UCLA Anderson Forecast Says Oil Shock Has Replaced Tariffs as Leading Risk to U.S. Economy

California continues to outpace the nation in output and income, but employment growth remains tepid

LOS ANGELES, June 3, 2026 /PRNewswire/ -- The June 2026 UCLA Anderson Forecast for the U.S. and California finds the economy confronting another inflationary shock, this time driven by the war in Iran and the closing of the Strait of Hormuz. After tariff-driven inflation appeared to peak and the labor market began to stabilize, rising energy prices have created a new source of pressure on households, businesses and the Federal Reserve.

The national economy remains relatively resilient, but the Iran-related oil shock has replaced tariffs as the major inflation threat. GDP growth is now expected to hold at roughly 2.1% in 2026 rather than accelerate; inflation is forecast to peak at 4.5%; and unemployment is expected to rise only modestly to 4.5%. The key forces offsetting the oil shock and tariffs are investment in artificial intelligence, tax cuts and earlier fiscal support.

In California, the same energy shock creates additional pressures because of the state's specific low-emissions gasoline requirements and the importance of ports and logistics to the state economy. California continues to outpace the U.S. in output and income growth, but its labor market remains weak, and the employment recession described in prior Forecast reports is expected to continue through the third quarter of 2026.

The National Economy

The June 2026 forecast for the nation describes an economy that had begun to move past the disruptions of 2025 before being hit by another adverse supply shock. The war in Iran and closure of the Strait of Hormuz have disrupted roughly 20 million barrels per day of oil flow, or about 20% of global daily oil consumption. The severity of the economic effect depends largely on how long the strait remains closed.

As the national report states, "The 2020s are beginning to look eerily similar to the 1970s," a decade marked by high inflation, slow growth and the reemergence of the term "stagflation." The current forecast does not predict a repeat of the 1970s, but the comparison reflects the sequence of supply shocks the economy has experienced since 2020: pandemic-era supply-chain disruptions, the war in Ukraine, tariffs and, now, the war in Iran.

The primary economic impact of the oil shock is inflation. Headline CPI inflation rose from 2.4% to 3.8% over two months and is expected to continue rising, peaking at 4.5% on a year-over-year basis by the end of 2026. Core inflation is expected to rise more gradually, peaking at 3.5% in the second quarter of 2027 as higher energy costs pass through to goods and services.

Tariff inflation, by contrast, appears to have peaked earlier in 2026. The overturning of many previous tariffs is expected to put modest downward pressure on goods and core inflation, but the report asserts that this effect will be small compared with the price disruptions caused by the conflict in Iran.

The labor market has held up better than expected but remains stagnant rather than strong. The unemployment rate was 4.3% in April, unemployment insurance claims remain near all-time lows, and nonfarm payrolls grew by an average of 76,000 jobs per month over the first four months of the year. The Forecast expects the unemployment rate to increase modestly to 4.5% by the end of 2026 and remain there as energy costs weigh on household spending and fiscal stimulus later moves into reverse.

The Federal Reserve now faces a more difficult policy environment. After cutting rates late in 2025 because of concerns about labor-market weakness, the Fed is unlikely to cut further in 2026. The Forecast expects the central bank to hold rates steady for the remainder of the year while it waits to see how persistent inflation becomes and how well the labor market holds up.

GDP growth is now expected to remain resilient rather than accelerate. Real GDP grew 2.1% in 2025, and the Forecast expects growth of 2.1% from the fourth quarter of 2025 to the fourth quarter of 2026. Growth is expected to weaken further to 1.8% in 2027.

The principal counterweight is the continued surge in artificial intelligence investment. Big Tech's AI infrastructure spending is expected to approach $700 billion in 2026, more than 50% higher than in 2025. Combined with tax cuts and other fiscal support, this investment is expected to help the U.S. economy absorb the oil shock without falling into recession under the Forecast's baseline assumptions.

The California Economy

The California forecast describes a state economy that remains bifurcated. California continues to outperform the U.S. in output and income growth, but employment remains weak and uneven. As the California report notes, the state's new bifurcated economy is not geographic, but sectoral, with AI, aerospace and other tech on one side, and the rest of the economy on the other.

California outpaced the U.S. in economic growth in the fourth quarter of 2025, and the Forecast estimates that the same happened in the first quarter of 2026. Investment in technology remains strong, with California continuing to attract a disproportionate share of venture capital funding. Increased demand for commercial aircraft, defense goods and space products is expected later in 2026 and into 2027 and 2028.

At the same time, the state's labor market remains weak. California's unemployment rate has been above 5.0% for 27 months, and it stood at 5.3% in April 2026. Payroll jobs increased by 56,600 in 2025 after benchmark revisions, and by 97,200 over the first four months of 2026; but the Household Survey showed an employment loss of 111,000 and a labor force decline of 158,000 over the same period.

California is more exposed than the nation to the energy shock in several ways. The state uses a specific low-emissions gasoline that tends to make prices higher than the national average, and its ports handle cargo that crosses the Pacific on ships that require large amounts of more expensive fuel. Higher energy costs are expected to reduce consumer demand and add pressure to the logistics sector.

Goods movement had been mildly positive prior to the Iran War, with imports through Southern California's ports above pre-pandemic levels and air cargo showing signs of improvement, particularly in international traffic. But the Forecast expects a drop-off because of lower consumer demand, higher fuel costs for air and sea freight, and supply chain interruptions. Logistics employment is expected to show little growth in 2026 and early 2027, followed by positive increases thereafter.

The state's high-productivity sectors remain the main 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. Tech employment remains under pressure, but the Forecast assumes that AI-related hiring and the end of contraction in other parts of tech will eventually produce employment gains.

Housing remains a major constraint. The 10-year Treasury rate has risen above 4.4%, and 30-year fixed mortgage rates have moved above 6.5%. With war-induced inflation moving higher, the Forecast does not expect downward pressure on mortgage rates this year. Deportations are expected to further limit the construction workforce, while tariffs continue to raise the cost of imported building materials.

Permits remain relatively flat, and the 12-month run rate for new permits is around 110,000 units per year, well below what is needed to address California's housing affordability problem. The overall outlook for California is slightly weaker than it was three months ago, though income and output are expected to continue growing faster than the U.S., even as employment growth remains tepid.

California Forecast Numbers

Unemployment Rates (Annual Averages)

2026: 5.5%
2027: 5.1%
2028: 4.2%

Total Employment Growth

2026: 0.2%
2027: 0.7%
2028: 2.5%

Non-Farm Payroll Jobs

2026: 1.2%
2027: 1.5%
2028: 2.0%

Real Personal Income Growth

2026: 2.3%
2027: 2.4%
2028: 2.5%

Residential Permits

2026: 115,000
2028: 122,000

Outlook

The June 2026 Forecast reflects an economy that remains resilient but is being tested by another major supply shock. Nationally, the central risk has shifted from tariff-driven inflation to energy-driven inflation. The baseline forecast does not call for recession, but it does anticipate slower growth, higher inflation and a Federal Reserve with little room to cut interest rates.

In California, the challenge is more acute. The state continues to benefit from AI, aerospace and high-productivity sectors, but its labor market remains weak and its exposure to fuel prices, logistics disruption, deportations and housing constraints makes the outlook somewhat weaker than it was three months ago.

The UCLA Anderson Forecast's summer 2026 economic outlook conference, titled The Blurring Lines Between Residential and Commercial Real Estate, will be held on Wednesday, June 3, in collaboration with the UCLA Ziman Center for Real Estate.

About UCLA Anderson Forecast

UCLA Anderson Forecast is one of the nation's most widely watched economic outlooks and was unique in predicting both the seriousness of the early-1990s California downturn and the strength of the state's rebound. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and was among the first to declare the COVID-19 recession in March 2020.
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About UCLA Anderson School of Management

UCLA Anderson School of Management is a world-renowned learning and research institution. As part of the nation's No. 1 public university, its mission is to advance management thinking and prepare transformative leaders to make positive business and societal impact. Located in Los Angeles, one of the nation's most diverse and dynamic cities and the creative capital of the world, UCLA Anderson places more MBAs on the West Coast than any other business school, and its graduates also bring an innovative and inclusive West Coast sensibility to leading organizations across the U.S. and the world. Each year, UCLA Anderson's MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics and doctoral programs educate more than 2,000 students, while the Executive Education program trains an additional 1,800 professionals. This next generation of transformative leaders will help shape the future of both business and society.
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SOURCE UCLA Anderson Forecast