Key takeaways
U.S. economy. The slowing but resilient national economy, buffeted by investment in AI, continues to face tariff-related uncertainties.
California economy. While some sectors have been buoyed by significant venture capital investment, others remain under pressure from federal spending reductions, tariffs, elevated costs and the effects of deportation policies.
Muddling through. Forecast economists don’t expect an immediate downturn or resurgence; instead, both the nation and the state are poised to muddle through early 2026 before experiencing stronger growth in 2026 and 2027.
The December 2025 UCLA Anderson Forecast for the U.S. and California describes a situation in which two economic trends currently are working in opposition. In some sectors, ongoing and optimistic investment in artificial intelligence infrastructure and rising income among high-wealth households are driving the economy, but tariff-induced inflation, policy-driven uncertainty and a gradually weakening labor market indicate signs of sectoral weakness.
The result is an economy expected to soften through the first quarter of 2026 before regaining strength later in the year.
In California, the outlook is further complicated by a bifurcated economy in which AI, aerospace and other high-productivity sectors continue to expand while construction, non-durable goods, leisure and hospitality, and government-funded services face significant headwinds. Deportations, elevated input costs and weak job growth are prolonging an employment recession expected to last into early 2026, even as the state continues to outpace the nation in overall productivity.
On balance, the forecast does not expect an immediate downturn or immediate resurgence. Instead, both the nation and the state are poised to muddle through early 2026 before experiencing stronger growth in 2026 and 2027.
The U.S. economy
The national forecast highlights a slowing but resilient economy significantly buffeted by sizable capital expenditures underway in AI infrastructure. The Forecast notes that projected AI-related investment in 2025 — originally estimated at $250 billion — has already surpassed $405 billion, with further increases expected in 2026. Fiscal stimulus from the One Big Beautiful Bill Act is set to reinforce this investment surge.
At the same time, tariffs imposed throughout 2025 continue to move through supply chains, raising the price of goods and placing pressure on consumers and small businesses. The ongoing policy uncertainty — including anticipated Supreme Court decisions on tariffs — has made long-term planning difficult for firms and has contributed to a cautious hiring environment.
Employment growth has slowed sharply, and unemployment is expected to inch up to 4.5% by the end of 2025, though unemployment insurance claims remain low. Inflation is projected to peak at 3.5% (seasonally adjusted annual rate) in early 2026, driven largely by pass-through from earlier tariff hikes, before gradually declining but remaining above target.
Interest rates have stabilized: Long-term rates are expected to remain near 4.0%–4.4% as structural pressures — including elevated public deficits, aging demographics and heavy borrowing linked to AI investments — prevent a return to pre-pandemic lows.
Overall GDP growth will soften in late 2025 and early 2026, exacerbated by temporary effects from the record-setting 43-day federal government shutdown. Later in 2026, growth is expected to rebound meaningfully as both fiscal and monetary stimuli take hold.
The California economy
At present, California’s economy continues to outpace the nation’s in high-productivity sectors such as AI, aerospace and advanced manufacturing, buoyed by the state’s disproportionate share of venture capital investment. Nearly 70% of all U.S. venture funding in early 2025 went to California, and 7 of the 10 largest investment deals in the Americas this year occurred in-state.
But this strength masks a growing divide. Construction, nondurable goods manufacturing, retail, and leisure and hospitality remain under pressure from federal spending reductions, tariffs, elevated costs and the early effects of deportation policies. Payroll job losses through the first eight months of 2025 marked the first sustained decline since the pandemic, and California’s unemployment rate has remained above 5.0% for more than 19 consecutive months.
The Forecast’s analysis of historical immigration restrictions suggests that deportations tend to raise unemployment among U.S.-born and documented workers through reduced consumption and disruptions in complementary occupations. Early county-level data in California show this pattern beginning to emerge, especially in counties with higher shares of foreign-born workers employed in construction, agriculture and hospitality.
Housing remains a significant constraint. Building permits have stayed subdued despite elevated home prices and the urgent need for new construction following the December 2024 and January 2025 wildfires. Workforce shortages tied to deportations, tariff-driven input costs and persistently high financing costs all contribute to slow progress in residential building.
Goods movement offers a bright spot: Air cargo volume has begun to recover to pre-pandemic levels in both Northern and Southern California, reflecting steady demand in higher-income households and businesses linked to the state’s technology sector.
California forecast numbers
The December forecast calls for a gradual improvement beginning in late 2026:
Unemployment rates (annual averages)
2025: 5.5%
2026: 5.5%
2027: 4.6%
Total employment growth
2025: 0.6%
2026: 0.7%
2027: 2.0%
Non-farm payroll jobs
2025: 0.0%
2026: -0.1%
2027: 1.9%
Real personal income growth
2025: 1.8%
2026: 1.1%
2027: 2.6%
Residential permits
2025: 101,000
2027: 121,000
The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. The forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.