UCLA Anderson Forecast Sees Resilient Growth Despite Inflation, Weak Labor Markets
California continues to outpace the nation in economic growth, even as employment recession persists
LOS ANGELES, Sept. 30, 2026 /PRNewswire/ -- The UCLA Anderson Forecast's September 2026 outlook finds an economy that has largely weathered a series of disruptions, with economic growth remaining resilient, even as inflation and interest rates have risen and labor markets nationally and in California remain weak.
The outlook has shifted considerably over the course of the year. In March, the Forecast expected tax cuts and rapidly expanding investment in artificial intelligence to help reaccelerate the U.S. economy in 2026. Three months later, the war in Iran and resulting oil shock had replaced tariffs as the leading threat to that expansion.
The contrasting signals are particularly pronounced in California. The state'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. Yet California's unemployment rate stood at 5.1% in August, the highest of any state. The "employment recession" identified by the Forecast six months ago has continued, even though California has outperformed the nation in the production of goods and services.
Nationally, the Forecast expects growth to remain above 2% for the remainder of 2026 and near 2% in 2027 and 2028, supported in part by continued investment in AI infrastructure and the wealth effects associated with rising technology equity valuations. Inflation, meanwhile, is expected to move higher again this winter, keeping interest rates elevated and prompting the Federal Reserve to raise rates accordingly.
The National Economy
The September 2026 forecast describes a U.S. economy that has proved surprisingly resilient through a series of shocks. The tariff increases that dominated the outlook in late 2025 were followed by the war in Iran and a sharp increase in oil prices in the spring. Despite those disruptions, underlying economic growth has remained around or above 2%.
Credit the continued expansion of AI-related investment for much of the growth. Capital spending by large technology companies has supported nonresidential investment, while rising valuations of AI-related companies have increased household wealth and helped support consumer spending. 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 GDP growth.
Fiscal policy has provided an additional boost. Larger income tax refunds and tariff refunds have increased disposable income, helping offset some of the drag from higher energy costs and interest rates.
The labor market, however, continues to send mixed signals. The unemployment rate fell in August to 4.1% from 4.5% in November 2025, but payroll growth has slowed substantially. Payrolls increased by 162,000 in August but averaged just 71,000 jobs per month over the previous three months, and 31,000 per month over the previous year. At the same time, immigration restrictions and demographic trends have reduced growth in the labor force.
The Forecast expects the labor market to stabilize rather than accelerate, with monthly payroll growth generally between zero and 50,000 jobs and unemployment remaining near 4.2% through the forecast horizon.
Inflation remains a more persistent concern. The disruption to world oil supplies caused by the Iran conflict, combined with attacks on Russian refining capacity, has kept energy prices elevated. Headline inflation, which declined to 3.4% in July and August after reaching 4.2% in May, is expected to move back toward 4% during the winter. Core inflation is expected to approach 2.9% in early to mid-2027 before gradually declining toward the Federal Reserve's 2% target.
Higher inflation has also changed the outlook for interest rates. The 10-year Treasury yield has risen from below 4% in February to around 5%, reflecting inflation and fiscal risks, heavy private-sector borrowing associated with AI investment and continued expectations for economic growth. The Forecast expects long-term rates to remain elevated.
The Federal Reserve raised the federal funds rate by 25 basis points in September, to a target range of 3.75% to 4%. The Forecast expects another quarter-point increase in December, followed by no further changes through 2027, absent another adverse supply shock.
Overall, the Forecast expects GDP growth above 2% through the remainder of 2026 and around 2% in 2027 and 2028. The outlook is subject to significant risks in both directions. A sharp correction in AI-related equity valuations or financing could reduce investment and consumer spending, while another escalation in the Middle East could push oil prices sharply higher. Conversely, a resolution of the conflict and faster diffusion of AI-driven productivity gains could produce stronger growth with less inflation.
The California Economy
California continues to present an unusual combination of superior economic growth and inferior employment performance.
In June, the Forecast estimated that California's economy had grown 2.9% in the first quarter of 2026. The actual growth rate was substantially higher: 3.7%, compared with 2.1% nationally. Over the year ending in the first quarter, California GDP grew 3.3%, compared with 2.7% for the nation. Adjusting for population migration leaves California's growth rate unchanged and widens its advantage over other fast-growing large states whose economies benefited from population gains.
Much of that growth reflects California's concentration in technology and other high-productivity industries. Six of the 10 largest venture capital investments in the Americas during the first quarter were in the San Francisco Bay Area, representing more than 95% of the value of the top 10 investments. In the second quarter, 82% of all venture capital investment went to California. Aerospace is also benefiting from increased commercial aircraft production, defense purchases, space exploration and satellite production.
But that strength has not translated into broad employment gains. California's unemployment rate has remained above 5% for 31 months and stood at 5.1% in August, one percentage point above the national rate. Payroll employment increased by 138,500 jobs over the 12 months ending in August, while a separate household survey showed 246,700 fewer Californians employed and a decline of 351,100 in the state labor force over the same period.
The two measures capture different aspects of employment, but both point to continued weakness in labor demand. Job growth so far in 2026 has been concentrated primarily in health care and social services, education and retail — sectors that the Forecast does not expect to provide the same support going forward. Government budget constraints, reductions in federal support for health care and continued deportations are expected to limit hiring in several of those areas.
A stronger California labor market will therefore depend increasingly on technology, aerospace and other durable goods manufacturing. Aerospace is already benefiting from increased production and government and private-sector demand. Tech employment continues to decline, although at a moderating pace. The Forecast assumes AI-related hiring and the end of contraction elsewhere in the technology sector will produce employment growth beginning in 2027 and accelerating in 2028.
Housing remains another constraint. New-home construction has changed little since June, with the annual pace of permits around 110,000 units, well below the level needed to address the state's housing shortage. Elevated mortgage rates, tariffs on imported building materials and the loss of construction workers through deportations are expected to continue limiting new construction.
Overall, the September 2026 California outlook is slightly weaker than the June forecast, largely because of continued disruption in energy markets. Recovery is expected to begin in early 2027, followed by stronger growth later in 2027 and in 2028.
The Forecast expects California's unemployment rate to average 5.2% in 2026, 4.9% in 2027 and 4.4% in 2028. Total employment is forecast to decline 0.2% in 2026 before growing 0.6% in 2027 and 1.8% in 2028, while nonfarm payroll employment is expected to grow 0.9%, 1.2% and 2.2%, respectively. Real personal income is forecast to increase 1.0% in 2026, 2.4% in 2027 and 2.6% in 2028. The Forecast expects 116,000 residential permits this year, rising to 118,000 by the end of 2028.
Separating AI Investment from AI's Economic Impact
In a new essay, senior economist Clement Bohr examines the distinction between the already substantial economic effects of investment in artificial intelligence and the effects of the technology itself. AI-related infrastructure spending and rising technology equity valuations are already contributing significantly to economic growth, Bohr writes, but evidence that AI itself is responsible for broad changes in employment or productivity remains inconclusive. He argues that it is too early to know how transformative AI will be, ultimately, and notes that previous general-purpose technologies took years to produce measurable economy-wide productivity gains.
UCLA Anderson Forecast's fall 2026 economic outlook conference, Energy in the Age of AI and War, is organized in collaboration with the Center for Impact and takes place on September 30, 2026.
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.
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
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