Weakness Persists in U.S. and California Economies, with Recovery Not Expected Until 2026

UCLA Anderson Forecast reports that the risk of rising layoffs' leading to a recession is a tangible possibility

• Throughout summer 2025, the U.S. economy endured inflection points that included a decline in payroll employment in June, a rising trajectory for inflation, and Federal Reserve chairman Jerome Powell's announcement of a change in monetary policy
• The "Powell Pivot" shifted the Fed's focus to a stronger emphasis on its employment mandate relative to its inflation mandate
• In the U.S. economy, growth will recover in mid-2026 and reach 2% by the fourth quarter of 2026, a faster pace of recovery than previously projected
• In California, recovery will commence in late 2026 and growth will be slightly faster in 2027

LOS ANGELES, Oct. 1, 2025 /PRNewswire/ -- Since the June release of UCLA Anderson Forecast's second quarterly report of 2025, the national economy has endured several inflection points that now inform its subsequent third quarterly economic forecast. First, the labor market deteriorated notably, marked by a decline in payroll employment in June. The inflationary trend pivoted to a rising trajectory. Finally, Federal Reserve chairman Jerome Powell signaled a change in monetary policy. In what is referred to as the "Powell Pivot," the Federal Reserve's focus has shifted to a stronger emphasis on its employment mandate relative to its inflation mandate.

As a result, this latest forecast comes at a time when more extreme economic scenarios are possible; and, while they do not manifest in the current baseline outlook, they are plausible enough to mention and monitor. The risk of rising layoffs' leading to a recession is now a tangible possibility. Even if a recession is avoided, the current pivot toward monetary easing sets the stage for what the Forecast anticipates will be a "stagflation-lite" regime, marking a period in which both inflation and unemployment remain modestly elevated. Finally, should the current administration's attempt to undermine the Federal Reserve's independence succeed, a full-blown stagflation scenario becomes a more significant risk.

Previous reports pointed to signs of weakening in the California economy. The data on employment in the state over the past eight months suggest that California is in an employment contraction, one that will last through 2025. Data on income and production are collected with a lag, but it is reasonable to expect that they will also show a sharp slowing from last year and possibly a mild contraction in the state's economy.

The California sectors that have fueled better-than-U.S. growth rates since 2000 have been stagnant or contracting; these include tech, durable goods manufacturing, entertainment and logistics. Entering 2025 with an economy growing at half the rate of the U.S. left the state's economy without the inertia evident in the national economy. Over the first seven months of the year, California lost payroll jobs and the unemployment rate increased to above 5%. Once the state is past the current weakness, which is expected to occur in late 2026, a tech, durable goods manufacturing and construction resurgence should lead to California's superior growth once again.

The national forecast

The UCLA Anderson Forecast's third quarterly report of 2025 observes that the U.S. labor market remains resilient. Claims for unemployment remain low at 1.92 million and, though the unemployment rate has risen to 4.3%, it remains low by historical standards. However, other dimensions of the labor market demonstrate signs of weakness. The aforementioned unemployment rate masks weak underlying employment growth, a result, simultaneously, of a decline in the labor supply among the working-age population affected by restrictive immigration policies and retiring baby boomers. June's outright decline in non-farm payrolls is particularly noteworthy, as economists view this as the primary signal that a recession is imminent — or even that it has already begun. Moreover, the positive job gains that have occurred on average over the past month are concentrated in just a few sectors, such as healthcare and education. Most other sectors of the economy have seen declining employment numbers since April.

Finally, there are now fewer job vacancies than there are unemployed. The Forecast expects the labor market to weaken further through the end of 2025, with the unemployment rate peaking at 4.6% at the onset of 2026, accompanied by further declines in non-farm payrolls. This is a mild weakening, similar to the economic slowdown in 1995. It does not represent a full-blown recession. It is projected that labor markets will slowly recover in the second half of 2026 and throughout 2027, as the effects from tariffs have worked their way through the economy and give way to the fiscal and monetary stimulus that is on the horizon.

After trending downward, inflation reversed course in May and has been gradually rising to uncomfortable levels with the monthly CPI inflation rate for August coming in at a seasonally adjusted annual rate of 4.8%. This rise is likely to persist: Inflation at earlier stages of production along the supply chain have only just begun rising faster than they have for finished goods. While some of this rise is driven by prices of goods exposed to tariffs, a large part of the increase so far has been driven by the price of non-shelter services, such as airline fares and dental care. This is concerning for two reasons: first, much of the cost of the tariffs has yet to be passed on to consumers; and second, significant inflationary pressures are still coming from the services sector, which makes up about two-thirds of the consumption basket. As a result, the Forecast expects inflation to continue to rise throughout the rest of 2025 as the cost of tariffs is finally passed on to consumers, with the headline CPI peaking at 3.6% SAAR in the first quarter of 2026.

The report forecasts third-quarter GDP growth to come in at around 1.0% SAAR. As in the first quarter of 2025, this subdued headline growth masks a stronger underlying rate of core GDP growth because of a run-up in imports in July before the next round of tariffs was imposed in August. The quarter will be driven by a recovery in consumer expenditure growth and continued expansions of AI capital expenditures, while residential construction contracts further. Following this quarter, growth is expected to weaken substantially in the winter as the cost of tariffs fully take hold. Consumption expenditures growth will weaken, as spending was pulled forward into the third quarter to take advantage of expiring electric vehicle tax subsidies and lower tariff rates. Non-AI related capital expenditure growth, which has been mostly non-existent so far this year, will contract, pushing net investment expenditures into negative territory. Growth will recover in mid-2026 and reach 2.0% by the fourth quarter of 2026. This is a faster pace of recovery than previously projected, owing to the higher levels of monetary and fiscal stimulus that will now take place.

The California report

For the California economy to grow faster than the U.S. economy, as it is accustomed to do, durable goods manufacturing — including aerospace and technology-laden sectors — will have to rebound strongly. In manufacturing, transportation equipment and related navigational equipment and semiconductors were the subsectors with the largest job losses in 2025. Aerospace should benefit from the return to normal production at Boeing and Airbus and increased emphasis on space exploration and satellite production. The recovery at Boeing is not expected to be adversely impacted by tariff-based retaliatory action by China and India in the near term, as Boeing has a 10-year backlog of aircraft orders that include many aircraft that would have been manufactured over the three years of an FAA-mandated slowdown in production. Nevertheless, California and the nation have experienced a general decline in manufacturing employment, and the timing of a turn-around in this sector remains uncertain. For technology, the issues are the issuance of a large number of H-1B visas and the rapidly changing skill set emphasizing AI development, now demanded by employers.

Two sectors that will be impacted by deportations are food processing (non-durable goods manufacturing) and agriculture. These will be disproportionately felt in the inland parts of the state and the agricultural coastal valleys. The H-2A program is in place for the purpose of allowing U.S. companies to hire foreign nationals temporarily for agricultural work. However, there is no sign from the Trump administration to indicate that it will champion bringing in seasonal guest workers. Rather, it is believed that U.S. residents with legal status will take jobs in the fields and in the meat processing plants that are now occupied by undocumented workers. Although temporary worker visas could make up for some of the loss of labor, the visas would likely be available only to the subset of workers who are seasonal. Temporary worker programs like H2-A are designed for partial-year entry into the U.S. and not permanent entry.

The data from the past three months confirmed that the California economy has been growing slower than the U.S. in 2025, with several quarters of negative job growth. The current forecast is substantially the same as June's, with a slightly weaker 2025 and a slightly stronger 2027.

A recovery in California will commence in late 2026; growth will be slightly faster in 2027. The unemployment rate is expected to hit a peak of 6.2% early next year and the average unemployment rates for 2025, 2026 and 2027 are expected to be 5.5%, 5.9% and 4.6%, respectively.

The forecast for 2025, 2026 and 2027 is for total employment growth rates to be 0.5%, 0.4% and 2.3%, while non-farm payroll jobs are expected to be -0.1%, 0.1% and 2.2% during the same three years. Real personal income is forecast to grow by 1.5% in 2025, 0.9% in 2026 and 2.7% in 2027. Higher interest rates, shortages of construction labor, and the rebuilding of damaged and destroyed homes lowered our residential construction forecast from March. The UCLA Anderson Forecast's expectation is for permitted new units to be 107,000 this year and grow to 117,000 by the end of 2027. This level of home building means that the prospect for the private sector building out of the housing affordability problem over the next three years is nil.

About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state's rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.
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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 School of Management