Colorado will see job growth, improving incomes and rising retail sales this year, predicted Bill Kendall, one of the state's top economists.

But those gains will be modest at best, he cautioned.

"It is not going to feel like a healthy economy," Kendall told a lunch gathering of the Denver Association of Business Economists on Wednesday.

Economists are trying to figure out why Colorado's economy fell so hard after Lehman Brothers collapsed in mid-September 2008, despite the state having avoided the run-up in home prices seen elsewhere.

"The economy fell off a cliff," said Kendall, who does economic modeling with the Center for Business & Economic Forecasting in Denver.

Kendall attributes the sharp contraction to the tight credit markets that small companies and entrepreneurs faced.

Companies in Colorado with fewer than 250 workers have cut their payrolls by 5.6 percent during this recession, while bigger businesses have shed jobs by half that amount.

In 2002 and 2003, bigger companies were responsible for the majority of layoffs, he said.

A sharp drop in commodity prices in the second half of 2008 also hit the state hard.

Grand Junction, which rode high on a surge in drilling activity, has suffered the sharpest declines in job growth of any metropolitan area in the country for the past 12 months, edging out even Flint, Mich., Kendall said.

Three areas to watch this year are commercial real estate, banking and government, economists said.

Although the last decade didn't generate the wave of speculative building seen in the early 1980s, many properties are now worth less than the debt owed on them.

Banks have continued to roll that debt over rather than recognizing and writing the losses off, actions that could eventually leave them short of capital.

That's a problem because the same small and midsize banks behind many of the failing commercial-real-estate loans are also a key source of small-business funding, said Tucker Hart Adams, a retired economist who also spoke.

Although governments were able to add jobs last year, along with the health care and education fields, budget shortfalls will force governments to cut jobs this year, Kendall said.

Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com