Economic Growth Index ends 2010 at 1996 levels

The Index of Economic Growth for the Northern Colorado economy was strong early in 2010 but weakened significantly in the third and fourth quarters. It’s only slightly higher than it was at the same time in 2009 and about equal to 1996 levels. The recovery is not very strong and points to a 14-year loss of economic growth momentum.

The Northern Colorado Business Report Annual Monthly Growth Rate has been negative every month since October. The year-over-year October change was especially bad but November was also weak. The weakness in the July-November data, compared to the same months in 2009, caused the forecast for 2011 and 2012 to be even more negative.

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Since I believe our economy has started a slow recovery which will pick up speed in late 2011 and 2012, I chose to forecast the trend line in the nearby chart rather than the actual data. The trend line demonstrates a slow, gradual recovery throughout 2011 and 2012. The problem is that it only gets back to zero near the end of 2012; I think our economy will do better than that.

The U.S. economy needs to grow much faster than the 3percent  to 3.5 percent I expect in 2011 in order to significantly lower the unemployment rate. We might have the necessary 6 percent growth for one quarter, but not the sustained growth necessary to permanently lower unemployment. We need to add 125,000 net new workers per month just to keep up with labor force growth.

The leading edge of the baby boomer generation reached age 65 this month. Since they weren’t a saving generation, many of them can’t afford to retire and open up jobs for younger workers. The trailing edge of the baby boom generation will reach age 65 in 2029. Between now and then, our labor surplus problem will slowly solve itself. Hopefully, an expanding economy will assist in this rebalancing of the labor market.

The computer revolution has been equally as important as the electricity revolution early in the 20th century, generating a massive increase in the efficiency of each worker at all levels of the labor spectrum. Blue collar workers have been displaced by computer-run machine tools; clerks have been replaced by electronic data storage, middle management has been displaced by computer organization and parameterization, and executives have been displaced by larger companies and fewer upper management positions.

The recession served to squeeze many of these superfluous workers out of the labor force quicker than they would otherwise have been displaced. It will take several years for this adjustment process to wiggle back to a new normal.

Employment

The job recovery in Northern Colorado is slowly gaining strength and I think will increase in momentum in late 2011, making 2012 a good job growth year, putting employment in Northern Colorado nearly back to 2008 peaks. As a result, unemployment should drop back to near the 6 percent level, maybe lower, depending on migration.

Construction

The total value of construction put in place in Northern Colorado got a very nice boost in 2010, mostly due to the federal Recovery Act. This stimulus will end by the middle of 2011 and the effect of government layoffs at all levels will be felt. The private sector will have to fill the void and QE2 (Quantitative Easing Version 2) should facilitate this process. This will have to be accompanied by a continuation of increases in consumer spending to signal that enough demand is present to justify private investment.

The number of single-family detached housing permits being pulled each month is bouncing along the bottom set late in 2008. The inventory of unsold houses is huge and there will be a slug of foreclosed houses hitting the market early in 2011. Despite this, days-on-market for homes under $280,000 is less than four months. The entire real estate market is not dead, just selective.

Vehicle registrations, sales tax accounts

All the slack has been squeezed out of the motor vehicle use market. Total motor vehicle registrations in Northern Colorado picked up in 2010, pulling the trend line up. New car sales are increasing, business is slowly picking up, and unused vehicles are being put back on the road.

New and renewed sales tax accounts issued by the state took a big dive in October, down 73 percent from the same month a year earlier and was the primary cause of the drop in the October growth rate discussed above. November showed a 5 percent increase over 2009, so perhaps October was just an anomaly. I certainly hope this does not portend a loss of entrepreneurial confidence in the health of our local economy.

Retail sales, bankruptcies

Consumers are cautiously buying again. Year-over-year nominal increases in retail sales were in the 7 percent to 8 percent range from September through November. Anecdotal comments from retailers are that December was a strong month. I expect the 2010 Christmas buying season to be slightly below the peaks of 2007 and 2008, but 2011 should see a resumption of significant increases in annual retail sales volume.

The number of bankruptcies filed remains high but should see level off and may even decline as foreclosures and unemployment drops.

So, the Northern Colorado economy is starting to glow again as slow growth takes away the frost left behind by the recession. Perhaps by 2012 the outlook will be as bright as it was throughout most of the 1990s.

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.