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Economic Trends: U.S. and California Outlook

As we look towards 2026, the economic landscape for both the United States and California presents a complex picture, according to the December 2025 UCLA Anderson Forecast. On one hand, significant investments, particularly in artificial intelligence (AI), are acting as a catalyst for growth. On the other hand, several challenges, such as tariffs and labor market weaknesses, are restraining economic momentum.

A Two-Speed Economy

The current economic forecast reveals the presence of contrasting trends. While certain sectors, particularly those driven by AI, continue to flourish, others such as construction and leisure struggle to maintain stability due to external pressures. These dualities create an environment where economic growth may slow at first before rebound prospects emerge later in 2026.

National Trends

Nationally, ongoing capital investments, particularly in AI infrastructure, are projected to enhance resilience. Initial estimates suggested that AI-related investment for 2025 would be around $250 billion; however, this figure has now soared past $405 billion. Such remarkable growth in this sector is further bolstered by fiscal reinforcements like the One Big Beautiful Bill Act (OBBBA).

Nonetheless, the shadow of tariffs looms large as they exert upward pressure on consumer goods prices, impacting small businesses and consumer spending. With expected unemployment rates edging toward 4.5% by the end of 2025, the performance of the job market casts uncertainty over future economic growth.

While inflation is anticipated to peak at 3.5% in early 2026, driven in part by these tariffs, it is expected to gradually decline afterward. Interest rates are anticipated to stabilize within a range of 4.0% to 4.4% due to public deficits and aging demographics, meaning that a return to the lower rates seen before the pandemic may not happen soon.

California’s Economic Landscape

Turning to California, the state is characterized by a bifurcated economic landscape. While high-productivity sectors such as AI and aerospace thrive, traditional industries like construction and hospitality are facing significant setbacks, exacerbated by elevated operational costs and regulatory changes.

Currently, nearly 70% of all venture capital investment in the U.S. flows into California, highlighting the state’s critical position in the innovation economy. However, the economic divide reveals growing disparities among various sectors. Employment losses signal troubling trends ahead, particularly in industries that typically rely on immigrant labor. The effect of heightened deportation policies is starting to manifest, adversely affecting local economies reliant on diverse workforces.

Housing developments remain at a standstill despite urgent needs and high demand, as rising input costs and labor shortages hinder progress. The forthcoming months are set to be particularly challenging, with an employment recession likely stretching into early 2026, as job growth in various sectors continues to falter.

Looking Ahead

As California navigates these complexities, the prediction for both state and national economies is cautious optimism. While a downturn is not anticipated in the immediate future, gradual recovery seems likely as consumer confidence and capital spending stabilize into late 2026 and beyond. Indicators from industries such as air cargo show signs of recovery, reflecting renewed demand from higher-income consumers linked to California's technology sector.

In conclusion, while challenges abound, the economic forecast suggests that with appropriate policies and investments in place, opportunities for recovery remain tangible. Stakeholders must remain adaptable as these economic currents unfold, staying attuned to the dual dynamics characterizing the current landscape.

For further insights and detailed information, the UCLA Anderson Forecast provides in-depth analysis and projections to help understand economic trajectories and implications for businesses and individuals alike.