2009 could prove to be trough of recession

The Northern Colorado Business Report Index of Leading Indicators continues its decline but, as I said last quarter, I think December 2009 data will be better than December 2008. The annual growth rate in November, the last month for which complete data is available, was 0.03 percent, just barely positive. Since December 2008 was such a weak month in the Northern Colorado economy, I think December 2009 will be better.

The last four years has each shown a weaker Northern Colorado economy than the year before; 2005 was the peak of the last expansion and I think 2009 will be the trough of the current recession. Recovery, however, will be slow and I expect it will take longer than four years for the Northern Colorado Index of Economic Growth to get back to the peak reached in both 2004 and 2005. However, a double-dip recession cannot be ruled out as interest rates increase.

I think the U.S. recession ended in August, although it will be several months before an official announcement will be made. I’ve said before that it will take until 2014 for the Dow Jones Industrials to get back to the 14,164 peak of 2007. I think that it will be 2016 before the Northern Colorado Index of Economic Growth gets back to 360, 11 years after it peaked in 2005. The inflated asset values of 2005 will take that long to recover after the housing/mortgage deflation of this recession.

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It is still possible that we will have a significant double-dip recession starting in late 2010 or early 2011 as interest rates rise to finance government debt. China has not purchased significant amounts of government securities since early summer and other countries are focusing on stimulating their own economies. That leaves U.S. citizens to buy the bulk of Treasury issues used to finance deficit spending. When the Federal Reserve begins to withdraw its monetary stimulus, the pressure on interest rates will be even greater.

Employment

Employment in Northern Colorado has dropped over 5 percent from its 2008 peak. It has fluctuated between 275,000 and 278,000 for most of 2009. I expect this floor to hold for most of 2010 with, perhaps, an increase by the end of the year. The unemployment rate is likely to remain in the 6.5 percent to 7.5 percent range unless discouraged workers start dropping out of the workforce, then it will go up. Nationally, the discouraged workers’ unemployment rate is 17.3 percent while the announced unemployment rate remains at 10 percent.

Construction

I think the construction industry has bottomed, although November data was very weak, dropping, in real terms, below late 1980s levels. Construction, in November, added about $30 million to Northern Colorado Gross Regional Product, about one-eighth its 2004 peak.

The harsh winter weather we have had so far has further discouraged single-family home construction. The issuance of home construction permits is on par with late 1980s activity. With government stimulus, houses priced under $280,000 are selling but there is a large inventory of unsold homes at prices greater than $300,000. The peak value of single-family home permits issued in 2004-05 was 40 times greater than in November.

Vehicle registrations, retail sales

Total motor vehicle registrations have leveled off, suggesting that the inventory is no longer expanding. We are in a situation where some business and personal vehicles are no longer being registered and active vehicles are replaced only when absolutely necessary.

New and renewed sales tax accounts in Northern Colorado are still dropping as more and more businesses close their doors and retail entrepreneurs refuse to invest in the declining economy. This situation will not reverse until there are clear signs that the economy is improving and new jobs are being added.

The value of retail sales will be down about 15 percent in 2009 from 2007-08 levels. This is the first dip in retail sales since at least the early 1980s. There will be no improvement until consumer sentiment improves and their spending resumes.

Foreclosures, bankruptcies

Foreclosures and bankruptcies have taken a holiday vacation as banks have eased off on the pressure on delinquent payments. I expect a resumption of this pressure in late January and February; there are still a lot of foreclosures hanging over the housing market. There will be no significant recovery in the housing market in 2010.

I think we can, at least for the next six to nine months, take our hands off the top of our heads to protect against falling debris from the economy, but we should hunker down and put our arms around our shoulders to minimize our exposure to current economic conditions. The first half of 2010 will be a respite from recent bad news but the end of 2010 might bring renewed downward pressures, depending on how adroitly the Fed handles monetary stimulus withdrawal and how successful the Treasury is in selling its securities to foreign investors.

John W. Green is a regional economist who compiles the Northern Colorado Business Report‘s Index of Leading Economic Indicators. He can be reached at jwgreen@frii.com.