Indicators point to trouble in U.S., local economy

The Northern Colorado Business Report Index of Leading Economic Indicators shows that growth in the Northern Colorado economy has moderated from its explosive rate of early 2004. Just as the national economy hit a soft spot during the summer, so did the local economy.
Most economists, including the Chair of the Fed, think growth is recovering and will remain strong for the rest of 2004. I think, however, that national growth will weaken further for the rest of the year and that 2005 will be a very troublesome year for both the national and local economies.
There are just too many economic negatives hanging over the United States economy. Interest rates are on their way up – how fast will depend on inflation and the need to finance the government deficit. Inflation will trend higher, primarily because of smaller productivity increases, but also because of a weaker dollar and resulting increases in the cost of imported goods.
Labor costs will increase more rapidly, especially if demand for goods and services increases further, including the demand for exports because of a weaker dollar. This will put upward pressure on prices of domestically produced goods and services.
Government spending will remain high because of war expenses and homeland security needs. Because taxes are too low to sustain current levels of government expenditures, the deficit will continue to grow. It will get even larger if the national economy falls into recession in 2005 and tax revenues fall. Government expenditures do not provide the same stimulus to the economy as does private investment, and private investment is low because of excess capacity, higher interest rates, and greater uncertainty about the future of our economy.
Currently, the only bright spot in the local economy is the construction industry and the sectors it supports, such as real estate and home furnishings. It makes me very nervous to visualize the effect that interest rate increases could have on the construction sector and the rest of our economy. Larger government deficits and lower post-election spending will contribute to a reduction in the level of government-supported construction that is occurring in Northern Colorado. Fewer high-paying jobs and more retired persons in our community add up to less political support for locally funded public works projects.
The value of construction put in place in Northern Colorado continues to grow at a rapid pace. It is being supported by increases in the prices of existing homes. This process of increasing values for the current housing inventory and the building of ever more expensive homes is establishing a substantial amount of wealth in Northern Colorado. This wealth is constantly being tapped to fund other consumer purchases. This process will slow dramatically as interest rates increase and home building slows.
Employment growth in Northern Colorado is slowing and will slow even further if the construction industry declines. The unemployment rate has decreased from 2003 peaks but will probably not trend much lower for at least another year. Many job seekers have become discouraged and have withdrawn from the labor pool.
The growth in total motor vehicle registrations is slowing as employment growth slows and sales of new cars weaken. Lower consumer confidence is also slowing the number of new sales tax accounts being issued in Northern Colorado. The rate of layoffs has slowed and entrepreneurs are less willing to invest in new retail businesses.
Growth in the value of retail sales is also slowing. Interest rate increases will result in fewer new homes being built and fewer remodeling projects, thus reducing the demand for household goods. Higher gasoline prices result in lower expenditures for other retail items. Consumer confidence ebbs, resulting in even fewer retail expenditures.
Personal bankruptcies have increased dramatically. Monthly total bankruptcies in Northern Colorado peaked at about 350 in early 2004 but have fallen back to about 250 during the summer. The rate is currently running at about one new bankruptcy for each 2,000 residents each month. Bankruptcies are a drag on any economy as banks and insurance companies must reduce other expenditures to cover these losses.
The outlook for the national economy does not look very positive and the local economy will be in trouble if growth in the national economy slows further and higher interest rates cause a slowdown in construction activity in Northern Colorado. Government deficits and our national security must be efficiently managed if we are to get through 2005 without a major recession.