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Amanda Kramer: Every episode, we have an LBIdea or a key takeaway. And the key takeaway here is that the events that have unfolded in the first part of the year have increased the likelihood of a recession and changed expectations for the economy.

Welcome to the Leeds Business Insights Podcast, featuring expert analysis to help you stand out from the herd. My name is Amanda Kramer. We are thrilled to be discussing the state of the economy in a look-ahead with Rich Wobbekind, Associate Dean for Business and Government Relations at Leeds and Senior Economist, and Brian Lewandowski, Executive Director of the Business Research Division at Leeds.

Welcome to Leeds Business Insights, Rich and Brian, and thank you so much for being here today.

Rich Wobbekind: Our pleasure.

Kramer: So, Rich and Brian, last fall, you talked about an expected slowing of the economy and, perhaps, even a recession. How have your expectations shifted over the past six months? Are you still expecting a recession?

Wobbekind: It's really been interesting, Amanda. Six months is a long time in the current economy. Lots of things have happened. We went in expecting a very slow year/potentially a recession, but a very slow growth year. And at the beginning of that six-month period, things were overperforming, and we were wondering if we had underestimated the strength of the U.S. economy.��

But since that point in time, and especially over the last, say, month or so, we've seen quite a bit of slowing in the national economy, and it does look like we're going to have a year with half a percent GDP growth as for the entire year. Whether or not we slip into the actual recession is going to be a technical thing, but we are anticipating that, in the third quarter, we'll have negative GDP reading for the third quarter. But whether or not the metrics will actually trigger the "recessionary label" is unclear at this point.

Kramer: And Rich, last time we spoke with you, you had talked about a couple of economic factors to keep our eye on in terms of indicating whether we might go into a recession. Is that something you might be able to reference again today?

Wobbekind: Absolutely. I mean, while we're spending the most time focusing on, of course, are the employment numbers and the personal income numbers. And those are two pieces that, actually, are measured in terms of whether or not you go into a recession technically. And the employment numbers, while they're slowing, are still positive. The income numbers are still positive. But on the other side of the ledger, one of the things we pay a lot of attention to is overall consumption. And a lot of that has to do with retail sales. And we've definitely seen a slowing in retail sales recently, and that's one of the reasons that people have started to say we are going to go into a recession potentially in the third quarter. This is being, of course, influenced by the Federal Reserve's interest rate policy, which has made borrowing more expensive for the average consumer in terms of auto loans or credit card loans.

Kramer: Thank you very much for that information. In shifting to a recent event, on March 10th, we witnessed the second largest bank failure in U.S.' history, which set off a small chain reaction within the global banking system and led to increased anxiety in the markets. What happened with SVB?

Wobbekind: You know, it's an interesting story. SVB became a very specialized bank for the high-tech sector and had tremendous growth in the period, say, 2018, '19 up to this year. So, they had very large growth. They were actually the 16th largest bank in the country. But their growth was very much focused on high-tech clients. And when the technology sector started to weaken, a lot of those clients needed to pull their resources out or needed the cash that they had at Silicon Valley Bank.

At the same time, although the bank was conservative, in the sense that it held those deposits in treasuries, in treasury securities, the value of those treasury securities that they were trying to liquidate had dropped dramatically in value, as the Fed had raised interest rates in the larger economy. So, unfortunately, they were caught with depreciating assets that they were trying to sell off or needed to sell off to support the withdrawals that were occurring out of the bank, and really triggered a lot of scrutiny after the fact. And people were critical, they should have managed their interest rate policy better.

But it also has created some scrutiny of the bank regulatory system. Historically, after Dodd-Frank was passed in 2008, 2009, after the global financial crisis, when that was put in place, a bank the size of Silicon Valley Bank would have been under more regulation. But there was a reform to that act passed in 2018, and that reform raised the threshold of supervision up to $250 billion. And so, even though they were a big bank, they were not in the regulatory examination set anymore.

Kramer: Oh, really interesting. Thank you for that information, Rich. And, you know, at this point, do you expect the crisis to spread? Or, do you think that the crisis is contained?

Wobbekind: I think it's very much contained. The Federal Reserve's response was really critical in that regard. They met over the weekend, and they backed all of the deposits that were uninsured at Silicon Valley Bank, which had a calming effect on the banking system, in general. And they also instituted something that allows banks that are holding these assets not to have to sell them at a depreciated value. They can borrow money at the full face value of the treasury bond or bill. Had that been in place before, Silicon Valley Bank could have sold off these assets without or loaned these assets at full face value. So, they would've been done well, you know, use that particular facility, and they would've been, probably, been okay overall in the grand scheme of things.

So, the Fed has really calmed that whole situation. That said, it's making all of the banks think a little bit more carefully about credit. And so, it is having an effect on the system, and people are watching that particular piece very closely, whether or not interest rates are actually declining as much as they should or interest rates going up, because the banks are raising their lending standards. And I'm more concerned about, you know, the actual stability of their bank, making it more difficult for households to borrow, making it more difficult for business, small businesses, to borrow. So, there's a lot of watchful eyes on that particular sector right now.

Kramer: Absolutely.

Brian Lewandowski: I think what's also interesting here is that, there's been a large outflow of deposits from banks, in general, even before the Silicon Valley Bank crisis. So, we've seen nearly a trillion dollars flow out of banks in the form of deposits, which creates a different set of problems for the banking sector and for the lending environment. So, we think about tighter credit conditions as being a real headwind for the economy.

��And part of that is banks becoming more risk-averse after Silicon Valley Bank. But also, there's less money for these banks to lend out. And who sort of wins in this situation? We have noted in the data that there's been a flow from the smaller community banks to the largest institutions in the country, I think, in part because there's this view that the largest banks are a little bit more stable or, maybe, too big to fail. And that has some implications for some of our smaller communities in Colorado.

Kramer: So, what are the implications of the collapse on smaller community banks?

Wobbekind: I think for startups, or whatever, they're going to the venture capital realm, there's definitely more interest in the venture capital piece. So, people are taking money out of the banks, as you pointed out. Overall, they're taking money out of the banks. They were actually taking money out of the larger banks before this whole thing happened at a pretty good clip. But why was that happening? Because the banks weren't paying very high rates of return. And an individual could put their money in a money market fund at Fidelity or Schwab or any of the major brokerage places and get them a significantly higher rate of return. So, people were... had much more mobility, technology-based mobility now, than they've had historically, and that is allowing or encouraging the flow of these funds out of the banking system.

Kramer: I think that's a really interesting point.

Lewandowski: If there is an outflow from smaller community banks to the larger banks, it seems that some of the rebalancing that'll happen is those larger banks don't have to pay as high of a rate for money, right? That money is a little bit cheaper, so they don't have to offer the money markets at higher rates because their deposits are already going up. So, what happens at the smaller community bank level? Do we actually see that the bank's cost of borrowing goes up a little bit because they have to lure some deposits back using higher rates?

Wobbekind: And at the same time, they have to be cautious because they're... there's definitely the fear has gone into society of, “small banks may be less stable.” You can see these ads running on television and radio all the time now, the smaller banks trying to assure their clients that they're stable and they're fully funded. But it probably does make it more difficult for these small banks financially, just in terms of the opportunity cost of getting capital. In addition, advertising is a cost that's got to be built in, in terms of them just comforting their depositors. In the process of doing that, it makes an even tighter squeeze on the community banks in terms of profit margins and so on.

Lewandowski: But, just to be clear, there isn't a strong signal out there that community banks are in trouble. In fact, the issues at play in SVB were very, sort of, unique in that they were long on these low-interest-bearing treasuries and they were lending out to the tech sector that had to, sort of, make a call on their deposits. And as they started to withdraw that money, the bank was forced to sell these low-interest rate treasuries at a loss because the price was depressed because interest rates had gone up on the new bonds that were issued.

And just to follow on that just a little bit, the percent of their... of SVB's deposits that were over the FDIC-insured limit was also really unique. So, when we think about community banks' deposits, most of those depositors have all of their money insured by the FDIC. And individuals are already protected by that insurance that's out there. FDIC did rescue all depositors for SVB. But as individuals who have money in community banks, this actually doesn't really affect most of us, because our money is 100% insured. And most community banks are not overexposed to the tech sector. And most community banks have also managed their interest rate risk in a way that these banks are not at the same sort of risk or not facing the same risks that SVB was facing now.

Kramer: Fantastic. So, what is the current status of inflation and interest rates?

Wobbekind: Well, the most recent data that we have on inflation at the national level shows that it's at its slowest pace growth rate since 2021. So, that's good news. We are seeing some slowing, and it's down to 5% again in the most... the national level on the most recent data. So, that's encouraging. But when you look at the sub-components of that, we're still seeing a lot of inflation in the services side of the economy. And that inflation will probably continue to persist, as higher wages are paid in restaurants or any kind of service industry that's out there.

It's going to last longer. It is turning in the right direction. And it certainly makes the consumer feel better when inflation is trending down, but it's well above the 2% target rate of the Federal Reserve. So, in that context, I think the discussion's going to be at the May Federal Reserve meeting, they're continuing to discuss a potential for yet another rate increase. And people are concerned. They've done so much over such a long period of time at this point now that they keep raising. They raised at the most recent meeting. And moving up another quarter of a point when you're potentially on the edge of recession, is that going to push us into recession?

So, there's a lot of dialogue going around this. But I think they really want to make sure that they have nipped inflation in the bud. And, personally, I'm leaning to the fact that they will probably do another quarter of a point interest rate increase at the next meeting. Brian, what are your thoughts on that?

Lewandowski: Yeah, I think that, when we look at Fed policy, the fear or the concern is that the Fed would stop too soon, that if they pause or even make that bold decision to change direction and lower interest rates because of what's going on in the economy, that signal would derail some of the progress that's being made on inflation right now.

But just to compare Colorado's inflation to the national rate, Rich described an improvement in inflation rates. Colorado is witnessing the same pattern, same trajectory — downward — but still high rates of inflation. So, we take a look at the non-seasonally adjusted data for the Denver Metro region. That's how it's reported at the MSA level. And Colorado was at 5.7% in March 2023 year over year, compared to 5% from the nation. So, we're running a little bit hotter. What's interesting about that is we were much higher on the transportation component. And remember, back in late December, early January, our gasoline prices really spiked in Colorado. And some of that's attributable to some production and supply chain issues that were unique to the Denver Metro region. And it looks like those higher fuel prices are still showing up in our inflation numbers. And that's what's pushing us above the national rate. When we take a look at core inflation, which removes those volatile components of food and energy, we're actually at the same rate as the national rate. We're at 5.6%, which again illustrates that those components of fuel are really the difference between us and the rest of the country.

The other component here, we're still seeing pretty high rates of housing price growth. Year over year, it was 7.7%. Nationally, it was 7.8%. But when we matched that up with other data, such as the FHFA Home Price Index, we are one of the leading states on the downside of home price appreciation. So, year over year, still strong growth numbers. But it looks like we peaked in the second quarter of 2022, and we've had two consecutive quarters of home price decline according to the index. So, again, I think more evidence that we should expect the Denver Metro inflation numbers to come down, as we look ahead to the second quarter and the third quarter of this year.

Kramer: Great. Thank you for that information. Now, labor shortage was a major headwind over the past two years. Are companies continuing to face labor challenges?

Wobbekind: So, it's been interesting, with the layoffs that have gone on in the high-tech sector, there seems to be more of a supply there of what had been a very scarce commodity, the more technically trained people that would work in professional and technical service types of jobs. But, that said, we've seen these layoffs from these large companies that are well-documented in the media on pretty much regular basis right now. We've also seen a lot of hiring being reported by ADP reports individual categories of companies or sizes of companies, and they show a lot of hiring occurring in medium and small businesses offsetting the loss in the large businesses in the country.

All by way of saying, in the answer to your question, are they still experiencing it? Yes, but it's gotten quite a bit better for the small and medium-sized businesses because there is this slowdown in terms of big business drawing all these people in. The slowdown of big business hiring is helping other classes of businesses in the economy. And there's a report that's done that shows a relationship of job openings compared. And we compared that to the unemployed people. And while the gap is still very large, there's 1.8 open jobs for every unemployed person in the country. But it has been coming down, it's trending down. We are starting to see that gap close a little bit.

Kramer: Brian, any more to add?

Lewandowski: I think the only thing to add here is that we've had one of the strongest employment growth rates in the country over the last couple of years. And so, it's really been an employee’s market in Colorado, as it has been nationally. So, the opposite of that is that employers have had a really hard time recruiting, attracting new workers. And some of those headwinds in Colorado have also been slower population growth rates, slower net migration to the state, which is, of course, an important source of labor.

But we've started to see that tide shift a little bit. And Colorado still has a very high job openings rate, as Rich was describing, that JOLTS data nationally, Colorado still has a high rate of job openings. And there's still an imbalance between the number of open jobs and the number of available workers or the number of unemployed people within the economy. But it seems to be coming... directionally, it is getting more imbalanced. Still not imbalanced, but we have fewer job openings within the economy, signaling a little bit less demand for workers.

At the same time, we're seeing a much slower hiring rate in the state. So, we went from being a top 10 economy last year in terms of job growth. Our employment grew 4%. We added the most jobs in a single year ever in the state of Colorado — over 100,000 jobs added. And it looks like we hit a wall in hiring in January. So, actually, from December to January, Colorado recorded a decrease in jobs. January to February, we rebounded and added jobs. But one of the slowest paces that we've seen in a while, so only 1.6% growth year over year. So, that's coming off a year where we averaged 4% through the entire year. Now, we're at 1.6%, which sort of begs the question, is it real? Are we really growing at 1.6%? Or, could there be some sort of issue with data collection or seasonal adjustments?

Because the swiftness of that slowdown, matching that up with what we're seeing in terms of job openings that are still posted, like, not everything is exactly syncing up with what we see on the ground in Colorado. But the data that's reported suggests that we're now a bottom 10 state in terms of the pace of growth in February.

Kramer: So, are there any national or global events or trends that you're keeping an eye on that may impact the economy?

Lewandowski: Cryptocurrency took such a front seat in the financial markets over the last couple of years. And I think it's sucked up a lot of capital that went into not the real economy. And now, we've seen a collapse of that market, to some extent, or at least a sharp decline. And I wonder if the timing of that somewhat benefits the real economy, especially given some of the tighter credit standards that are out there

Now, instead of people sort of diverting their attention from the real economy and putting it into crypto, which many of the NFTs... they're not real assets. But they were growing at such a fast rate that it was hard not to put money into that. But with that market not as hot right now, maybe that brings some money back into the real economy, which can support some of the real growth that we need right now, especially given some of the tighter lending standards. Any thoughts on that, Rich?

Wobbekind: You know, I've heard discussions around this. And I think that is potential. My problem is, I think, the people who invest, the largest investors, by far, in crypto are people in their 20s. Are they looking for, how do you make the higher-than-average rate of return types of investments? And... or do they turn and put their money in a bank or into money market fund or something? And I guess I'm a little skeptical that they're going to look for the next... what's the next hot thing? But we'll see where that money actually flows, as we go forward. But I think it's something very interesting to focus on. It certainly diverted a lot of financial assets out of more investible marketplace for a long period of time.

We're still looking at Russia. And that hasn't ended. So, that's still on the table. And certainly, in terms of the sanctions and what it's meant for energy costs in Europe. I mean, that's all playing into sort of the global piece, as is the recovery in China playing into the global piece. So, there are certainly global aspects that you have to pay attention to.

In the U.S., the biggest thing on the horizon in my mind is the debt ceiling and how that's going to get worked out and what that's going to mean and, are the parties going to negotiate? And we're going to have a reasonable solution to that, because it's pretty clear when you look at the numbers that the Congressional Budget Office is putting out there a lot of the social support systems, social security, Medicare, in particular, they're on limited time horizons at this point. They're on, like, nine- or 10-year lifespans at this point, a system that we promised people would be there forever at the rates we've promised. They're going to have to make some very serious decisions here. And there is, of course, skepticism that the two parties can come to some sort of conclusion, agreement, on this topic.

Kramer: So, are there any post-pandemic trends that you're keeping an eye on that may contribute to or counteract the recession indicators?

Wobbekind: Certainly, some of the trends that have had negative impact, if you will, are the way we use real estate. And that's really been a difficult adjustment for the commercial real estate industry. How we do shopping has been a little bit of an adjustment for the retail industry, but really, it hasn't been as impacted as many people thought it would be. But the working from home, the more remote working, has certainly impacted inner cities and inner-city occupancy rates, but also, daytime spending in inner cities. And you don't need to go to Denver, for sure, talking more specifically about Colorado, but you could talk about downtown Boulder, our hometown here, in terms of not having as much foot traffic during the day from people actually in the office buildings coming down onto the streets.

So, those are more in the negative side of the ledger. But then, if you think about the positive side of the ledger, I think we've gotten much better at working remotely. We've really adapted to use of technology more. We've become more efficient in a number of ways. And it helps us recruit people from all over the country. If you have a totally remote job, we can have people working anywhere. And that's one of the things that may be impacting us locally. The cost of living is so high here. People can live in another state that's less expensive and still work "in Colorado." And we do know that's happening. We know companies that are doing that, and hiring technical people in different parts of the country who aren't living here.

Lewandowski: I would add to that, and Rich touched on this with work patterns, but that could be a real headwind in the next year or two, because banks that are holding a lot of this commercial real estate, if you don't have the occupancy, those real estate values are going to be lower when it comes time to refinance or sell those properties. And that could end up being somewhat of a crisis for the financial sector.

The other thing post-pandemic is travel. And in Colorado, we always point to Denver International as a real regional asset for us. And coming out of the pandemic, it was one of the first airports to recover, globally. And for many months, we were the third busiest airport in the world.

Now, we're starting to slip a little bit, because some of the other larger airports are starting to rebound, because the international passengers are starting to come back. So, we're... I think we're sixth or seventh globally now, which is still a really incredible number for us. We're now back above pre-pandemic levels when it comes to passenger traffic — most passenger traffic that's ever gone through Denver International Airport. So, that's a positive sign that the travelers are coming back.

But that mix of travelers is a little bit different, where it's more leisure travel than business travel. And when we take a look at some of the sub-markets in the state, say, comparing our mountain resort communities to downtown Denver, we've seen the tourism industry truly rebound in the mountain resort communities, but it hasn't quite come back yet in downtown Denver, because we don't have all of those business travelers back.

The good news when I talk to convention and visitors bureaus is that there does seem to be a lot of demand in that convention business. So, you know, there were questions during the pandemic, if we would even get together again at conferences, and now we know the answer is yes. But there's still a question about business travel and if that will truly get back to where we were before the pandemic, or are we able to do without some of that business travel because of the Zoom capabilities.

Kramer: Thank you, Rich and Brian, for joining us today.

Wobbekind: It's our pleasure to be here.

Lewandowski: Thanks for having us back.

Kramer: Thank you again for listening to Leeds Business Insights. Don't miss a single episode, subscribe to Leeds Business Insights, wherever you get your podcast. You can also find more information about our podcast series at leeds.ly/LBIpodcast. If you've enjoyed this episode, you may also enjoy Creative Distillation, an entrepreneurship research podcast from the Leeds School of Business. Check it out at pod.link/creativedistillation.

Leeds Business Insights Podcast is a production of the Leeds School of Business and is produced by University FM. We'll see you next time.