Category: Uncategorized

Mark Schniepp
April 2026

Uncertainty

A year ago, tariff hysteria gripped the nation, the stock market, and all the talking heads on TV who predicted carnage and chaos in the form of higher inflation, infuriating the nations we trade with, and interrupting economic growth. Clearly this was politically motivated because none of that happened.

In 2025 the nation (and more severely so, California) experienced an expansion in growth with barely any job creation. So, in spite of the tariffs and weak labor markets, GDP rallied from the investment boom in Artificial Intelligence (AI). Economic growth would have been even more impressive had it not been for the 43-day government shutdown. According to the Bureau of Economic Analysis, this subtracted slightly more than a full percentage point from fourth quarter GDP growth.^[1]

Here we are a year later and the new uncertainty of the season is the price of oil, inflation (again), the duration of the Israel-Iran war, and how all of these things together will upset domestic economic growth.

Oil prices have jumped $40 to $50 per barrel since early March, resulting in a $1.50 per gallon bump for gasoline in California. Higher gasoline prices are akin to a tax increase, especially for lower income groups. So, we are all paying a higher tax on gasoline due entirely to the war.

Also due to the war driving up oil prices, the stock market has experienced a 10 percent correction, and interest rates (especially in the 10-year treasury bond and mortgages) have moved noticeably higher. Economists see most of these movements as temporary and prices and rates will very likely revert back to pre-war levels once the Middle East conflict and Strait of Hormuz situation is resolved. No recession is forecast, but both inflation and unemployment rates will increase this year.

The first quarter estimate for GDP by the Atlanta Federal Reserve’s GDPNOW prediction has ranged from 2.3 to 1.3 percent over the last few weeks. A slowdown in consumer spending and business investment in late March and early April have pushed the estimate down to 1.3 percent.

Inflation

Last year we were correct regarding our skepticism about Tariffs causing higher rates of inflation. The U.S. economy remains predominantly domestically driven, with tariffs having a greater impact on trading partners than on the U.S. economy itself.

Capital markets were nervous at first but settled down. Inflation for the most part simply moved laterally through 2025. If anything, tariffs may have prevented inflation from going lower, but no clear indication on the price level could be detected as tariff-driven.

Nevertheless, inflation has missed the Fed’s 2.0 percent threshold for over five years.  It was 2.4 percent in both January and February this year and was seemingly making progress toward reaching the target rate later in 2026.

But crude oil prices soared with the onset of the war in early March and have remained sharply higher into April.  The effect of this has pushed the headline rate of inflation higher (to 3.3 percent), due principally to higher gasoline prices but indirectly through other prices now being raised by vendors to compensate for their higher fuel costs.

The longer that crude oil prices stay elevated, the longer it will take for gasoline prices to retreat and for pre-war levels of inflation to be restored. More fed cuts, that were anticipated before March, are likely off the table now until at least later in the summer. Inflation is going to remain sticky for awhile and movement toward the Fed target will be delayed further.

Interest Rates and Federal Debt 

Interest rates rose sharply in March, in sync with oil prices. An inflationary environment does not favor the bond market where interest rates are determined. Consequently, the war is the first issue that needs to be resolved. Combined with lowering inflation, another big issue is the federal debt, which continues to rise. If Congress really wanted to make housing more affordable in this country, they would reduce federal spending so that a potential budget surplus could go toward debt reduction. That would make a meaningful difference in longer term rates, mortgage costs, and a buyer’s ability to purchase a home.

Many economic ills could be resolved with lower inflation, lower levels of debt, and avoiding wars that threaten oil prices, or any globally demanded natural resource.

The Trump administration has asserted that a temporary spike in gasoline prices is worth de-arming Iran of its ballistic missile and nuclear capability. While that may certainly be true, it is just as important, now that their capability has been “de-fanged,” to resolve the matter as fast as possible so that prolonged inflation can be avoided this year.

Optimism Ahead ?                    

The aggregate effect of war, higher oil prices, possible prolonged inflation and even the mounting federal debt can be summarized by movements in the stock market. Currently, the broader market indices are rallying back and are now break even for the year-to-date. That is an encouraging sign for the current 2026 edition of economic uncertainty.

[1] Analysts using BEA data estimate that the shutdown subtracted roughly 1.15 percentage points from Q4 2025 annualized GDP growth, mainly via a 16.6 percent drop in federal spending. Without the shutdown, Q4 growth would have been around 2.5–2.6 percent instead of the reported 1.4 percent. See: https://www.federatedhermes.com/us/insights/article/government-shutdown-masks-solid-gdp-growth.do

The Fragile Labor Market

No labor market data on job creation is available yet for California this year as Q1 is nearly completed. The first report will arrive in April. However, for the U.S., the January and February reports were released and the results were mixed; January was a stellar report, and February was not though it was impacted by the 31,000 worker Kaiser strike in the healthcare industry.

Over the last 12 months, the U.S. created 155,000 jobs; however, 126,000 were created in January 2026 alone.  If not for that, virtually no net job creation would have occurred nationwide since March 2025.

This clearly demonstrates the existence of a fragile labor market condition today. However, due to virtually no growth in the labor force over the last 12 months (and much slower growth since the pandemic), the unemployment rate has only ticked up 0.2 of a percentage point over this time period (to 4.4 percent), a negligible amount.  Consequently, despite the lack of job creation, there is not much reported labor force misery. At least not yet.

While yes, it is the entry level age group that is unable to land jobs, this age cohort largely lives with their parents, has not had a full-time job yet, and is therefore not eligible for unemployment benefits.  Consequently, unemployment insurance claims show no discernable increase.

Layoffs

Driven by AI restructuring, automation and cost-cutting efforts at major firms, layoffs in 2026 are now surging.

As of March 11, the following high profile layoff announcements have been made this year:

In early March, Block announced a 40 percent of workforce layoff plan, equating to 4,000 workers to be replaced by AI.  Block is the parent company of Square and CassApp. Software giant Atlassian (Australia) announced a 10 percent cut on March 9, with 640 layoffs occurring in the U.S. The company makes the Jira and Confluence software for project tracking and documentation respectively. Most companies like Atlassian are cutting staff citing the impact of AI among the principal reasons for layoffs.

California has led the nation in layoffs since 2022, and with the highest number of layoffs since the pandemic year of 2020 occurring in 2025.

WARN Report^[1]

The WARN reports present announced job cuts by company and by county.  We have aggregated announced layoffs by the date when they are effective for 4 counties in Southern California: Ventura, Los Angeles, Orange, and San Diego. The data indicates which industries are generating the most layoffs over the last four years.

With the largest workforce in the state, it is predictable that LA County had the most layoffs over the 5-year period of calendar 2021 through 2025 plus the first 2 months of 2026. 83,100 were reported followed by San Diego, Orange, and Ventura.

In 2023, much of the commentary about the California economy explicitly identifies AI and machine-learning-driven predictive maintenance, robot control, and process optimization as actively eliminating manufacturing positions for human workers and slowing job growth relative to productivity improvements.  Manufacturing has led all other industries in layoffs across all counties. Layoffs peaked in 2023.

Eighty-four percent of total layoffs in the Information sector occurred in Los Angeles County. The TV, Film and Sound recording industry is a subsector of Information, and most downsizing has occurred therein, starting with the actors and writers labor disputes in 2023 and continuing with the rapid development of AI disrupting the film industry beginning simultaneously during the strike.

Tech jobs are principally represented by the Professional, Technical and Scientific Consulting services sector. This industry has experienced significant layoffs together with very little new hiring since late 2022.

Layoffs in Southern California hotels in 2024-2025 were due to a mix of weak demand, particularly from the international visitor, sharply rising labor costs, and hotel restructuring following the resolution of the hotel workers strike in 2024.  Hotels faced meaningfully higher labor costs from contracts and the attendant wage pressures that were negotiated during the labor dispute.  Staff levels were reduced accordingly, and many vacant positions were not filled. And on top of union deals, Los Angeles adopted a Hotel Worker Minimum Wage ordinance which will phase wages up to $30 per hour by July 2028 (for the Olympics) and this ordinance began increasing in 2025.

With two months of notices now included in our analysis for 2026, layoffs are already starting out strong.   We will continue to provide updates this year on the California labor market—both in terms of these WARN notices, and the monthly employment updates by the State. So stay tuned.

[1] WARN stands for Worker Adjustment and Retraining Notification. This is a U.S. labor law requiring employers with 100+ employees to provide 60 days advance notice of plant closings or mass layoffs, defined as 50 or more employees.

Mark Schniepp

February 2026

I asked Gemini what the key economic issues are in 2026.  Here’s what it said: “Today’s economic landscape is dominated by questions related to monetary policy, global trade and affordability . . .”

Then it proceeded to list seven principal concerns, and my response—the human response—follows each question.

Inflation & Monetary Policy: Will inflation remain stubbornly elevated, necessitating higher-for-longer interest rates, or will productivity gains allow for further normalization?

Human response: Inflation is not elevated now. It is not in steady decline either, and it is moving more so in a lateral fashion. Interest rates are higher because of this. Productivity this year from AI will definitely enable short term rates to be lowered and inflation to push in the direction of the Fed’s 2.0 percent target.

Economic Affordability: Can income keep pace with the rising cost of living, particularly for middle-income households, and how will consumer demand hold up?

Human response:  Currently, wages and salaries have kept just above the consumer cost of living pace, for not only middle income households but for lower income households as well. Will this continue during 2026? Yes. There will be fewer people employed in 2026 but continued wage growth exceeding inflation due to productivity gains.

Trade Policy & Tariffs: What will be the long-term impact of new tariffs and restrictive immigration policies on consumer prices and global trade tensions?

Human response: The impact is occurring now. There is some pressure on the Producer Price Index, which has moved higher over the last few months. Although economists are not certain, there is speculation that tariffs are pushing prices of imported goods higher.  There is simply not much clear evidence yet that tariffs are impacting consumer prices, but higher producer prices tend to drive prices of final goods to consumers higher.

Don’t worry about global trade tensions. That ship has sailed. Now producers of goods are learning how to navigate the current tariff structure. The year will be one in which governments and foreign producers acclimate to the current tariff environment now in place.

Labor Market Health: While the overall market remains stable, will the creeping increase in unemployment significantly impact entry-level workers?

Human response: It already has impacted entry-level workers. The unemployment rate for 20 to 24 year olds (high-school, community college and 4 year college graduates) continues to rise. The rate for older workers 25 and above is quite stable.

California

During 2025, the job creation in California was limited at just 55,000—all due to the healthcare and local government sectors. Employment in all other sectors of the labor market declined. The unemployment rate climbed to 5.5%. UCLA projects a similar rate in 2026, before the labor market starts tightening again in 2027.

Much of the recent weakness is due to the state’s technology sector, which is no longer the major driver of job creation that it was prior to 2023. Although much has been made about the current AI boom that is driving billions of dollars of investment, there is no clear job boost occurring.

While AI (and 75% of all investment in AI in the U.S. is based in California) is expected to power the next wave of growth in tech, AI adoption, implementation and proven results take time. A large share of firms are still navigating how to integrate AI into their operations, and the associated job creation will likely have to wait until 2027.  Job formation in the form of developing, maintaining, and overseeing AI systems is expected. New opportunities have and will continue to emerge in AI engineering, data science and data adaptation, AI training, AI ethics, and AI safety specialists.

Fiscal Sustainability: How will the U.S. and other nations manage record debt levels that are currently threatening long-term global growth?

Human response: I hate when anyone (or anything) leads with the word “sustainability.”  It is overused, akin to the word “existential.”  The more important claim here is “threatening” because in the U.S. now, growth does not appear to be hindered by our rising debt. However, the continuation of this trend will keep longer term interest rates higher and growth lower than potential unless it is managed and with some clear progress visible. Treasury Secretary Scott Bessent knows this well, and he believes the U.S. will “grow” its way out of debt.  It does not appear at all that Congress has the will to do much about this from the spending side. Consequently, until the situation worsens into a wake up call, we remain vulnerable to higher inflation, less private investment, less growth, and less job creation.

Economic Inequality: How can policy address the widening gap between the top 10% and the rest of the population, a long-term issue gaining increased attention?

Human response:  Usually the stock response is implementing more progressive income taxes, raising the minimum wage, or increasing budgets for public education including apprenticeship programs.  But all of these “solutions” have been put in place many times and in many forms over the last 75 years. Public education has been the biggest failure and taxation policies will be both unpopular and avoided. I just don’t like government programs because they seldom work and create unintended consequences.  Educating the workforce with meaningful and needed vocational direction will be the longest lasting solution towards reducing the inequality gap if we can find a mechanism to incentivize the private sector to prioritize this.

AI and Productivity: Will Artificial Intelligence investments drive sustainable productivity gains or create a “show me the money” bubble?

Human response: According to the Stanford Human-Centered Artificial Intelligence 2025 AI report, “AI business usage is accelerating: 78% of organizations reported using AI in 2024, up from 55% the year before. Meanwhile, a growing body of research confirms that AI boosts productivity and, in most cases, helps narrow skill gaps across the workforce.” ¹

Nevertheless, the consensus is now shifting towards a “show me the money” reckoning in 2026 where AI investment needs to justify its massive cost outlays. The AI bubble is now deflating.  The high valuations of AI companies have been under pressure in the financial markets over the last three months. Since early November, my stock value index for AI companies Palantir, AppLovin, Constellation Energy, American Micro Devices and Nvidia is down 32 percent, and at the lowest aggregate valuation since early July 2025.

¹ https://hai.stanford.edu/ai-index/2025-ai-index-report

Mark Schniepp

January 2026

Recent Labor Market Evidence

The November report on job openings and layoffs paints a picture of a U.S. labor market that continues to soften. Job openings declined further, and layoffs are rising, reflecting a clear and reduced proclivity by firms to expand their workforces.

The private sector experienced weak growth in the final three months of 2025, averaging just 29,000 net new jobs. This is down sharply from the 100,000 average in the first quarter of 2025. Furthermore, we expect weak growth to persist in 2026.

But while there is much less hiring and more separations occurring in the broad U.S. and California labor markets, the unemployment rate, though weaving and bobbing, is not projecting a worrisome condition. The most recent reports show the rates moving lower for both the U.S. and for California.

And in California, there are net job losses to date for calendar 2025.

Deportations are subtracting from the labor force and limiting its growth. Housing  remains a chronic constraint for
domestic migrants further limiting the California labor force.  Employers are finding workarounds by turning to more international hiring and/or more automated processes.

There will be fewer job opportunities in 2026 nationwide, and even fewer in California.

Healthcare and state and local public sector job growth are forecast to remain positive, along with skilled jobs in the professional services and industrial sectors. However, there is likely to be further downsizing in financial activities, information, manufacturing assembly, and retail/wholesale trade. Companies still need people who can run, manage, and improve the systems that are now part of routine business operations.Automation and AI will make work better. They replace humans in repetitive work allowing workers to focus on problem solving.  They also make operations safer, more efficient, and more predictable. They don’t slow down or get tired. And they only get better at what they do.

Be generally prepared for a jobless expansion, where goods and services growth will be relatively high but net employment growth will be stagnant.

This means there will be amplified competition for available jobs.

Tariff scare fading

There was some evidence that trade disruptions eased in December. The indexes for new export orders and imports expanded for the first time since the summer, when tariffs were at their height and much uncertainty about trade deal negotiations clouded the outlook. As new tariff actions have calmed down, and with new trade agreements in place, many firms have adjusted their supply chains to optimize sourcing and minimize costs. This is one reason the index for inventory purchases is trending higher.

Calming of the tariff hysteria will boost hiring in the logistics sector.  With less uncertainty this year regarding the modus operandi of the new administration, anxiety about new hiring will ease.

Tariff revenues are soaring now, producing record-setting revenues, which could provide some small reduction in the annual budget deficit.

Affordability squeeze

Inflation has clearly eased but Americans are still impacted by the fallout of the 2022-2023 inflation surge. As consumers, many are deeply unhappy with their financial situation, and with good reason. They are grappling with a severe affordability squeeze. Prices for many goods, from groceries to car insurance (and home insurance and gasoline in California), are high and continue to climb. Meanwhile, wage inflation (pay increases) is slowing due to the stalling of job creation and short supply of job openings.

Deportations are freeing up housing in many parts of the country and rent inflation has moved decidedly lower. In many regions of California rent inflation has subsided to less than one percent but housing costs are still too high for many individuals and families. Rental property vacancy rates have increased. According to Kidder Mathews and Lee & Associates, the rate in Los Angeles County is 5.3 percent, 5.0 percent in San Diego County, 6.0 percent in the Inland Empire, but due to limited inventory, is still 3.6 percent in Orange County.

This month’s outlook for economic conditions in 2026

Improvement in 2026 over 2025 is currently expected.  But new job opportunities will remain austere.  No risk of recession, but job seekers may not see it that way.

Inflation will continue to gradually deflate.

Interest rates—-both short and longer term—will decline.

Tariff fears will melt away.

And affordability concerns should improve. But prices for general goods and services are not going to decline.

Corporate America should be profitable in 2026.  The growth of earnings will be the result of productivity gains from AI, lower interest rates, and tax cuts which will push consumption higher. Analysts generally expect double-digit earnings growth for S&P 500 companies in 2026.

On January 1, 2026, Deutsche Bank predicted the S&P will reach 8,000 points by year-end, suggesting a gain of nearly 17 percent. Morgan Stanley, JPMorgan Chase, and Goldman Sachs are generally optimistic about the broader market indices for 2026, forecasting double-digit returns and significant earnings growth.

Mark Schniepp
December 2025

I have been whining a lot lately about the effect of rapid AI adoption by the business sector on the labor markets, especially in
California this year. The national economy continues to report job gains, while California shows virtually none. We are the tech hub of the nation, and that industry has reported more layoffs than other sectors.

A surge of capital is flowing into AI. Last year, private investment in AI totaled $109 billion in the U.S. with China and the U.K. under $10 billion. This year, AI investment in the U.S. will rise to an estimated $161 billion according to the Stanford Institute for Human-Centered Artificial Intelligence.

While uncertainty this year has been more elevated and has caused delays or postponement in hiring, the principal cause appears to be the advent of practical AI technology that is seemingly replacing workers in many industries.

Through October, there were 160,000 layoffs announced in California, or nearly 25,000 more than in 2024 over the same time period.  Both are the most of any state in the U.S.

This year, thousands of workers at Amazon, Intel, Salesforce, Apple, Meta, Paramount, Warner Bros. and Walt Disney Co. have lost their jobs.

The downsizing has contributed to California having the highest unemployment rate in the nation at 5.5 percent in August. Only Washington, D.C. has a higher rate.

And layoffs now appear to be accelerating. According to the most recent Challenger and Gray report, 48,000 layoffs this year have been due to the replacement of workers by AI, and over 30,000 of those were in October alone.

Layoffs in California are heavy in the technology sectors, the film, TV, and sound recording sector (i.e., Hollywood), in finance and in advanced manufacturing which includes aerospace parts, medical devices, and computer components like chips and boards.

The big loser of AI is the younger entry level workforce because AI systems can at least perform many of the tasks that new workers in their freshmen and sophomore years could do.

Aside from tech, AI is also replacing entry level jobs, in finance and professional services. But in Hollywood, workers of all ages have

been laid off or simply not hired because AI is being used to create content, produce realistic video derived from existing film, and generate the attendant sound for scenes, including full soundtracks. AI can create actors, reducing staffing costs and precluding the need for wardrobe, makeup, or training.

Locational settings all over the world (or universe) and large volumes of extras needed to create crowded scenes can now be realistically created by AI.

Runaway production to other states and countries has largely contributed to the lack of new hiring in film and TV, leading to the sale
of Paramount in August, and the now-for-sale status of Warner Bros.

2025 has been the most difficult year since the Great Recession (aside from the pandemic) for any positive job creation in the state, following two sluggish years in 2023 and 2024.

Nevertheless, Moody’s Analytics estimates AI spending this year has added more than half a point to U.S. gross domestic product, much of what you can see in the 2025 quarterly estimates for California. Consequently, we are experiencing what appears to be a jobless economic expansion.

A labor market rebound may be on the horizon

By one estimate, Silicon Valley tech giants will invest more than $400 billion this year in AI data centers, along with electric grid infrastructure. Amazon, which recently announced plans to invest up to $50 billion to expand its AI and supercomputing services for the U.S. government, will break ground on a 1.3 GW facility in 2026. In the short term, jobs will be created to construct and maintain data centers and their attendant infrastructure.

Tech sector employment may ultimately experience a rebound by 2027 with the presumed hiring of thousands of workers to clean up the untidy content of inaccurate images, text, videos and low-quality narratives generated by AI learning models since 2023.

Southern California has a deep history in aerospace and a large, experienced workforce in engineering and manufacturing. As part of a “re-industrialization of the area, private sector expansion of aerospace and other advanced manufacturing is now occurring in Los Angeles and San Diego Counties. El Segundo is becoming a hub for defense and aerospace start-ups. Hadrian Automation is expanding its aerospace component manufacturing facilities creating hundreds of new jobs in Torrance.

Furthermore, venture capital investments in the region more than doubled to $5.8 billion in 2025 Q2 compared with a year earlier. Costa Mesa-based defense tech company Anduril received the most funding, raising $2.5 billion according to research firm CB Insights.

Anduril leased a 190,000 square feet office campus at The Hive in Costa Mesa, and 163,000 square feet of industrial space in Santa Ana, both in September 2025. The facilities are expected to support a rigorous expansion of manufacturing, distribution and R&D operations.

Providing workers can be hired, the construction industry is flush with industrial, warehouse, residential and infrastructure projects. Tourism in California is likely to rebound from the modest downturn in international visitors in 2025, especially if global GDP moves higher as forecast.

Onshoring of manufacturing operations has been a major policy thrust of the Trump Administration though it will predominately occur in other states. Nevertheless, California will realize some direct and spinoff effects of an expansion in domestic manufacturing activity especially in the advanced technology and defense products. This should result in new job creation by 2028.

The Olympics are coming to Los Angeles in 2028. The estimated economic impact will be substantial. Current estimates have job creation at 75,000 workers in 2028, with spinoff effects lasting into 2029.

The UCLA Anderson Forecast calls for another stagnant year of job creation in 2026 but a rebound in 2027, with total wage and salary employment rising about two percent if the conditions we’ve described above fall into place.

We cautiously expect a rebound in job creation but not reaching the extent of the average annual numbers recorded in the past. The labor force in the region is not increasing that fast anymore and population will be contracting by the early 2030s.

Mark Schniepp
Mid November 2025 

Global Growth

A slight slowdown in world economic growth is forecast by the International Monetary Fund (IMF) which might produce a drag on U.S. growth but probably not much. Their GDP estimate for the world is 3.1 percent.

The IMF, never really noted for its ability to forecast, does have inflation contracting throughout the world, but cites uncertainty and labor supply shocks as factors that could reduce growth. Uncertainty is always present in some shape or form. We’ve had plenty of uncertainty this year and yet U.S. GDP growth was 3.8 percent in quarter 2 and is estimated at 4.1 percent in quarter 3, according to GDPNOW.

Labor supply shock is an event which would reduce the overall supply of available workers. Well, that risk is always present. It occurred with the pandemic, and it is occurring in the U.S. now in some industries like construction and food services due to deportations.

But a labor supply shock could be a blessing in disguise because we are not forecasting much job growth in advanced economies due to the rapid conversion to labor saving technologies that has grown especially pervasive in the U.S. this year.

U.S. Economy

The consensus forecast at this time (late 2025) is 1.8 percent growth for the U.S, an improvement over the 1.4 to 1.8 percent projection by organizations earlier this year.

The UCLA Anderson forecast in their September report is for 1.1 percent GDP growth, but it will likely be revised upward with their newest update in early December.

The forecast for inflation in the U.S. ranges from 2.9 to 3.5 percent, with Peterson, an outlier predicting 4.5 percent for the consumer price index. UCLA Anderson forecast has consumer price inflation averaging 3.2 percent in 2026.

The Government Shutdown

Late last week’s conclusion of the record 43-day federal government shutdown will enable restoration of key government functions and resume the flow of economic data critical to us economists and policymakers. However, it will take days, weeks and in some cases—months—before all operations are normalized again. While the immediate damage to the economy appears limited, the shutdown’s impact, including delayed spending, suspended contracts, and worker furloughs—are expected to impact overall economic growth in quarter 4. The early estimate is that we will see a half-point reduction in GDP growth. This, however, will be made up in the first two quarters of 2026.

Risks to the Upside

I’m citing upside risks because many of the downside risks already seem to be embedded in the baseline estimates presented above. This includes sticky inflation, tariff uncertainty and aversion, geopolitical anomalies, and labor force availability.

The upside risks are (1) accelerated growth from AI investments and (2) clear productivity results, (3) lower inflation than expected enabling the FED to continue easing monetary policy benefitting interest rate sensitive sectors, namely the housing market, and (4) stronger corporate earnings supporting higher stock market values.

A less volatile global political environment in 2026 should improve global growth, providing fiscal problems facing European and Asian countries can be contained or limited.

AI Vulnerability

A looming risk that even I will admit to is that continuing U.S. growth depends on whether today’s optimism about AI is sustained. The expanding use of AI has boosted productivity and output. This will likely continue in 2026 and over time but the path to those gains may be uneven. With business investment and household spending so dependent on confidence in the potential of AI to increase productivity and reduce costs, any setback could disrupt momentum and expose the underlying drag from tariffs, restrictions of immigration, and other policy changes, which would lower the economy’s potential in 2026.

The Labor Market

This is an area of the economy that is being seriously impacted in 2025. No meaningful turnaround in job creation is forecast for 2026, by anyone. Entry level workers will continue to find difficulty landing jobs and fewer job openings will be available overall. Particular sectors such as healthcare and accommodation and food services will provide opportunities for employment. But in industries where AI is being adopted for replacing labor intensive functions, such as software development, professional services, customer service, translators and proofreading, and some data analysis, the industry-wide workforces are likely to contract in 2026.

Until more jobs are created in AI than AI is replacing, the broad-based adoption of new technologies by firms across all sectors will continue
to challenge job creation.

Mark Schniepp
Mid-October 2025

The Current Outlook from the Consensus

California economic growth remains positive and will close out 2025 with a higher unemployment rate but also higher growth in output than 2024. The overall growth in the production of goods and services has remained positive all year, due to higher worker productivity, ongoing new development of structures and infrastructure, and busier international trade activity at the Ports of LA, Long Beach, and Oakland.

The UCLA Anderson Forecast projects a slower 2026 relative to 2025, with growth approaching the longer-term average rate moving into 2027.

All of the tensions from the new trade policy ease in 2026 but midterm elections may elevate uncertainty again with legislative changes dependent on which political party obtains a majority in the House and Senate.

By 2027, businesses will have become accustomed to trade policy, tariff shifting or avoidance, and consumer substitutions. There will be a modicum of price inflation due to tariffs more apparent this quarter or in early 2026.

Small businesses are starting to respond to high input costs caused from tariffs by passing them along to consumers. In September, 31 percent of respondents to the monthly small business survey (by NFIB) plan to raise prices, up 5 points from August survey and the highest since June. Twenty-four percent of respondents reported raising prices in September.

IMF global growth projections have undergone upward revisions from previous forecasts of 2025 and 2026 growth suggesting a stronger economic position in 2027.

Esoteric Signs of Weakness

Conventional signs of economic weakness include slowing GDP growth, rising unemployment claims, and declining consumer spending. Because none of these conditions apply today, technically, the U.S. economy is nowhere near a recession.

Consumer spending rose sharply in August for the third straight month. Retail sales growth for general goods and food has also been steady. But recent income data show that the country’s richest households are responsible for a large proportion of the spending growth, enabling them to maintain expenditure levels despite higher prices due to inflation.

And certainly enough, throughout 2025, dubious signs of consumer anxiety have emerged. The “Hamburger Helper” indicator suggests more weakness in the economy than the forecast consensus. Sales of the product are up 15 percent over the last 12 months. Packaged complete meal products like this tend to increase when economic conditions deteriorate because of the savings they offer.

The same is true for Hormel’s SPAM. The food maker reports growing sales of the canned product in 2025, attributing it largely to the higher prices of food products in general.

The consumer confidence and sentiment indices (by the Conference Board and University of Michigan) are currently at recession levels, signaling clear signs of dissatisfaction among Americans regarding their current and future prospects for spending, job opportunities, and income growth.  A principal reason is the price of goods, which has risen 30 percent since the pandemic.

Layoffs are rising though not at seriously high levels yet. The cumulative total year-to-date through August is at the highest number since the pandemic.

The rate at which workers are quitting their jobs is now the lowest in five years, suggesting fewer job opportunities. We already know this is a growing issue in the U.S. with the onset of Artificial Intelligence crowding out mostly new entrants into the workforce.

The unemployment rate for 16 to 19 and 20 to 24 year olds is 21.9 and 10.0 percent respectively. For everyone else, it’s under 5.0 percent.

Labor markets are indeed weak, but trauma due to unemployment is relatively absent so far. And at this point in time, due to the rapid change in which technology has transformed many job functions, the forecast for employment in 2026 is highly uncertain. There is a general non-hiring sentiment among California tech and manufacturing companies as adoption of AI systems in software development, computer board and component design, web development, data analytics, and advanced manufacturing products continues to evolve.

It is likely however, that with larger participation by firms to adopt AI systems for their business functions, more jobs will be created to create, adapt, implement, maintain, and improve the technology across the spectrum of industry usage. While this concept has yet to be proven, there is a likelihood that in the short run, job creation may eclipse job disruption.

Employment growth is negligible in 2026 in the California forecast, but relative to 2025, a meaningful restoration of job growth does occur in 2027 including more broader based participation by industries. Our forecast generally has modest but positive job creation for the remainder of the decade but a return to a tight labor market is entirely absent.

Mark Schniepp
September 2025

The National Economy

Despite all the warnings about the new administration’s trade policy and how it would slow down growth and reboot inflation, there is little to no evidence of that during the first 8 months of the year. GDP rose 3.3 percent in the second quarter of 2025 and (according to GDPNOW) is growing at a 3.0 percent pace in the third quarter, and the third quarter ends in less than 3 weeks.  Strong consumer spending and domestic investment are responsible for the above average pace of growth.

A buoyant stock market is contributing to household wealth, and together with higher real wages, these rising measures give households reasons to spend.  Business investment levels, especially on software and AI has increased at exceptionally high rates, driving productivity gains.

The U.S. labor market is slowing down, but low unemployment persists. The rate in August was 4.3 percent. The recent increases in the unemployment rate, which have been minor, are the result of more people entering the labor force and outpacing the rate of job creation which remains positive.

The U.S. economy is still adding jobs—an average of 75,000 per month in 2025—which represents a significant slowdown from 2024. Differently from previous situations of low unemployment rates, there is still a moderate level of unfilled job openings, which have resulted in relatively high levels of wage growth. Deportations are contributing to this. Over the last year, nominal wages have grown at a rate averaging 4.3 percent, eclipsing inflation.

Outlook for the rest of 2025

Last year at this time, we thought that the momentum of consumer spending would tire out, and growth would moderate. Neither have occurred.  Moreover, the stock market is at or close to all time highs, home prices are at or near all time highs,  and inflation has moderated.

The economy is not expected to grow faster next year. The inflation rate will continue to move towards the 2 percent target gradually in 2026.  Mortgage rates, which have started a descent now will continue decreasing through the fourth quarter of 2025. There should be more reductions of the Federal Funds Rate in 2026 pending what the Fed does for the remainder of 2025. This will stimulate sales activity in the housing market since owners, who currently hold a low-interest-rate mortgage, will be more tempted to cash in their gains and move into larger houses. Unemployment rates will rise slowly, but still remain low by historical standards.

The California Economy

The key economic issue for the state is the feeble rate of job creation in 2025.

The labor markets have softened since 2023.  In that year, it was largely due to the tech sector along with warehousing and distribution, and TV, film, and sound recording, the latter due to the actor’s and writer’s strike.

Unemployment has been rising as a result. The latest July 2025 unemployment rate of 5.5 percent is tied for the highest among U.S. states, ranking California 50th (and only behind the District of Columbia at 5.9 percent).

Technology-related jobs and employment in engineering are pillar industries for California. Technology Services has weathered a worrisome downward movement in employment from the peak in mid-2022. Initially, last year’s forecast had the freefall bottoming out by mid-2025. However, the layoffs have not stopped, due entirely to the rapid adoption of AI systems which are replacing lower level software development, web design, and data analysis positions. Though new net hiring has not returned, stock prices for many publicly traded California tech firms have reached all-time record highs.

The Outlook for California

The new 2026 outlook factors in the weak labor market of 2025 which is weak due to AI. The vast majority of growth in employment is being concentrated in sectors that depend on public funding: State and local Government and Healthcare. And these sectors have not been able to replace workers with robots or other AI systems in the way other labor markets have.

The Federal Government has already cut back 250,000 government jobs which will reduce government expenditures during fiscal 2026.

AI has particularly impacted the Professional Business Services sector, the Information sector, and of particular concern, workers in TV/film and sound production.

In addition to weakened job creation, high vacancy rates in the office market persist, and new housing permits have been limited this year. However, the outlook for the 2026 economy could actually be more auspicious than this year.

Last year, the base forecast for the California economy was for slower growth than the U.S. in 2025. That appears to have been the case although the U.S. numbers are due for a major revision.  Despite a “recession” in employment growth, overall economic growth will be close to the Nation’s, and then move slightly faster in 2027. The unemployment rate is expected to hit a peak of 6.1 percent this year and remain in the vacinity of 6.0 in 2026.  In 2027, the rate is expected to be move to the mid to lower 5 percent range.

Lower levels of inflation and interest rates should result in more positive consumer sentiment and increased spending. Lower interest rates will provide a stimulus for housing, vehicles and commercial real estate.

Additional stimulus should come from the leisure, entertainment and hospitality sector as the volume of international tourists visiting California is expected to rise.

Logistics should also play a more significant role in 2026 as trade flow volumes continue to expand at the Ports of Los Angeles, Long Beach, and Oakland.

The demand for AI software, chip design and production, web development, IT applications, services and systems, and data analysis is only going to strengthen in California, the nation, and the world.  AI is booming; consequently, demand for data, data centers, software, and energy to support data centers will remain a principal engine of growth for the California economy.

New building activity has been a meaningful contributor to GDP growth and this sector will only strengthen over the next several years. Overall non-residential activity has slowed in 2025 with fewer hotel and retail projects, and very low levels of office development, but investment in industrial buildings and infrastructure projects is booming throughout the state.

New residential construction will rise in 2026 with lower interest rates and rising incomes. New housing permits issued are forecast at 102,000 this year, 107,000 in 2026, and 115,000 in 2027. Needless to say, this level of home building means that the prospect of the private sector building California out of the housing affordability problem over the next three years is nil.

Mark Schniepp
August 2025

Stronger Growth in Quarter 2 Offset the Quarter 1 Slowdown

We were told by a flurry of the analytical pundits observing the Trump administrations new polices that the proposed tariff regimen (combined with the downsizing of federal government) would crash the equities market, spike inflation, lower GDP and employment growth, resulting in recession, chaos and trauma.

That was last March and April. Fast forward five months to August 2025: the stock market moved to an all time high in July, GDP growth came in at 3 percent for quarter 2, labor markets are stable and creating jobs, and inflation has moved lower. Every indicator that was predicted to move in a negative fashion as a result of Trumpenomics 2.0 has moved exactly the other way.

Now the economy is not entirely out of the woods as there are still concerns and potential downsides on the horizon, but the probability of a meaningful negative outcome this year is less certain today.

The labor market report for July was weak, although preliminary. Unemployment still remains at 4.2 percent, a level that has generally held steady over the last 13 months. AI appears to be impacting job creation in many industries, as we reported last month in this newsletter series.

Tariffs have been delayed in implementation. Businesses have adopted strategies to mitigate tariff risk, like supply chain diversification or absorbing the tariff cost.  Consumers have substituted to other goods or not incurred the higher costs predicted for goods coming from China, Europe, Canada, or Mexico.

The stock market is overly worrisome with uncertainty, and overreacted last April. Earnings reports for Q1 and now for Q2 have been more positive then expected. The market pushed to an all time record high in July. It looks overbought now so don’t be surprised if a correction this month and into September dominates the movement of stock values.

The full impact of tariff policy is still unfolding. The pundits are still warning that the negative effects on prices, employment and GDP growth will become more pronounced in the future.

Course Correction on Tariffs

The initial tariff plan revealed on April 2 with the reciprocal tariff rates on all countries worldwide appears now to have been a gigantic PR scheme to coax our trading partners to rethink their tariff rates on U.S. exports and/or their non-tariff barriers which effectively preclude U.S. exports altogether.

A clearer picture of the global trade landscape is now emerging.

The United Kingdom was the first country to negotiate trade policy with the U.S., back in May. The tariff rate was set at 10 percent. The EU is the top trading partner with the U.S. and reached a 15 percent tariff agreement on July 29. The same rate was negotiated with Japan 7 days earlier. South Korea reached a deal on July 30. Though these recent trade deals have eased some uncertainty around tariff policy, they strongly suggest 15% is shaping up to be the floor for tariffs.

Tariffs at the current rate of 10 to 15 percent on all goods coming into the U.S. are generally manageable. Trump confirmed on July 28 that 15 percent represents the new standard for tariff negotiations. Furthermore, at the current rate of received tariff revenues to date, the federal government is on pace to collect $350 billion this year.

The policies to date would imply the average tariff rate is nearly 18 percent, far above the 2024 average of a just over two percent and the highest rate since the 1930s. As long as these significant tariffs are in place, the U.S. trade deficit should slowly but steadily start shrinking.

China faces an August 12 deadline to reach an agreement. Tariffs currently in place will likely add to higher export goods prices coming from China. However, we need to wait and see how the tariff structure and the corresponding response plays out.

Inflation is still an issue for the economy. The CPI for June still shows a 2.7 percent inflation rate over the last year. Fortunately, the 2025 calendar year trend for CPI inflation is decidedly down, but we still face tariffed goods coming into the U.S. and especially as the holiday season ramps up.  Consumers may substitute successfully enough to avoid tariff inflated priced goods but this circumstance remains a wait and see.

I’m not concerned about recession this year. I’m not really concerned about the new tariff economy either. They will likely have a minimal impact on prices and consumer spending.

Higher interest rates are a problem for the housing market and less so, the car market. Some relief may be coming over the next 5 months but it won’t be much. Stay tuned for tariff and labor market updates. Inflation and whether unemployment rises will be the important assessment indicators for the rest of the year.

Mark Schniepp
July 2025

The key issue emerging for the California economy in 2025 is the broad based weakness of the labor market. Only 3 sectors are responsible for all of the job creation this year, and two of the three are either entirely or largely financed by public sector funding—healthcare and local government. Up to now, these two sectors have been mostly unaffected by the recent advent of Artificial Intelligence.

As AI tools and technologies continue to advance, companies are increasingly exploring ways to leverage AI to enhance productivity, automate certain tasks, and reduce cost. This includes roles in sales and customer interaction, which may be affected by the increasing efficiency of AI systems.

Displacement of jobs by AI is no longer a warning; it has become a reality.

Microsoft announced on June 19, 2025 that thousands of layoffs will occur in July with the sales team taking the largest hit. On July 2, the company confirmed that 9,000 workers would be laid off. Last month, Microsoft cut 3 percent of its global workforce, or 6,000 workers. Amid these cuts, the company is investing $80 billion in AI infrastructure and data centers.

IBM announced 8,000 layoffs in late May, mostly in HR, with 9,000 more layoffs planned.

Intel also announced in June that it would lay off 10,000 workers or about 20 percent of its foundry workforce. Those layoffs are occurring this month to streamline operations and eliminate human bureaucracy with more automated systems. Other tech companies like Amazon, Meta and Google have also been implementing workforce reductions and restructuring as they prioritize AI investments.

Simply put, AI is automating tasks that are repetitive and time consuming for people. This includes data entry, answering phones, warehouse stock picking and sorting, and assembly line manufacturing, to name a few.

By industry, here’s how AI will help business with analytical precision and cost reduction:

Chatbots will handle routine customer inquiries. AI can also categorize and route customer support tickets to appropriate teams or agents. This eliminates administrative support jobs, one of the subsectors of professional business services.

AI can analyze customer behavior patterns in spending data, anticipate where products should be marketed and sold, and make recommendations for business strategies.  AI can quickly process large datasets, identifying trend and/or anomalies. The action eliminates intro and mid-level data analysts in the Information labor market of data analytics and processing.

AI can evaluate customer interactions with either AI customer service agents or human agents to gauge their emotional state to identify business areas for improvement. Humans doing this now are in the professional business services sector.

AI can power robots and automated systems that handle tasks like packing and sorting goods in warehouse and distribution center settings. Robots will replace warehouse jobs that are part of the transportation and warehouse labor market.

AI currently analyzes data from sensors and equipment logs to predict machine failure rates and develop schedules for maintenance, minimizing downtime and increasing equipment lifespans. Fewer workers are needed in manufacturing to handle these activities to keep assembly lines operating continuously. Jobs in manufacturing are now being eliminated and will continue to be eliminated.

AI can process financial data to automate routine reporting tasks for reports that banks and securities firms need to file with regulating agencies. This will eliminate jobs in the financial activities sector of the broader labor market

AI can handle facial recognition and object detection for security systems. Business services employment for these tasks can be entirely eliminated.

Chatbots are able to answer customer inquiries and resolve some issues, operating 24/7 without breaks or overtime pay. In fact, no pay.

Layoffs that have been the most prolific since the release of ChatGPT have occurred in software programming. AI-powered tools like GitHub Copilot and others can suggest and generate code snippets, functions, or even entire programs. This significantly reduces manual coding efforts and speeds up development. AI-driven tools can analyze code, identify potential bugs and vulnerabilities, and even automatically apply fixes.

We have witnessed the loss of 70,000 tech jobs in California since the beginning of 2023; 18,000 of those are in software development. We have also witnessed the elimination of 50,000 jobs in TV, Film and Sound recording, also since early 2023.

AI is rapidly advancing in areas like 3D modeling, character design, and environment design, displacing traditional modelers, designers, the need for expensive sets or filming on location. Google Veo 3 is a video generation model that produces cinematic visuals, voice generation and lip-syncing for characters, and adding ambient sound and music. It is designed for  businesses to produce short films and ads. AI-powered tools including Veo are accelerating video editing, special effects creation, script writing, animation, art in general, and many post-production tasks, which has led to the need for fewer professionals and technicians in these areas.

Surveys have shown that AI has already displaced many workers in the information, entertainment, and gaming industries,

and that it has also created new job opportunities [1]. However at this point, the layoffs appear to have far offset jobs created.

Yet the labor market shows very little trauma as a result.  Despite minimal job creation in California this year, the unemployment rate is 5.3 percent and relatively stable over the last 12 months. It has actually declined modestly since December.

As AI matures in tandem with the physical capabilities of autonomous vehicles, taxi drivers, uber drivers, bus drivers, and truck drivers will be largely eliminated. As robotics that lift, move, and sort continue to advance, the factory and warehouse workforce will be meaningfully reduced.

The aging population of the state (and nation) is demanding more human healthcare resources than AI can currently displace. Healthcare is the only private labor market that has consistently created jobs over the last 5 years. But even here, AI is now capable of replacing social workers, therapists, nursing assistants, and laboratory technicians. This will undoubtedly begin to reduce the rate of positive job growth that we’ve been observing in California healthcare since 2020.

Employment in all other industries is now consolidating, largely due to the rapid onset of AI.

While California’s population was in decline between 2019 and 2022, a turnaround occurred with modest growth in 2023 and 2024. This was entirely driven by a rebound in immigration across the southern border. In early 2025, border security was strengthened, resulting in fewer new immigrants arriving at southern and northern entry points.

As the decline in California’s population resumes (due to few new immigrants and deportations of illegal immigrants), limited labor force growth will coincide with the AI induced slowdown in job growth. Unemployment is very likely to rise in California in the second half of 2025 and 2026, but significant trauma is not in the forecast.

The onset of AI has occurred rapidly, becoming adopted in a more widespread fashion by all sectors of the economy. AI has generated significant cost savings in technology, the financial sector, real estate, manufacturing, video and sound recording, and professional services.  A large part of these cost savings have come at the expense of jobs, a condition that is unlikely to change as AI becomes both smarter and more pervasive in the economy.

But at the same time, job formation in the form of developing, maintaining, and overseeing AI systems is expected. New opportunities have and will continue to emerge in AI engineering, data science and data adaptation, AI training, AI ethics, and AI safety specialists.

Up to now however, it appears that new AI job creation will not offset jobs displaced by AI. Consequently, this becomes a pressing social issue that will need to be addressed as AI evolves.

[1] Los Angeles Times, “Why Hollywood Studios are Downsizing,” June 15, 2025