1st Quarter 2007
The National, State, and Local Economy

By Robert J. Sonora
Assistant Professor of Finance
Office of Economic Analysis & Business Research School of Business Administration Fort Lewis College

Despite some earlier concerns about the national and state economies, many of the indicators are pointing up. Still there are still some niggling concerns including potentially rising fuel prices, though as reported earlier this week, experts don’t believe gas prices will rise above $3 per gallon, a volatile stock market, and continuing real estate woes.

Overall, the national economy appears to be a pretty good shape, despite weathering a sharp decline in the stock market and uncertainty in the Middle East. Output in the fourth quarter of 2006 grew at an annual rate of 2.2%, led by household consumption growth and a surprisingly strong growth in net exports. This was offset by a decline in domestic investment, in part due to declining residential sales.

During the last quarter of 2006, US gross domestic product (GDP) grew at relatively sound 2.2%. Most of the growth can be attributed to steady growth by US household purchases, which grew at 4.2%, about one percentage points above the six year mean. This is particularly important to the overall health of the economy as household consumption accounts for almost 70% of total US GDP growth can also be attributed to a decline in imports (– 2.2%) and growth in exports (10.5%), though the US is still has a considerable trade deficit. Defense spending rose 12% in the last quarter, which offset a decline of 10.2% in the non-defense sectors. Finally, firm and household investment fell by about 15.5%, driven by a steep decline in residential investment – as is well documented. Figure 1 illustrates the growth of GDP and its components over the past six years.

Source: Bureau of Labor Statistics

Nationwide seasonally adjusted average weekly earnings were up 3.8% from February 2006 to February this year, real (adjusted for inflation) average earnings were up 1.5%. On the other hand, weekly hours have fallen, but not significantly.

Figure 2 shows the annual growth rate of average weekly income for the US, Colorado and the five Region 9 counties. As can be seen Region 9 was performing nicely before growth rates declined beginning in 2002 in the aftermath of the Missionary Ridge fire, and shrank in the second half of 2004. Since the fourth quarter of 2004 the economy has average weekly income has recovered nicely, with weekly income growing at 5% in the second quarter of 2006, ahead of the state and national average.

Source: Bureau of Labor Statistics

Income continues to rise, with average weekly income rising about four% from the second quarter 2005 to 2006 to about $785 per week. Total county and state income continue to grow, with Archuleta county experiencing about 8% annual growth from 1994-2004, with county GDP increasing to about $251 million up from $101 million (not adjusted for inflation), compared to a 6% annual growth in Colorado, see Table 1 below.

Table 1. Total Annual Income (millions of dollars)

Source: Bureau of Economic Analysis

Figure 3 illustrates the unemployment rates of the US, Colorado, and the three largest Region 9 counties from the second quarter of 1990 through 2006. San Juan and Dolores counties are not included because of their large degree of volatility, but are available on request. The data is ‘smoothed’ to remove seasonal fluctuations. La Plata continues to have the lowest unemployment rate while Archuleta and Montezuma are more on par with the rest of Colorado and the US.

In January of this year the unemployment rates in Region 9 were: Archuleta – 4.8%; Dolores – 6.8%; La Plata – 3.5%; Montezuma – 5.2%; and San Juan – 6.8%. Statewide and nationwide unemployment averaged 4.6%.

Source: Bureau of Labor Statistics

Inflation remains low, about 2.4% in February. Once concern, however, is the relatively high rate of core inflation, which removes the volatile food and energy markets. Core inflation hit about 4% in February, see Figure 4. Fed watchers do not believe the Central Bank will raise the short term interest rate during this week’s policy meeting, but with the summer driving season kicking in, there may be some temptation for them to raise rates at the next meeting – given they still believe inflation risk to be present. Indeed statement from the most recent meeting of the Federal Open Market Committee (FOMC) on March 21, the body which decides US monetary policy, read that inflationary pressures are “somewhat elevated” which leaves, once again, the door open for future Federal Funds Rate (FFR) increases.¹

Denver’s inflation, and core inflation remain high, indeed in 2006 core inflation was 0.4% higher than the overall Denver rate, most likely due to a relatively high inflation rate in housing prices.

Source: Bureau of Labor Statistics

Moreover, many are still a bit nervous over the shape of the “yield curve”, which maps the relationship between short and long term bond rates. Figure 5 illustrates the interest rate differentials for the between 30 year and one month rates (in blue) and the 30 year and FFR (pink). Generally speaking the yield curve should slope upwards, which is represented in the graphs below as a positive interest rate differential. As can be seen in the last quarter of 2006 the yield curve has been “inverted”, which often hints at a recession – we can see the curve inverting as the economy heads towards the 2001 recession.

Source: Federal Reserve Bank of St. Louis

Taking together, inflationary pressures (illustrated by the shape of the yield curve) and continued vigilance by the Fed may not be good news for the housing market, particularly those which hold short term adjustable rate mortgages (ARMs), which have been driven up by short term interest rates, and households borrowing in the ‘sub-prime’ market. In December of 2006, Colorado earned the dubious distinction of being number one in terms of foreclosures with one foreclosure per 376 households, up almost 300% from the previous year. The nation as a whole saw one foreclosure per 1,055 households, up 35%.

There appears to be considerably less foreclosures in Region 9 than in the rest of the state, Greeley experienced the highest rate in the state. Housing prices continue to grow, good for homeowners but more difficult for first time home buyers, as second home buyers continue to purchase housing here.

Nervousness in these markets may be partly responsible for the recent drop in global stock markets. Some analysts seemed to believe that the economic miracles of China and India might be in question, but that seems specious and disingenuous. More likely it is continued uncertainty in the Middle East and the decline in the dollar (though good for exports, see above). Though decomposing all of these interconnected variables is difficult.

Durango Price Index

The inflation rates that the majority of us are familiar with are the national average. The closest inflation rate to be used here in La Plata County is found in the Denver-Boulder-Greeley metropolitan statistical area (MSA). The Office of Economic Analysis and Business Research will is compiling data to be used in the calculation of a Durango Micropolitan SA (mSA). The index will be calculated using a basket of common goods and services the average household would buy during the course of a month.

Our basket will contain housing and utilities, food, local services (restaurants, insurance, etc.), gas, clothing, etc. It will not include big ticket items (durable goods) as these are generally not purchased by the average household every month, and will only be calculated using goods and services purchased in Durango.

The index will start using Denver-Boulder-Greeley expenditure weights which will, over time, morph into Durango specific expenditure weights.

A caveat: this is not to be assumed to be in any way comparable to the CPI calculated in Denver. Their basket is extensive, including large ticket items, updates for durable goods. Rather this is to be a general bench mark for how a frequently purchased basket will change from month to month.

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Contacts: Dr. Deborah Walker, Dr. Robert Sonora, Dr. Luke Miller
Office of Economic Analysis and Business Research