Mid-Year 2008 Economic Update and Outlook
The U.S. economy has lost considerable momentum in the wake of deflated housing and credit markets. Consumer confidence, labor market conditions, and GDP growth should improve as markets begin to stabilize, but rising commodity and consumer prices could prolong the process.
In fact, the nation's near-term economic outlook largely depends on how the current pressures play out. In a more fragile environment, sudden changes like a spike in oil prices or an abrupt pullback in consumer spending can trigger recession. For now, though, the U.S. economy appears more likely to manage several quarters of minimal growth before expanding at a healthier pace in 2009. Economic trends in Colorado will follow the national pattern, although the state's concentration of both fossil and renewable energy companies will help support better-than-average growth. Many of these companies are located in Metro Denver, but the region’s housing market and higher concentrations of financial services and retail companies could limit growth this year.
Metro Denver’s housing market has faired better than markets in many metropolitan areas, but several more months of foreclosures and excess inventory are likely before a sustained recovery takes hold. Weak credit conditions will also be a challenge for the region’s financial services industry, but business interest in the area remains high and the commercial real estate market is strong. Expect the region’s economic performance to lag statewide trends slightly but exceed national averages.
Job growth slows, but unemployment remains historically low
- Metro Denver employment increased a larger-than-expected 2.1 percent in 2007, and the region’s job growth has tracked just below the statewide average so far this year. This trend is likely to continue as high prices and credit problems affect employment in manufacturing, financial activities, and perhaps wholesale and retail trade. At the same time, headquarters relocations to the region and growth in renewable energy should have a positive impact on employment. Expect Metro Denver job growth to average slightly below two percent for the year.
- The Metro Denver unemployment rate declined to 3.8 percent in 2007 from 4.4 percent in 2006. Unemployment through May 2008, however, averaged 4.6 percent in a 21 percent increase over the prior year. The region’s unemployment will rise slightly until business confidence and the national labor market improve, but the rate will remain well below historic highs. Expect Metro Denver unemployment to average about 4.5 percent for the year.
Competitive lease rates keep commercial real estate stable
- Metro Denver’s direct office market vacancy rate remained stable at 11.9 percent in the first quarter of 2008, and lease rates increased slightly. Because the area’s average lease rate remains lower than many comparable metro areas, the market should continue to attract interest despite declining business confidence and loan availability.
- The region’s industrial market, however, could weaken slightly as the combination of high commodity prices and low product demand burdens manufacturers. Direct average vacancy rates rose from six percent in the fourth quarter of 2007 to 6.9 percent in the first quarter of 2008, and rates could trend slightly higher this year.
Retail sales slow but remain healthy
- Metro Denver retail trade sales increased a healthy 6.4 percent between 2006 and 2007. The region’s relatively high per capita income and tourist base support strong retail sales, but the impacts of low consumer confidence and higher prices for household essentials will draw down discretionary spending. Barring any significant spikes in gas or food prices, Metro Denver retail trade sales should increase about four percent in 2008.
More positive housing trends by late 2008
- Metro Denver home sales fell only slightly in 2007 (-0.9 percent), but sales declines have accelerated through early 2008. Assuming that access to credit improves throughout the year, though, the reentrance of buyers into the market should help clear inventory and quicken home sales in the third and fourth quarters. Expect a mild, two or three percent decline in total home sales this year.
- The median single-family home price in the Denver-Aurora MSA declined three percent from the fourth quarter of 2007 to $223,500 in the first quarter of 2008. The median price was down 6.6 percent over the year, while the national median price was down 7.7 percent. Declines in the U.S. and Denver median home prices have steepened over the past two quarters, but Denver prices should stabilize before those in other regions. Assuming the decline in Denver prices reaches bottom by the third quarter of this year, the annual median price will decline by about four percent before rising in 2009.
- Recent data suggest that a sizeable number of Colorado subprime loans could reset for the first time in 2008 and 2009. Options for selling or refinancing a home remain limited, but interest rate conditions for adjustable rate borrowers have recently improved. While adjusted payments may be unaffordable for some borrowers regardless of interest rate, lower rates will still help dull the impacts of this year’s loan resets. Expect the count of Metro Denver foreclosure filings in 2008 to be close to the 2007 level.
- Restrictive financing and an excess inventory of homes on the market continue to keep downward pressure on building permits in Metro Denver. The total count of permits fell 18 percent between 2006 and 2007 with the largest decline in the detached, single-family homes category. The decline in construction activity should flatten through 2008 as housing inventory shrinks and demand for transit-oriented development continues to grow. Still, the count of Metro Denver building permits will probably fall another 10 percent this year.
National and statewide economic conditions are included in the downloadable report at the top of the page.