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Are we heading toward a recession and is Colorado prepared for it?

Posted: 5:57 PM, Aug 14, 2019
Updated: 2019-08-14 21:08:12-04
Dow drops 800 points

DENVER – After the Dow Jones fell more than 800 points Wednesday, financial talks turned to whether the U.S. is heading toward another recession.

The treasury bond yield curve has tipped, which has historically been an indicator that a recession is coming. Normally, long-term investments earn more than short-term investments. When short-term investments start to earn more, it results in a tipped yield curve.

As of Wednesday morning, the 10-year Treasury bond fell below 1.6 percent, dropping lower than the 2-year bond.

However, Maclyn Clouse, University of Denver finance professor at the Daniels College of Business, said that doesn’t mean a recession will happen immediately. Recessions typically happen between 18 and 22 months after the yield curve tips.

“The recession is not going to start tomorrow,” Clouse said. “There are a lot of things that are going to be happening between today and 22 months from today.”

On a national level

There are a number of things that could happen on a global scale, which could cause a recession. Clouse is keeping an eye on the tariff talks with China, the Chinese economic slowdown, Brexit’s effect on Europe, interest rates in Europe or more.

Clouse said the U.S. has a much more global economy than before, so some of these things could cause or worsen a recession.

Despite the dismal day on the stock market, Clouse said the underlying U.S. economy is strong.

“Right now we have lots of jobs, we have a low unemployment rates, many companies are reporting good earnings,” he said. “The basic economy doesn’t necessarily show signs of moving into a recession, at least right away.”

On a national scale, Clouse believes eliminating some of the volatility would help, particularly when it comes to the tarriff talks.

On a state level

The Colorado Treasury keeps a close eye on the economy and possible warning signs of a recession. State treasurer Dave Young said he has a team monitoring this on a daily basis.

“Our number one job in the treasury is to make sure that taxpayer money is safe,” Young said. “Rest assured that we are taking care of that money.”

When the Great Recession happened, Colorado’s treasury was one of only a handful of states that made money, according to Young.

“We have a history, I think, of wise and safe investment that makes sure we don’t lose any money, and we are continuing that tradition right now,” he said.

By state constitution, Colorado’s Treasury is not allowed to invest in the stock market. Even so, the Treasury is being cautious with its decision, moving to less risky investments at the moment and improving the quality of investments.

On a legislative level, members of the Joint Budget Committee say there’s still more work to be done.

“We are better prepared but not as prepared as we would like to be,” Rep. Chris Hansen said.

Colorado as a whole was forced to make deep cuts during the Great Recession, including $1 billion in cuts to K-12 education.

This time around, there are more reserves built up in the state education fund to help buffer the impacts a recession would have on schools.

The unemployment insurance fund has $1 billion in it right now. Other things like Colorado’s Temporary Assistance for Needy Families have also been bolstered up. The Public Employees Retirement Association, PERA, has also been supported as well.

However, there’s more that could be done to protect the state from a recession. The general fund reserve is the state’s primary way to combat a recession.

“We should probably be at a 10 percent general fund reserve to withstand a moderate recession, so we still have some work to go because we’re still only at 7.25 percent of state expenditures,” Sen. Dominick Moreno said. “We’re going to be looking to build that reserve up.”

Something that could help protect the state is a November ballot question that would allow the state to retain its current tax revenue.

“If that passes were in a much better position to build up state reserves,” Rep. Hansen said. “I think the joint budget committee feels there’s more we need to do to prepare. But, we are hopeful that we’re not going to be in as deep of a recession as we were last time.”

On a personal level

For now, Clouse says he doesn’t think it’s a good idea to start pulling money from the stock market.

Typically, when stock prices are low, he tells people that’s the time to spend the money to buy in, since the prices will be lower.

“There’s great evidence that says the people who panic and pull out when things are bad are essentially going to be selling when prices are low and then, later on, will be buying when prices are high and that’s the opposite of what we say in finance,” he said.

Clouse’s best advice is for people not to panic but to be prepared and pay attention to their finances.