July 9, 2004 12:00:00 am

On the economy: Economy improving but how long can it last?

The Northern Colorado Business Report Index of Leading Indicators shows explosive growth in the Northern Colorado economy late in 2003 and during the first four months of 2004.
Almost all of the growth is in the construction sector. Growth in the construction sector does benefit many of the other sectors of the economy, but a valid question to ask is ?What happens to construction when interest rates go up and money becomes more costly?? If the construction sector contracts as fast as it has expanded, the rest of the economy will be hurt just as badly as it is now being helped.
The national economy is looking good as this is being written (early June) but the stock market is signaling uncertainty ahead. The late 2003 momentum in the national economy, as I expected, generated strong positive growth in the first half of 2004. But the stock market has dropped from its highs and is treading water. The next major move is more likely to be down than up.
There are many negatives weighing on growth in our nation?s economy in spite of this being an election year. The Economic Cycle Research Institute in New York is predicting that the national economy will slow dramatically over the next three to six months. If this happens, it will threaten the president?s re-election hopes, frustrate job-seekers and jeopardize corporate expansion plans.
Growth in the money supply is flattening and mortgage applications, after recent explosive growth, are dropping rapidly as it becomes apparent that inflation is becoming a problem and the Fed will increase the discount rate. Corporate profits and employment growth will suffer as money becomes more costly and consumer demand decreases because of higher energy costs and concern about mounting American casualties in Iraq.
The growth rate in the Northern Colorado economy in March and April was reminiscent of recovery from the 1991 recession. I think the strong growth rate continued in May and June and will be sustained until, perhaps, August. Much depends on how fast interest rates increase and how greatly consumers feel pinched by higher gasoline and other energy-related downstream prices.
Employment growth in the local economy is not strong but the increase in construction activity should give it a nice boost. The trend line is flattening as employment struggles to rise above its winter lows. The unemployment rate is dropping but not rapidly as discouraged workers return to the labor pool.
Construction is currently providing the growth we see in the local economy. The total value of construction put in place in Northern Colorado easily set a new record at over $200 million in April, far surpassing the previous monthly record set in summer 2002. This is primarily the result of increased private residential construction but should create enough momentum to last several months. Monthly construction activity is 12 times greater than it was in 1991.
As soon as it became evident that interest rates were headed up, new-home buyers rushed to lock in low rates. This caused a big increase in the number of new, detached housing permits issued. A substantial amount of wealth is being invested in housing in Northern Colorado. This is a wise shift given the rate of increase in home prices versus returns currently available in the stock market and other investments.
Growth in motor vehicle registrations is leveling off but may begin to increase at a more rapid pace if our economy creates more jobs or attracts a greater number of retirees. The recent run-up in the stock market may have enabled some older employees to adjust their investment portfolios and retire to Northern Colorado.
New sales tax accounts also set major new records in March and April, surpassing the previous high of early 2001. The several new wellness centers on the drawing boards and the recovering economy has caused entrepreneurs to commit to owning their own retail businesses. They are optimistic about growth prospects for our economy.
Retail sales continue to increase much faster than the rate of inflation. Retail sales should be given an extra boost by the increase in single-family dwellings being constructed as builders add fixtures and appliances and new homeowners decorate their new homes and landscape their properties.
A major negative is the out-of-control growth in bankruptcies in Northern Colorado. The Northern Colorado Business Report has acquired a new monthly data series that has been incorporated into the economic indices published in this issue, replacing the old quarterly bankruptcy series. Bankruptcies grew very rapidly in March and April over their monthly levels from one year ago.
Bankruptcy rates are getting very close to one new bankruptcy for each 1,000 residents per month. I recently read a Web news article that stated that Colorado leads the nation in bankruptcies. Bankruptcies are a drain on any economy because someone, usually the business owner or their insurance company, must cover these losses, tying up human resources and raising insurance premiums.
The Northern Colorado economy currently looks robust. But what happens when energy price increases and building material shortages boost inflation, interest rates shoot up as the Fed tightens, and investment dries up — even as casualties in Iraq continue to increase and the Federal deficit grows larger.
I am not optimistic about the last quarter of 2004 or 2005. A major shift in consumer and investor sentiment will rapidly occur if there are one or more terrorist acts preceding the national election in November.

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