This story was produced as part of the Colorado Capitol News Alliance. It first appeared at coloradosun.com.
By Brian Eason | The Colorado Sun
State forecasters Friday painted a bleak picture of Colorado’s economy, predicting that a weakening labor market and shrinking consumer spending could dig the state budget into a deeper financial hole.
But no one’s quite sure how bad things really are.
“We may be telling a different story at the March forecast,” Emily Dohrman, a senior economist for Colorado Legislative Council staff, told the Joint Budget Committee.
“It’s difficult to discern what’s going on in the employment market right now because we’re getting such conflicting signals.”
The December forecasts from legislative economists and the governor’s Office of State Planning and Budgeting serve as the foundation of the legislature’s budget negotiations for the next three months, as lawmakers look to close a budget shortfall of around $850 million.
While the budget outlook always fluctuates from one quarterly forecast to the next, lawmakers head into the 2026 legislative session with an even blurrier picture than usual.
Conflicting signals
The federal government shutdown that ended in November delayed the release of key economic data, and prevented some surveys from being conducted at all, leaving forecasters in the dark about the true state of the labor market.
Job growth has been slowing, and the unemployment rate ticked up nationally to 4.6% in November. But when the latest Colorado snapshot was taken in September, unemployment actually fell to 4.1% — a bright spot against the dimmer national trend.
On the other hand, state unemployment insurance claims are rising, and people are staying jobless longer. Other economic measures, like rising defaults on auto loans, and shrinking household savings, suggest consumers are struggling. In a shift from recent years, wages are growing more slowly for low-income earners and middle class households than higher earners.
Credit card delinquencies are at their highest level since 2011, Dohrman said.
“This is another indication that households are being financially constrained and are overextended,” she said. “This may lead to lower levels of consumer spending in the future, as households are not able to continue spending at the rate that they currently are.”
Artificial intelligence, for better or worse, is driving business investment, keeping economic growth positive, even as other industries pull back. But forecasters warned that Colorado’s economy may be particularly vulnerable if Wall Street’s outsize investments in tech companies prove to be a bubble that bursts.
The governor’s office pegged the risk of a near-term recession at 50% — but they said it’s more likely that the state will enter a “rolling recession” in which different parts of the economy shrink at different times.
The federal tax cuts passed in this summer’s One Big Beautiful Bill Act are already having unexpected effects, reducing corporate income tax collections more than forecasters predicted.
But uncertainty isn’t necessarily a bad thing, chief legislative economist Greg Sobetski said.
“I know that this presentation has been a lot of doom and gloom,” Sobetski said. But, he noted, the federal tax cuts could also spur more economic activity than forecasters expect or reduce state tax collections by less than they fear.
“The outlook could be a lot better,” he said.
The budget picture remains bleak
While the two forecasts largely agree on the state of the economy, they offer slightly different roadmaps for next year’s budget discussions.
The governor’s office says the budget picture remains largely unchanged from September. The administration expects a dip in tax collections this current budget year to be largely offset by gains in next year’s budget.
The forecast did nothing to change the fundamental problem with Colorado’s budget, said Mark Ferrandino, the governor’s budget director. Medicaid costs — the state’s single largest expense — are expected to grow by nearly 12% if current trends continue. State spending can only grow by 3.5% next year under the Taxpayer’s Bill of Rights cap. The constitutional amendment limits government spending to the combined rate of population growth and consumer inflation.
“If you don’t address the underlying growth trend in Medicaid, these cuts just go again the next year,” Ferrandino said. “If Medicaid still is growing at 8% to 12%, it’s gonna grow faster than the TABOR cap, which means we have to make more cuts in the core services and the operating budgets.”
Under the Legislative Council forecast, lawmakers could have even more work to do between now and March, when they traditionally finalize the state’s budget proposal. Legislative staff now expect the state will face a $399 million shortfall in the current budget year, due primarily to falling corporate income tax collections. That’s $92 million worse than they anticipated in September.
For next year’s budget, which starts July 1, 2026, lawmakers could have $47 million less to spend than previously expected, the legislative forecast says.
“Thank you, everyone, for another sobering forecast,” JBC Chair Emily Sirota, a Denver Democrat, said dryly.
Colorado Capitol Alliance
This story was produced by the Capitol News Alliance, a collaboration between KUNC News, Colorado Public Radio, Rocky Mountain PBS, and The Colorado Sun, and shared with Rocky Mountain Community Radio and other news organizations across the state. Funding for the Alliance is provided in part by the Corporation for Public Broadcasting.
