Research and the Real World

As an editor/project coordinator with the BRD for 20-some years, the 2010 Colorado Business Economic forecast was my 20th. Granted I'm not a research analyst or economist, but as a person who's read my fair share of forecasts over the years, here are some things that stuck in my mind as I worked on this year's (in no particular order):

Construction--Don't look for the Construction Sector to lead us out of this recession. Colorado will record only 7,000 single-family permits in 2009--a 37% decline from 2008 and an 83% drop from the peak in 2004.

Energy--Colorado is home to eight of the largest natural gas fields in the nation and three of the largest oil fields. The Henderson Mine is North America's largest primary producer of molybdenum (used in the production of steel).

Retail--Colorado retail sales for 2009 are forecast to decline (decrease, fall, drop, slide--how many ways can you say that? We had to use those words too many times this year.). This significantly affects the coffers of state and local governments.

Healthcare--Sixty-two percent of all U.S. bankruptcies are caused by medical problems. Of the $500 billion spent annually in the U.S. to treat the top 10 most expensive diseases, $93 billion are attributed to obesity-related factors.

High Tech--Colorado ranked third nationally in per capita high-tech employment for the third consecutive year, according to Cyberstates 2009.

Total employment--The current decade shows the weakest job growth of the past four decades, with the addition of approximately 117,900 jobs. Compare that to the 650,000 jobs that were added during the "go-go" 90s.

What did forum attendees think? Check out their comments, along with the complete 2010 forecast, on the BRD website.

In 2008, Colorado ranked 10^th in the country for job growth, increasing 0.8%. According to Economy.com, Colorado is expected to fall in ranking to 31^st, losing 3.8% of employment in 2009, before rebounding to 9^th, with -0.4% employment growth in 2010. It becomes a stark reality check when a state can rank among the top ten performers while recording a net loss of jobs.

Early in the decade, employment peaked in December 2000 and didn't return to that level until December 2005 - a full five years later. Since then, the state added more than 110,000 new jobs before peaking in June 2008. Seventeen months later, the precipitated decline has moderated, but may not be over. Assuming that employment bottoms in Q1 2010 and begins to build, the year could be a net zero for growth. If the state returns to pre-recession growth rates, then it could be likely that Colorado returns to June 2008 employment sometime in 2013. If some new, slower growth becomes reality, it could be longer.

Colorado will have roughly 117,900 more jobs closing out this decade than when it began, all of which were essentially created in the first 12 months of 2000. Population has increased nearly 870,000 over the same period. With unemployment at 6.7% (not seasonally adjusted), there are many more people living off the same number of jobs created a decade ago.

While Q1 2009 total wages were down more than a billion in Colorado year over year, wage growth over the decade has been substantial, growing at a compound annual rate of 3.7% from 2001 through 2008, and outpacing population and employment growth.  During this period, average wages increased 3% per year, employment increased 0.7%, and population at 1.7% (half of which came from in-migration), annually from 2001 to 2008. Regardless of the strong wage performance of the decade, the quick drop in both total and average wages have been a shock to state and local government funding, which relies heavily on income taxes and consumer spending (sales taxes).

Residents and business have undoubtedly been strained in this remarkable recession. Households have experienced wealth shocks (homes and investments), debt shocks (home equity loans, mortgages, credit cards), and job losses. Businesses have seen markets dry up and consumers shrink. The interconnectedness of economies and industries has become ever more apparent (e.g., architects and engineers are pipelines for commercial construction, which is impacted by consumer spending and industrial growth; and as industry grows, population grows thus more rooftops, schools, and infrastructure).

Colorado's industry diversity, innovation, quality of life, and skilled workforce are sure to help state return to growth. Given the state's mix of goods-producing and services-producing industries, and export and domestic markets, the state is clearly a player on the greater national and global economies.

On December 7^th, the Business Research Division at the Leeds School of Business will release our projections for 2009 and 2010 employment in the state at the Colorado Business Economic Outlook Forum. This consensus forecast will be based on the thoughts and expertise of industry leaders on the ground in Colorado, with their comprehensive stories surrounding the numbers. Come listen to the economic intricacies that will impact your community in 2010.

In the video, I discuss the three, promising to be dynamic, breakout sessions:

• Heroes Wanted: Fixing the Mess in State and Local Government Budgets.
• What Do Capital Markets Have in Store for Real Estate?
• The Future of Uranium, Renewables, and Coal--Impacts on Colorado's Economy.

Learn More >

The BRD staff research team is busy compiling and editing data and reports from the members of the Steering Committee for the 2010 Colorado Business Economic Outlook Forecast (BEOF).  Unlike many forecasts, which are developed from econometric models, the BEOF is derived from the expert opinions of public and private leaders across the state. In addition, the BEOF is unique because it details the factors that that will drive each of the sectors in the state economy.

The Steering Committee and BRD research team have a series of challenges when forecasting the outlook for 2010.  First, they must evaluate the monthly employment pattern for 2009 to determine if there are signs that the downward trend has reversed. In addition, they must take into consideration the magnitude of future revisions to the data series (the 2009 monthly data will be revised in March of 2010 and 2011). The 2009 forecast will be prepared based on the analysis of trends, expert opinion, and possible revision. It will serve as the foundation for the 2010 forecast. The trick will be to determine the turning point in the loss of jobs and when employment patterns will return to normal.

On a positive note, the feedback from the committee suggests that the economy is improving. Preliminary data suggests that the largest employment declines and the extreme volatility of the past 12 months appear to be behind us. At the moment, it remains to be seen whether this will produce annual job gains or job losses in 2010.

Stay tuned! Check out the 2010 BEOF on December 7 at the Grand Hyatt for further details.

I recently had a discussion with Miles Moffeit, a reporter for the Denver Post, about the recent announcement that about 8,100 jobs had been created or saved in Colorado through funding from the American Recovery and Reinvestment Act (ARRA). Some highlights from the discussion, which led to an article in the Post, follow in the subsequent paragraphs.

The federal government requires recipients to report the number of jobs saved or created. Based on our experience conducting federally-funded research, there are significant challenges associated with quantifying the impact of any public or private assistance funding efforts. One of the challenges is accurately attributing the impact for the assistance, relative to other internal or external funding. For example, a company may receive a total of $10 million in funding, with $1 million in funding coming from the ARRA program leveraged against $9 million from other sources. If 50 jobs are retained or created because of the total $10 million in funding, what portion of those jobs should be attributed to the investment from the ARRA program?

A Return on Investment (ROI) analysis of jobs created or retained should also account for the differences in worker type and their varied impact on the economy (salaried, hourly, commission, part-time, temporary, full-time, and contract workers). Because each type of worker impacts the company and economy in a different manner, they should be accounted for differently.

Job growth and retention are essential for economic expansion and stability. When final revisions are made to the 2009 employment data, it is likely that Colorado jobs losses will exceed 100,000 jobs. If the ARRA program has helped create or retain jobs, that is good for the state. This is the upside. (Based on recent trips to the mountains and Southwest Colorado, it seems apparent that a number of construction jobs have been created throughout the state as a result of the ARRA.)

The downside is that the ARRA program is an incredibly expensive tool for creating jobs. The expense for job creation is further heightened by the costs of administering the program and tracking the ROI. Time will tell whether or not the ARRA investments effectively deterred further erosion of the economy and a case can be made that the ARRA should not be measured based on the cost of a job created, but rather on impact the program had on preventing a major depression.

For further information on the ARRA reporting, click here.

BRD blog readers recently received a sneak preview of a report, IS! Phase I, Final Report, jointly released by our research team and Dr. Ron Rizzuto from the Reiman School of Finance. The plan would provide stimulus for successful companies that are having difficulty securing credit. The basic parameters of the concept is that the federal government would provide 80% loan guarantees to successful firms, with additional workforce training incentives to retrain workers and reduce unemployment rates. In a nutshell, the report indicated that over a five-year period, the process of providing assistance to firms with a proven track record would add about 1 million workers to the nation's payrolls.

This past week, the report was officially released to the media, which resulted in a variety of  inquiries about the general concept. One of the most frequently queried topics was the risks associated with the potential adoption of this concept.

Overall, the plan has much more upside potential than associated downside risk. Risk could increase if the following four items are not properly addressed:
• The program should be simple to understand and easy to implement.
• The program should be attractive to successful companies that have been unable to acquire funding for new product development, capital investment, expansion into new markets, or other growth opportunities.
• The program is intended to increase the availability of funds, not the number of government workers, thus it becomes essential to select a government agency with a proven track record to administer the program. Most likely that agency would be SBA (Small Business Administration). If immediate stimulus is to be felt, the loan review process must be thorough and timely.
• The total loan portfolio of the program must remain balanced to manage the anticipated default rate. If a disproportionate number of companies from high-risk industries are accepted, then it is likely that the program default rate would increase. 

In the weeks ahead additional research will be conducted to fine-tune the present analysis and evaluate various variations of the concept. At the same time, interested parties will further test the merits of the concept with members of Congress.

Economy Shows Signs of Recovery

Nationally, evidence continues to mount that the economy bottomed out during the second quarter and that lower than potential growth will occur through at least next year. Because the state economy is closely linked to the national and global economies, recent economic data point to a slow recovery for Colorado.

In late September, the BRD convened the estimating committees for the 2010 Colorado Business Economic Outlook.  Results from a straw poll of committee members predicted that Colorado would again experience negative employment growth next year, -0.1%. The more formal, in-depth forecast will be released by the BRD at the 45th annual Colorado Business Economic Outlook Forum on December 7 at 1:00 pm in Denver at the Grand Hyatt.

In early October, the BRD released the Q4 Leeds Business Confidence Index (LBCI). The results point to improved economic conditions in Colorado. The forward looking index increased for the third consecutive quarter, from 47.5 to 49.7. Moderate gains were recorded in five of the six index components, and three of the components are now above the neutral mark of 50. The only index component to register a decline was expectations for growth of the state economy.

While there is justifiable optimism because of the improvement of the overall index, the LBCI remains below 50. The fact that business leaders expressed continued concerns about profits, hiring, and capital expenditures suggests that the chances have increased that Colorado will lag the national economy in its recovery, much as it entered the recession later than the nation. This prognosis reflects decreased optimism in the strength of the state's recovery based on data from the construction and energy industries.