Colorado economic forecast uncertain amid national banking woes

Uncertainty in the international financial sector hung a question mark over Colorado’s financial outlook Thursday.

The legislature’s Joint Budget Committee, which sets the state’s budget, heard economic forecasts from both legislative economists and the Governor’s Office of State Planning and Budgeting on Thursday. The quarterly forecast is the last before the legislature sets the budget for the upcoming fiscal year.

Presenters highlighted overall uncertainty due to continuing inflation and attempts to rein it in via higher interest rates and the ongoing war in Ukraine. The collapse late last week of Silicon Valley Bank and subsequent tremors across the financial industry underscored it.

The brouhaha in the financial sector helped spur Goldman Sachs to up its prediction of a recession within the next 12 months to 35%. On Thursday, just hours before the state economic forecast presentation, the Washington Post reported that Wall Street and federal regulators were working on a plan to stabilize another distressed institution, the San Francisco-based First Republic Bank. Earlier that day, Treasury Secretary Janet Yellen testified before the U.S. Senate that the nation’s banking system “remains sound.”

Legislative economist Louis Pino acknowledged that the forecast couldn’t include the rapidly changing circumstances in the financial industry. The economic forecast report notes that “whether this bank closure is a symptom of a larger problem remains unclear.”

“We are aware of the recent bank crisis unfolding right now,” Pino told lawmakers. “The extent of the shock to the financial system is unknown at the time of publication.”

He warned that it could further destabilize an economic outlook that predicted slow growth. Otherwise, inflation and continuing increases to federal interest rates and shocks to the housing market continue to top concerns.

Prior to the bank failures, the legislative economists predicted the risk of a near-term recession was “receding,” though legislative chief economist Greg Sobetski declined to predict the odds of one.

The economists with the Governor’s Office of State Planning and Budgeting said the risk of recession is still “elevated,” but that the state would be well positioned to weather it.

“The positive news here is all about the labor market,” Bryce Cooke, deputy director of the office, said. “We do think there are going to be job losses” but that unemployment rate would still be less than 4%. It is currently 2.8%. During the Great Recession, it peaked at 9.4% in October 2010, according to federal data.

The state budget is expected to grow. Sort of.

Despite the uncertainty, forecasters predict ongoing revenue surpluses beyond the cap instituted by the Taxpayer Bill of Rights in the state’s constitution. This fiscal year, each of the forecasts expects the state will collect upward of $2.5 billion above the constitutional cap on revenue.

Each forecast expects to break the cap in subsequent years, though they differ on estimates of just how much. Under TABOR, the state needs to return excess collections to voters, though it can also ask voters to keep the money via an election.

While that seems to paint a rosy outlook, state Sen. Rachel Zenzinger, an Arvada Democrat and chair of the budget committee, said it’s more complicated. Rising costs and the inflation-plus-population growth formula behind the revenue cap means the state may not keep up with actual costs.

“It’s a paradox because here we have the revenue, it is growing, we have TABOR refunds that will be expected, but at the same time we will not be covering the rate of inflation plus population with existing services,” Zenzinger said.

She said the forecast instead points to a lot of volatility, and an overall economic picture of the budget slowly tightening, but not yet at a crisis level.

“We need to shore up essential functions of government and make sure we are not growing our ongoing costs at a higher rate than we can sustain,” Zenzinger said.