Economic Outlook

Natalie MullisChief Economist, Legislative Council Staff303-866-4778 │ Natalie.Mullis@state.co.uswww.colorado.gov\lcs

Mountain States Employers CouncilJune 29, 2016

2

Six years of moderate growth…

Contributions to Real Gross Domestic Product (GDP)

Source: Bureau of Economic Analysis. Seasonally adjusted annual rates.

0.8%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I

2008 2009 2010 2011 2012 2013 2014 2015 2016

Gov't Consumption & InvestmentNet ExportsGross Private InvestmentPersonal Consumption Expenditures

Real GDP

3

The Business Cycle is Mature

• Businesses led the recovery…• But the consumer is driving growth now

– Labor market near full employment– Households budgets balanced

(some spending, some saving, and record low debt burdens)– Better credit conditions– Household net worth up

• Weighing on growth:– Global economy– Oil – High housing costs– Tightening monetary policy– Low labor force and productivity growth

4

Business drove the recovery…

Source: Bureau of Economic Analysis. Profits and income with inventory valuation and capital consumption adjustments.

Business Investment, Income and ProfitsTrillions of Dollars

Corporate Profits after Tax

Equipment & Intellectual Property Investment

Proprietors' Income

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

2005 2007 2009 2011 2013 2015

5

…but consumers took the reins for the expansion

Real U.S. Retail & Food Service SalesBillions of 2015 Dollars

Source: U.S. Census Bureau; adjusted for inflation using the consumer price index for all urban areas (CPI-U) to the dollar value of most recent month of data. Data are seasonally adjusted.

$140

$150

$160

$170

$180

$190

2008 2010 2012 2014 2016

1.7 percent increase year-to-date through April

compared with last year

6

Low gas prices are muting consumer statistics

Source: U.S. Census Bureau; adjusted for inflation using the consumer price index for all urban areas (CPI-U) to the dollar value of most recent month of data. Data are seasonally adjusted.

Change in U.S. Retail Sales, Not Adjusted for InflationYear-to-date through May

7

The labor market is nearing full employment…

Source: Bureau of Labor Statistics. Seasonally adjusted. Colorado U6 rates shown as four-month moving averages.

9.4%

4.7%

8.2%

3.1%

14.8%

7.5%

16.9%

9.7%

2006 2008 2010 2012 2014 201695

100

105

110

115

2006 2008 2010 2012 2014 2016

Total Nonfarm EmploymentIndex 100 = January 2010

U.S.

Colorado Underemployment (U6)

Unemployment (U3)

8

$27.21

$22

$23

$24

$25

$26

$27

$28

2008 2010 2012 2014 2016

$25.46

…which should put upward pressure on wages

Source: Bureau of Labor Statistics. Seasonally adjusted. Adjusted for inflation using the CPI-U for all urban areas.

Real Average Hourly Earnings2015 Dollars

U.S.

Colorado

9

Positions are going unfilled

Source: Bureau of Labor Statistics. Job Openings and Labor Turnover survey.

10

1

2

3

4

5

6

7

8

100

200

300

400

500

600

700

800

2006 2008 2010 2012 2014 20160

10

20

30

40

50

60

70

80

90

100

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 2008 2010 2012 2014 2016

Unemployment Claims

Source: U.S. Department of Labor. Seasonally adjusted.

Initial Claims for Unemployment InsuranceThousands of Claims

U.S.

Colorado

Continued ClaimsThousands

11

Household budgets are more balancedSome spending, some saving, and record low debt burdens

4%

5%

6%

7%

8%

1980 1985 1990 1995 2000 2005 2010 2015

0%2%4%6%8%

10%12%14%

1980 1985 1990 1995 2000 2005 2010 2015

Debt Service Ratios

U.S. Personal Savings Rate

Historical Average

Historical Averages

Mortgage Debt

Consumer Debt

4.6%

5.4%

5.5%

Source: Bureau of Economic Analysis. Seasonally adjusted annual rates. Calculated as personal savings and debt service payments as a percent of disposable personal income.

12

Household net worth is at historic highs

 4

 5

 6

 7

Source: Bureau of Economic Analysis, Federal Reserve, S&P Dow Jones Indices, LLC.

80

130

180

230

2005 2007 2009 2011 2013 2015

20-City Composite

Denver

Case-Shiller Home Price IndicesIndex 100 = January 2000

Ratio of Household Net Worth to Personal Disposable Income

Dow Jones Industrial Average

2005 2007 2009 2011 2013 2015

13

The global economy is weighing on growth

Source: Federal Reserve Board of Governors & Bureau of Economic Analysis (balance of payments basis). Seasonally adjusted.

80

85

90

95

100

105

110

115

120

2006 2008 2010 2012 2014 2016

Broad Index

Major Currencies

$0

$50

$100

$150

$200

2006 2008 2010 2012 2014 2016

U.S. ExportsMillions of Dollars

Goods

Services

Trade Weighted U.S. DollarIndex of the Dollar to Foreign Currencies

Appreciating

Depreciating

14

Contracting

Expanding

30

40

50

60

70

2006 2008 2010 2012 2014 2016

Manufacturing activity is slowing

Source: Institute for Supply Management.

Institute for Supply Management IndicesDiffusion Index

Manufacturing

Business Activity

15

$100

$200

$300

$400

$500

$600

2006 2008 2010 2012 2014 2016

Manufacturing activity is slowing

Source: Federal Reserve Board of Governors & U.S. Census Bureau.

Industrial Production IndexIndex 2007 = 100

Durable GoodsIndustries

All Industries

85

90

95

100

105

110

2006 2008 2010 2012 2014 2016

New Manufacturers’ OrdersBillions of Dollars

16

Low energy prices are weighing on regional growth

Source: Energy Information Administration (weekly average prices).

$0

$40

$80

$120

$160

2006 2008 2010 2012 2014 2016

West Texas Intermediate Crude Oil PriceDollars per Barrel

$0

$4

$8

$12

$16

2006 2008 2010 2012 2014 2016

Henry Hub Natural Gas Price

Dollars per Mcf

$1.84

$48.72

17

6.6%7.1%7.8%

3.8%2.4%3.4%2.4%1.5%1.1%1.6%2.3%1.7%1.7%

6.9%2.8%1.9%

6.2%3.8%

2.3%1.3%1.3%1.3%0.3%0.2%

-1.1%-17.6%

18.616.9

11.310.7

8.98.2

5.75.6

4.03.53.12.92.62.52.42.32.11.71.61.41.20.8

0.1-0.2-0.7

-5.0

Leisure & HospitalityAccomodation & Food Services

ConstructionEducation & Health Services

GovernmentHealth Care & Social Assistance

Local GovernmentProfessional & Business ServicesTrade, Transportation & Utilities

Retail TradeFinancial Activities

Administrative & Support ServicesProfessional, Scientific & Technical Services

Educational ServicesState Government

ManufacturingReal Estate

Arts, Entertainment & RecreationInformation

Other ServicesWholesale Trade

Federal GovernmentManagement of Companies & Enterprises

Finance & InsuranceTransportation & Utilities

Mining & Logging

Colorado Nonfarm EmploymentYear-over-Year Change in April 2016

Source: Bureau of Labor Statistics. Seasonally adjusted.

Thousands of Jobs Percent Change

18

3.1%3.2%2.7%

1.6%2.6%2.7%2.1%3.3%3.4%

2.1%1.9%

0.5%1.9%2.6%

0.5%1.1%2.3%2.4%

1.1%0.7%2.1%

1.0%1.0%0.1%0.1%

-0.3%-15.7%

623.0535.3

449.0377.0364.0

308.5288.4

252.9219.0

142.0138.0

99.098.288.168.066.055.347.441.941.040.327.05.74.00.0

-40.0-125.0

Education & Health ServicesHealth Care & Social AssistanceProfessional & Business ServicesTrade, Transportation & Utilities

Leisure & HospitalityAccommodation & Food Services

Retail TradeProfessional & Technical Services

ConstructionAdministrative & Support Services

Financial ActivitiesGovernment

Finance & InsuranceEducational Services

Local GovernmentOther Services

Arts, Entertainment, & RecreationManagement of Companies & Enterprises

Transportation & WarehousingWholesale Trade

Real Estate, Rental, & LeasingFederal Government

UtilitiesState Government

Information ServicesManufacturing

Mining & Logging

U.S. Nonfarm EmploymentYear-over-Year Change in May 2016

Source: Bureau of Labor Statistics. Seasonally adjusted.

Thousands of Jobs Percent Change

19

0

20

40

60

80

2011 2012 2013 2014 2015 20160

400

800

1,200

1,600

2011 2012 2013 2014 2015 2016

Rig counts and investment have plummeted

Source: Baker Hughes.

U.S. Active Drilling Rig Counts Colorado Rig Counts

Oil & GasCrude Oil

Natural Gas

20

1.00

1.04

1.08

1.12

1.16

1.20

1.24

1.28

2011 2012 2013 2014 2015 2016120

160

200

240

280

320

2011 2012 2013 2014 2015 2016

But oil companies continue to operate the best wells

Source: Energy Information Administration (production shown as three-month moving averages).

U.S. Crude Oil ProductionMillions of Barrels per Month

U.S. Crude Oil StocksBillions of Barrels

21

…and they’ve found many of them in Weld County

Source: Colorado Oil and Gas Conservation Commission.

Colorado Crude Oil SalesMillions of Barrels per year

0

20

40

60

80

100

120

140

20012003200520072009201120132015

WeldColorado

Colorado Natural Gas SalesMillions of Mcf

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2001 2003 2005 2007 2009 2011 2013 2015

Weld

Garfield

La Plata

All Other

22

Geography of Colorado Oil and Gas Activity

23

Colorado outgrew most states in recent years…

5.8%

6.7%

State Rank in Percent Change in Nominal GDP2013 to 2014

24

..but lost ground in 2015 because of energy

5.8%

6.7%

State Rank in Percent Change in Nominal GDP 2014 to 2015

25

$0

$1

$2

$3

$4

$5

2006 2008 2010 2012 2014 2016

Tighter monetary policy will weigh on growth

Source: Federal Reserve Board of Governors.

0%

1%

2%

3%

4%

5%

6%

2006 2008 2010 2012 2014 2016

Federal Reserve Balance Sheet

Traditional Portfolio

All Other

Central Bank Liquidity Swaps

Mortgage Backed Securities & Federal Agency Debt

Effective Federal Funds Rate

Trillions

26

3.0%

3.4%

3.8%

4.2%

4.6%

5.0%

2012 2014 2016

0%

4%

8%

12%

16%

20%

1975 1980 1985 1990 1995 2000 2005 2010 2015

Although the timing matters, the pace matters more

Source: Freddie Mac, Primary Mortgage Market Survey. Monthly average.

U.S. 30-Year Fixed Mortgage RateHistory since 1975

Since January 2012

27

1.1%2.1%

-8.7%0.9%2.1%

-0.6%-2.3%

3.0%1.3%3.0%2.1%

HeadlineCore

EnergyFood

HousingApparel

TransportationMedical Care

RecreationEducation

Other

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2006 2008 2010 2012 2014 2016

U.S. Inflation

Source: U.S. Census Bureau. Seasonally adjusted.

CPI-U InflationYear-over-Year Change in Prices April 2016 over April 2015

Headline

Core

28

Denver-Boulder-Greeley Inflation

Source: U.S. Census Bureau. Seasonally adjusted.

CPI-U InflationYear-over-Year Change in Prices Second half of 2015 over prior year

-1%

0%

1%

2%

3%

4%

5%

6%

2005 2007 2009 2011 2013 2015

1.4%3.5%

-19.0%0.1%3.8%

0.7%-7.2%

4.2%5.0%

0.1%2.1%

HeadlineCore

EnergyFood

HousingApparel

TransportationMedical Care

RecreationEducation

Other

Core

Headline

29

80

100

120

140

160

180

200

220

240

2006 2008 2010 2012 2014 2016

10-City Composite20-City CompositeCO-Denver

Housing costs will weigh on consumer spending

Case-Shiller Home Price IndicesIndex 100 = January 2000

Source: S&P Dow Jones Indices, LLC.

80

100

120

140

160

180

200

220

240

2006 2008 2010 2012 2014 2016

Low TierMiddle TierHigh Tier

Denver Home Prices

30

Home price appreciation varies around the state

Federal Housing Finance Authority, All Transactions Home Price IndexIndex 100 = January 2005

Source: Federal Housing Finance Authority.

31

Lessor’s Market

Renter’s Market

Seller’s Market

Buyer’s Market

2

4

6

8

10

12

14

2006 2008 2010 2012 2014 2016

Housing supply is lower than demand

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2006 2008 2010 2012 2014 2016

Rental Vacancy RatesPercent of Rentals Vacant

U.S. Month's Supply of HomesNumber of Months

"Equilibrium Rate"

Source: U.S. Census Bureau & National Association of Realtors. Seasonal adjustments to month’s supply by St. Louis Fed.

Colorado

U.S.

32

In many areas of Colorado, builders can’t keep up

0.0

0.5

1.0

1.5

2.0

2.5

2006 2008 2010 2012 2014 20160.0

1.0

2.0

3.0

4.0

5.0

2006 2008 2010 2012 2014 2016

Source: U.S. Census Bureau. Seasonally adjusted three-month moving averages.

U.S. Housing PermitsMillions of Units

Colorado Housing PermitsThousands of Units

Single Family

Multi-Family

33

Demographic changes will weigh down both the economy and wage growth

30%

40%

50%

60%

70%

80%

90%

100%

50s 60s 70s 80s 90s 00s 10s100

105

110

115

120

125

1 2 3 4 5 6 7 8 9 10

Dec. 1983 to June 1990Apr. 1991 to Feb 2001Dec. 2001 to Nov. 2007

U.S. Labor Participation Rate Productivity GrowthReal Output per Hour

Age 25 to 54

Men

Total Civilian

Women

Source: Bureau of Labor Statistics. Seasonally adjusted.

Years of Recovery & Expansion Since Recession

July 2009 to …

34

What’s going on with wages?

Lower labor mobilityDemographic shifts

Low inflation Slower productivity growth

Slower growth in producing sectorsSlow global economic growth

Strong labor marketRising housing costs

35Source: June 2016 Legislative Council Staff Forecast.

36Source: June 2016 Legislative Council Staff Forecast.