Colorado economy to grow in ‘14 but struggle to reach its potential

November begins the annual stretch run for the economy, as businesses squeeze all they can out of year-end sales while keeping an eye on indicators for 2014.

CompanyWeek checked-in with Martin Shields, economics professor and director of the Regional Economics Institute at Colorado State University for a status report and peek at economic conditions shaping end-of-year prospects.

Q: There are different interpretations to last month’s jobs report. Colorado's unemployment rate dropped again - but do you have concerns about the region's job growth rate? Are we adding enough jobs?

MS: Although the state has re-attained pre-recessionary employment levels it still is not where it "should" be. By that I mean that economies tend to grow over time. If we use previous employment growth rates and project them forward, and apply them to the start of the recession, we see the state is still tens of thousands of jobs below its potential. Right now we are growing at a rather typical rate. That means we are not making up for many of the lost jobs. This is reflected in persistently higher than normal unemployment rates.

Q: Some anticipate the economy sliding into another recession into 2014. What's your macro-outlook?

MS: I think more of the same. The economy is doing "fine" by historical growth standards, but it is coming out of the worst downturn since the Great Depression. And "fine" is not sufficient to make up for the losses.

What really troubles me, however, is the fact that household income has been stagnant or declined for many Coloradoans. This means that standard of living are really no better than they were at the start of the millennium. Generally, we hope economic growth makes people better off. We are not seeing that now.

Q: Can you elaborate? How can we create higher-paying jobs in a growing, low-inflation economy?

MS: This remains a real challenge. Although the economy is bouncing back, businesses remain reluctant to hire. Bringing someone new onboard is truly a commitment, and employers want to be sure that they won't have to let someone go in 6 months or a year. This means that many businesses are viewing the longer run with uncertainty. The Federal Reserve Bank is committed to keeping interest rates low, which helps business investment tremendously. Yet our economy remains driven by consumers, who account for about 70 percent of GDP. And the vast majority of consumers live in households where income has not grown. So they are not spending more, so businesses are not producing more, which means they are not hiring more. It really is a vicious circle. We have a few options from a federal perspective. One is to substantially increase the minimum wage; but unemployment might arise for some. Another is to use the tax code to increase incomes for lower earning households; but then new budgetary problems arise at the national level. There is no silver bullet.

Q: With housing prices bouncing back, is there any cause for concern about a new equity-financing bubble?

MS: Nationally, we have seen housing prices grow over the past year or so more than the historical average. But it is important to remember that prices had truly crashed. This bounce back is just movement back to the long-run equilibrium. Yet there are probably some regional markets that are witnessing a pricing run-up that may not be justified by the fundamentals. One of my continued curiosities in economics is that we don't learn as quickly as any of us hope.

Q: Colorado's MFG sector growth is likewise subject to different interpretation: as a percent of the overall economy, the state’s MFG sector lags the national average, though food & beverage, lifestyle, and technology MFG seem to be growing. How should we reconcile the MFG numbers?

MS: Colorado has never been a manufacturing based economy, although it is an important industry. Some of the recent growth has been from the sectors you identified. As the national economy recovers, the state's manufacturing sector should bounce back. But it is unlikely that it will be able to carry the load in terms of getting the state back to where it needs to be.

Martin Shields is the director of the Regional Economics Institute at Colorado State University and a Professor of Economics. Reach him at martin.shields@colostate.edu.