The Colorado Economy: Different Ways to Look at the Same Thing
The Economist asks what's driving growth
Gaining multiple perspectives when looking at the same thing often yields new understanding. Let’s look at the state’s economy from different angles and see what we find.
Historically, Colorado’s economy was based on transportation, mining and tourism. While important, none of these historical sectors drive the economy today. Over the last half century, the state has consistently outperformed the nation and most neighboring states. The only time the state’s economy really tanked was from 1986 to 1990 during the S&L crisis when real estate was severely overbuilt, and prices crashed. In most cases, job growth fuels population growth, and when the state entered the abrupt five-year hiatus on real estate development, it encountered net outmigration as construction workers went elsewhere looking for work.
There must be something driving growth in the first place to create population in-migration and development. All regional economies — especially small nations, states and counties — have what we call an economic base upon which the rest of the regional economy develops. The base is created from dollars flowing into the state from the rest of the world. This can come from exports, from benefits originating outside Colorado paid to retirees, and even investment or capital flows into the state for infrastructure and real estate.
The State Demography Office performs economic base analysis on all counties. From the base analysis, they model overall job growth that ultimately translates into population growth. Taking some liberty with their county data to combine it statewide yields some interesting results. The economic base of Colorado is about 41 percent of the total economy as measured with jobs. This means for every basic job created, another 1.4 jobs are created. This is the “multiplier” we often read about in economic reports. A quarter of Colorado’s base comes from traditional industries (agribusiness, manufacturing, mining and the federal government) and another quarter comes from Colorado’s role as a regional (multi-state) and national service center related to industries like trade and transportation, business and professional services, and finance, insurance and real estate. The surprise in this base analysis is that 21 percent of the economy appears to come from retiree household spending. Thirteen percent of the base is generated by tourism, and 15 percent is derived from non-retiree households with investment income or public transfer payments.
To understand long-term structure of the state and local economies, I use the Bureau of Economic Analysis’ (BEA) regional data. BEA data for jobs, income and GDP by industry and sector allows tracking changes over time. Comparing the state’s share of industry jobs with the state total and the nation facilitates understanding about how the economy is structured. Economists call this the “location quotient.” Such analysis for 2015 shows Colorado’s economy is relatively more oriented to mining; the military; information; professional, scientific and technical services; and real estate, when compared with the nation.
When a similar analysis is applied to the rate of job change over time, we can begin to forecast a little about the unfolding future. For instance, for the last 50 years, Colorado saw its rate of wage and salary employment grow between 79 percent and 87 percent faster than the U.S. growth rate. Looking at specific industries, we can see the impact of the state’s steady population growth in the retail sector whose growth rate has consistently been about 64 percent higher than the nation for the last half century. Some sectors growing at increasing rates relative to the nation over the last 15 years include management of companies and enterprises, state and local governments and the military. Most other industries are still growing faster than the nation over the last 15 years compared with the prior several decades, but at rates more consistent with national growth rates.
Sources focused less on articulating the state’s economic structure and more on tracking and forecasting the economy include economists like Gary Horvath, who offers an interesting perspective that incorporates a portfolio approach. He breaks the economy into three broad areas: solid growth, which grows at the average rate of all industries since 1990 (trade related and most government entities); strong growth industries growing substantially faster than the state average (professional and business sectors and health care); and volatile areas such as mining, manufacturing and employment services, which can vary widely from year to year.
Taken together, these perspectives point to Colorado having a solid foundation for continued economic growth based upon business services and technology. The traditional industries and tourism are still important, but perhaps less so. Retirement may comprise more of our economic base than we think, and success in desirable job growth areas begets more job growth related to new construction. Coloradans are fortunate in many respects, including our economic structure and outlook.