Posted: February 01, 2014
2014 Colorado Economic Oulook
Housing market, jobs outlook are keys to expected ‘decent’ yearBy Tucker Hart Adams
Illustrations by Shaw Nielsen
Over 35 years in the forecasting business, I’ve learned that no one can consistently predict the future of the economy. So I’ve developed a series of rules to keep me from making some common mistakes. The most important may be: There is no new paradigm. The four most dangerous words in forecasting are, “This time it’s different.”
The end of 2013 was a time when many pundits on the national and international scene were wringing their hands and saying: “This time it’s different. The world is mired in endless recession and/or slow growth. Everything has changed and the future is grim.”
Luckily Colorado economists aren’t falling into the trap. Their outlook for 2014, while cognizant of the challenges we continue to face, is generally upbeat.
Our six economic forecasters – Tom Binnings, Gary Horvath, Natalie Mullis, Jason Schrock, Patty Silverstein and Richard Wobbekind – expect the recovery following the Great Recession (December 2007-June 2009), to continue through 2014.
If that is indeed the case, it will exceed the post-World War II expansion average of 58 months. Their growth rate forecast for U.S. output (Gross Domestic Product adjusted for inflation) varies from a modest 2 percent to a relatively robust 3.1 percent. Most of the forecasters expect Colorado to outperform the nation. Mullis, chief economist for the Colorado Legislative Council, is the most optimistic at 3.1 percent, while Horvath, an independent economist, is expecting only 2.3 percent nationally and statewide.
The most important variable in determining the economy’s health is jobs. If people can’t find jobs and, importantly, well-paying jobs, nothing else really matters. Here the expectations are moderately positive, with employment growth anticipated between 2.1 percent and 2.4 percent. That will push the local unemployment rate below 7 percent by December, possibly as low as 6.1 percent.
During the past four years, job growth has only averaged 0.7 percent, and until June 2013 we still had fewer people at work than we did in May 2008. Colorado’s unemployment rate peaked at 9.1 percent in fall 2010, with the broader unemployment rate, including discouraged and part-time workers unable to find full-time jobs, topping 15 percent.
There is general agreement that job growth will occur in professional and business services, construction, health and social services and tourism. Most of the forecasters look for job declines in information, financial services and federal government employment.
Despite the Federal Reserve’s quantitative easing program, which pushed interest rates to record lows, the group does not expect inflation to rear its ugly head in 2014. Denver inflation (the proxy for Colorado), however, will be as much as a full percentage point above the national rate, with forecasts ranging from 2.2 percent to 3.0 percent. If that sounds worrisome, don’t forget that, back in 1979, local inflation averaged 15.5 percent and was at double-digit levels for five years from 1974-81. Since 1984 it has not topped 5 percent.
2.2 percent to 3.0 percent: Inflation rate forecast for Denver in 2014
The Federal Reserve has pumped nearly $3 trillion into the U.S. economy in its attempt to avoid a depression and get the economy back on a reasonable growth trajectory. A crucial concern is that the Fed could abruptly end its quantitative easing program, nicknamed QE3, causing rates to soar. That could quickly push the country back into recession.
Colorado’s economists presume the Fed has the knowledge and tools at its disposal to end QE3 without causing a devastating disruption. Although interest rates will rise, the increase will be between 0.5 and 1.2 percentage points. Kirk Fronckiewicz, Bank of America Merrill Lynch senior banker, points out:
“The rebound from the Great Recession has been quicker in Colorado than nationally. Commercial lending activity has been good and a great number of companies are seeking to refinance debt to lock in rates at what they view will be the low. In 2014 there will be increased conversation around the direction of interest rates. Business owners I have met with have said very little about the Fed policy and related uncertainty. It is not a factor one has direct control of but must manage around.”
Hassan Salem, market president for U.S. Bank in Colorado, adds: “Businesses and individuals certainly do pay attention to rates, and we see that in the lift we experience when rates are low. However, rate is not the only factor in deciding how to finance a project or business expansion, so we are confident that over the long term we will continue to see growth in borrowing as the economy improves. Making loans is core to our business and our interest in helping companies and individuals achieve their goals has not wavered through all economic cycles.”
Mortgage rates are expected to be in the 4.5 percent to 5.2 percent range. Though not as attractive as the 3 percent rate a few months ago, it is in a range that allows people to buy homes. Back in 1981 and 1982, the mortgage rate peaked above 15 percent, still averaging from 6 percent to 8.5 percent during the long expansion in the 1990s and 2002-2007.
Local mortgage lenders believe that if the mortgage rate doesn’t exceed 6 percent, the mortgage market will remain healthy. Penney Carruth, a real estate agent with Aspen Snowmass Sothebys, told us: “A 100 basis-point increase in mortgage rates will have little, if any, impact on high-end home sales. These typically affluent, high-end buyers have long established banking relationships and sufficient equity to mitigate rate growth. However, the impact would be significant to the housing market for locals who are employed in the area.”
4.5 percent to 5.2 percent: Expected mortgage rates this year
CONSTRUCTION /REAL ESTATE
39,300: The optimistic forecast for new, single-family homes in 2014. The more conservative figure comes in at 29,100
The forecasts devoted more time to the housing market than any other sector of the economy. Housing is critically important for a number of reasons:
• Construction creates many high-paying jobs in Colorado, nearly 170,000 at the peak of the last housing cycle in June 2007. Construction jobs declined 34 percent over the ensuing four years, a major factor in the Great Recession.
• Home equity has traditionally been a substantial source of wealth. It allows households to borrow for large or unexpected expenses, provides startup capital for entrepreneurs and is an important part of many retirement plans.
• When individuals are unable to sell their homes, they usually cannot relocate to find new or better jobs. This has been a major problem in recent years, boosting unemployment and decreasing the labor participation rate.
Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.