The California economy continues to outperform the U.S. thanks to a strong tech sector and venture capital, but unemployment is high and gas prices are rising, according to the latest UCLA Anderson Forecast released Wednesday.
“The overall outlook for the state is slightly weaker than our forecast 3 months ago,” wrote Senior Economist Jerry Nickelsburg in the quarterly forecast. Nevertheless, he added, “Income and output will continue to grow faster than the U.S. even as employment growth is tepid.”
The unemployment rate reached 5.3% in April and is expected to peak at 5.6% later this year, before slowly coming down over the next three years.
Nickelsburg warned that California is more exposed to economic shock if the Iran war continues than other parts of the nation. He noted that the state uses already-expensive low-emissions gasoline, and its ports handle cargo that crosses the Pacific on ships that require large amounts of more expensive fuel.
The forecast highlighted the state’s high-productivity sectors as a source of longer-term optimism. Aerospace is benefiting from increased production at Boeing and Airbus, increased defense purchases, and demand tied to space exploration and satellite production. The forecasters also expect AI-related hiring to eventually produce employment gains.
Housing remains a major constraint, however, with permits flat at around 110,000 units a year — well below the level needed to address affordability. In addition, deportations are expected to limit the construction workforce, while tariffs raise the cost of imported building materials.
“That the home construction sector is in the doldrums is evidenced by the continuation of depression-level sales volume for single-family detached housing and continued increases in median prices,” wrote Nickelsburg.
For the national economy, the forecast sees parallels with the 1970s, when the world also experienced an oil-price shock.
“The 2020s are beginning to look eerily similar to the 1970s,” a decade marked by high inflation, slow growth and the emergence of the term “stagflation,” according to the economists.
The forecast expects national growth in real GDP of 2.1% from the fourth quarter of 2025 to the fourth quarter of 2026. Growth is then expected to weaken to 1.8% in 2027.
The national unemployment rate stood at 4.3% in April and is expected to increase to 4.5% by the end of the year.
The UCLA forecast is one of the nation’s most widely watched economic outlooks and was among the first to declare the COVID-19 recession in March 2020.
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