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Colo. economists agree slowdown is coming, but not on when

Author: Wayne Heilman, The Gazette - July 16, 2018 - Updated: August 7, 2018

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The Colorado economy has been booming for years, but several economists expect growth to slow over the next year and fall into a recession by late 2019 or early 2020.

Current economic statistics reflect strong growth, including unemployment rates that are nearly the lowest levels on record, payroll growth that is accelerating after slowing last year, housing construction at the highest levels since the most recent recession and consumer spending growing at rates well above inflation. But economists see mounting threats to continued growth that could trigger a downturn.

“It is difficult to predict when the slowdown will come, but when you have this many variables pushing toward a recession, it makes a recession more likely and erodes confidence” in the economy, said Tatiana Bailey, director of the Economic Forum at the University of Colorado at Colorado Springs. “The factors that point to a recession don’t yet outweigh the factors that point to a continued expansion, so we aren’t yet at a pivot point.”

Bailey said the state may become a victim of its own success. Employers are adding jobs faster than people are entering the job market, worsening the labor shortage. Many employers struggle to find qualified job candidates, and they’re boosting wages and expanding recruiting efforts to fill openings.

“There are already signs of increasing inflation, and I view those with trepidation,” Bailey said. “When you combine that with a slowdown in people entering the labor force, that will worsen inflation concerns. Along with trade issues and threats of tariffs, there is a growing chance of more interest rate increases that will reduce capital investment by businesses.”

The state’s leading economic indicators show “some steam left in this expansion,” she said. But she expects a decline before 2020, as employers pass the cost of higher wages onto consumers, who likely will slow spending as a result.

“My best guess is that a recession will start sometime next year, but we have higher-than-average factors that could accelerate” the downturn’s arrival, Bailey said. “We probably have six to nine months of coasting left” in the current expansion, the second-longest on record.

Tom Binnings, a senior partner in local economic research and consulting firm Summit Economics LLC, said the U.S. economy remains “very robust and strong, in part due to the fiscal stimulus from tax cuts” enacted late last year. But, he said, “It wouldn’t take a lot to bring on a recession. Anything that shakes or destroys business confidence would trigger a recession.”

While business investment has been strong in the first half of the year, Binnings said, an escalating trade war could shock the nation’s economy and trigger a downturn. He also said immigration restrictions proposed by the Trump administration could make an already worsening labor shortage more acute and thus slow economic growth.

Binnings said he still expects continued but slower growth for the state and national economies into next year. He expects concerns about inflation to trigger higher interest rates, while uncertainty about trade policies and the Nov. 6 election will moderate economic growth during the second half of the year.

“My forecast is optimistic. Certainly there are risks, but the expansion should keep going for at least another 12 months,” Binnings said.

Gary Horvath, a Broomfield-based economist who writes the cber.co economic research website, said the positive factors for Colorado’s economy still outweigh the negative factors, but he agrees with forecasts by Bailey, the Governor’s Office of State Planning and Budgeting and the Colorado Legislative Council, all of which project that the state and local economies will soften over the next 12 months.

“The biggest negative is that companies are having trouble finding workers with a 2.8 percent unemployment rate. Every business is looking for workers,” Horvath said. “That means that companies are missing out on business opportunities that they could take advantage of if they could find enough workers.”

Possible ballot initiatives that could restrict oil and gas exploration, along with escalating housing costs, also could slow the Colorado economy, Horvath said. But he said strong commercial development along the Front Range and Western Slope, a more diverse Colorado economy that isn’t dependent on a single industry or sector and strong growth in consumer spending and the overall economy more than offset his concerns.

“A lot of (economists) see a recession in 2019 or 2020, but right now there seems to be too many moving pieces to say that,” Horvath said. “There is a lot of concern over tariffs and trade, but the question is whether they are just for show and a negotiating tool or will they actually happen. There is a lot of talk, but in the end nothing could end up happening.”

The Colorado Legislative Council’s latest forecast last month said the state and national economies “are firing on all cylinders and appear positioned to flourish in the near term.” But the council also expects growth to “slow significantly in late 2019 and 2020” due to rising inflationary pressures and tighter labor markets.

Wayne Heilman, The Gazette