Next year will be \u201cno gangbuster year,\u201d for the economy, according to one of Southern California\u2019s leading economists, James Doti.<\/p>\n
Last year, the president emeritus at Chapman University and its team of economists predicted the nation\u2019s gross domestic product, used to measure economic health, would slow to 1.8% in 2025, down from 2.7% the previous year. Their latest prediction says 2026\u2019s growth will edge upward to a modest 2%.<\/p>\n
Without digging into the weeds of political commentary, Doti candidly said the economy would have expanded more had President Donald Trump\u2019s tariffs not happened and California made efforts to trim its high taxes. He blamed both for driving away a chunk of the state\u2019s population, leaving behind a challenging labor market.<\/p>\n
\u201cIf it weren\u2019t for the tariffs, the economy would be much stronger,\u201d Doti said. \u201cIf we didn\u2019t have that negative impact from tariffs, [offset] as a result of billions in AI spending and the wealth accumulation we\u2019ve had, there would have been a much stronger economy than what we have now. There\u2019s no question, the tariffs are having an impact.\u201d<\/p>\n
\u201cMy message for California \u2026? It\u2019s very clear: the focus needs to be on reducing taxes,\u201d said Doti. \u201cWe\u2019re experiencing the ramifications that taxes matter.\u201d<\/p>\n
Tariff impacts<\/p>\n
\u201cThe takeaway is that with all of these moving parts, all of these complications, all of these unprecedented policies and initiatives that we\u2019ve never seen before \u2014 like tariffs and a federal government shutdown \u2014 the bottom line is we believe we\u2019re going to have a year pretty much like last year, with growth of around 2%,\u201d said Doti. \u201cThat should relieve some of the anxiety of those two groups of prognosticators \u2014 the one that thinks we\u2019re going to have a recession, and the other that believes we\u2019re going to have a much higher uptick in inflation. We don\u2019t see this.\u201d<\/p>\n
Trump has made tariffs on foreign nations a major administration policy, saying they will raise revenue for the country and help create jobs domestically. The tariffs, which notably are paid by consumers, cover most goods and affect all trading partners with the United States.<\/p>\n
\u201cWe view tariff-related concerns about significantly higher inflation rates as overblown,\u201d\u00a0Chapman economists wrote in the report. \u201cThe fact that those tariffs seem to be in a constant state of flux doesn\u2019t make forecasting any easier, nor do the unprecedented reductions in government employees.\u201d<\/p>\n
The report was cowritten by Chapman economists Raymond Sfeir and Fadel Lawandy.<\/p>\n
Their forecast calls for a mild increase in inflation from the current 3% rate to 3.3% by mid-2026, before settling back to 3.1% by year-end.<\/p>\n
Job growth stalls<\/p>\n
Since the rapid recovery following the pandemic-induced recession, California\u2019s job growth slowed appreciably.<\/p>\n
Over the three-year period from the second quarter of 2022 through June of this year, job growth across the state was only 2%. In a ranking of the nation\u2019s 50 states, that lackluster growth put California in the 48th spot, according to figures cited by Doti from the Tax Foundation\u2019s 2024 State Business Tax Climate Index.\u00a0<\/a><\/p>\n The job market continues to worry Chapman economists.<\/p>\n \u201cOur forecast calls for California\u2019s weak job growth to continue into 2026. On average, the 0.3% increase in job forecast in 2026 translates to a gain of only 62,000 jobs,\u201d according to the report. \u201cMore unsettling for California\u2019s economic future is the sharp decline in the number of advanced industries, or high value-added sectors such as technology, software development, aerospace and medical products.\u201d<\/p>\n In comparison to all advanced establishments in the U.S., the percentage of such jobs in major population centers in California dropped to 14.9% in the first quarter of 2025 from 17.5% in 2018.<\/p>\n Except for the tech-rich Silicon Valley\u2019s 1.9% loss in jobs, Orange County\u2019s job growth of 1.6% over the post-pandemic 2022 to 2025 period was the weakest among the major population counties in the state. The Inland Empire had 3.3% growth during the period, while Los Angeles County saw 1.8% more jobs.<\/p>\n \u201cEven more alarming is that Orange County\u2019s growth over this period was a full percentage point lower than the U.S., excluding California,\u201d according to the report, which predicts virtually no growth for the county in 2026. \u201cThat\u2019s roughly the same as the U.S. and California job growth forecasts.\u201d<\/p>\n Soft real estate<\/p>\n On Wednesday, the Federal Reserve cut its interest rate for the third time this year, pointing to a job market that Chairman Jerome Powell said may be weaker than it appears. The central bank lowered its key overnight borrowing rate by a quarter percentage point, putting it in a range between 3.5% \u2013 3.75%.<\/p>\n Still, the real estate sector is soft, Doti said.<\/p>\n On the residential front, the Chapman forecast shows a decline in mortgage rates from an average of 6.6% this year to 5.6% in 2026, thereby increasing\u00a0housing affordability.<\/a><\/p>\n Even with a forecasted decline in mortgage rates,\u00a0the lack of housing affordability<\/a>\u00a0will constrain housing appreciation to about 2% in 2026.<\/p>\n Chapman is the last of a handful of universities in Southern California to deliver economic forecasts \u2014 all of which are reading the tea leaves similarly.<\/p>\n