On The Economy: 2001 predictions show slow growth

The Wells Fargo Bank/Northern Colorado Business Report Index of Leading Economic Indicators has fluctuated little – from 7.0 to 7.5 – since the beginning of 1998. The average annual monthly change in employment, number of single-family housing permits issued, total value of construction, motor vehicle registrations, new sales-tax accounts, retail sales and bankruptcies has been in that range for three years. There were only four months during that period when the index dipped into negative territory. During the early 1990s, the index was even stronger.

But the forecast is for slower growth in the index – in the 5- to 6-percent range – for the final four months of 2000. It is likely that the annual monthly change in the index will be below 5 percent in several months in 2001 and negative in some months. Keep in mind this is only slower growth, not negative growth.

Growth in the U.S. economy is slowing. The National Association for Business Economics’ most-recent survey suggests the business climate is becoming difficult because of higher energy prices, the effects of past Federal Reserve tightening and a stronger dollar.

Profit margins for many companies are being squeezed tighter than at any time since the early 1990s, causing many companies to cut capital spending plans. The NABE forecasts suggest a soft landing is in progress. Inflation for 2000 will be around 3.5 percent but could be higher in 2001, depending on productivity changes and wage pressures. Unemployment is likely to remain low, about where it is now.

Much depends on new president George W. Bush and the Republican Congress. It is not likely there will be bipartisan cooperation and it is likely there will be a tax cut. A tax cut will cause an increase in consumer spending, stimulating the national economy. If the national economy is still growing strongly, this stimulus might cause enough additional inflation to prompt the Fed to increase the discount rate.

Additional consumer spending will also cause imports to increase, worsening the trade deficit and putting downward pressure on the dollar. An economy flirting with recession would be able to absorb the stimulative effects of a tax cut.

According to Ernie Goss, publisher of the Mountain States Business Conditions survey, economic growth and inflationary pressures in the Mountain States region aren’t slowing at the same pace as in other parts of the United States. Economic conditions in the Colorado economy are still strong, pointing to continued growth in the months ahead. Federal rate hikes have had only modest negative impacts in Colorado. Economists at the University of Colorado Business Research Center are, however, forecasting a slowing Colorado economy in 2001.

Employment growth in Northern Colorado definitely seems to be slowing. The summer 2000 peak in employment was less than in 1999, the first time the year-to-year summer peak was negative in the 1990s. Cold weather and a weak Christmas selling season will not bail out the employment picture. Unemployment, however, remains low, suggesting continuing labor shortages.

The total value of construction is also slowing as major institutional and highway construction projects wind down towards completion. The number of single-family residential permits being issued continues to show strong growth, although no stronger than in 1999. Weld County is stronger, but its additional strength only offsets weakness in Larimer County. Significant weakness in the construction sector could have a serious negative effect on the Northern Colorado economy.

Growth in total motor vehicle registrations was stronger than expected in 2000 because of purchase incentives. Growth in new sales tax accounts issued in Northern Colorado was also stronger than expected, more than making up for the major slowdown in the second half of 1999.

The growth in retail sales was weak in the first quarter of 2000 after the outstanding Christmas season of 1999. The second quarter rebounded nicely and the forecast is for a good fourth quarter. I think, however, that the forecast is too optimistic and the 2000 Christmas season will show very little growth over 1999. There are just too many negatives dampening consumer optimism.

Annual bankruptcies per 1,000 population is still decreasing, but only because population is increasing faster than bankruptcies. The number of bankruptcies is increasing nationally and in Northern Colorado. Many households are discovering that their bills, after years of torrid spending, are coming due just as they are ill-prepared to pay them. Legislation making it harder for Americans to discharge their debts through bankruptcy is pending in Congress.

Thus, there are several warning signals flashing in the national and local economies. The coming tax cut could bail out the national economy or add boom on top of a soft landing. However, in spite of what happens to the national economy, the local economy demonstrates its own strength that is relatively independent of the national economy.