Trade policy and inflation raise risks for Colorado economy

DENVER — Federal trade policy and a softening labor market pose the greatest risks to Colorado’s economy, according to the Governor’s Office of State Planning and Budgeting in its December Economic Forecast to the Joint Budget Committee. The report warned that tariff-driven inflation and economic uncertainty are placing growing pressure on households and businesses.

In its December 2025 economic and revenue outlook, OSPB said higher tariff-related costs are weighing most heavily on middle- and lower-income households, while higher-income earners continue to see stronger growth in income and wealth. That group now accounts for a majority of consumer spending, leaving recent economic strength increasingly dependent on their investment and purchasing decisions.

Risks to that spending, including a pullback in artificial intelligence investments, weaker consumer purchasing power due to tariffs or labor market deterioration, could threaten broader economic performance, the report said.

Inflation has risen in recent months, driven locally by services excluding shelter and by food prices. Since early 2020, household energy costs have risen faster than overall inflation, a trend OSPB expects to persist in the medium term. The combination of tariff-related price increases and strong consumer demand has added to inflationary pressure.

OSPB projects national inflation to rise to 3.5 percent in 2026, with an estimated 30% to 40% of inflation attributable to direct and indirect tariff impacts, consistent with external forecasts.

The office estimates a 50% chance of a mild recession in 2026, though it expects a baseline scenario of rolling downturns across specific regions and sectors rather than a full macroeconomic recession. The labor market is expected to soften gradually, reducing income and spending in 2026 before stabilizing in 2027.

Economic conditions vary widely by industry. In agriculture, beef producers are benefiting from record-high prices, while soybean farmers continue to struggle amid depressed markets. Housing and commercial real estate remain subdued as buyers and developers wait for lower interest rates and greater economic certainty, even as additional supply keeps price growth below national trends.

Nationally, the economy has been volatile in 2025 due to shifting trade policy. OSPB said slower consumer spending, the weakest in two years, has been offset by AI-related capital expenditures, which have been the largest contributor to growth this year. The office forecasts U.S. gross domestic product growth of 1.9% in 2025, slowing to 1.2% in 2026 and rebounding to 1.4% in 2027.

The labor market continues to weaken, with low hiring demand but also low separations, keeping unemployment relatively low. OSPB forecasts minimal job growth but expects declining labor force participation to keep unemployment at or below 5% in both Colorado and the U.S.

Wage and personal income growth remained resilient in 2025, though lower-income earners saw slower gains than higher-income workers for the first time since the mid-2010s. Colorado wage and salary growth is projected at 4.7% in 2025, slowing to 3.4% in 2026 before rebounding to 4.3% in 2027.

Consumer spending has held up through 2025, driven mainly by higher-income households and spending on vehicles, home goods and restaurants. Some data suggest growth reflects higher prices rather than increased purchases, while signs of financial stress are emerging among lower-income consumers.

Energy prices were largely stable in the third quarter of 2025, with oil around $60 per barrel. The Energy Information Administration expects oil prices to decline to about $50 per barrel in 2026, while natural gas prices are projected to remain above average due to rising international demand for liquefied natural gas.

Housing conditions in Colorado continue to favor renters and buyers. An influx of multifamily units in late 2024 pushed vacancy rates higher and rents lower, while elevated interest rates have dampened homebuyer demand and slowed new construction.

Commercial real estate showed mixed performance in the third quarter, with stronger retail absorption and lower industrial vacancies but rising office vacancies. New development remains limited, though the total value of new projects has increased, possibly reflecting higher construction costs and a shift toward higher-margin developments.

OSPB also cited significant federal policy uncertainty, including changes tied to tax and spending legislation, the longest government shutdown on record in October and November, and ongoing volatility in trade policy. The shutdown disrupted federal contracts, worker pay and benefit programs, contributing to economic uncertainty, while pending court decisions on trade measures add further risk to the outlook.