On the economy: 2003 was worst year for growth since late ’80s

The Northern Colorado Business Report Index of Leading Economic Indicators, sponsored by First National Bank and Union Colony Bank, documents that the Northern Colorado economy showed strong recovery in October, trailing the recovery in the U.S. economy.

The indicators also show that 2003 was the worst year for economic growth in Northern Colorado since the late 1980s.

The U.S. gross domestic product grew a strong 8.2 percent in the third quarter, and productivity increased more than 9 percent. This strong growth will carry over to the fourth quarter, although at one-half or less the rate of the previous quarter.

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This momentum will also continue into early 2004, although growth in the second half of 2004 will be much harder to sustain. Growth in the U.S. economy in 2004 will be much closer to 3 percent than to 4 percent.

Unemployment is unlikely to drop significantly because of continuing productivity growth and greater demand for investment and employment in Europe, China and India. The weakening dollar makes imports much more expensive and signals an outflow of investment capital. The greatest stimulus for growth in the United States in 2004 will be the increasing size of the federal government and defense spending.

The Fed will continue to rapidly expand the money supply, keeping interest rates low while carefully watching for a resurgence in inflation. If prices begin to rise, the Fed will slow the growth of the money supply, forcing up interest rates and raising the discount rate. High productivity gains, however, enable companies to maintain profit margins without raising prices.

Growth in Northern Colorado and the nation overall is very difficult to forecast at this time. Several other international economies are emerging as production leaders and consumers, and the image of the United States abroad has been greatly tarnished by Iraq.

The Northern Colorado economy is undergoing a structural shift, away from high-tech manufacturing and more toward high-tech applications and retirement services. In addition, Colorado’s reputation as a recreation destination is hampered by transportation problems.

Employment in Northern Colorado continues to increase, seemingly at about the same rate since 1994. We know, however, that employment in Northern Colorado is shifting from higher-paid, high-tech towards lower-paid service workers. We now have about 250,000 employees in Northern Colorado, about 50 percent more than in 1991.

Total value of construction put in place in Northern Colorado is growing at a much slower pace than in 2002 and is not likely to resume faster growth in 2004. Construction is the engine of growth for our economy, and any slowing will be felt in other sectors. Growth in the number of single-family housing permits being issued has stopped, falling in Larimer County but continuing to grow at a slower pace in Weld County. The market for expensive homes is almost nonexistent and is weak for less-expensive homes. When interest rates go back up, home building will slow even further.

The number of motor-vehicle registrations in Northern Colorado continues to increase, worsening traffic conditions and keeping pressure on state and local budgets to improve our road system and build rapid transit. Registrations continue to increase because employment continues to increase, and new cars continue to sell. Productivity growth is greatly benefiting automobile manufacturers who are offering buying incentives rather than lowering base prices.

New sales-tax accounts being issued continue to grow but at a slower pace than in the 1990s. Retail sales in 2003 are on a par with 2002; the trend line is beginning to level off. The Christmas selling season will be about equal to 2002, perhaps higher by about the rate of inflation (2 percent).

Bankruptcies continue to increase, both in nominal numbers and per 1,000 residents. This mirrors trends in both Colorado and the nation. Bankruptcies are a drag on any economy, increasing the cost of insurance, decreasing profits and savings and lowering investment.

The above economic indicators suggest that growth in the local economy continued through the fourth quarter and will be positive in the first quarter of 2004. The balance of 2004, however, is very difficult to predict. There are many negatives hanging over the U.S. economy: huge federal deficits, a weakening dollar, exhausted tax spending, lower state and local government spending, a poorer worldwide image, and investment dollars and jobs moving offshore.

Watch the stock market. If the Dow falls back (10 percent) from the 10,000 level of mid-December and the Nasdaq and S&P also fall, the second half of 2004 will see much slower growth. The Northern Colorado economy will be affected by slower growth in the national economy.

John Green, Ph.D., is a regional economist who can be reached at (970) 484-6463.