March 17, 2023
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#1 — Is the Economy a Top Seed or an Underdog?
In part due to high rates of inflation and interest, the US and Colorado continue to see positive, but slowing GDP growth. The slowdown in growth can be attributed to declining investment in residential real estate and business. The pace of business spending slowed from 9% in 2021 to about 4% in 2022, mostly as a result of significant decreases in residential investment because of high mortgage rates from the Fed.
Additionally, the pace of consumer spending slowed from 2021 to 2022 — particularly in goods. During the pandemic, consumers were spending more on goods, rather than services, which were largely shut-down or limited as a result of COVID-19. The balance of spending is returning to pre-pandemic ratios, when consumers spent more on services.
The Silicon Valley Bank failure raises some concerns about financial stability, which increases our risk of recession. However, Silicon Valley Bank is an outlier in the banking sector for many reasons, including niche clientele and its over-reliance on low-interest bonds that have suddenly become more expensive as the Fed continues to raise interest rates. It is unlikely that the Silicon Valley Bank run will have reverberating effects throughout the industry.
#2 — Labor Market Going Hard in the Paint
Colorado’s unemployment rate sits at a very low rate of 2.8%, and is one of thirteen states that has an unemployment rate below the national average. Colorado has the third highest labor force participation rate at 68.1%, which is well above the national rate of 62.4%, and job openings still remain historically high. There were two job openings per person seeking employment in Colorado from March to December 2022.
Rising job-quits and elevated job openings still means a strong labor market despite signs of a recession and tightening monetary policy. The leisure and hospitality sector led the way in job growth since last January.
#3 — The Budgeting Playbook under TABOR is Simple, Yet Very Difficult
Revenue projections were revised upward since the December Forecast, but that doesn’t mean more money for the General Fund– simply, it means higher TABOR rebates. Relative to the December forecast, revenue above the Ref C Cap has been increased from $2.47 billion to $2.75 billion in FY2022-23 and from $1.53 billion to $2.02 billion in FY2023-24.
Ironically, the TABOR revenue cap (Ref C), which makes it very difficult to adequately fund schools, roads, higher education, and healthcare, actually makes it very simple to plan since legislators can only budget to the Ref C cap. Because of this, we can already look at the budget picture for 2024 and 2025: and it doesn’t look good. Just maintaining current spending levels (i.e. keeping up with inflation and caseload growth) looks ominous in the out years. The extra revenue available this year makes it a good time to do one-time budget spending, like capital construction, but adding on-going expenses (like hiring another teacher) is challenging this year since it’s unlikely it will be available the next year.
#4 — Have You Saved Anything for the Second-Half?
Household personal savings jumped almost 30 percentage points during the pandemic as a result of federal and state action through direct cash transfer payments, as well as Colorado’s advanced rebate checks sent out last fall. As those transfers dwindled, household savings rates have fallen quickly from almost 35% in 2020 to 4.7% now. This is below the historical average rate of 7.5%; dropping savings rates indicate just how much high inflation is eating into household budgets.
As a result, many individuals and families are turning to credit cards to supplement their income and pay for necessities. Credit card payments as percent of disposable personal income increased in the first quarter of 2023 after falling year after year since the Great Recession. As far as savings goes for the state budget, it looks like we will finish this year’s budget (FY 2022-23) with a 16.6% General Fund Reserve.
#5 — Home Field Advantage?
Colorado’s home prices peaked midway through 2022 as high household savings and low interest rates fueled the growth. But both interest rates and savings have quickly swung the other direction in 2023.
Home prices in the Denver Metro area are down 15.7% since the May 2022 peak. Two factors will moderate further drops in home prices though: new home listings are falling and new home construction is slowing. Colorado’s homebuilding permits are down 30% from the year prior. The average 30-year-mortgage rate jumped from 3.8% in March 2022 to 6.7% in March 2023 driven by the Federal Reserve’s eight interest rate hikes. This has had a huge impact on what homebuyers can afford. To put that into perspective, a $2,050 monthly mortgage got you a $550,000 home. Now that same monthly mortgage gets you a $427,500 house.
