California’s economy continues to outpace the nation in overall growth but remains constrained by sluggish hiring and an unemployment rate that has stayed elevated for nearly two years, a UCLA forecast said Wednesday.
The spring 2026 UCLA Anderson Forecast finds that while California has grown faster than the United States for four consecutive quarters, hiring has not kept pace with production, creating what economists described as a structural imbalance in the economy.
Also see: California jobs mystery: Jobless claims dip as layoffs surge
“Normally, one would expect employment to grow in step with output and income; however, the opposite has occurred,” UCLA Anderson Forecast Director Jerry Nickelsburg wrote in his report on the state’s economy.
Using a monthly gross domestic product methodology developed by the forecast, UCLA economists estimate California’s annualized fourth-quarter growth was 3.8%, well above the nation’s initial 1.4% estimate for the same period.
Despite that output strength, payroll employment declined last year, marking the first sustained contraction since the pandemic, Nickelsburg wrote. The state’s unemployment rate stood at 5.5% in December and has remained above 5% for nearly two years.
Also see: Southern California pay raises shrink to 5-year low
The forecast characterized California as operating within a “new bifurcated economy,” driven by high-productivity sectors such as artificial intelligence and aerospace on one side, and slower-growing industries including construction, retail and segments of leisure and hospitality on the other.
According to the report, nearly 70% of U.S. venture capital funding flowed to California in early 2026. Hiring has begun to recover in aerospace and computer systems design, and goods movement indicators — including port activity and air cargo volumes — have rebounded to or exceeded pre-pandemic levels.
If the gains continue, those sectors could help drive stronger job growth in 2027 and 2028, according to the forecast. Housing construction, however, remains constrained by labor shortages, tariff-related material costs and financing conditions.
More from UCLA: California wealth gap to widen, U.S. economy to slow into 2026
“Lower mortgage rates may spur some additional activity, but permit levels remain subdued and multifamily development is not expected to accelerate materially in the near term,” Nickelsburg wrote.
The forecast projects California’s unemployment rate to average 5.6% in 2026, declining to 4.8% in 2027 and 4.4% in 2028.
Total employment growth is expected to reach 0.9% this year, increasing to 1.8% in 2027 and 2.1% in 2028.
Real personal income growth is projected at 1.9% in 2026, rising to 2.8% in 2027 and 2.7% in 2028.
Nationally, the forecast said the balance of risks has shifted since late 2025 from stagnation toward reacceleration in 2026.
The U.S. economy expanded 2.2% in 2025 despite tariff hikes, supply chain disruptions and a prolonged federal government shutdown. GDP growth is projected to approach 3% in 2026, supported by income tax cuts, fiscal expansion and continued capital spending on artificial intelligence infrastructure, the report said.
Capital expenditures on AI are expected to reach roughly $660 billion in 2026, or about 2% of GDP. While the labor market stalled in 2025, the unemployment rate has edged down to 4.3% from a late-2025 high of 4.5%.
The forecast cautioned that the primary national risk has shifted from contraction toward potential overheating as fiscal stimulus, AI investment and improving labor conditions converge.
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