Rising interest rates and higher energy costs will slow economic growth next year, Tucker Hart Adams, U.S. Bank’s chief economist for the Rocky Mountain region, warned Tuesday.
“It is a time to be cautious,” Adams told a breakfast crowd gathered in the Pinnacle Club for her 2006 economic forecast.
Adams gave two scenarios. Her more optimistic one has the Colorado economy bumping along, creating about 45,000 nonfarm jobs next year.
That 2.1 percent increase in jobs is only slightly slower than the 2.3 percent growth that Adams estimates for this year. But her darker scenario, which she places at just under even odds, forecasts a national recession that hits Colorado.
A recession occurs when the economy contracts for two consecutive quarters.
Unlike the 2001 recession, which was triggered by reduced business spending, the next recession will result from a slowdown in consumer spending, Adams said.
Consumers, who account for 71 percent of economic activity, outspent their disposable income in July as they struggled to cover higher gasoline prices.
Additionally, Adams said, a rise in interest rates could cool the housing market and make it harder for people to live off their home equity.
“At some point, American consumers must bring their debt under control and housing prices must reflect demand for living space rather than Ponzi-scheme speculation,” Adams said.
Since 2000, housing wealth in the U.S. has increased by $6.5 trillion, fueling about $200 billion extra a year in consumer spending and accounting for about a third of the increased economic growth the country has enjoyed.
To pull that off, buyers borrowed $4 trillion, money that will eventually have to be repaid.
“Housing is the softest and most troubling part of the economy,” Adams said.
Other economists see the possibility of a recession as less likely.
“Eventually, we are going to have one,” said Bill Kendall, an economist with the Center for Business and Economic Forecasting in Denver. “I am not sure I would put the odds that high.”
Colorado also may be in a better position to weather any downturn, should it occur.
The last U.S. recession, which ran from March to November of 2001, pushed Colorado into a three-year downturn. That prolonged rough patch taught many Colorado consumers to behave more cautiously and kept a cap on home prices in the state, said Jeff Romine, a research economist with the University of Colorado at Boulder.
“Even though they are seeing raises, (consumers) are not translating that into retail sales,” Romine said. “They have a new pattern of spending.”
Adams, who acknowledges she is outside the consensus, said that Colorado, already suffering some of the highest foreclosure rates in the country, won’t escape a real-estate slump triggered by higher interest rates.
Colorado’s economy is already facing some headwinds, she said.
Retail spending in the state, which was increasing at an 8.6 percent rate through April, slowed sharply in May and June.
Metro Denver home sales are down sharply this year, and housing permits are expected to fall 8.7 percent this year.
Consumers, already struggling with gasoline at $3 a gallon, will soon have to cope with sharply higher natural-gas prices when they heat their homes.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
