Colorado business leaders' confidence in the economy has dropped for the state and the country as a whole. And while their outlook remains positive overall, there are growing indications that entrepreneurs in these parts seem worried that the good times may finally be about to turn.
"Expectations were tempered a little bit going into the third quarter," says Brian Lewandowski, assistant director of the University of Colorado Boulder's Leeds Business Research Division, whose Leeds Business Confidence Index is widely seen as the gold standard for economic forecasts in the area. "It does pose some warning signs."
Adds Richard Wobbekind, the research division's executive director: "The headline is 'uncertainty.'"
For the latest confidence index, accessible in its entirety below, Wobbekind, Lewandowski and their cohorts asked a panel of Colorado biz heavyweights to share their thoughts about the direction the economy is heading based on six topics: the state economy, the national economy, industry sales, industry hiring, industry profits and capital expenditures.
This graphic shows that optimism among the panelists is down from the second quarter of 2018 to the one just getting under way in four of six areas annually and five of six quarterly.
The panelists' largest concerns arose in relation to capital expenditures and industry profits.
"The capital expenditures number went down by over three and a half points," Wobbekind notes; the specific amount is 3.6. "We're not sure exactly what is causing the decline in that particular number, but it's one of the main reasons the overall numbers went down."
He explains that "capital expenditures are the proxy for business investment, and business investment in the current quarter and beyond helps productivity in the economy, helps to boost salaries in the economy, and is the underlying piece to figure economic growth. If you're supportive of having more productivity, capital expenditures are absolutely critical in that process."
Additionally, Wobbekind goes on, "there was a two-and-a-half-point drop in confidence about industry profits. And those things may be linked. If expectations for industry sales and profits decline, that may be why some of the companies are less optimistic about doing capital expenditures."
The confluence of capital expenditures and hiring is depicted in the following graphic:
Such factors must be put into context, Wobbekind emphasizes. "Employment growth in Colorado continues to go up, and personal income growth jumped significantly. The mainstays of measuring the current economy are very strong. So a little softness in the confidence index isn't a lot of trouble."
Moreover, Lewandowski points out that dips like the current one don't necessarily portend a plummet.
"While a 3.6 drop may look large, we've certainly seen these types of movements in the past," he says. "In the fourth quarter of 2017, we saw a similar movement, a kind of softening of expectations. But then we saw a re-acceleration for the first quarter of 2018. And that was true for the overall economy as well. In 2017, we were seeing slower employment and GDP growth among the components, and in 2018, things are re-accelerating."
For these reasons, Lewandowski goes on, "tempering expectations a little bit going into the third quarter of 2018 doesn't necessarily mean there's going to be a slowdown. But we did see some interesting things in our comments section about headwinds" — the aspects of the economy that could potentially cause growth to flag.
He points out that the top headwind was labor shortages, "which has become a real problem for some companies and industries. That's reflected when you look at the unemployment rate and even wage growth. We're starting to see some real wage growth in the economy and more inflation, and that points to a shortage of labor and scarcity in some other infrastructures."
Here's a graphic showing the other major headwinds:
As you can see, the availability of housing, and the high prices it commands, were significant anxiety-producers for the panelists, as were the tariffs currently being pushed by President Donald Trump's administration. Wobbekind has been hearing plenty about the latter.
"We do a lot of public presentations and interact with business audiences on pretty much a weekly basis," he reveals. "And afterward, people will come up to me and say, 'I can deal with the tariffs if I know what they are.' But not knowing what the tariffs are or what's going to be negotiated and the uncertainty related to those types of policy decisions are creating question marks for businesses in terms of the future. And that uncertainty might be a reason why we saw a decline in the capital expenditure number. People aren't sure what direction policy is going, and specifically what direction a tariff may be going that can impact their industry — and they're going to question whether or not they should be investing in the coming couple of quarters until that gets resolved."
There's less apprehension about policy shifts that may result from the election of a new Colorado governor, Wobbekind believes, since both Republican Walker Stapleton and Democrat Jared Polis are perceived to be business-friendly — though the energy sector continues to be wary of Polis given his previous positions on fracking.
Still, folks who've lived and worked in the state for decades remain aware that the economy won't remain red hot indefinitely.
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"This run we've been on is exceptional,"Lewandowski acknowledges. "In employment recovery and employment growth since the Great Recession, we're third-best in the nation. But Colorado has gone through many boom-and-bust cycles — that's clear. So we have to take a look at the disruptors — what could disrupt this going forward. And that's difficult to predict."
For example, "the last five recessions we've had have all happened for different reasons. We had a financial/housing crisis. Prior to that, there was the tech bust. Prior to that, it was a savings-and-loan crisis. Prior to that, it was energy, and prior to that, it was another bust related to energy. So the question is, what will be the driver of the next business cycle and how exposed will Colorado be to that cycle? Colorado was really hot in the late 1990s because of technology, and that hurt us in 2000, 2001, with the tech bust; that's why we lagged in the recovery compared to many states nationally. I think you can make a compelling argument that one reason Colorado recovered early from the Great Recession was our new energy footprint coming out of the Denver-Julesburg basin. But if the next crisis is an energy crisis or a tech crisis of some sort, we have a lot of exposures in those areas."
In the meantime, questions remain. "Do we have enough housing to grow at the pace we're growing at?" Lewandowski asks. "Do we have enough office or industrial space? Are the roads good enough for people to commute to work without staying in their car for an hour? Do we have enough people to hire?"
Those answers aren't in yet, but the latest report is. Click to read the Leeds Business Confidence Index for the third quarter of 2018.