The California Economy, as predicted by UCLA forecasters

LOS ANGELES – The December 2025 UCLA Anderson Forecast predicts the U.S. and California economies will soften through early 2026 before rebounding strongly later in 2026 and 2027. 

This period of “muddling through” is characterized by two opposing economic trends: massive investment in artificial intelligence (AI) infrastructure and high-wealth income growth, which counteract weakness caused by tariffs, policy uncertainty, and a softening labor market. 

California faces a deeper divide, with its high-tech sectors thriving while its construction, manufacturing, and hospitality sectors endure an employment recession expected to last into early 2026.

The National Economy: AI-Driven Resilience

Big picture view:

The national forecast describes a slowing but resilient economy significantly supported by capital expenditures in AI infrastructure.

AI Investment Surge

Projected AI-related investment for 2025 has already surpassed $405 billion, exceeding the original $250 billion estimate, with further increases expected in 2026. This surge is reinforced by fiscal stimulus from the One Big Beautiful Bill Act.

Headwinds

Sectoral weakness stems from tariffs imposed throughout 2025, which are raising goods prices and pushing inflation toward a projected peak of 3.5% (SAAR) in early 2026.

Labor Market

Employment growth has slowed sharply, and the unemployment rate is expected to inch up to 4.5% by the end of 2025.

Interest Rates

Long-term interest rates are expected to stabilize near 4.0%–4.4%, prevented from returning to pre-pandemic lows by structural pressures like elevated public deficits and heavy borrowing for AI investments.

GDP Outlook

Overall GDP growth will soften in late 2025 and early 2026, exacerbated by temporary effects from the record-setting 43-day federal government shutdown. Growth is then expected to rebound meaningfully later in 2026.

The California Economy: A Growing Divide

Local perspective:

California’s economic outlook is characterized by a divided economy, where high-productivity sectors mask weakness in traditional industries.

High-Productivity Strength

Sectors like AI, aerospace, and advanced manufacturing continue to expand, largely due to the state receiving nearly 70% of all U.S. venture funding in early 2025, including seven of the 10 largest investment deals in the Americas this year.

Sectoral Weakness

Construction, non-durable goods manufacturing, retail, and leisure and hospitality face intense pressure from federal spending reductions, tariffs, elevated costs, and deportation policies.

Employment Recession

Payroll job losses through the first eight months of 2025 marked the first sustained decline since the pandemic. California’s unemployment rate has remained above 5.0% for over 19 consecutive months, and an employment recession is expected to last into early 2026.

Impact of Deportations

The forecast notes that deportations, based on historical analysis, tend to raise unemployment among U.S.-born and documented workers by reducing consumption and disrupting complementary occupations, a pattern already emerging in certain counties.

Housing Constraints

Building permits remain subdued due to workforce shortages (linked to deportations), tariff-driven input costs, and persistently high financing costs, despite high home prices and the need for new construction following the December 2024 and January 2025 wildfires.

By the numbers:

The December Forecast projects a gradual improvement for California beginning in late 2026, despite a challenging start to the year.

Unemployment Rate 2025: 5.5%2026: 5.5%2027: 4.6% Non-Farm Payroll Jobs 2025: 0.0%2026: -0.1%2027: 1.9% Total Employment Growth 2025: 0.6%2026: 0.7%2027: 2.0% Real Personal Income Growth 2025: 1.8%2026: 1.1%2027: 2.6% Residential Permits 2025: 101,0002026: N/A2027: 121,000

The Source: This report’s analysis, projections, and numerical data are derived entirely from the December 2025 UCLA Anderson Forecast for the United States and California. The information reflects the official economic outlook and detailed sector-by-sector analysis provided by the UCLA Anderson Forecast, including their assessment of investment trends, the impact of tariffs and policy, and their specific numerical projections for unemployment, job growth, and income. 

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