Last month, I talked in detail about the outperformance of gross domestic product, or GDP, in the third quarter of this year.

It’s interesting that despite the elevated economic growth rate, consumer sentiment continues to deteriorate.

The final November index came in at 61.3, historically a very low level. If consumers still are spending (retail sales are holding steady), the unemployment rate is consistently below 4% and personal income has increased (at least on a nominal basis), why is sentiment still dour?

It’s primarily about inflation. Although we now have slowing in the inflation rate to 3.2% in October from 3.7% in September (technically called “disinflation”), it doesn’t change the fact that virtually all items are significantly more expensive than they were pre-pandemic.

The Colorado Department of Labor and Employment recently did a CPI analysis; its comparison showed January 2019 food items are 15% to 30% higher in price (e.g., meat is 30% more expensive).

Food categories in general are up about 25%, as are transportation (+35%) and shelter costs (+23%) with Denver’s CPI consistently higher. Locally, we might not be as expensive as Denver, but we aren’t that far off, either, with our regional cost of living index at 107% of the U.S. average.

The sticker shock across the coun

try has elevated consumer expectations on inflation to a 4.5% rate for the coming 12 months and to 3.2% over the next five to 10 years — both well above the Fed’s desired target of 2%. If you were to chart consumers’ expectations on inflation and actual inflation as it materializes, they are remarkably close. This has me a little worried that inflation might be unpredictable over the next few years.

Homing in on shelter costs, I recently did an article on our local multifamily market and how it is now categorized as “soft,” according to the Department of Housing and Urban Development, primarily because of a high vacancy rate. This hasn’t caused rents to come down much, but it does mean renters can look for concessions such as lower security deposits or one to two months’ free rent.

Our economic dashboard online now has apartment rental information for Colorado Springs, as well as Denver and Salt Lake City for the sake of comparison. The 2023 Q2 local vacancy rate is quite high at 13.6% with an average rent of $1,479 a month.

Local home sales and median existing home price information are updated to Q3 of this year in November’s report. That data shows that existing home sales continue to fall mostly due to low inventory. As a point of reference, U.S. existing home sales are at 2010 levels. Local median (existing) home prices are holding steady with Q3 at $466,300.

If we combine existing and new homes, the average price sits at $557,000 in October, indicating that new homes are typically more expensive and there are a lot of $1 million-plus homes that are pulling up the average price. Compared with October 2019, average home prices including existing and new homes are up 49.7% when compared with October 2023 home prices.

The percentage of homes sold affordable to the median household income, as defined by the local Housing Opportunity Index, declined further in Q3 to 21.5% (from 25.3% in Q2).

As Colorado Springs Mayor Yemi Mobolade often addressed when campaigning, the Housing Opportunity Index was 71.4% as recently as 2019 Q3 — therefore, a massive drop in local home affordability.

The lower level of building permits locally and in the U.S. only exacerbates the shortage of homes. This isn’t projected to change much as The Conference Board is forecasting residential investment for all of 2023 at minus-11% on top of the 9% decline in 2022. For 2024, residential investment is forecast to very modestly improve at a 1.5% growth rate.

Nonresidential investment, which includes commercial real estate, is forecast to end this year at a decent 5.2% growth rate, but to deteriorate to a minus-0.7% growth rate in 2024.

The office commercial real estate (CRE) market is dragging down all the CRE market with more headwinds coming. These include a) higher interest payments as variable-rate loans mature or building improvements have to be financed; b) more tenants letting leases expire or requiring less space due to hybrid/ remote work; c) more product on market with sublease space available, which is at 215 million square feet versus 80 million pre-pandemic; d) office-based professional employment that is not as robust; and e) generally unfavorable conditions and lower property valuations making obtaining credit even more difficult.

Looking forward, many CRE experts say that AI, or artificial intelligence, might further reduce the need for office space as white-collar jobs are more likely to be affected by the automation of big data. Class A space with a lot of amenities is performing notably better. Longer term, it’s more favorable to the CRE market for less (office) space construction to occur to hopefully bring eventual balance to the structural changes occurring in this subsector. This is true to some extent for multifamily construction, too.

The National Federation of Independent Business small-business survey also shows some persistent headwinds. In October, surveys showed that 33% of owners plan to raise prices over the next three months, which is the highest reading in a year. In addition, wage pressures persist primarily due to the difficulty in finding quality labor, with 43% of owners having job openings that are “hard to fill.”

Job openings have come down from pandemic highs, but they are still elevated. And if you look at the detail in the small business survey, it’s apparent that some employers have given up on posting jobs probably because they can’t find the talent they need again, implying persistence in wage pressures. Hybrid and remote work appear entrenched in the new world of work, and I believe this will keep some upward wage pressure on in-person jobs such as health care and hospitality.

Small businesses also are saying they have slower sales traffic (net 17% fewer firms reporting higher sales), reduced credit availability, and lower earnings (32% reporting a drop). Typically, when business conditions and consumer sentiment deteriorate, employers have their pick of workers, and that’s not the case in this cycle (or for the foreseeable future due to demographics).

A net 24% of firms plan to raise compensation to keep or attract workers. I’ve never seen a scenario where businesses are reporting lower earnings and overall conditions but are struggling to find labor.

Businesses (and consumers) also address the strain of higher interest rates in various surveys. The impact of higher rates often materializes with a lag. I believe that lag is catching up as variable rate loans mature, and new acquisitions become necessary (such as from a broken dishwasher, defunct automobile or expired capital equipment).

During the Federal Reserve’s November meeting, it opted to keep interest rates the same due to inflation improvements. And given that the GDP forecast and overall economic picture has a below trend growth rate of 0.8% for 2024, the Fed is not looking to throw the U.S. economy decisively into a recession; thus the “pause” in hikes.

Now, how about good news? El Paso County job growth in the second quarter blew past Q1 levels with 12,391 new jobs. Our region needs about 5,600 new jobs per year to match annual population growth, so 12,391 jobs is a stellar performance. Indeed, other than 2020, our region has been matching or exceeding the 5,600 threshold since 2013.

This Quarterly Census of Employment and Wages data set includes employment by industry (which is not out yet) and wage information, which is updated. The second quarter wages for the U.S., Colorado and El Paso County are quite a bit lower than they were in Q1, which is a pattern we have noticed before. This data does have some quarterly volatility, so I’ll comment on new jobs and wages when we have Q3 data, and more accurately, the year-end data.