State's fate tied to stocks
By Aldo Svaldi
Denver Post Business Writer
Dec. 24, 2000 - Colorado's early economic fate rested on the cost
of gold and silver. Later it was tied to farm prices and then
petroleum prices.
Today, the Nasdaq composite index
could hold Colorado's future. It's
down 40 percent for the year.
What people may not realize is that
the state is much more dependent
on the stock market than at any
time in the past, economists said.
"I think technology weakness is
leading the economic slowdown in
the U.S. That will have an impact
on Colorado,"
said Sung Won Sohn, chief
economic officer at Wells Fargo
Bank.
What economists don't know is how
stormy things will get next year.
Most call for a soft landing, or
gradual slowdown, but a prolonged
correction in technology and telecommunications could point to
something harder.
"I think in 2001 you are going to see slower growth, no question,"
said Nancy McCallin, the governor's chief economist.
McCallin and Sohn are among 10 economists who gave The Denver
Post a glimpse into the future. They face the unenviable task of
trying to predict the weather as clouds form on a sunny day that
has lasted 10 years.
A few lightning bolts and the whole forecast changes.
"None of the Western states can ignore a national recession," said
Tracy Clark, senior economist with the Bank One Economic Outlook
Center at Arizona State University.
If the national economy lands softly,
so will the economies of the Western
states. Same with a hard landing.
The West's isolation might remain a
romantic ideal, but reality will set in if
things get ugly nationally, he said.
The Western Blue Chip Economic
Forecast that Clark oversees
forecasts slower but solid growth
rates in most areas. Single-family
home permits are an exception. They
are expected to fall for the second
year in a row.
The forecast's seven economists
expect Colorado to enjoy a 7.3
percent increase in current personal
income, down from 8.2 percent this
year. Retail sales growth will cool to
6.4 percent from 8.4 percent.
The Colorado Business Economic
Outlook from the University of
Colorado expects fewer people to
move to the state and for home
construction to slow down. But the
state's job machine is expected to
churn out 61,800 net new jobs.
Per-capita income is expected to
jump from $32,500 to $34,264.
Normally, those numbers would
indicate strength. But coming off the
strong growth Colorado as enjoyed,
they mark a change.
One thing the economists aren't
predicting is a surging state
economy.
Six interest rate hikes from the
Federal Reserve through June of this
year have accomplished their mission
of slowing the economy. U.S.
economic growth in the third quarter
hit 2.2 percent, compared with 5.6
percent for the first half of the year.
The Nasdaq composite index is down
more than 40 percent for the year.
Retail sales point to weaker
Christmas spending. Consumer
confidence is slipping.
Some key economic indicators are
starting to point to an easing in the
local economy, said U.S. Bank
economist Tucker Hart Adams. But
with unemployment low and wages
rising, it isn't anything the average
Coloradan can feel yet, she said.
Bill Kendall, an economist with the
Center for Business and Economic
Forecasting, said he sees no hard
evidence of a slowdown in Colorado
yet.
If anything, economists who follow
the state have bumped up their
estimates for 2000. For the last
several years, forecasters have
underestimated the state's strength
and have had to play catch up.
Nationally, economists are getting
more pessimistic. Forecasters who
wouldn't mention recession are now
hedging their bets.
Sohn has raised his estimates of a
recession to 40 percent.
Kendall defines a soft landing as
economic growth in the 3 percent to
4 percent range. A hard landing
would take it down to 1 percent
growth. With a recession, the
economy would shrink for at least
two quarters.
Vectra Bank Colorado economist Jeff
Thredgold puts himself in the
soft-landing camp. He expects
monetary officials to drop rates
quickly if they see a rapid slowdown.
Quick action and well-timed
interest-rate cuts saved the U.S.
economy in 1998 from a downturn.
"The Federal Reserve is on our side,"
he said.
Jeff Romine, a regional economist
with the Denver Regional Council of
Governments said a downturn could
provide a welcome breather. He
predicts fewer people moving into
the Denver area, which should give
the region time to catch up on its
development needs.
Fewer people means fewer housing
units will be built.
The Colorado Business Economic
Outlook is looking at total housing
units to drop to 46,000 in 2001 from
54,000 this year. Construction hiring
is expected to slow significantly.
Construction resources will shift
away from building buildings to
adding infrastructure and preparing
lots for the next housing upswing.
Penn Pfiffner, a consulting economist
with Construction Economist in
Lakewood, said that the construction
of infrastructure, from bridges to
power plants, should hit $1.9 billion
next year - more than the $1.7 billion
the region spent during the
construction peak at Denver
International Airport in 1992.
Economists admit their predictions
are more accurate if they're following
a trend. It is tougher to catch a
major shift in the economy, good or
bad, until it is well under way.
Colorado's economy is more diverse
than it was 10 years ago, which
makes it more dependent on national
trends, including the stock market's
swings.
The stock market's decline is already
putting a pinch on the city's large
mutual-fund families based in Denver
and Cherry Creek. The amount of
money they're managing has shrunk,
cutting into their fees.
But the market's influence runs
deeper. Many of Colorado's old
corporations were culled during years
of manic merger activity in the late
1990s.
New technology and
telecommunications start-ups rose to
take their place, often funded with
generous venture capital. Investors
snapped up initial public offerings and
debt flowed freely like intravenous
solution into the arms of the
capital-hungry telecommunications
industry.
In that regard, the party is over.
A Denver Post survey found that
through mid-December, the stock
prices of nearly a quarter of 60
Colorado telecommunications and
technology companies were down 90
percent or more from their highs.
Those 60 companies have lost $184
billion in market value, and the
bleeding has accelerated as the year
draws to a close.
Low stock prices translate into worthless options for executives
and hiring freezes and layoffs at some companies. Start-up
companies now find the capital markets closed to them long before
they can support themselves.
Will things ease before those companies starve to death?
"Some of the bloom is off the rose," Thredgold said. "Some of those
companies were adding people any time they could find them. They
are now letting some of them go."
Thredgold said Colorado will face the perils of living and dying by
the technology sword. Colorado in 1998 claimed the highest
concentration of technology workers on a per-capita basis of any
state in the country, according to the American Electronics
Association.
Technology contributed to the region's boom. A down cycle in
technology could work the other way, economists said.
Colorado's technology companies are not alone in their suffering.
Stock investors had counted on a Thanksgiving rally and it didn't
happen. They held hopes for a Christmas rally, which still hasn't
materialized. Investors hold plenty of cash, but most market
watchers don't expect them to jump back in unless they see better
prospects for corporate earnings, which have slowed with the
economy.
Sohn estimates that 20 percent of consumer spending is tied to
the wealth effect, which is the financial security people gain from
rising stock and home values.
He forecasts retail sales will grow at a slower pace next year. If
the decline is severe enough, a "negative" wealth effect could take
hold. Rather than spending, consumers start saving.
State tax collections also could take a hit if the market's downturn
continues. Years of large capital gains have boosted Colorado
incomes. McCallin said capital gains now represent 12 percent of
state income, up from only 3 or 4 percent five years ago.
As a result, Colorado ranks as one of the most capital
gains-dependent states in the country.
If taxpayers start harvesting losses, incomes will fall. Beleaguered
companies are less likely to pay out bonuses - another strain.
From TABOR, the tax-andspending limitation law, to the recently
passed Amendment 23 for school funding, the state's budgetary
hands are getting tied tighter and tighter.
McCallin said the state's ability to respond to a downturn with
fiscal policies is now limited.
While economists aren't expecting a recession next year, they said
one will eventually come.
McCallin said a recession is almost a certainty within the next three
to five years.
Adams, the U.S. Bank economist, said a mild recession by 2002
would not surprise her.
If the Federal Reserve cuts interest rates to shore up the economy
and the Bush administration hands out generous tax cuts, that
would stimulate the economy.
Adams said wage pressures remain tight because of a worker
shortage caused by demographics and job growth. Colorado's wage
gains have outpaced the nation and inflation has run higher here,
3.7 percent, than in the rest of the nation, 3.3 percent.
Higher energy prices are now part of the mix as well. Inflation could
rear its ugly head, and the Federal Reserve will be forced to put on
the brakes once more.
Tim Sheesley, corporate economist for Xcel Energy, said higher
energy prices are not only inflationary, but could also tip the
economy into a recession.
Natural gas prices are nearly triple the levels of a year ago. Burned
too many times, petroleum producers have moved more slowly to
increase supply. One of the colder winters in recent years has
made the problem worse.
"There is nothing people notice more quickly than when they get
that bill for heating their house. Energy costs can cause a
meltdown in the economy," he said.
A meltdown may be extreme, but expect 2001 to be a year for
caution. |
