U.S. Economy to Slow Through Early 2026, While California Navigates a Two-Speed Recovery

Economic Overview - The December 2025 UCLA Anderson Forecast indicates a dual economic trend in the U.S. and California, with strong AI investment and rising incomes among high-wealth households driving growth, while tariffs, immigration policies, and a weak labor market create headwinds [1][2][4] - The national economy is expected to soften through early 2026 before regaining strength later in the year, with projected AI-related investment in 2025 surpassing $405 billion, significantly higher than the initial estimate of $250 billion [4][7] California Economic Conditions - California's economy shows a bifurcated landscape, with high-productivity sectors like AI and aerospace expanding, while construction, non-durable goods, and leisure sectors face significant challenges [2][8] - The state continues to attract a disproportionate share of venture capital, with nearly 70% of U.S. venture funding in early 2025 directed to California [8] Employment and Labor Market - Employment growth has sharply slowed, with unemployment expected to rise to 4.5% by the end of 2025, while inflation is projected to peak at 3.5% in early 2026 [6][7] - California's unemployment rate has remained above 5.0% for over 19 months, with payroll job losses marking the first sustained decline since the pandemic [9][10] Housing and Construction - Housing remains a significant constraint, with subdued building permits despite high home prices and a need for new construction following recent wildfires [11] - The forecast anticipates gradual improvement in residential permits, with 101,000 expected in 2025 and 121,000 in 2027 [13] Future Projections - The forecast predicts a gradual improvement in economic conditions starting in late 2026, with unemployment rates expected to decrease from 5.5% in 2025 to 4.6% in 2027 [13] - Total employment growth is projected to be 0.6% in 2025, increasing to 2.0% by 2027 [13]