ON INDUSTRY: LEADING ECONOMIC INDICATORS

Last quarter, the 1st Choice Bank/Northern Colorado Business Report Leading Economic Indicators examined the health of the Northern Colorado economy on an intermediate-run basis, using data available with a six-month to two-year lag.
This quarter, we examine short-run data series available with less than a six-month lag. Relying on short-run changes in data can be risky. One- or two-month movements in a series may or may not represent more fundamental changes in the growth of an economy.
The Wall Street Journal reports that the national leading indicators of economic activity rose again in July, signaling solid growth well into 1998. Six of the 10 indicators rose, with the biggest gains coming from stock prices and lower unemployment claims. Construction spending increased 0.5 percent over June (which was up 0.1 percent over May), the biggest increase in five months.
The big jump in construction spending resulted primarily from a 1.2 percent increase in nonresidential building, mainly in factories. Residential construction increased 0.9 percent. National consumer confidence was also up in July, and orders for big-ticket items was at a healthy level, indicating solid economic growth for the foreseeable future. Second-half gross domestic product should grow at a 2.7 percent to 3 percent rate.
Consumers are confident that low unemployment and minimal inflationary pressures will persist. Thus, consumer spending should remain strong. Nationally, sales of existing homes rose 2.2 percent in July, a result of the strong economy, low mortgage rates, and hefty stock-market gains.
This spurs first-time buyers and stimulates baby-boomers to trade up. There was also a decline in inventories of existing homes for sale. The median price for existing homes rose 4.1 percent, to $126,500 in July. Sales were strong in the West.
However, according to F.W. Dodge, the total value of new construction contracts fell 4 percent in July. New construction activity has fallen for three months. New nonresidential building is stronger, with good gains in manufacturing, warehouse, health facilities and office construction. New residential building slipped 4 percent, with a 13 percent drop in multifamily housing and 3 percent drop in single-family housing. New nonbuilding construction (mostly public works) fell 22 percent.
So what˜s the situation in Northern Colorado? We˜ look first at employment and the unemployment rate, then at residential building permits, motor-vehicle registrations and retail sales. Employment in Northern Colorado is very cyclical, typically peaking in September or October and hitting its low point in January. This suggests an employment picture dominated by construction and the weather, rather the Christmas retail season.
In fact, the longer-run economic cycle in Colorado is dominated by construction spending and employment. Our late 1980s recession was largely a result of less construction activity and employment. Our model forecasts continued increases in employment in Northern Colorado through October, decreases through January and then continued growth in employment through October 1998.
Employment didn˜t fall as fast last Christmas season because of the strength of consumer spending, but neither did it increase as fast as predicted this summer, suggesting growth in employment may be slowing from recent rates. The unemployment rate in Northern Colorado was 4.15 percent in June, up from 3.49 percent in May and 3.09 percent in April.
It˜s forecast to increase through January 1998, and then decrease through May 1998, when new high-school and college graduates hit the labor market.
We have probably seen the low point in the unemployment rate in Northern Colorado at about 3 percent. Jobs are plentiful, and there is some pressure on wages. The lowest possible natural rate of unemployment in our economy is probably about 3 percent, i.e., that many people will always be between jobs, a healthy sign.
Single-family residential building permits declined to 339 in July, after peaking for the year at 365 in June. The number in July 1996 was 329. Single-family permits were high in 1994, lower in 1995, higher in 1996, and now lower again in 1997. The number of permits issued are triple the number of permits which were being issued in the 1988 to 1991 period. However, it˜s doubtful that the strong activity of 1994 to 1997 will continue into 1998.
Single-family residential building in Northern Colorado appears to be slowing. Permits being issued for two-family units also appear to be slowing from 1993-1995 levels. The number of permits issued for three- to four-family units, however, has been healthy since 1993 and especially strong in 1996 and so far in 1997.
This market may be becoming saturated, especially if employment growth slows. Permits for five or more family units has also been strong since 1993 but slowed in 1997 and are likely to remain somewhat weak as the rate of employment growth slows.
Motor-vehicle registrations typically peak in the summer months but show spikes in December and January as cars are gifted for the Christmas season. Registrations were stronger than our model expected last fall, but much weaker since May. The remainder of 1997 and 1998 shows a significant slowing in the rate of growth of motor-vehicle registrations.
Congestion on local streets may have peaked, as job growth and new-vehicle registrations slow from past rates of increase.
Retail sales in Northern Colorado are generally increasing, but with substantial month-to-month variability. Retail sales are currently varying between $450 and $550 million per month. The amount of retail sales significantly increased when the Rocky Mountain Factory Stores opened in Loveland, indicating that the retail market area was significantly expanded.
In addition, the rate of growth in retail sales and the month-to-month variability also increased. We see, obviously, the same pattern in tax collections from retail sales. Collections increased with the opening of the factory-outlet mall, the rate of growth increased, and so did the variability.
In May, sales-tax collections were more than $8.5 million. One way to forecast the growth in consumer spending in Northern Colorado is to examine retail sales growth in individual sectors.
Retail sales are slowing in wholesale trade, in some areas of retail trade (building, general, food, automobiles, apparel, furniture, and miscellaneous), and lodging. Retail sales are still strong in manufacturing, utilities, eating and drinking places, and services.
Growth in consumer spending in most retail areas has slowed, but consumers are still eating out and buying services. There is also an indication of continued strong spending on recreation items and entertainment.
In sum, do the above statements indicate continued growth in Northern Colorado? Yes, but slowing from the recent unsustainable rates of 1994-1995. It appears that the national economy will continue to grow well into 1998, and the local economy, also, will see positive rates of growth, probably through 1998.John Green is a professor of economics at the University of Northern Colorado in Greeley.