From the local to the national economy, the financial outlook for the new year appears mostly bright.
Increasing confidence and certainty, among a bevy of factors, bode well. Still other factors, including real estate foreclosures, suggest the recovery might not be as robust as what usually occurs following a recession.
May-Investments in Grand Junction firm forecasts trends with a proprietary leading economic index that takes into account business optimism, commercial lending, export activity and retail sales in the United States. “The index, since April or so, is climbing,” says Doug May, president of May-Investments. “It indicates sustainable growth through next year.”
Advancing indicators in the index include increasing business optimism and strong retail sales over the last four months of 2010. For December, eight of 10 indicators showed improvement.
May says he considers the stock market a good bet, with the Dow Jones Industrial Average climbing as much as
15 percent to 20 percent at some point this year.
At the same time, though, May cautions that banks still are not lending as freely as the Conference Board and other business groups suggest. While low short-term interest rates might prompt predictions of an uptick in lending, May says the reality is that banks remain cautious and require loan applicants to jump through more hoops than three years ago.
May says he’s also concerned about a downturn in expenditures on the shipment of goods overseas. A dip in such spending during the last half of 2010 belies reports of increased demand for imports in China and India.
A continuous increase in demand is not a given any more than high demand in the United States five years ago offered a reason to ignore the possibility of a recession two years later.
May forecasts slow, steady growth this year in gross domestic product, the broad measure of goods and services produced in the country.
On the heels of a recession, GDP growth has surged as much as 9 percent in a year. But May doesn’t see anywhere near that kind of growth coming off the Great Recession that officially ended in the summer of 2009.
One major factor in a 2011 economic rebound could be the real estate foreclosure rate. If it’s nearing its peak, builders could resume constructing more homes and commercial buildings. Foreclosed homes usually sell for less than nearby homes, bringing down real estate values in an entire community or even a whole country. Such has been the case in the aftermath of the Great Recession. Many of those homes have been purchased, however, reducing inventory.
Rising consumer spending over the past year also has reduced the inventory of products companies had stockpiled during the recession.
“Because the economy is starting to digest and the public’s outlook is starting to solidify, the economy is kicking in again,” says Steve Gunderson, Western Colorado regional president for U.S. Bank.
Gunderson says another factor in his outlook is the end of theelection cycle in November. When businesses and consumers see the makeup of Congress stabilize and government regulation clear, they feel more secure about buying products and investing.
In the wake of such government funded plans as the Troubled Asset Relief Program for financial institutions in 2008 and American Recovery and Reinvestment Act of 2009, business owners looked with wary eyes to the mounting national debt and jobs that would exist only as long as government funding continued. The programs accounted for a total of more than $1.4 trillion in federal spending.
The current economic climate is one that holds more promise, Gunderson says. “The real engine in our economy is the players in the economy, not the government. When they think things are positive, they’ll show it.”
May says small businesses will be among the key players. “We need small businesses to get us out of this because large businesses won’t.”
Large companies remain reticent to make large investments. And many companies can’t obtain the loans they need to make large investments, he says.
Despite the optimism displayed by some economic analysts, most predict a recovery that will be much slower than the one that followed a downturn early in the 21st century.
Gunderson, for one, believes recovery will take at least two to three years.
May says the recovery will chug along for about another year and half before another recession takes hold in mid-2012. But he doesn’t suggest business people panic over that prospect. Recessions typically occur two to three years following the end of the previous downturn. Because the Great Recession ended in the summer of 2009, it would be reasonable to expect another one three years later.
“It’s just a regular recession,” May says, adding that it probably won’t be nearly as severe as the whopper that hit the country in late 2007.
Mesa County didn’t feel the brunt of the recession until 2009, following a big decline in natural gas development in the region.
The turbulent energy business constitutes a wild card in the local financial outlook. Extraction of natural gas, coal and other energy sources spur or depress the economy.
The industry is partly credited with initially buffering local effects of the Great Recession. The recession began in late 2007, but unemployment rates remained lower and home prices trended higher. In late 2008, though, natural gas activity began to decline. Decreased employment, falling home prices and lower per capita income followed in the Grand Valley. The holiday shopping season in the fourth quarter of 2009 reflected less consumer spending than the same period in 2008. Such a decline hadn’t happened in Mesa County since the oil shale bust of the mid-1980s.
Already facing lower demand due to reduced manufacturing and declining profits, energy companies complained of stricter drilling regulations enacted in Colorado in 2009. Proponents hailed the new rules as a way to help protect the environment and the tourism dollars that come with the allure of outdoor recreation in Colorado. But opponents warned that tighter regulations could cause companies to drill more in other parts of the country.
By 2010, gas production increased in Western Colorado over 2009 levels. Williams Production, for one, plans to drill more than 300 gas wells in the area this year. Next year could bring even higher production levels. “We’re looking to pick up additional rigs in 2012,” says Chad Odegard, asset director for Williams Production in the Piceance Basin of Western Colorado.
Gunderson counts himself among those concerned about the effects of increased regulation on the energy industry. He says regulations add to cost and affect how any company operates and how much a company can afford to transact.
Energy is tied to the financial outlook for Mesa County and much of Western Colorado. But other factors — from lending trends to returns on investments —could have effects as well. By the time the second half of 2011 rolls around, local and national analysts could have a clearer picture of whether 2012 will bring more of an economic upturn or the specter of another recession.