As California inches closer to a new year, the economy is expected to soften through the first quarter of 2026 before rebounding in later months as a result of a bifurcated economy, according to a UCLA economic forecast released Wednesday.
The December 2025 UCLA Anderson Forecast, a 98-page report examining economic trends, described two situations working in opposition. Some sectors of the economy will drive growth as a result of heavy investment in artificial intelligence and rising income among high-wealth households while other areas will weaken as a result of tariff-induced inflation, policy-driven uncertainty and a gradually weakening labor market.
On Wednesday, the UCLA Anderson School of Management is expected to conduct its Winter 2025 Economic Outlook conference and discuss findings of their report. Economists will give addresses on the topic “Financial Stability Amid AI & Crypto Exuberance,” presented in collaboration with the UCLA Fink Center for Finance.
Highlights of the report show, at present, California’s economy continues to outpace the nation’s in high-productivity sectors such as AI, aerospace and advanced manufacturing. California received significant venture funding in early 2025 with seven of the 10 largest investment deals in the Americas occurring in-state.
However, due to federal spending reductions, tariffs, elevated costs and the early effects of immigration policies, sectors such as construction, nondurable goods manufacturing, retail, leisure and hospitality will remain under pressure.
California’s unemployment rate has remained above 5.0% for more than 19 consecutive months, and economists anticipate it will continue until 2027.
“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,” according to the report. “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.”
Despite an urgent need for new construction following December 2024 and January 2025 wildfires, housing will be impacted due to workforce shortages tied to deportations, increased costs in materials and high financing.
A positive note of the report found air cargo volume has begun to recover to pre-pandemic levels in both Northern and Southern California. The data indicates a steady demand in higher-income households and businesses linked to the state’s technology sector.
The forecasts anticipates a gradual improvement beginning in late 2026 for California’s unemployment rates, employment growth, non-farm payroll jobs, real personal income growth and residential permits.
Meanwhile, the national forecast highlights a slowing but resilient economy — also being supported by investment in AI infrastructure. The report notes that AI-related investment surpassed $405 billion far beyond what was originally estimated at $250 billion, which will be further boosted due to the One Big Beautiful Bill Act.
Tariffs enacted throughout 2025 will continue to impact the supply chain with businesses expected to raise goods prices, placing pressure on consumers and small businesses.
Unemployment is expected to increase up to 4.5% by the end of 2025, according to the report. Inflation is projected to peak at 3.5% in early 2026, driven by tariff hikes, though economists anticipate that figure will gradually decline but remain elevated.
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