Business sentiment in Colorado took a nosedive, according to the Leeds Business Confidence Index, a measure of how business leaders across Colorado feel about the national and state economy.

It was the second-largest decline in the economic tracker’s 23-year history, according to a report from the University of Colorado Boulder released Tuesday.

The main reason? There’s large uncertainty over the new White House administration’s policies, according to responses from more than 200 business leaders in the quarterly survey.

The index dropped from a score of 50 (the neutral baseline) in the last quarter to 31.9 in the latest survey, the third-most pessimistic score recorded by the economic indicator. Respondents cited tariffs, federal contracts and grants, health care, immigration and foreign policy as their largest concerns.

Trump is placing a wave of policies aimed at cutting back on federal spending and using tariffs to push for American-made products or coercing other nations to tackle issues affecting the U.S., such as curbing fentanyl getting into the country and illegal immigration.

It’s causing a “policy shock,” as there’s several policies businesses may be heavily impacted by, said Richard Wobbekind, CU Boulder economist.

The last major events to cause the index to significantly drop was when the COVID-19 pandemic hit and during the 2008 Financial Crisis, two recessionary periods.

The CU Boulder economists behind the index said they weren’t surprised there would be a drop in confidence as businesses parse out how Trump’s policy changes could affect the economy and their respective industries. But the researchers said they didn’t expect a drop as large as the one measured this quarter.

“When you sort of look at that drop, it is dramatic,” Wobbekind said.

The outlook business leaders have for the national and state economies is “pretty dim” and similar to sentiments ahead of a recession, though they’re not forecasting a recession yet, he added.

“Uncertainty is the shock,” said Brian Lewandowski, executive director of the Business Research Division at the Leeds School of Business at CU Boulder.

Why the index matters

The Leeds Business Confidence index has remained nearly unchanged since its induction, Lewandowski said. Each quarter, it asks business leaders across the state about their expectations for the U.S. economy, Colorado’s economy, sales, profits, capital expenditures and hiring.

While most economic indicators are backward-looking and reveal how the economy has performed, the confidence index aims to measure how businesses feel about the future.

It’s still not clear how businesses’ response to tariffs, cuts in federal spending, layoffs to federal workers and other major Trump initiatives could affect the economy.

The low index could mean businesses across the state are worried about hiring more workers or investing into the company through expansions or buying more equipment, Lewandowski said.

“That can become somewhat self fulfilling, where that business uncertainty creates a behavioral pause, which then ends up slowing the economy,” he explained.

Colorado was expected to see slower growth in 2025, according to CU Boulder’s economic outlook. But Lewandowski said their updated models show the growth will be slower than they expected in December when the annual forecast was released.

“There are some components where we know we already got it wrong,” he said giving an example of how they projected federal employment to grow.

A more dismal outlook than Trump’s first term

In 2017, the Leeds Business Confidence Index spiked after Trump won the election.

But his second-term didn’t incite the same amount of optimism for Colorado business leaders as it did after his first win.

Though Trump promised to enact tariffs during his presidential campaign, economists didn’t know what the scale of the policy would be once he took office. Colorado business leaders had mixed reactions to how a Trump presidency may impact the economy as he took office, as the index had a neutral score of 50 in the first quarter.

Since his inauguration, Trump implemented tariffs on China, Canada, Mexico and countries importing oil from Venezuela, as well as imported products from pharmaceutical drugs, copper, lumber and foreign-made cars. He also expanded his 2018 steel and aluminum tariffs to 25% on imports.

Trump announced Wednesday as the beginning of “Liberation Day,” as the president said the tariffs aim to push the U.S. from relying on foreign goods.

“We’re going to charge countries for doing business in our country and taking our jobs, taking our wealth, taking a lot of things that they’ve been taking over the years,” Trump said. “They’ve taken so much out of our country, friend and foe. And, frankly, friend has been oftentimes much worse than foe.”

Many national economists worry businesses will pass on the cost of tariffs to consumers, causing higher prices on goods like cars and groceries.

Trump said his policies will encourage job growth as companies open more factories in the U.S. to mitigate the tariffs, but the process of opening factories can take years and requires significant investment from companies.

Overall, business sentiment had been pessimistic for the past few years during the period of high inflation, but business leaders in the survey were becoming more optimistic in 2024 as prices stabilized.

Tariffs, the top concern noted by respondents, are expected to bring back higher inflation.

Nearly half of the business leaders in the survey said they expect inflation to surge more than 3% again this year.

The recent drop in confidence reversed many of the gains made last year as optimism dropped for every category the index tracks, from expectations for industry sales, profits to future hiring.

The economists noted that Colorado’s economy is still performing very well, with the state’s gross domestic product and personal income per capita at record levels — so they’ll be looking at how both businesses and consumers react to the policy changes and whether their concerns will manifest

“Sometimes behavior matches those expectations as we look back in time, and sometimes behavior does not match those expectations,” Lewandowski said. “Now we’ll watch for the next several months to see if they actually behave in that way.”