Boosted by investments in AI, a revitalized aerospace industry and a growing U.S. defense budget, California’s economic growth is expected to continue outpacing the nation, according to a forecast from the UCLA Anderson School of Management.
However, tariffs, deportations and high energy prices are likely to somewhat slow growth, though it should pick up next year and in 2028, the fourth-quarter report said.
A major weakness, though, has been jobs. The state’s booming economy has not resulted in broad employment gains, a disappointing trend expected to continue the rest of the year.
California added only 138,500 jobs in the 12 months ending in August, with its unemployment rate standing at 5.1% that month, one point higher than the national average.
“California’s new bifurcated economy is not one between East and West, but one between AI, Aerospace and the like and the rest of the economy,” senior economist Jerry Nickelsburg said in the report released this week.
“But a rising tide does not necessarily lift all boats, particularly when that tide is fundamental technological change. There remain signs of concern in labor markets,” he said.
With final figures in, the report notes that the state’s economy grew at a 3.7% rate in the first quarter, substantially higher than the 2.1% rate of the overall U.S. economy.
The high growth rate exemplifies the state’s rich concentration of high-tech and other high-productivity industries.
Six of the 10 largest venture capital investments during the first quarter were in the San Francisco area, while in the second quarter, 82% of all venture capital investment went to California, according to the report.
The state’s aerospace industry is further benefiting from increased commercial aircraft production, defense purchases, space exploration and satellite production, it said.
The splurge in venture capital spending has been driven by the artificial intelligence boom, highlighted by OpenAI closing a record-breaking $122-billion funding round on March 31 at an $852-billion valuation.
In Southern California, where SpaceX has spawned scores of aerospace and defense startups, Costa Mesa’s Anduril Industries closed its own record-breaking $5-billion funding round in May at a $61-billion valuation.
However, the growth in those sectors has not resulted in widespread state job gains.
In Hollywood, a slowdown in film production has prompted Disney, Sony, Amazon and other studios to announce layoffs, with the industry shedding roughly 57,000 jobs in four years.
The impending merger of Paramount Skydance and Warner Bros. Discovery could erase another 4,500 jobs in Los Angeles County, according to an August report commissioned by the county government.
In the San Francisco area, even as tech companies have benefited from hundreds of billions of dollars in AI investments, major companies such as Google, Salesforce and Facebook owner Meta have cut staff.
However, the forecast predicts that AI investment will begin to produce job gains next year and in 2028, even as the cuts have depressed California’s jobs picture.
While payroll employment increased modestly over the 12 months ending in August, a separate survey of California households showed a decline of 351,100 people in the state labor force over the same period, the report noted.
The household survey includes the self-employed, agricultural workers and others not on company payrolls.
Job growth this year has been driven by healthcare and social services, education and retail — industries that the forecast does not expect to remain as strong.
The report notes government budget cuts, lower federal support for healthcare and President Trump’s deportation agenda are expected to trim hiring.
The forecast expects California’s unemployment rate to average 5.2% this year, 4.9% next year and 4.4% in 2028, with real personal income to increase 1.0% this year, 2.4% next year and 2.6% in 2028.
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