On the Economy: Region’s economy in slowdown mode

The Northern Colorado Business Report Index of Leading Indicators, prepared in conjunction with First National Bank and Union Colony Bank, is confirming a significant slowdown in growth in 2003.

Through July, only two months (January and April) are showing positive growth over the same months in 2002. Growth was strongly positive in 2002, so it’s difficult for 2003 months to show positive growth. An annual cyclical pattern seems to be emerging: 2000 was positive, making 2001 look weaker, especially after 9/11; 2002 was positive, making 2003 look weaker.

Nationally, the economy is growing at an increasingly rapid pace. This growth can be attributed to the biggest increase in the size of the federal government in U.S. history, including unprecedented military spending in Iraq. The Department of Homeland Security and more than $100 billion in military expenditures have provided a big boost to economic growth. This is good, old-fashioned Keynesian economics. The tax cut is also contributing to economic growth by increasing demand via consumer expenditures. Stock-market prices are increasing, adding wealth to the portfolios of investors, and further stimulating consumer spending.

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Productivity increases have recently been very large, allowing businesses to maintain and even increase production without recalling laid-off workers. This has also kept a lid on price increases and contributed to higher corporate profits. Business capacity utilization is low and is not increasing very rapidly. Much of unused production capacity must be technologically upgraded, requiring significant investment.

The economies of China and India are growing rapidly, creating jobs for their citizens, increasing their standard of living, and establishing demand for consumer goods. Investments by U.S. companies in these and other Pacific Rim countries are not being made to supply the U.S. market with cheap, foreign-made goods but rather to supply the growing consumer demand in those countries. These foreign investments siphon off investment dollars that might have been used to upgrade productive capacity and increase employment in the United States. Thus, U.S. workers must acquire management and technical skills and be willing to work abroad.

Employment growth in Northern Colorado is struggling to keep up with 2002. There were 6,000 more workers employed in July 2003 than were employed in July 2002, approximately a 2.5 percent increase. The unemployment rate is still under 6 percent but is higher than in 2002. There are currently 50 percent more employees working in Northern Colorado than in 1991.

Construction supported the Northern Colorado economy through the 1990s. Now, growth in this sector is rapidly slowing, and so is the local economy. Institutional construction cannot be supported because of shrinking budgets at state and local government levels. Residential construction is well below its 2002 level and continues to slow. The recent bulge in new residential construction resulted from interest-rate increases from 40-year lows. If interest rates continue to increase because of huge federal deficits, new residential construction might stabilize at a much lower level.

Total motor-vehicle registrations continue to increase because employment is increasing in Northern Colorado and because buying incentives are still mildly effective. Automakers have also signaled price increases for the 2004 models, and consumers are making purchases to take advantage of historically low interest rates.

New sales tax accounts issued in Northern Colorado continue to increase. Many laid-off workers are starting new businesses and Northern Colorado continues to rank highly on best-places-to-retire and other similar lists. The long run outlook for our economy is still positive, creating the hope that new business ventures will be successful.

The rate of increase in the value of retail sales is leveling off. The trend line is now flatter than it has been since the recession of 1991. The number of new shopping malls being proposed for Northern Colorado might reflect an optimism that can’t be supported if retail sales growth continues to slow.

The number of bankruptcies in Northern Colorado and nationally is a significant drag on the local and national economies. Rapid growth in bankruptcies in our economy mirrors similar growth on the national level. Bankruptcies reduce business profits, increase insurance costs and result in fewer investment dollars available for economic expansion.

The short-run outlook for the local economy is not positive; look for more negative growth months, year-over-year, for the rest of 2003. Next year will look better because 2003 was so weak. The local economy must resume its growth to fill tax coffers and avoid further cutbacks in education, road construction and government services.

The current strong growth in the U.S. economy might not be sustainable. Large military expenditures will continue, but increasing government deficits will drive up interest rates. Economic growth in China and India will attract investment funds away from the United States. Extended tours for troops in Iraq will take some pressure off unemployment rates. The foundation has not yet been established for economic growth similar to that of the 1990s.

John W. Green is a regional economist and can be reached at (970) 484-6463.