County?s economy expected to remain stagnant rest of year

Previous forecasts that the Boulder County, Colorado, and U.S. economies would begin to turn around have not materialized.

The economy at all levels is forecast to remain stagnant at least through the third quarter. After moving upward slightly in the second quarter, the national Leading Economic Indicator (LEI) for August dropped to 111.8, the same level it was in January. This lack of growth in the past eight months indicates that the national economy is not expected to show substantial growth in the months ahead.

At the local level, the Boulder County LEI increased slightly from 109.5 to 110.2, which suggests that local employment growth will be paltry at best.

During the past quarter, GDP data for the past year were revised — downward in most cases. The revised data showed negative growth for the first three quarters of 2001, followed by growth of 2.7 percent during Q4 2001 and 5 percent during Q1 2002.

During the second quarter, this rate of growth tapered off to 1.1 percent and is expected to remain slightly above this level for the remainder of the year. Just as the recent historical GDP data were revised downward, the near-term expectations for GDP also have been adjusted downward. At this juncture it is difficult to see what sector will lead to stronger growth. During the second quarter, the average quarterly interest rate spread, the difference between a 10-year constant maturity treasury and a 3-month constant maturity treasury, continued to increase, with the difference being 335 basis points. This relationship, also referred to as the yield curve, is one indicator that supports the belief that there will be strong growth in the year ahead.

The rate of unemployment for Boulder County dropped from 5.6 percent in the first quarter to 5.2 percent in the second quarter. This decline in unemployment occurred despite a decrease of 1,383 employed workers, from 183,722 in Q1 to 182,339 in Q2.

The decrease in employment was driven by a decrease in the size of the labor force as the average size of the quarterly workforce decreased by 2,288 workers, from 194,596 in Q1 to 192,307 in Q2. It is interesting to note that even with an increase in unemployment from 3.1 percent in Q2 2001 to 5.2 percent in Q2 2002, the average size of the labor force increased by 3,303 potential workers while jobs were lost. This increase in the labor force has occurred in other parts of Colorado as the state continues to have appeal because of its strong technology base, lower unemployment compared to many other parts of the country and quality of life.

The seasonally adjusted national level of unemployment for July 2002 was 5.9 percent, compared to 5.2 percent for Colorado. The Boulder County and Colorado not seasonally adjusted unemployment rates for July 2002 are similar, 5.2 percent for Colorado and 5.4 percent for Boulder. This compares to rates for the same period in 2001 of 3.7 percent for Colorado and 3.6 percent for Boulder.

The recent downturn in the economy has negatively impacted the earning power of Boulder County residents. State ES202 employment data indicate that average wages paid to workers decreased from $45,562 in 2000 to $44,310 in 2001. This decrease in annual wages is attributable, in part, to layoffs that tended to affect more higher wage earners than usual and the elimination of wages generated through bonuses and stock options.

The loosening of the labor market and reduced pressure to increase local wages at rates greater than the national rate of wage growth are also factors. Companies are reportedly using this opportunity to upgrade their workforce with more qualified employees, many of whom are willing to work for wages lower than in previous years.

Over the past year, increased unemployment and weak wage and salary growth have caused a reduction in level of consumer confidence and retail sales. After dropping for six consecutive quarters, the Rocky Mountain Quarterly Index of Consumer Confidence average increased to 113 in Q1 2002 and 118.5 in Q2. This is close to the level of confidence in Q1 2001, 120.1, but well below the level of 144.3 in Q2 2000.

The patterns of movement for the Rocky Mountain Consumer Confidence have paralleled the movement of the national index, but until recently have consistently been higher than that national indicator. Several of the Rocky Mountain states, including Colorado, have yet to come out of the recession.

Retail sales through the first half of 2002 for Boulder County were about 19 percent lower than the first half of 2001. The most prominent reasons for this decline is the creation of Broomfield County, where sales from FlatIron Crossing are now recorded. However, statewide retail sales are down 1.7 percent through the month of June. This is in sharp contrast to national retail sales, which are up 5.2 percent over the prior year through the month of August.

The combined retail sales of Broomfield and Boulder County through the first half of 2002 are actually 0.2 percent higher than for the first half of 2001; however, about 20 percent of Broomfield sales have historically been in areas formerly in Adams or Jefferson County.

Allowing for this difference, adjusted Boulder County sales for the first half of 2002 are about 3.5 percent less than for the first half of 2001. Another way to look at it is to compare retail sales for the four counties that are affected by the creation of Broomfield County ? Adams, Boulder, Broomfield and Jefferson. Total sales for the first half of 2002 for these four counties is 1.7 percent less than for the prior year. These totals are not adjusted for inflation, which would further exacerbate the situation.

The decrease in the stock market continues to have a negative wealth effect. After breaking the 2,000 level in early January 2002, the Nasdaq slowly dropped off for the remainder of the first quarter, closing at 1,784 on March 29. The Nasdaq has continued to slide in the second quarter and dropped to nearly 1,400 in mid-June. The change in the value of the Boulder County Stock Index, compiled by CNet, has been less dramatic. The Q1 2002 ending total was 2,588, slightly higher than the Q4 2001 ending total of 2,536.

Although mortgage rates have reached historical lows, the demand for new residential housing has dropped off drastically. The total number of building permits for the first half of 2002 is down about 35 percent compared to the first half of 2001, and there is a decrease of about 18 percent in the value of these permits.

For the first half of 2002, there was a 28 percent decrease in the number of single-family permits and a 24 percent decrease in value of permits compared to the first half of 2001. Overall, Boulder County housing prices have continued to increase in value. The rate of increase is lower than in previous years, and it does not affect houses in all price ranges and locations. For example, data provided by the Boulder Areas Realtors Association suggest that houses in Lafayette and Louisville have shown the sharpest increases, houses in Longmont and Boulder have shown minimal increases, and houses in other areas have shown decreases.

The completion of the peripheral construction at FlatIron Crossing and the high vacancy rate for office space along the Highway 36 corridor have substantially reduced the demand for non-residential permits. For the first half of 2002, the number of permits issued decreased by 54 percent while the value of these permits fell by 59 percent. There is anecdotal evidence suggesting that vacancy rates are decreasing; however, the supply of office space is expected to exceed demand for at least the next 24 months.

A review of economic signals suggests that while there does not appear to be reason to be pessimistic about the future, at the same time it is difficult to be overly optimistic about the direction of the economy for the remainder of 2002. At best, the economy will perform in a sluggish manner.

Nationally, the GDP is expected to show growth for the remainder of 2002, but at a rate of growth well below the first quarter rate. While interest rates are anticipated to remain low, this will not be enough to cause consumer confidence to increase for an extended period. The reduction in wealth-related issues, such as real wage growth, stock portfolios values and real estate prices, will cause consumers to be cautious about making retail purchases in the short term.

In addition, uncertainty brought about by the upcoming elections, tension in the Middle East, possible war in Iraq, and the war on terrorism may put a damper on consumer confidence and consumer spending. The other important part of the spending picture is business investment, where companies are not expected to increase capital expenditures significantly before the first quarter of 2003.

Fortunately, Boulder County did not directly feel the negative impacts of the fires or drought that were experienced in other parts of the state. It is too early to tell to what extent the county will be indirectly impacted by these events. Our initial thought is that companies negatively affected by water restrictions will be forced to lay off employees or go out of business, and that the fires in the state, particularly Rocky Mountain National Park, will reduce the contribution of the tourism industry to the local economy. In addition, the county economy also will experience direct and indirect negative impacts from state and local government revenue shortfalls resulting from decreases in the amount of sales and income taxes. The longer term horizon points to slower, but positive growth in 2003 and beyond.

Most likely, the local unemployment rate will remain in the range of 5 percent to 5.5 percent for the remainder of the year, slightly above the natural level of 4.5 to 5 percent. While there is no evidence that the economic conditions of Boulder County will improve drastically by the end of the year, there is no evidence to suggest that the economy will get worse.Richard L. Wobbekind is associate dean of external relations in the College of Business and Administration at the University of Colorado at Boulder and director of the college’s Business Research Division.

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