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Colorado Economic Update: The COVID Edition
Colorado Economic Update:
The COVID Edition
BY NATALIE ROONEY
Data confirm what we already know: The Colorado economy has been hard hit by COVID-19. Yet, some good things are happening when you dig in, take a look at the numbers and hear what the Centennial State’s economic experts have to say.
As the Associate Dean for Business and Government Relations, Senior Economist, and Faculty Director of the Business Research Division at the University of Colorado, Boulder, Richard Wobbekind oversees the quarterly release of the University of Colorado Leeds Business Confidence Index. Typically, economists rely on monthly data to make their forecasts and predictions, but COVID19 has changed how they examine data and make their forecasts due to rapidly changing scenarios.
“This has been so unusual,” Wobbekind says. “The government never shut down the economy before.” Forecasts based on monthly data became useless as the situation changed daily. “We began doing ‘COVID economic discussions’ instead,” Wobbekind says. “There is so much uncertainty. All we can continue to do is say what we think is happening from what the data tell us.”
Economists began relying on high frequency data, which is anecdotal and not as comprehensive but provided a better snapshot. “We were trying to see how bad things were getting, but on the flip side, as things were recovering, that high frequency data was helping us see weekly when things were recovering without waiting for monthly numbers,” Wobbekind says. While the Q3 data from the Leeds Business Confidence Index looked dramatically better than Q2, the Q3 index score of 44.3 still indicated an overall pessimistic outlook. For comparison purposes, a score of 50 is considered neutral. The index was at 50.8 in the first quarter of 2020, the last quarter recorded before the pandemic. The index declined to its lowest recorded level in its 17-year history — 29.7— in Q2. Q3 Index respondents didn’t feel positive about capital expenditures or hiring. In fact, they were the two lowest readings in the survey. Capital expenditures are showing negative growth nationally for 2020 and are even down in 2021 models, Wobbekind notes. “Capital expenditures and hiring are where you get future growth. Those two things and the magic of them working together are where you get your GDP growth. Sales and profits are good in Colorado and nationally, but the survey says companies aren’t going to invest and hire. They’re going to wait and see.”
COLORADO’S DRAMATIC JOB LOSS
Prior to COVID-19, the only weekly data economists examined came from initial unemployment claims, which are released each Thursday for the prior week. Typically, Wobbekind studies a four-week moving average of those numbers. “You don’t want to hang your hat on one week,” he says. But the virus changed that thinking. “Weekly numbers showed us how quickly things went bad and how much better they’re becoming over time.”
Weekly unemployment data also show continuing claims. “That gives us a sense of how many people continue to be on unemployment,” Wobbekind explains.
Colorado’s unemployment rate hit 11.3% in April, its highest-ever level since the state began tracking unemployment levels in 1976. The prior record was 8.9% in the fall of 2010, during the fallout from the Great Recession. In May, 21,000 jobs returned to the hardhit leisure and hospitality sector - still far off the year over year numbers and down almost 38 percent compared to 2019. “The pandemic has been devastating for that particular group,” Wobbekind says. High frequency data provided additional important information, including flight volume from Denver International Airport (DIA). “DIA was sending us its weekly flights and TSA volume which we’d normally never use,” Wobbekind says. Open Table began producing weekly state level restaurant reservation data. As of mid-July, Colorado’s unemployment rate stood at 10.5 percent, more than 2.5 percentage points higher than at the worst point in the Great Recession.
WHAT WILL RECOVERY LOOK LIKE?
Wobbekind says the original expectation of many economists was a V-shaped recovery that would take six months to get the U.S. back to pre-COVID numbers. Then it appeared as if the recovery might be W-shaped where certain industries, but not all, might bounce back with decent job numbers. Now, as uncertainty about a second coronavirus wave persists, thinking has evolved to a recovery that looks like the Nike swoosh symbol. “A second wave and people showing fear again could really slow down the recovery for some industries, like restaurants,” he says. “Studies tell us that a lot of small businesses, especially restaurants, have very little operating capital. They can only operate for a few months without reserves before they fade into the distance.” The Colorado Department of Labor and Employment (CDLE), reported that Colorado’s unemployment rate rose slightly to 10.5 percent in June. During the same period, the national unemployment rate declined 2.2 percentage points to 11.1 percent. As of the last week of June, Colorado had the 34th lowest unemployment rate in the U.S. Additional data points for June:
Colorado’s labor force grew by 100,200 to 3,169,300. The labor force participation rate rose by 2.1 percentage points to 68.7 percent. But it is still below the February ratio of 69.4 percent.
The number of individuals employed in Colorado increased by 80,100 to 2,835,500, which represents 61.4 percent of the state’s 16+ population. While Colorado’s employment-to-population ratio has improved since April, when it was 58.3 percent, it still falls well below the
February level of 67.7 percent. • Colorado counties with the highest unemployment rates in June were: Gilpin (19.7%), San Miguel (17.1%), Summit (16.6%), Pitkin (16.0%), and Eagle (15.7%).
County-level unemployment rates are not seasonally adjusted and are directly comparable to Colorado’s June unadjusted rate of 10.7 percent. Other startling statistics demonstrate COVID-19’s impact on Colorado. In 2019, 64.5 million passengers traveled through DIA. In April 2020, traffic was down 95 percent - and down 86 percent year over year. Colorado’s economy is trending upward faster than much of the nation even with its heavy reliance on leisure and hospitality. About half of the jobs lost during the first half of the pandemic have returned in the health care sector, but only 16 percent have returned in accommodations and food services, according to data from the Colorado Department of Labor and Employment. More than 100,000 Colorado businesses received money from the federal Paycheck Protection Program (PPP). “That helps with a couple of months of survival,” Wobbekind says. “But I don’t know when or if we’re going to see another wave of PPP. If there’s another wave of the virus, the picture isn’t going to be pretty.”
UNCERTAINTY TINGED WITH BRIGHT SPOTS
Patty Silverstein, President and Chief Economist for Development Research Partners, encourages CPAs to understand how their clients and their clients’ industries are doing. “One of the key measures we look at to determine the direction of the economy is what’s happening with employment,” she says. “There are sectors that have been hard hit, but other sectors are very resilient.” Silverstein says people are trying to figure out where to take their skill sets and how to fit back into the economic system. High touch industries like leisure and hospitality, which include restaurants and lodging, arts and culture, and personal services, remain the most challenged. “When we don’t know how the pandemic is moving, people in these fields don’t know whether their skills will be demanded two months from now or twelve,” she explains. “It’s a really challenging time. During the Great Recession, we knew that business, as a whole, would eventually improve, but this is a public health crisis. We’re constrained to operating within the health restrictions, and it’s not predictable.” A few key areas are driving economic activity in the Metro Denver and Front Range areas. “The tech industry is vibrant, especially with the move to remote work,” Silverstein says. Colorado already had the highest concen
tration of remote workers – 8.6 percent according to the Census Bureau – prior to the pandemic. “High tech companies had to kick into high gear to ensure people were connected. Fortunately, we have a high concentration of those companies located here, so that was a bright spot in our economic activity,” she notes. Additional workers will continue to be needed in health care as elective surgeries resume. “Our health care workers have been rock stars throughout,” Silverstein says. Denver also has a strong concentration of bioscience companies which have ramped up to find cures and treatments for COVID-19. “Companies are doing what they can to research and be ready to mass produce whatever is determined as the solution,” she says. Even aviation, which was nearly crippled by the dramatic drop in passenger travel, has seen increases in air cargo. Another positive: Wobbekind says employment offers for many CU graduates haven’t been rescinded but rather have been delayed. “They asked students to start in September instead of June or July, so they
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were pushed back, but not pulled.” Part of the delay has to do with the difficulty of onboarding new employees in a virtual environment. “It’s just not the same as being across the hall and able to talk to them right away when you’re trying to mentor them as they learn,” he says.
COMMERCIAL REAL ESTATE: THE END OF OFFICE SPACE?
What happens to commercial office space in a remote work world? Will buildings sit empty while we all continue to work from home in our jammies? Probably not, says Silverstein. While business leaders might wonder if they need as much space and consider reducing costs by continuing remote work, life won’t continue this way forever. People have proven they’re effective working from home, but many can’t wait to get out of the house and back to the office. Co-working and shared office spaces were trending upward prior to the pandemic which pointed out the greater need for flexibility, Silverstein says. “Right now, we just don’t know what office space will look like. Will companies need to keep larger offices because there’s now a need for more square footage per employee?” she asks. “Space per employee shrank for a while, but spaces might need to grow because of social distancing for those who return to the office.” The demand for industrial space has grown as the logistics industry has expanded, and that’s a trend Silverstein says we’ll continue to see. The Metro Denver marketplace has long served a lot of logistics operations because of the convenience of the I-70/I-25 crossroads. “People have become accustomed to ordering something and having it on their doorstep in a couple of days. The only way you can do that is to have logistical centers move closer to the population,” she says. “While it made sense for logistical centers to be concentrated near DIA and metro regions, you’ll see logistics operations spreading across the state.” The commercial spaces hardest hit ultimately will be retail brick and mortar stores. While there’s still a human desire to touch and feel items before purchasing, people are discovering they don’t need to do that as much or as often, Silverstein says. Restaurants also are going to be highly challenged until a cure is found and people feel comfortable returning. “Those marketplaces in particular are highly susceptible to business failure. It’s sad. Those are so many of our entrepreneurs who moved into that sector because they were following a passion for cooking or selling a product. It’s an industry filled with passion and one that is going to be challenged. It’s just so important to know your clients, know whether they’re the ones who will struggle, or if they’re operating in a bright spot.” bright spot.”
WILL THERE BE A 2020-2021 SKI SEASON?
Face it, Colorado. Your active selves want to know if you’re going to be able to ski this winter. Wobbekind says models predict that the tourism industry will take the longest to bounce back. Vail Resorts’ Epic Pass includes free Epic Coverage for the 2020-2021 season – which provides refunds associated with certain personal events, including illness, job loss, and injury. It also expands coverage to protect from certain resort closures, such as any due to COVID-19. Will that be enough to tempt skiers to purchase? Models also predict that convention and tourism business won’t return until 2021 as even smaller meetings have been cancelled for 2020. “I don’t think we’ll see bounce back in tourism and conventions until the middle of next year or beyond,” Wobbekind says. “So much of it depends on people’s comfort with flying and how quickly we open air traffic to international travel.”
CONSULTING THE CRYSTAL BALL
Thanks to a general recovery in Q3, pent up consumer demand, and a high level of unemployment compensation from the state and federal levels, a lot of cash is floating around out there right now, says Wobbekind. “But if you can’t partially or completely reopen venues, there’s nowhere to spend.” This is easily seen in the high monthly savings rate. The National Bureau of Economic Research dates the COVID-19 recession as beginning in February 2020. The energy industry already was suffering mightily as we entered 2020 thanks to downward pressure on energy prices. Slowing job growth of 40,000 was predicted for Colorado this year. Now, with all of the uncertainty, Colorado likely will end up with job losses from 120,000 to 150,000, a total Wobbekind calls brutal. “That’s more in one year than the entire job loss from the recession,” he says. “It will take a long time to get back to the same employment levels as before.” The current expectation is that won’t happen until the second
half of 2022. Currently, the U.S. unemployment rate is predicted to be under 10 percent by the end of 2020 and under six percent by the end of 2021 with Colorado’s rate expected to be lower than the U.S. rate each year. U.S. unemployment was 3.5 percent before the COVID-19 pandemic began, and Colorado’s unemployment was 2.5 percent. Colorado was in a strong position prior to COVID and was one of the top five states for economic and job growth. Now, the Centennial State is sitting somewhere in the top 15. Mountain communities that rely heavily on tourism have been particularly hard hit with some counties having close to 40 percent of their employment in tourism in the high country. “Since tourism has been hit hardest, those areas have the toughest issues to address,” Wobbekind says. In general, Silverstein says analysis points to recovery at some point in 2021. “My view was and remains that the recession would last a minimum of four months and a maximum of eighteen months. It’s looking more like eighteen right now. We’re pegging May 2021 as when we really start to see some inflection points in activity.” She says this is mainly because of the need for a vaccine or cure, which takes time for trials and production to be in place. “That’s still a long way off. Our economy isn’t going to move into a solid position until the health issues move into a solid position.”
