The U.S. economy is expected to slow over the next several months while California’s wealth gap continues to widen due to federal policy changes on tariffs, deportations and favorable tax changes for the rich, according to the UCLA Anderson Forecast released Wednesday.
In California, the university’s winter forecast describes a divergence of economic trends that economists say should correct itself once the economy absorbs all the structural changes over the next one to two years.
One trend shows fast-growing technology sectors raising billions in investments — such as data centers and artificial intelligence infrastructure. The other trend shows a state economy weighed down by tariff-induced inflation, policy-driven uncertainty and a “gradually weakening labor market,” according to the report.
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“The result of these changes is an economy that is expected to soften through the first quarter of 2026 before regaining strength later in the year,” said senior UCLA economist Clement Bohr in an interview with the Southern California News Group. “There’s a lot of uncertainty, but the turning point is really going to be in the first quarter, and we expect most of 2026 to be fairly strong. You should see inflation stop rising early next year, because tariffs will have been passed through into final prices by then.”
But things could get messy with the tariff situation.
The Supreme Court is expected to weigh in on whether President Donald Trump’s far-reaching tariffs are legal. The court will rule in the next several weeks or months on whether an emergency law — International Emergency Economic Powers Act — gives the president near-limitless power to set and change duties on imports, with potentially trillion-dollar implications for the global economy.
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Inflation, which hovered at about 3% in September, is projected to peak at 3.5% in early 2026, driven largely by earlier tariff hikes. Meanwhile, unemployment is expected to inch up to 4.5% by the end of 2025 — showing a modest uptick of 0.1% from current levels.
However, these economic forecasts could be revised once the U.S. Bureau of Labor Statistics catches up with the release of economic data delayed by the 43-day federal government shutdown that ended Nov. 12 — which will have some effect on the slowing economy, Bohr said.
California ‘bifurcated’
The outlook in California is complicated by “a bifurcated economy” where AI, aerospace and advanced manufacturing continue to expand while construction, leisure and hospitality and government-funded services face significant headwinds, Bohr explained.
At present, he said, California’s economy is buoyed by the state’s disproportionate share of venture capital investment in high-productivity sectors, largely in the Silicon Valley. Nearly 70% of all U.S. venture funding in early 2025 went to California, and seven of the 10 largest investment deals this year occurred in-state, according to Crunchbase data cited in the forecast.
While AI spending was originally estimated at $250 billion for various projects, investments have already surpassed $405 billion, with more expected in 2026, the forecast says.
The investment surge is expected to be reinforced by fiscal stimulus from the One Big Beautiful Bill Act, signed into law on July 4 by Trump. The tax law also boosted the income of wealthy households.
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“There’s a lot of investment coming into Silicon Valley and San Francisco because of the artificial intelligence boom. The widening gap between high income and low income consumers and households is a national phenomenon,” Bohr said. “But it’s more extreme in California because the state is the epicenter of this technology boom.”
At the moment, he explained, there is a “depression in demand” for goods and services in Southern California because tariffs are being felt more strongly in the ports complex in Long Beach and Los Angeles, and the Inland Empire having one of the main logistics and distribution hubs in the U.S.
While the region may be slumping somewhat now, Bohr expects “a fairly strong” recovery in 2026 and 2027, and Southern California to be “at the front end” of that rebound.
But that strength masks a growing divide.
Construction, nondurable goods manufacturing for items with a short lifespan — like food, apparel and paper products — retail, and leisure and hospitality remain under pressure from federal spending reductions, tariffs, elevated costs and the early effects of deportation policies.
Payroll job losses through the first eight months of 2025 marked the first sustained decline since the pandemic, and California’s unemployment rate has remained above 5% for more than 19 consecutive months, said Jerry Nickelsburg, director emeritus of UCLA Anderson Forecast. As of August, the state’s unemployment rate stood at 5.5%.
Early county-level data in California show a higher unemployment trend beginning to emerge, especially in counties with higher shares of foreign-born workers employed in construction, agriculture, food processing and hospitality, according to the forecast.
Nickelsburg said Trump’s immigration policies will have “near-term negative consequences” for communities that are closely tied to foreign-born workers.
“This is already seen in the data for 54 counties in California,” Nickelsburg said. “Those with a higher percentage of foreign born residents and within which have a larger percentage of jobs in agriculture, construction and leisure and hospitality, have already begun to see elevated unemployment relative to other counties in the state.”
“Once past the current weakness, expected late next year, a tech, durable goods manufacturing, and construction resurgence should lead to superior growth in the Golden State once again,” Nickelsburg said.
Durable goods are products that last three or more years, like automobiles, furniture, appliances, and electronics.
Housing ‘subdued’
Housing remains a significant constraint.
Building permits have “stayed subdued despite elevated home prices,” according to Nickelsburg. This fall, California’s permits for new housing dipped to an 11-year low, minus the pandemic-era lockdowns.
Workforce shortages tied to deportations, tariff-driven costs and persistently high financing costs all contribute to slow progress in residential building, the forecast said.
