2nd 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
Last quarter the overall national economy seemed to be doing pretty well, despite some earlier misgivings. However, skepticism about economic health is creeping back in. Continued uncertainty in the Middle East, rising energy prices, are keeping the spectre of inflation very much in the limelight.
The national economy slowed sharply in the first quarter of this year, growing an anemic 0.6%. Though it’s difficult to blame household consumer’s who continue carry the economy on their back, growing at annual rate of 4.4%. In the month of May, retail sales alone grew 1.4% to $377.9 billion, despite higher energy prices. This is particularly important to the overall health of the economy as household consumption accounts for almost 70% of total US GDP This was enough to offset less impressive data: firm and residential investment shrank for the third quarter in a row by 9.6% because of reduced residential purchases, which fell 15.4 percent. Unlike the previous quarter, exports fell 0.6% and imports rose 5.7% despite, the decline in US dollar – falling about six percent against the euro and UK pound and seven percent to the Japanese yen – further indication of possible inflation as the cost of imports rise.
In light of declining defense expenditures, government expenditures rose 1% over the first quarter. Figure 1 illustrates the growth of GDP and its components over the past six years.
On the other hand, in line with strong retail sales, in the first quarter of this year corporate profits $20.3 billion in the first quarter of 2007, after declining $4.9 billion in the fourth quarter of last year. And, during the second quarter firms have increased capital and software purchases after a fall in the first quarter of 2007.
Nationwide seasonally adjusted average weekly earnings were up 0.8% the third quarter of 2005 to the third quarter 2006, but when adjusted for inflation fell 1.14% over the same period. Private sector weekly incomes rose 4.1% over the past year, and, adjusted for inflation rose 2.7%
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 3.3% in the third quarter of 2006, still ahead of the state and national average.
Income continues to rise, with average weekly income rising about 4% from the second quarter 2005 to 2006 to about $785 per week. Total county and state income continue to grow, with Region 9 growth averaging 7.1% compared to 3.4% statewide annual growth from 2001– 2006, see Table 1 below.
Table 1. Total Annual Income (millions of dollars)
Year.Quarter |
Colorado |
Archuleta |
Dolores |
Montezuma |
La Plata |
San Juan |
Region 9 |
2001.3 |
20,333,659 |
19,188 |
2,056 |
53,236 |
141,609 |
1,726 |
217,815 |
2002.3 |
20,097,609 |
19,927 |
2,369 |
55,089 |
151,741 |
1,856 |
230,982 |
2003.3 |
20,628,616 |
19,734 |
2,328 |
54,974 |
163,023 |
2,011 |
242,070 |
2004.3 |
21,198,463 |
21,156 |
2,356 |
58,092 |
181,393 |
1,726 |
264,723 |
2005.3 |
23,257,496 |
24,215 |
2,235 |
63,553 |
200,601 |
1,835 |
292,439 |
2006.3 |
24,074,743 |
25,123 |
2,641 |
66,516 |
214,494 |
1,907 |
310,681 |
Mean Annual Growth Rate |
3.38 |
5.39 |
5.01 |
4.45 |
8.30 |
1.99 |
7.10 |
Total Growth 2001–2006 |
18.40 |
30.93 |
28.45 |
24.95 |
51.47 |
10.49 |
42.64 |
Figure 3 illustrates the unemployment rates of the US, Colorado, and the three largest Region 9 counties from the second quarter of 1990 through April 2007. 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 April of this year the unemployment rates in Region 9 were: Archuleta – 3.4%; Dolores – 5.4%; La Plata – 2.5%; Montezuma – 3.5%; and San Juan – 6.3%. Statewide unemployment was 4% and nationwide, 4.4%.
Inflationary pressures have slowly been rising from 2.4% in February to 2.6% in April. Once concern, however, is the rate of core inflation, which removes the volatile food and energy markets. Core inflation hit about 2.3% in April. Fed watchers, and bond markets, seem to be hinting that they think the Fed will raise the short term interest rate during this week’s – though it’s not certain. Indeed during the March meeting the policy meeting, the Federal Open Market Committee (FOMC) on March 21, the body which decides US monetary policy, states:
“Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures … the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.”
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. However, the recent upturn in bond prices suggests that the yield curve is turning aroung, as the graph shows, it seems to be in a trough about to turn up.
The ten year bond rate has risen seventeen percent from its 52 week low to 5.24 percent, another inflationary hint. It also is augers for higher mortgage rates which will hurt those with adjustable rate mortgages, new homeowners and current homeowners looking to refinance – the national average for a thirty year fixed mortgage is now 6.75% up from about 6.2% in January. More sobering news for the economy in the medium term.
Markets have been pretty robust. Despite some growing uncertainty in the automobile industry and the decline in China’s Shanghai stock market because of the Chinese government’s decision to raise capital gains taxes in an attempt to prevent a stock bubble. Both the Dow Jones Index, below, and the broader S&P 500 have been growing at a good pace. Indeed the S&P 500 has almost doubled in value since 2003.
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
This article also rolls out an estimated price index for Durango. Given underlying similarities, inflation in Durango will be closely correlated to Denver-Boulder-Greeley. The biggest difference between the two is the treatment of housing – in Denver the average household spends about 20 percent of their income on housing while in Durango it’s about 28 percent.
There are four way of evaluating housing prices: the acquisition approach, which treates the home as a non-durable good, that is as a flow of services; the cash flow approach, which treates housing as an asset flow; the user cost approach, which effectively assumes that the user cost, i.e. the value of the home, is equal to the rental price; and the rental equivalence approach, which values the home as equivalent to the market rental price of an identical home.
Given data availability we use the rental equivalence approach. However, it must be clear that the average rental unit in Durango differs from the average home which is owned which may bias the results down, somewhat. Morover, the average rental rate of a home has risen 40% since 1995 while the average home price has doubled over the past seven years.
On the other hand, once a home is bought, the homeowner “locks in” a rental price when she gets a mortgage. Moreover, homeowners in Durango have benefitted from from the rapidly rising asset price intrinsic in the current value of the home, homeowners have seen their home assets double in seven years.
Our estimate for the first half of 2006 Durango inflation was about 4.6 percent compared with 3.8 for Denver. In the second half, inflation moderated to 2.6 percent in Durango while in Denver it fell to 3.4 percent. The reason behind these difference were large differences in housing price movements in each city.
As we collect more data, these estimates will be more timely.
Please note: the rate of inflation is the percentage change in the price level, prices in Durango are generally higher than in Denver, primarily due to transportation costs. Thus a lower inflation rate does not necessarily mean prices are lower in Durango.
