Remodeling the Economy: 2011 Midyear Economic Update
Column by Patricia Silverstein
In early 2011, the nation's recovery appeared progressively more solid as the stock market rallied, businesses reported higher profits, and consumer confidence improved. The positive signs, though, belied fundamental economic weaknesses that grew more apparent as commodity prices rose and public debt crises unfolded both here and abroad. While the economy is now on a very fragile footing, a return to recession is not inevitable if we at least begin to fix or remodel some of the nation's underlying vulnerabilities, including the public sector debt problem and the lack of confidence by the private sector.
Metro Denver employers' forward-looking hiring expectations for the third quarter were timid, with just one-in-five employers planning to hire, six percent planning layoffs, and the vast majority (70 percent) planning no staffing changes. While some businesses - particularly those focused on healthcare and renewable energy activity - will add appreciable numbers of jobs this year, the public sector malaise and its influence on business confidence will keep the pace of hiring sluggish. Employment will likely increase by only about 7,000 positions, a pace that is too slow to reduce the expected 8.7 percent annual average unemployment rate.
Lack of confidence is keeping consumer spending activity increasing at a slow pace. Even a modest increase in sales might still appear weak when adjusted for inflation, which averaged 3.8 percent in the Denver area during the first half of 2011. While the early-year spike in food and fuel prices may ease through the rest of 2011, expected price increases for cotton and other commodities could mean households will continue to pay more for their essentials. Expect retail trade sales growth in 2011 to reach a modest 5.5 percent, or 2.3 percent on an inflation-adjusted basis.
The housing market remains awash in contradictions. Mortgage rates are still near historic lows, home prices are highly affordable, and many home sellers are motivated. At the same time, mortgage qualification standards are higher than they were before the recession, and many potential buyers doubt their job and income security. Given today's incentives and deterrents for homebuyers, home sales will likely continue at a slow pace. Metro Denver home sales through the first seven months of the year were 6.5 percent below sales in the same months of 2010, although the tax credit-driven sales push that occurred early last year made sales early this year look weak by comparison. Most likely, slow-and-steady activity this year will generate a similar number of sales as last year's boom-and-bust market, resulting in a 0.6 percent annual average increase in the number of home sales.
The region's home prices have weathered the soft market better than prices in many other metros. Whereas sluggish home sales generally lead to a softness in prices, this situation has been offset by a significant decline in unsold inventory and fewer foreclosed properties. As a result, Metro Denver's median home price in the second quarter ($232,700) was down a slight 0.9 percent over-the-year. This small decline is in sharp contrast to the nationwide median home price ($171,900) decline of 2.8 percent. What remains unclear is the extent to which lender caution and other fallout from the "robo-signing" crisis has merely delayed foreclosure filings. Predictions of a second wave of foreclosure activity seem overblown, particularly because many of the unconventional loans that ignited the crisis have already been foreclosed. Barring any significant uptick in foreclosure sales, Metro Denver's median home price will likely remain at a level similar to the first half of the year.
The limited change in new home inventory is also fostering stable home prices. Metro Denver officials issued 3.3 percent more residential construction permits in the first half of 2011 than they did during the same months of 2010, with a major uptick in apartment issuance accounting for the entire gain. Apartment issuance was up 69.4 percent year-to-date in June, while permit issuance for detached homes and condominiums was down 2.2 percent and 22.4 percent, respectively. With home sales still sluggish and prices low, single-family homebuilders have few reasons to start new projects. As a result, the region's strengthening apartment market is one of the only sources supporting residential construction activity. It is likely that permits representing about 5,600 single-family and multi-family housing units will be issued in 2011.
The national economy's recent stumbling suggests meaningful growth will prove elusive until we remodel two key facets of our economy. First, the $14.3 trillion U.S. debt problem has many sources, including costly military engagements and an aging population that places an ever-greater burden on Social Security and Medicaid. Political bickering is aggravating these challenges and leaving households, businesses, and investors rattled. Budget cuts promised under Congress' debt ceiling agreement must be specifically identified and agreed upon. Second, private-sector businesses must be encouraged to fill the gap left by government spending. Healthy corporate profits suggest many businesses have accumulated wealth, but a profound lack of business confidence has kept employers from using new resources to hire. More clarity on taxes, healthcare, banking, and public finance would go a long way in boosting business confidence. Hence, increased government clarity will foster increased business confidence, which will ultimately lead to more job and income opportunities for households.
These challenges are difficult in themselves, but their interconnectedness makes them even harder to confront. While Metro Denver's economy remains subject to national trends, the area is still a magnet location with good growth potential.