Legislative council downgrades Colorado economic outlook; federal policy uncertainty tops risks

David Hansen, principal economist for Legislative Council Staff, told the Joint Budget Committee on March 17 that U.S. economic growth has cooled and that the council had lowered its near‑term outlook.

"We continue to expect the U.S. economy to expand at a moderate pace through our forecast, but we have downgraded our economic expectations since December," Hansen said, presenting the March 2025 Legislative Council forecast.

The LCS baseline projects real U.S. GDP growth of about 1.3 percent in 2025, 1.7 percent in 2026 and close to 1.9 percent in 2027. Hansen said Colorado is likely to follow that slower national pace and that labor markets will soften: employment growth has decelerated and the Colorado unemployment rate, while still low, "has been climbing," he said. Hansen also warned forecasters see measurement error in some Colorado labor market data after a change to the state's Department of Labor and Employment reporting system.

Why it matters: the forecast underpins state revenue estimates and budgeting decisions. Slower growth and higher unemployment typically reduce income and sales tax receipts and increase pressure on safety‑net spending.

Inflation and monetary policy: Hansen and Legislative Council staff said inflation measures remain above the Federal Reserve's 2 percent target and have ticked up recently. In the Denver area, housing has not contributed to inflation over the past year the way it has nationally; instead, transportation (including vehicle and gasoline prices) has pushed the local index higher. Market volatility has risen—the VIX jumped from about 15 to as high as 28 in one week—and University of Michigan consumer sentiment fell sharply in February and March, factors Hansen cited in revising his inflation and rate assumptions.

On rates, Hansen said the council now expects the Federal Reserve to delay cuts further into the forecast period because of persistent inflation. "We now anticipate interest rates will remain higher for longer into the forecast period," he said.

Construction and investment: Hansen said nonresidential construction contracted sharply in Colorado in 2024 and is expected to contract again in 2025 before stabilizing in 2026 and rebounding in 2027. Residential permit activity has been down, driven by a steep decline in multifamily permits; single‑family permits have shown some improvement since their 2023 trough.

Household balance sheets and business investment: Hansen noted the personal savings rate rose to 4.6 percent in January and that mortgage delinquencies remain below historical averages while consumer debt delinquencies have climbed toward historical norms. He said these mixed signals, together with slowing business investment, suggest households remain in relatively sound positions but are increasingly cautious.

Downside and upside risks: Hansen listed major downside risks as sharper deterioration in the labor market, sustained inflation that forces tighter monetary policy, and continued federal policy uncertainty and trade disruptions. "One of the most prominent is the impact of significant federal policy changes and particularly the influence of those changes on consumer confidence in spending and business investment," he said. Upside risks would include faster federal policy clarity, stronger tax‑policy signals and rapid disinflation prompting monetary easing.

Chief economist Greg Sobetsky of Legislative Council emphasized the tilt toward downside risk: "I actually think that downside risk to the forecast are both more probable and more severe," he told committee members during questions.

OSPB deputy director Bryce Cook, presenting the OSPB view that largely aligned with LCS, cited the same tariff and federal policy uncertainty as a direct driver of falling consumer confidence: "Consumers and businesses alike tend to pull back in times of uncertainty and so that's increasing the downside risks that we're seeing here," Cook said.

What forecasters said they did not know: both LCS and OSPB warned of measurement and timing issues that raise uncertainty in the near term. Hansen said Colorado labor market measures may include undercounts from the state's data system migration; Cook noted a recent federal benchmarking release (BLS) that will be reflected in later forecasts. Forecasters repeatedly said March and April tax‑filing data will be critical to revenue projections.

Ending: Committee members used the economic discussion to probe specific channels—tariffs, inventories, and federal layoffs—but forecasters repeatedly stressed the central message: near‑term risk is skewed to the downside and uncertainty is unusually high.