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A High-Flying Economy

A High-Flying Economy

Like scenes from Colorado’s high country, our economic view is strikingly positive heading into 2018. With record-high stock markets, rising income, robust profits and low unemployment, optimism prevails. Will the economy hit turbulence that shocks it to lower levels? Tame financial conditions make that unlikely. Expect the nation and Colorado to expand at moderate cruising speeds in 2018.

National Conditions:

  • Consumers. Rising income, stock prices and house values boosted households’ ability to spend. Also, the University of Michigan’s Index of Consumer Sentiment recently hit its highest level since 2004, suggesting considerable consumer strength moving forward.

    Spending on “big ticket” items will remain strong. Sales of light vehicles, for example, should hover around 17 million in 2018, with spending on household furnishings moving up again.
  • Business Investment. Increasing domestic and international demands provide a base for advances in business spending on equipment. Looming, but still unclear tax cuts, also point to good prospects for 2018.

  • Government. While federal defense spending may advance, some states may retrench as pension liabilities and uncertainties about tax revenues restrict expenditures. This is not a boom area going forward.

  • International Trade. Global economic strength will boost exports of American goods and services again in 2018. A booming domestic economy, however, speeds up purchases of foreign products by American consumers and businesses. Those trade conditions are likely to persist through 2018 despite political wrangling over trade deals.

Housing Dynamics:

The median house price jumped 6% nationwide and nearly 8% in the Denver area during 2017. Housing starts are still only about 60% of the 2005 high, however. Chart 1 shows the strong uptrend in housing units completed since 2012 (red line). A low supply of houses, however, at less than six months at current sales rates (blue line), will keep the current sellers’ market intact. Short-run turbulence in house sales and building from rising interest rates and slumping income, while always possible, appears unlikely in 2018.

Chart 1: National Housing Indicators (shaded Area Is Recession.)

Local Conditions

Colorado celebrated its 2017 top ranked state economy with population growing at twice the national rate. Low home and rental vacancy rates reflect high demand. For price measures computed by the U.S. Federal Housing Agency, Chart 2 shows faster increases in Colorado (green line) and in the Denver MSA (red line) than in the nation (blue line) since 2008. Although increases have slowed a bit, they are still close to 10% statewide. Residential construction may slow down in 2018, which will not relieve existing pressures, especially in front-range urban areas.

Chart 2: Changes in House Price Indexes (shaded Area Is Recession.)

Population Trends. Urban areas offer appealing amenities for most age groups. Denver, for example, provides easy access to entertainment, major-league sports, high-quality restaurants and museums. The Pew Research Center notes that millennials, now the largest group in the population, account for only 35% of homeowners but 40% of renters, significant changes from previous generations. And Colorado’s home ownership rate has dropped to 60% from 70% ten years ago. Empty nesters in the shrinking “baby boom” generation face transition costs when moving from suburbs to attractive urban locations. Size limits, along with higher prices per square foot for urban-core units, restrict adjustment. These longer-run factors will continue to influence housing dynamics here.

*Dr. Paul Kozlowski is professor emeritus of business economics and finance at the University of Toledo and has served as an advisor to business and government organizations for over forty years. He is past-president of the Mid-Continent Regional Science Association and his articles appear in a variety of economic journals and books. He holds a Ph.D. in economics from the University of Connecticut and lives in Denver.

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