July 7, 2006

Boulder Valley economy to grow at slow pace in upcoming quarter

The Boulder County Leading Economic Indicators continue to grow, albeit at a sluggish pace. The index for the third quarter rose from 109.3 to 109.9, indicating that the local economy will continue on a positive path during the upcoming quarter.

Movement of the index is determined by changes in real gross domestic product, or GDP, local retail sales, residential building-permit valuation and the interest rate spread. Changes in real GDP are the most dominant factor and receive the heaviest weight. This implies that the local and the state economies are significantly linked to the national economy.

These linkages lead us to pause as the U.S. economy, measured by real GDP growth, is projected to be slower for the remainder of the year. Real GDP growth for 2006 is expected to be similar to last year, in the 3.5 percent range. This year, first quarter GDP grew at a 5.6 percent annual rate, while quarters two through four will increase in the range of 3 percent. This may sound like a drastic slowdown, but I don’t believe it will feel like one. Due to the effect of the hurricanes on the reporting of data, GDP in the fourth quarter 2005 grew at a 1.7 percent annual rate. I would argue that the first quarter results this year were balancing that quarter and were actually a “catch up” effect. If the last two quarters are averaged, the results are only slightly higher than the rate of growth that is anticipated for the remainder of the year.

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Retail sales positive
Retail sales play an important role in the fiscal stability of the Boulder Valley. The year over year growth rate of 5.6 percent is positive and should improve in the latter part of the year as significant portions of Twenty Ninth Street are opened, creating a stronger retail base in the city of Boulder.
Building on the University of Colorado campus and continuing work on Twenty Ninth Street and other nonresidential projects in the county has increased first quarter permits by 33 percent from the same quarter a year ago and almost 14 percent year over year. The overall levels of nonresidential construction still are nearly 10 percent higher compared with a year ago. However, construction on Twenty Ninth Street is nearing completion, and fewer construction projects are expected on the CU campus.

Data from the residential sector of construction are less optimistic from an employment standpoint. In addition, year over year total permits fell by 30 percent, and valuation dropped 27 percent. The rates of decline were similar for both single-family and multifamily permits and valuation. We believe this decline is a reflection of the general softening in the Colorado housing market and the increased regional competition from markets in Broomfield and Weld counties. Given the current statewide inventory backlog and foreclosure rates in the residential markets, this slowdown in new construction in the Boulder Valley could prevent overbuilding in this market.

Jobs will drive population
Employment growth and the unemployment rate are important measures when analyzing the strength of the economy. Nationally, employment is anticipated to increase by 1.7 percent in 2006, while Colorado is expected to grow at a more robust rate of 2.3 percent. For the past four years, Boulder County employment has grown at a rate slower than that of the state. Year over year employment has risen by 1.9 percent in the Boulder Valley.

This year, the U.S. unemployment rate will average 5 percent, compared to 4.9 percent for Colorado. The Boulder rate will be 0.5 percent to 1 percent below the state average, in the range of 3.9 to 4.4 percent. The first quarter average was a little more than 4.1 percent.

With the improving state economy, an increase in the number of jobs will attract more people to Colorado. As a result, statewide population will grow at a rate of 1.5 percent in 2006, compared to 1 percent for the nation. Boulder County’s population has increased at a rate about half that of the state in recent years. We anticipate that this trend will continue as people move to areas within the region where housing prices match their income.

On June 29, the Federal Open Market Committee raised the fed funds rate for the 17th time since mid-2003, to 5.25 percent. The big question at this juncture is whether or not the Fed will pause. The Fed continues to express concern about inflationary pressures but is also cognizant of the impact of higher energy costs and interest rates on both consumers and businesses. The interest rate spread index component narrowed to 0.07 percent in the first quarter, highlighting that there will be virtually no monetary stimulus to the economy.
Wealth and confidence

Two final factors to consider when viewing the economy are the wealth effect and consumer/business confidence. The wealth effect can be evaluated from changes in real estate and stock market values. Confidence is measured by both business and consumer market research surveys.

After reasonable appreciation in the housing market in 2005, prices statewide have risen more slowly this year. Colorado has led the nation in the per capita foreclosure rate several months running. While part of the problem is being caused by higher energy prices and interest rates on adjustable rate mortgages, the resale market is being negatively impacted by substantial new housing stock. In addition, the May swoon in the stock markets limited wealth accumulation.

Our final points of discussion are consumer and business confidence. Nationally, consumer confidence readings have bounced back in June after declining a bit in April and May. All in all, consumers appear to be weathering the storm of higher energy costs and interest rates. Consumer confidence in the Rocky Mountain region remains higher than the national average.

At the state level, the best indicator of business investment is the Colorado Business Leaders’ Confidence Index. This index measures expectations of six components of the economy on a quarterly basis, including capital expenditures and hiring. The index for the third quarter of 2006 registered 54.2, down substantially from 60.1 the previous quarter. The index is measured on a scale where 50 is the neutral point, with values above 50 considered expansionary. While the declines occurred in all six categories, the only one below 50 was expectations of the national economy. Overall, Colorado business leaders remain confident about employment prospects, as well as the overall performance of the Colorado economy.

The Boulder County LEI indicates continued but limited expansion of the area economy. This expansion will be led by better employment growth and lower unemployment rates than the nation. This expansion at both the state and local levels will be held in check by higher interest rates and energy costs.

Richard L. Wobbekind is associate dean of external relations in the Leeds School of Business at the University of Colorado at Boulder and director of the school’s Business Research Division.

The Boulder County Leading Economic Indicators continue to grow, albeit at a sluggish pace. The index for the third quarter rose from 109.3 to 109.9, indicating that the local economy will continue on a positive path during the upcoming quarter.

Movement of the index is determined by changes in real gross domestic product, or GDP, local retail sales, residential building-permit valuation and the interest rate spread. Changes in real GDP are the most dominant factor and receive the heaviest weight. This implies that the local and the state economies are significantly linked to the national economy.

These linkages lead us to…

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