California’s economy continues to outpace the nation in economic growth despite a weak labor market, while inflation and elevated interest rates remain concerns nationally, according to a UCLA Anderson Forecast being released Wednesday.
The September forecast found California’s economy grew at an annual rate of 3.7% in the first quarter of 2026, compared with 2.1% nationally, with only Washington state growing faster.
Over the year ending in the first quarter, California’s gross domestic product grew 3.3%, compared with 2.7% nationally, according to the forecast.
But the state’s economic growth has not translated into broad employment gains. California’s unemployment rate stood at 5.1% in August, the highest of any state and one percentage point above the national rate, according to the forecast.
UCLA economists said the “employment recession” they identified six months ago has continued even as California has outperformed the nation in the production of goods and services.
Payroll employment increased by 138,500 jobs in California over the 12 months ending in August, while a separate household survey showed 246,700 fewer Californians employed and a decline of 351,100 people in the state’s labor force over the same period.
Job growth so far this year has been concentrated largely in healthcare and social services, education and retail, sectors the forecast does not expect to provide the same level of support going forward.
The forecast said stronger employment growth will increasingly depend on technology, aerospace and other durable-goods manufacturing. Tech employment continues to decline, although at a moderating pace, while aerospace is benefiting from increased commercial aircraft production, defense purchases, space exploration and satellite production.
UCLA economists expect AI-related hiring and the end of contraction elsewhere in the technology sector to produce employment growth beginning in 2027 and accelerating in 2028.
California’s unemployment rate is forecast to average 5.2% in 2026 before declining to 4.9% in 2027 and 4.4% in 2028. Total employment is expected to decline 0.2% this year before growing 0.6% in 2027 and 1.8% in 2028.
Housing construction is expected to remain constrained. The annual pace of permits has remained around 110,000 units, with elevated mortgage rates, tariffs on imported building materials and the loss of construction workers through deportations expected to continue limiting construction.
The forecast expects 116,000 residential permits this year, rising to 118,000 by the end of 2028.
Nationally, UCLA economists expect economic growth to remain above 2% for the rest of 2026 and near 2% in 2027 and 2028, supported partly by continued investment in artificial intelligence infrastructure and rising valuations of technology companies.
The forecast estimates that high-tech investment and the wealth effect associated with AI-related equities together account for nearly one percentage point of core gross domestic product growth.
Inflation is expected to increase again this winter, with headline inflation moving toward 4%. Core inflation is expected to approach 2.9% in early to mid-2027 before gradually declining toward the Federal Reserve’s 2% target.
The forecast expects the Federal Reserve to raise its benchmark interest rate by another quarter-point in December and make no further changes through 2027, barring another adverse supply shock.
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