Most signs pointing to recovery in local economy during 2004

For the second consecutive quarter, the Boulder County Leading Economic Indicator increased, from 101 to 101.6, suggesting that the Boulder County economy will show signs of improvement in the first quarter of 2004.

While nationally the Conference Board’s Leading Economic Indicator (LEI) points to changes in the gross domestic product (GDP), locally the Boulder County LEI forecasts changes in county employment. The increase in the Boulder County LEI indicates that there should be growth in local employment during the first quarter of 2004.

The Boulder County economy entered the recent recession later than both the state and the nation, and appears to be recovering at a slightly slower pace than other parts of the country. The primary indicators of the Boulder County LEI are the national GDP and county retail sales. The upturn in both of these is the strongest sign that the Boulder County economy is poised for modest improvement.

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The United States entered the recent recession in early 2001 and recorded an increase in GDP of 0.3 percent that year. In 2002, the national economy showed signs of strength in only the first and third quarters. The economy started off slow this year, with growth of 1.4 percent in the first quarter, but has come on strong since then, with an increase of 3.3 percent in the second quarter and 8.2 percent in the third. This upward momentum is expected to continue into 2004 as the annual GDP growth rate moves from 3.2 percent in 2003 to 4.2 percent in 2004.

The past three years have been difficult for retail businesses. Overall, state growth in retail sales has increased at a rate less than the Denver-Boulder-Greeley inflation rate. In other words, there has been no real growth in sales. This has occurred at a time of increased competition and slowing population growth. In fact, the retail market appears to be saturated in certain parts of the state. Unfortunately, during this period Boulder County has not fared even as well as the state. Significant employment losses, combined with the demise of Crossroads Mall in Boulder and the addition of FlatIron Crossing in Broomfield County, have sharply reduced retail trade sales and retail sales taxes in Boulder County.

On a positive note, Boulder County retail sales for the first three quarters of 2003 were 2 percent higher than the same period in 2002. Various forecasts, including a recent poll conducted as part of the Colorado Business Leaders Confidence Index, indicate that businesses expect retail sales for this holiday season to be better than last year. Anecdotal evidence suggests that this season also will be different from past holiday seasons in that it will be accompanied by increased employment, albeit temporary, and reduced discounting, which should help boost profitability. A strong holiday season would provide a solid foundation for 2004. The Colorado Business Economic Outlook Forum forecasted an improvement in statewide retail trade sales of 3.5 percent next year.

During the second quarter of 2003, the average quarterly interest rate spread, the difference between a 10-year and a three-month constant maturity treasury, grew from 256 basis points to 328 as the 10-year rate increased from 3.6 percent to 4.2 percent. This relationship is a key component of the Boulder County LEI as well as The Conference Board’s LEI. The steep slope of the yield curve supports the view that the national economy will experience growth.

Relatively low mortgage rates and creative financing packages continue to fuel strong demand for refinancing. In the short term, mortgage rates are expected to remain favorable for new home buyers for at least the first half of 2004. Despite these favorable rates, new single-family construction has occurred only in pockets throughout Colorado. Statewide, new home construction is not anticipated to be particularly strong in 2004 as net migration to the state is expected to increase only slightly, from 16,541 in 2003 to 18,808 next year. This is down from 33,704 in 2002, 67,245 in 2001, and 78,449 in 2000.

Residential construction in Boulder County has been on a downward slide since 2000. During the first nine months of 2000, 1,784 permits were issued for a valuation of $224.8 million. Permits dropped by 5.2 percent during the first nine months of 2001, to 1,691. For the same period of 2002, permits declined to 1,399, or 17.3 percent, followed by another decrease of 22 percent, to 1,091, for the first three quarters of 2003. Declines in valuation have been similar. Total residential valuation for the first nine months of 2001 was $220.3 million. For the same period in 2002, it fell to $204.5 million, and dropped again in 2003, to $161.8 million.

During 2000 and 2001, nonresidential construction permits in Boulder County were driven by building at FlatIron Crossing, which was located in Boulder County at that time. Hospital and dormitory construction also were strong in 2001 and 2002.

For the first nine months of 2000, 215 non-residential permits were valued at $328 million. For the same period in 2001, this total decreased only slightly, to 196 permits, with a valuation of $324 million. Last year only 92 permits were drawn with a valuation of $201 million, and in 2003, 83 permits have been issued with a value of $191 million. The outlook for increased non-residential activity is even dimmer for 2004. Limited state funds and high vacancy rates for office buildings will minimize demand for non-residential building permits. An uptick will depend on a Crossroads groundbreaking by mid-year.

Because a number of local companies are listed on the Nasdaq, it is considered to be the exchange that is most relevant to Boulder County economic conditions. After breaking 2,000 in early January 2002, the Nasdaq fell to 1,100 during the second week of October last fall. It ended the first quarter of 2003 at 1,341, the second quarter at 1,623, and the third quarter at 1,786. In mid-September the market topped 1,900 and has flirted with 2,000 through mid-December. Although more modest appreciation is forecast for 2004, a healthy Nasdaq is anticipated. In addition, renewed IPO activity should encourage greater venture capital flow and support entrepreneurial activity.

There is increased household optimism about the prospects for the regional economy. After declining for three consecutive quarters, the quarterly average of The Conference Board’s Rocky Mountain Index of Consumer Confidence rose sharply, from 75.4 in the first quarter of 2003 to 91.8 in the second quarter of 2003; however, it dropped slightly in the third quarter of 2003 to 86.1. This measure of consumer sentiment is based on a small sample, and is quite volatile on a month-to-month basis. In June, the regional indicator reached 93.9 before dropping to 73.9 in July. It increased to 87.8 in August and 96.6 in September, and climbed to 105.4 in October.

It is important to examine the October data from two different perspectives. One is to view the improvement in confidence that has occurred since the first quarter. In March 2003, the regional indicator dropped to 59.9 as the United States entered war in Iraq, and now stands at 105.4.

Second, additional information is garnered when comparing the regional index to the national index and to the indices of the eight other regions. The Rocky Mountain Index in October was significantly higher than the national index of 81. Furthermore, it was well above the indices for the other regions of the country.

Another sign of the improving economy is the lower unemployment rate. Boulder County has entered the range for natural unemployment (4.5 to 5 percent). The not seasonally adjusted unemployment rate for October was 4.7 percent for Boulder County and 5.2 percent for the state. The rates one year ago were 5.4 percent for Boulder County and 5.6 percent for Colorado.

While the seasonally adjusted rates would likely be higher, it is important to note that Colorado and Boulder County are faring about one-half point better than the U.S. unemployment rate.

National factors such as pent-up business demand, low interest rates, and a steep yield curve are signs that the national economy should rebound strongly in 2004. This is reflected in projections for such items as retail sales, investment demand and overall growth in GDP. Continued fiscal and monetary stimuli have set the stage for strong growth. With an election year on the horizon, the economy has the attention of the president and other officials who are seeking reelection.

Because the Colorado and Boulder County economies are closely tied to the national economy, the Boulder County economy is expected to experience a more broad-based recovery in the first half of 2004. This recovery will drive modest employment growth. The real question is whether the wages and stock benefits associated with these new jobs will be at the same level as the wages paid to employees who were laid off during the past three years.

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.