2014 Colorado Economic Oulook
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.
Most of the forecasters expect the value of nonresidential building contracts to come in at about the same level as 2013. Binnings is the optimist here, forecasting a 20 percent increase. Patty Silverstein, of Denver Research Partners, looks for an increase in downtown Denver office and industrial space in the I-70/I-225 corridor but declines in other parts of the city.
Real estate developer Dennis Carruth points out that the commercial market is far more dependent on job growth than the financing rate. He does not see much impact at all of a 100-150 basis-point increase in mortgage rates:
“Job growth since 2012 has not come close to that required to fill job losses experienced 2008 to 2010. For example, our newer class B buildings in southwest Denver achieved full service lease rates in the $24-$27/RSF range prior to 2008; today those same rates are $19-22/RSF and are being required not only by new replacement tenants, but also to renew existing leases. The impact of low lease rates, accompanied by high costs for real estate commissions and contemporary tenant improvements, makes one wonder when, or if, commercial (particularly job-dependent office) real estate will become sufficiently viable to support new construction anytime soon.”
20 percent: Anticipated increase in nonresidential building contracts for the new year, according to the most optimistic forecast
The four sectors that underlie the state economy are agriculture, energy, manufacturing and tourism. These sectors bring new dollars into the state, and with a big multiplier effect, create jobs.
Agriculture: According to the Department of Agriculture, only 13.2 percent of Colorado’s population lives in rural areas, where per capita income is lower and the poverty rate is higher. Employment has been flat, with unemployment slightly below the urban level. Almost half of all farms are less than 100 acres, with only 10 percent larger than 2,000 acres. Half of total farm receipts are from Weld County, one of the largest agricultural counties in the country.
Ron Carleton, Colorado deputy commissioner of agriculture, recently told the Denver Business Economists that he expects farm income to decline in 2013, due to a combination of declining corn prices and drought.
Energy: Even at the peak of the energy boom 30 years ago, the mining industry (including oil and gas) accounted for less than 4 percent of Colorado’s jobs. Last year it was 1.3 percent. Nevertheless, it still provides almost 4 percent of the state’s GDP. With the exception of 2008, jobs have grown steadily since 2000.
Gary Horvath believes the extractive industries are likely to decline in 2014:
“Despite the governor’s pro-fracking stance, Colorado has positioned itself as not friendly to the extractive industries. Other states, such as North Dakota, are more receptive to drilling, and companies will follow the path of least resistance. Although the drop in gas prices is a relief to the consumer, demand and prices are not favorable to growth in the industry.”
Tourism: Expanding national and local economies, along with an improving employment climate, is important to the tourism industry. Travel is a discretionary expense for individuals and businesses alike, and is one of the first budget items cut when times are tough.
As the economy recovered from the Great Recession, total direct travel spending in Colorado rose to $16.7 billion in 2012, up 5.7 percent over 2011. The number of travelers set a record – more than 60 million. Business travel rebounded but remained below peaks recorded in 2000 and 2001. It is unlikely to return to those levels as companies have discovered cost-effective alternatives.
Tourism was negatively impacted by the fires and floods during the last year. Peggy Campbell, president and CEO of Visit Estes Park, is hopeful for 2014:
“Since tourism is the basis of the Estes Park economy, the September flood and subsequent road closures into Estes Park had a devastating effect. Thankfully, highways are opening quicker than expected, so with sufficient destination marketing and messaging funding, we expect 2014 to start out slow but our summer business to get back on track.”
Manufacturing: Manufacturing provides 5.7 percent of the state’s jobs. It is particularly important in Pueblo, where 7.2 percent of employment is in that sector. CSU-Pueblo economist Kevin Duncan points out that small manufacturers there are adding jobs, 25 at Pueblo Dubworks and 50 at Rocla Concrete tile. The Vestas plant there is also expected to benefit from a contract for 200 wind towers in Texas.
WRAP UP: 2014 will be a decent, although fairly unremarkable, year for Colorado’s economy. Inflation and interest rates will remain low, the housing market will continue to improve and jobs will be a bit easier to find. Commercial real estate faces hurdles, as do agriculture and the oil and gas industry.
The most important factor affecting the outlook for 2014 is jobs. Despite high unemployment, many positions go unfilled. We need skilled craftsmen to work in construction and the oil fields and Ph.D. scientists and engineers to push the boundaries of technology. The days of high-paying jobs for high school dropouts are over. Those jobs have moved to other parts of the world. Our high schools, community colleges and universities must not fail to do their job.