State economic projections released Friday indicate growing fiscal challenges for Colorado, as weakening employment trends and declining consumer expenditures threaten to widen the state’s budget deficit. n nForecasters acknowledged significant ambiguity in interpreting current conditions due to contradictory data patterns. n n”We might present a different outlook by the March forecast,” said Emily Dohrman, a senior economist with the Colorado Legislative Council staff, during testimony before the Joint Budget Committee. n nShe highlighted difficulties in analyzing labor market dynamics, noting that while national unemployment rose to 4.6% in November, Colorado’s rate had dipped to 4.1% as of September. Yet recent increases in unemployment insurance claims and longer durations of joblessness suggest underlying strain. n nAdditional warning signs include rising auto loan defaults, diminishing household savings, and slowing wage growth for lower- and middle-income groups compared to higher earners. Credit card delinquency rates have reached their highest point since 2011, indicating financial stress among families. n n”This reflects growing financial pressure and overextension,” Dohrman explained. “Such constraints could suppress consumer spending going forward.” n nBusiness investment remains buoyed by advancements in artificial intelligence, supporting overall economic expansion despite pullbacks in other sectors. However, experts warn that Colorado’s reliance on tech-driven growth could pose risks if current valuations in the technology sector reflect an unsustainable bubble. n nThe governor’s Office of State Planning and Budgeting estimates a 50% chance of a near-term recession, though they anticipate a staggered downturn—what some describe as a “rolling recession”—where different industries contract at varying times. n nFederal tax legislation passed earlier this year, known as the One Big Beautiful Bill Act, has already led to sharper-than-expected declines in corporate tax revenue. n nStill, uncertainty doesn’t automatically imply negative outcomes, noted chief legislative economist Greg Sobetski. He suggested the tax cuts might stimulate more economic activity than projected or result in smaller revenue losses than feared. n
“The outlook could be a lot better,” he said. n
Both the governor’s office and legislative economists agree on the broad trajectory of the economy, but differ slightly in their budget implications. The administration sees little change from prior forecasts, expecting short-term revenue dips to be balanced by future gains. However, Medicaid costs are projected to rise nearly 12%, far outpacing the 3.5% limit on state spending increases imposed by the Taxpayer’s Bill of Rights (TABOR). This structural imbalance threatens recurring cuts to essential services unless long-term cost drivers are addressed. n
Under the legislative forecast, the state faces a $399 million shortfall in the current fiscal year—$92 million worse than previously estimated—mainly due to weaker corporate tax receipts. For the 2026–2027 budget cycle beginning July 1, available funds could be $47 million less than earlier projections. n
“Thank you, everyone, for another sobering forecast,” remarked JBC Chair Emily Sirota, a Democrat from Denver. n
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Uncertainty clouds Colorado state budget picture, as economy wobbles
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. n nBut no one’s quite sure how bad things really are. n n“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. n n“It’s difficult to discern what’s going on in the employment market right now because we’re getting such conflicting signals.” n nThe 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. n nWhile 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. n nConflicting signals n nThe 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. n nJob 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. n nOn 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. n nCredit card delinquencies are at their highest level since 2011, Dohrman said. n n“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.” n nArtificial 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. n nThe 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. n nThe 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. n nBut uncertainty isn’t necessarily a bad thing, chief legislative economist Greg Sobetski said. n n“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. n n“The outlook could be a lot better,” he said. n nThe budget picture remains bleak n nWhile the two forecasts largely agree on the state of the economy, they offer slightly different roadmaps for next year’s budget discussions. n nThe 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. n nThe 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. n n“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.” n nUnder 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. n nFor next year’s budget, which starts July 1, 2026, lawmakers could have $47 million less to spend than previously expected, the legislative forecast says. n n“Thank you, everyone, for another sobering forecast,” JBC Chair Emily Sirota, a Denver Democrat, said dryly.