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Bracing for a downturn: As recession fears mount, business leaders say Boulder area well-positioned

According to the slogan on a popular t-shirt, “Whatever doesn’t kill you will make you stronger. Except bears. Bears will kill you.”

For many investors and executives alike, last week’s plunge into a “bear market” seemed pretty deadly.

The term is used by Wall Street when an index such as the Standard & Poor’s 500 falls 20% or more from a recent high for a sustained period. Last Monday, June 13, when the S&P 500 fell 3.9%, closing down more than 20% below the all-time high it set in January, the markets earned the “bear” label. That, in turn, heightened fears of even harsher actions by the Federal Reserve to combat spiraling inflation — and worse, anxiety about a new recession as soon as next year.

Even if that happens, however, some of the area’s experts in economics say they’re bullish on believing the Boulder Valley can bear it.

After all, the area bucked some gloomy national trends during the technology downturn of 2002, the Great Recession of 2007-09 and the COVID-19 shutdown in 2020-01.

“I would expect that to be the case again,” said Nick Krenz, associate vice president of Brightside Wealth Advisors in Boulder. “Not that we’re completely immune to any economic fallout —that’s simply not true — but I think we’re more sheltered than a lot of areas of the country, I think it’s fair to say. It’s a highly desirable place to live for a lot of folks. It attracts a lot of people here. There are lots of good jobs in industries that can and should sustain even through a longer recession.”

On June 15, in an aggressive move to tame mounting inflation, the Fed raised its key interest rate by three-quarters of a point, its largest hike in nearly three decades, and signaled more hikes might be coming.

Although Krenz said the investment community thinks there’s “a decent chance” of a new recession, “I think there’s a case where we avoid one as well.” He said the traditional definition of “recession” is two consecutive quarters of negative growth in the nation’s gross domestic product.

“The GDP for the first quarter was revised down, so it’s possible we’re in the middle of a recession right now,” he said. “We may not know it for a few months at this point.

“If we do enter a recession, we don’t think it’s going to be a long one just because of the state of our financial system in general,” he said. “I do think that Boulder can sustain and should survive pretty well through a recession, just like it did 15 years ago.”

Brian Lewandowski, executive director of the business research division at the University of Colorado Boulder’s Leeds School of Business, agreed that “Boulder is a pretty resilient community. Over the last few recessions, sometimes we’re hit almost as hard as the nation but other times not.

“We have a lot more high tech here, we have some really impressive federal labs that are here; that also provides some stability,” Lewandowski said. “Those federal labs have high-paying jobs, really high-skilled workers. We’ve got a pretty thriving startup ecosystem in Boulder. Having high-skilled, high-wage, high-tech jobs has helped Boulder out.”

John Tayer, president and chief executive of the Boulder Chamber, noted that the “diversity and depth of our industry sectors has allowed us to maintain a pretty stable business environment while many other more singularly focused economic ecosystems may face more challenging times depending on what industries are most affected. That’s one of the reasons we’re always looking to support a wide spectrum of industries in Boulder and see that as a significant asset of our economic vitality.”

The chamber sees little need to coach its members on how to survive a recession, Tayer said, because “the businesses that we work with have a variety of strategies to economize and to prepare for economic downturns. We don’t claim to have any specific expertise in that area because we know that we’re dealing with business professionals. But we stand available to support them with access to financial resources and business consulting that can help them to navigate through difficult times.”

The then-newly formed Ziggi’s Coffee chain weathered the depths of the Great Recession’s difficult times, so founder-owner Brandon Knudsen isn’t too worried about fending off another one.

“I was in business in 2008 but certainly not at the scale we’re at now,” he said. “I’ve seen some pretty low times. I think the difference is we were in survival mode, not growth mode, at that time. We were pretty fortunate in the coffee space.

“I feel confident,” he said. “I know there’s a lot of people who are concerned, but I’m not concerned about it.”

He’s so confident, in fact, that, fueled by a “crazy” surge in business during the pandemic, he plans to add 50 more locations in the next 14 months. “We’re at 51 now, and we’ve got over 50 that are in some phase of getting ready to start building or building,” Knudsen said, adding that he’ll do it cautiously.

Ziggi’s recently moved its headquarters from Longmont to a new building in Mead.

“From a company standpoint, we’re going to grow,” Knudsen said. “At the store level, that’s where we have to be really careful and make sure that we’re strategic, make sure we provide a great value, because people are going to get real picky. They’re still going to get coffee, but the days of ‘it doesn’t really matter what you do, people are going to get coffee’ are gone. You’ve got to step up your service. You’ve got to be that much better at everything you’re doing to make sure that people still come in.”

During a downturn, he said, customers seem to adapt. “Folks with 20-ounce drinks maybe move down to a 12-ounce, and the folks that were getting a small drink, maybe they skip it for a couple days. But the benefit for us is the people who are going out to dinner still want to have that interaction, especially after the pandemic. Nobody wants to hunker down in their home. So I think in the coffee space we can provide that, so people who maybe were going out to dinner maybe have cut back, but maybe they’re going out to get coffee instead.”

That process of paring down is common if a recession looms, Lewandowski said.

“What we often see is some retrenching, where consumption behavior changes a little bit,” he said. “So maybe you end up rethinking the vacation you were going to take, just because you are trying to prepare for a storm. So you hang onto more of those dollars than you normally would, expecting some sort of turbulence.”

Even though Knudsen says his company is “positioned to weather the storm pretty well,” he admits that the current spate of inflation is daunting.

“Costs are insane,” he said. “The price of a cup has tripled. A plastic cup that was eight cents is now a quarter or 30 cents or more. So there’s been some challenges. But we predicted some of it. We had some price increases at the beginning of the year to help offset that. The price of the drinks has to reflect the increased cost to us. The margins in coffee aren’t as huge as everyone thinks they are from the outside. There’s a lot of overhead and those sort of things. So we’ve just been adjusting prices accordingly.”

Supply-chain woes? For Ziggi’s, not so much.

“As far as getting product, we have incredible relationships with our vendors. They’re very close. I consider all of them friends,” Knudsen said. “So vendors have to make a choice when there’s a limited amount of supply. They kind of pick and choose who they’re going to give their products to. We pay our vendors on time, we treat them well. We treat them like family. So we’ve been really fortunate that we haven’t had many disruptions.

“Alcohol and coffee are recession-resistant businesses.”

Knudsen said a recession now or next year could mean a “perfect storm” for some businesses that prepared for a post-pandemic buying surge. “You’re begging to get things, you’re begging to upgrade your kitchen, you’re begging to put new hardwood floors in,” he said. “So my fear is that all these local people have been stocking up their inventory and getting ready — but then all of a sudden the orders just go away because people tighten up. I worry about those type of things.”

In Boulder, Lewandowski said, the presence of CU Boulder taught the city some lessons during economic downturns.

“What was interesting during the pandemic recession was the impact of the university,” he said. “The university is usually a pretty stable employer, and a pretty stable source of economic support because of all the students that are here and the spending of the university. When classes were not held in person, that had a short-term detrimental impact on the Boulder economy,” he said. “If we head into another recession, assuming that it’s not a pandemic or a health crisis, the university returns to being one of those stabilizing forces in Boulder because we are still open and the students will still be here.”

From an employment standpoint, he said, Boulder’s recovery “was faster than any recession in the last 40 years —faster than the tech recession, faster than the Great Recession, faster than the savings-and-loan crisis. You’d have to go back to the ’80s to find a recession where we regained our job losses as quickly as we did in this event. And the job losses were much deeper in this event.”

Boulder and Boulder County reached peak unemployment rates of 10% and 9.9% in the second quarter of 2020, Lewandowski said, based on non-seasonally-adjusted numbers and a survey of households. Today, he said, the city of Boulder has a 2.1% jobless rate, while the county is at 2.4%.

What can investors do now to prepare for a recession, if it should come?

“In terms of what to do and how to position,” Krenz said, “our advice to our clients is always to fall back to the plan, whether or not you have a literal financial plan or work off of a budget. For consumers, make sure you’ve got cash on the sidelines. For retirees, have two to three years of cash outside the market if possible, where you can withstand a sustained market decline. We’ve certainly been there for the first part of this year, and we could continue that for the rest of this year, maybe the better part of next year, before we see any meaningful climb out of this market selloff that we’re in right now.”

For businesses, Lewandowski said, “what we might see, what we sometimes see, is rethinking investment. And so maybe it’s not the right time to invest in a new plant or new software or new people. And that’s where we see some retrenching on the business front, where they rethink some of those expenditures they might be making, thinking that demand for their goods or services might go down in the short run.”

Still, the investment adviser and the economist believe this recession, assuming it’s coming, won’t be as bad as previous ones, especially here.

“Comparing to the last major one that we went through — ’07, ’08 — there were a lot of things broken, in the economy and the financial markets then — the housing market tops among those,” Krenz said. “Crazy lending standards led to a lot of overlending and highly leveraged home purchases. That was a recipe for disaster. The markets getting tied up with that and other risky investments in derivatives really threw the financial system of our country into chaos for a period of several months. We don’t see that kind of underlying damage to the economy or to the financial system that we have right now that would lend itself to an ’07-’08 type of recession. Relatively speaking, the financial markets of this country are relatively strong right now. The average corporation, for better or worse, is recording record profits or near-record profits, and on average are not as leveraged as they were 15-plus years ago, and have a substantial amount of cash on the sidelines. The general financial markets, systems and infrastructure in our country are much stronger and in a different place than they were ’07 and ’08.

“If we are led into an inflation-led recession, right now or in the near future,” Krenz said, “I think because of the state of the underlying market, it will be relatively short and relatively shallow in terms of the potential damage from any impending recession that may be looming out there for us.”

Although rising interest rates, spiraling inflation and fuel prices, and other impending moves by the Fed are “warning signs that we’re keeping a close eye on,” Lewandowski said, “there is still a lot of positive news in the market if you take a look at the labor market. It’s really strong. We’re still seeing strong hiring. We’re seeing a lot of job openings, almost record job openings. So from that standpoint, I think that’s a reason for some remaining optimism.

“If we do enter into a recession, I think there is discussion about it being a less severe recession than what we saw, say, during the financial crisis of 2007 to 2009, because the banks are more financially stable than they were going into that recession. We also see households on a much more stable footing when we take a look at the debt-obligations ratio or financial-obligations ratio, so money that is committed to servicing debt from households is still at a near-record low level. Not only are banks well capitalized but households are more able to weather a downturn than they were during the Great Recession.”

When the National Association for Business Economics recently polled its members about the likelihood of a recession by next year, more than half put the chances at greater than 25%.

“I started to read that ‘more than half’ and thought, jeez, that’s kind of a lot,” Lewandowski said. “And then I kept reading and it’s not that they put the likelihood at 100%. So that sort of softened it for me too. I don’t think that that group of very informed individuals is necessarily saying that a recession is certain.”

CU Boulder does its own Leeds Business Confidence Index, a quarterly survey it’s been conducting for 20 years. The latest survey was launched June 1 and just ended. Lewandowski said he asked that same question of Colorado business leaders and will be intrigued to see their answers, especially in the wake of the new bear market.

“It’s always a good idea to prepare for economic turbulence,” the Boulder Chamber’s Tayer said But just as President Franklin D. Roosevelt declared during the depths of the Great Depression in 1933 that “the only thing we have to fear is fear itself,” Lewandowski noted that the risk of preparing for a recession is that “if people start to believe it’s coming, it’ll come because people will start to change their behavior in expectation of that storm coming — and then it becomes a foregone conclusion.

“They’re making a totally rational decision,” he said, “but the fear of it happening can actually make it happen.”