The new year may seem like 2004 all over again

The Northern Colorado Business Report Index of Leading Indicators is struggling to remain positive.

The data shown in the nearby graph has been adjusted for September and October; otherwise it would be strongly negative, down to a 20 percent contraction rate in October. The data adjustment was necessary because of the bankruptcy law that became effective on Oct. 19. August bankruptcy data was slightly higher than normal, September data was 75 percent above normal and October bankruptcies were more than 400 percent above normal. November bankruptcies fell to one-tenth of their level earlier in 2005 (only 20 in Northern Colorado). The new law flushed bankruptcies out of our economy and it will take most of 2006 to determine a new equilibrium.

If it were not for bankruptcies, the Northern Colorado economy would be coming out of a cyclically slower growth caused by the boom year in 2004. Growth has been very cyclical since 2001, a much different pattern than the steadier growth we enjoyed during the 1990s. The cycle should peak again in 2006 unless the national economy slows suddenly.

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The national economy is showing much more strength than I had anticipated at this point. Most recent quarterly growth is 4.3 percent and productivity also increased at a rate well above 4.0 percent. Companies are awash in cash and foreigners continue to finance our substantial government deficits. This abundance in the supply of money is keeping interest rates (the price of money) from rising very quickly, thus enabling homeowners to continue to refinance their homes and pull cash out for consumer purchases.

The Federal Reserve Board will probably make a couple more one-quarter point increases in the discount rate and then take a breather under the new chairman. At that point, the discount rate will be about equal to private sector market rates of interest.

Construction costs are increasing very rapidly, matching recent increases in energy costs. Thus, the inflation rate will probably increase in 2006 as higher energy and construction costs work their way through the economy. If foreigners reduce purchases of our federal government’s debt, interest rates could increase very rapidly in the last half of 2006.

Employment growth in the summer of 2005 deviated from its normal pattern by showing much slower increases, putting summer 2005 employment at a lower level than similar months in 2004. This weakness can probably be attributed to fewer residential construction projects. The unemployment rate dropped as employment increased and fewer new entrants entered the labor force. Perhaps fall employment numbers, including new retail employment, will bail out the somewhat weak summer employment picture.

Total value of construction put in place through October was much weaker than in 2004. The weaker months in 2005 were substantially stronger than the weaker months in 2004 but the stronger months in 2005 were far below the strongest months in 2004. I look for 2006, on average, to be about equal to 2004. The single-family home resale and new home markets are weakening but should not turn down in 2006. The value of new homes will jump because of increases in construction costs, unless builders adjust the amenities provided.

Motor vehicle registrations continued to increase because of new employment opportunities and very strong new car sales. Nationally, new car sales fell very rapidly in October and November. New car sales in Northern Colorado have apparently fallen in the Greeley area but not in Fort Collins and Loveland. We now have twice as many registered automobiles on our roads as in 1991, plus all the service vehicles bringing goods to a larger number of retail outlets.

Growth in the number of new retail outlets licensed each month continues to decrease. As the number of layoffs in Northern Colorado has diminished, so has the number of new retail businesses being located in our economy. The number of new retail outlets peaked in March 2004 and then fell over 50 percent by December 2004.

Retail sales are the “cash cow” for government coffers in Northern Colorado and the volume of retail sales just keeps increasing. Prices are increasing and we continue to attract new shoppers. The location of retail sales, however, is shifting away from Fort Collins to the Loveland interchange of Interstate 25.

Overall economic growth in Northern Colorado is showing some strength after a very strong 2004 and a weaker early 2005. The health of our economy in 2006 will depend on interest rates and the construction sector but would be negatively affected by any weakness in the national economy.

John W. Green is a regional economist who compiles the Northern Colorado Business Report’s Index of Leading Economic Indicators. Green, a Fort Collins resident, was previously chairman of the University of Northern Colorado economics department.