Colorado’s economic recovery could be heading for a slowdown, with widely divided opinions on whether a recession is in sight, according to the June 2022 earnings forecast.
Legislature economists told the Joint Budget Committee that the economy was facing “significant headwinds” from high inflation and the reaction of the Federal Reserve, which raised interest rates from 0, 75% last week, the highest in 28 years.
An analyst said economists don’t expect Colorado to enter a recession.
Others, however, put the odds of a recession in Colorado at “one in three” over the next 18 months.
Senator Chris Hansen noted that sales tax revenue will certainly continue to rise, but this is due to inflation and means purchasing power is diminished.
“We need to look closely [this] impact on the state budget,” he said.
On the bright side, TABOR refunds to taxpayers later this year could reach $750 per taxpayer or $1,500 for joint filers, according to the Legislative Council (LCS) forecast, although governor economists are sticking to refunds of at least $500 per taxpayer. or $1,000 per co-registrant.
And other good news: the collection of severance pay, which has been declining for several years, is experiencing an upsurge due to high oil and natural gas prices.
The unemployment trust fund, which became insolvent during the pandemic, is also showing signs of improvement, according to forecasts.
But inflation is clearly the main concern of economists and members of the JBC.
According to forecasts, the engine of inflation, especially on oil and natural gas prices, is the war in Ukraine.
Inflation in Colorado was forecast at 8.5% in May. The main drivers are higher housing, food and transport costs, which together account for more than 80% of the increases that have driven these high inflation averages, according to LCS economist David Hansen. .
Inflation is now outpacing wage gains, leading to lower real wage growth, Hansen said.
Employment, which stood at 3.5% in May, improved and most sectors saw employment levels return to pre-pandemic levels. Economists also noted that employment levels among those aged 25 to 54 are now above pre-pandemic levels, as is employment among those aged 55 and older.
The state is approaching full employment, Hansen said.
Chief economist Greg Sobetski told the JBC he expects the jobless rate to fall further in 2023 – to around 3.2% – but job growth is also expected to slow to around 2, 1% in 2023.
“We expect additional labor force participation,” he said, adding that economists also see a slowdown in labor market departures. “We are concerned about the effects of a rapid tightening of monetary policy on employment.
The counter is the number of job offers – an employer with two job offers could cut to one without significantly affecting the unemployment rate, he said.
As a result, economists are not predicting the state will go into recession, Sobetski said.
In May, Colorado exceeded the number of pre-pandemic jobs by 35,800, according to the forecast. A few sectors have even fewer employees than before the pandemic, mainly local and state government, mining and logging, and hospitality and the food sector.
As for general fund revenue growth, general fund collections have been “impressive” over the spring. The personal income tax forecast was revised upward by $868 million, or 8.2%, in June from March, while corporate income tax revenue was revised upwards to $454 million. Sales tax collections, meanwhile, increased by $171 million.
TABOR refunds will continue over the next few years, and the TABOR prepayment, approved by the General Assembly at its recently concluded session, could reach $750 per taxpayer or $1,500 for joint filers, according to forecasts, adding that there will be enough excess revenue from TABOR to also trigger the six-part sales tax mechanism, a refund that appears on annual tax returns.
Sobetski said the next TABOR repayments, expected at $3.65 billion, will be the highest in state history.
Next year’s budget-makers will have additional disposable income to spend or save above spending levels in the 2022-23 fiscal year, the forecast added.
Sobetski said the increase in general fund revenue will be higher than expected in March, but said growth is “flat,” meaning that if tax revenue is higher, the purchasing power of those income is affected by inflation.
High inflation will make budgeting difficult, according to JBC Vice Chairman Sen. Chris Hansen, D-Denver.
And while Sobetski said he doesn’t expect a recession, that’s part of the downside risks to the forecast, due to inflation outpacing incomes, the Federal Reserve’s response to inflation, and other economic risks, such as war in Ukraine, supply chain disruptions. and the lingering pandemic.
Ultimately, Sobetski said, the general fund reserve was down $335 million from the March forecast, and instead of a general fund reserve of 15%, it’s 13.6%.
General Fund appropriations also fell by $160 million, Sobetski noted. This affects both the current year’s budget and next year’s, he said.
What is available, in addition to required expenditures and other obligations for 2023-2024, according to a scenario developed by economists as well as JBC staff, is approximately $218.8 million.
Governor Jared Polis said in a statement Tuesday that “Colorado’s economy continues to recover faster and stronger and ahead of other states, as new high-paying jobs are added every week and the unemployment rate in Colorado continues to fall.”
On inflation, Polis said the country “is facing bigger headwinds than expected.” The governor blamed global inflationary pressures, including Russia’s war in Ukraine, and corporations ‘passing higher input prices to consumers, driving up energy, food and housing prices. , and the impact of monetary policy response on aggregate demand. “
He added: “Wage growth is expected to continue at a rapid pace as job vacancies continue to outnumber the unemployed.”
The governor’s economists from the Office of State Planning and Budgeting offered a slightly different approach.
“As the labor market continues its strong recovery, high inflation and tighter monetary conditions cloud the economic outlook for the United States and Colorado,” according to their forecast.
They also noted that inflation has reduced wage growth and that Coloradons are no longer able to build personal savings.
OSPB economist Bryan Cooke said the Fed’s decision to raise interest rates by 0.75% was a bit of a surprise, and he pointed to an estimate that there would be 13 changes interest rates in the coming months. As a result, inflation will begin to decline in 2023 from the current annual Denver-Boulder CPI (Consumer Price Index) of 8.2% to around 4.4% in 2023 and 2.8% the next year, Cooke said.
But these Fed changes also increase the risk of a recession, Cooke said, calling the chances of a recession in Colorado “one in three” over the next 18 months.
As for the TABOR early redemption authorized by Senate Bill 22-233, OSPB economists estimated the total 2023 refund at $878 per taxpayer. It will amount to “at least” $500, they said, noting that refunds are based on projected earnings.
The OSPB forecast also warned of lower corporate income tax revenue going forward due to lower profits in 2023, due to tighter financial conditions and slowing economic growth. growth in consumer spending.
The OSPB economists agreed with the Legislative Council economists on increasing sales tax revenue, but with the same caveat.
OSPB revenue from severance pay, which is taxes paid primarily by the oil and natural gas and mining industry, has rebounded due to inflation and could reach more than $300 million in 2022. , the highest level for at least three years.