors in economy considerable as 2005 unfolds

This column initiates a monthly commentary on economic factors affecting the Northern Colorado economy. I will discuss local data in greater depth, examining fundamental changes ahead for the local economy. I will also discuss national economic developments and their impact on the local economy.
This column will supplement my quarterly column and Index of Leading Economic Indicators tracking the health of the local economy.
I cannot be positive about the outlook for the U.S. economy through 2006. There are too many negatives and very few positives. Government fiscal management is key to economic growth and must be tailored to domestic and world economic conditions. Tax cuts and tax breaks cannot be legislated while a major war effort is being conducted. A rapidly growing economy can bail the national economy out of this dilemma; however, economies generally do not grow robustly in the face of increasing risk and uncertainty. Business growth over the past two years has resulted in greater unemployment, as productivity increases have allowed businesses to increase profits and pay down debt in the face of increasing uncertainty.
This column is too short for a thorough discussion of all the negative conditions facing the national economy and how they will interact to slow GDP growth over the next year. There will be a recession in 2005-2006, perhaps a severe one.
The federal deficit is large and growing, seemingly with little concern on the part of Congress or the White House. Discussion continues to make the personal tax cuts permanent, and business tax breaks were added to the fiscal 2005 budget bill, thus reducing revenue at the same time that war expenditures are mounting and homeland security is being strengthened.
Under these conditions, the government will probably be forced to ignore Social Security, health-care costs and coverage, and education, although the Social Security debate will be fierce. As revenues fall, so must expenditures, unless the Fed prints more money, further debasing the value of the dollar.
Inflation will increase. The price of petroleum is searching for a new equilibrium. Remember when OPECâ??s target range was $22 to $28 per barrel? I think the new target range will have to be $40 to $50. World demand for petroleum is growing quickly, and I think $60 oil will not be uncommon during periods of supply-and-demand imbalance.
The U.S. manufacturing economy is no longer very sensitive to the price of petroleum. This is the result of increased energy efficiency and greater reliance on imported goods. Foreign manufacturing, however, is less energy-efficient, so the prices of imported goods will increase, boosted by a weaker dollar.
Consumers, on the other hand, are more sensitive to the higher cost of gasoline and other energy resources. Higher pump prices, heating-oil prices, natural-gas prices, coal prices â?? for electricity generation â?? and prices for consumer goods all greatly reduce how far slowly increasing wages and salaries can be stretched.
But all is not gloom and doom in the local economy. If you read my recent quarterly column, you know that construction is very strong and that the developing health-care sector will provide growth in the Northern Colorado economy at least through 2006. We havenâ??t had a slow-growth year in the local economy since at least the early 1990s, and 2005-2006 will be no exception.

John W. Green is a regional economist who compiles The Northern Colorado Business Reportâ??s Index of Leading Economic Indicators. Green, a Fort Collins resident, was previously chairman of the University of Northern Colorado economics department.