Colorado business index slumps to three-year low

A monthly index tracking business conditions in Colorado has slumped to its lowest reading in nearly three years as severe drought conditions begin to take a toll on the state economy.

Ernie Goss

The Business Conditions Index dropped nine points to 49.6 in July, the first time the reading has slipped below growth-neutral 50 since 2009.

“With 62 of 64 counties in the state suffering through significant to severe drought conditions, it was not surprising to record an overall index below growth neutral,” said Ernie Goss, director of the Goss Institute for Economic Research in Denver.

Goss calculates the Business Conditions Index for the mountain states of Colorado, Utah and Wyoming based on the results of monthly surveys of supply managers in the three states. Readings range from 0 to 100.

Readings below 50 forecast contracting economic conditions over the next three to six months. In Colorado, the index slipped to its lowest level since it stood at 48.7 in September 2009. The overall reading reflected lower component readings for new orders at 51, production or sales at 53.5 and employment at 59.

“While food production, both on the farm and in the factory, is not a substantial part of the state economy, the backward linkages to other businesses in the state are important,” Goss said. “As a result, I expect the drought to continue to weigh on the economy in the months ahead.”

The Business Conditions for the three mountain states fell more than a point in July, but at 56.1 remained above growth-neutral 50 for a 33rd consecutive month.

Goss said nearly 80 percent of the 116 counties in the three-state region have been declared drought disaster areas. While drought conditions have yet to substantially affect businesses, the situation could change, he added. “Only 14 percent of the firms reported that drought conditions had increased the costs of inputs for their companies’ sales, while almost none reported impacts on company sales. I expect this to change in the months ahead, pulling the overall index lower.”

The overall reading for the three states reflected a lower component reading for new orders at 51.9, but a higher reading for production or sales at 54.7. The reading for employment fell four points, but at 59 forecasts growth. “The mountain states region continues to outperform the U.S. in terms of job growth. However, I expect that advantage to close in the months ahead as regional growth tied to exports and energy weakens,” Goss said.

A component of the index tracking confidence among supply managers in the three states fell more than five points to 47.9. “European economic turmoil, the drought and the ‘fiscal cliff’ all served to push the economic outlook into negative territory,” Goss said.

Supply managers reported adding to inventories of raw materials and supplies for a 32nd straight month, pushing up the component reading nearly two points to 62.8.

The reading for prices paid, a measure of wholesale inflation, edged up four-tenths of a point to 62.8. Supply managers projected prices on the products they buy to increase an average of 2.8 percent over the next six months, Goss said.

The reading for exports dropped a point to 46.5 on a weaker global growth and a stronger dollar that made U.S. goods less competitively priced.

In Utah, the Business Conditions Index edged down a half point to 55 on component readings of 50.9 for new orders, 56.2 for production or sales and 54.7 for employment.

In Wyoming, the Business Conditions Index advanced nearly five points to 60.4 on component readings of 49.4 for new orders, 49.7 for production or sales and 64.9 for employment.