Category: Uncategorized

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

Mark Schniepp
June 2025

The key issues for the California economy in 2025 include the effect of new foreign trade policy, attempts to reduce federal government spending, and the onset of AI in most industries, especially technology and advanced manufacturing.

Reductions in federal spending could impact healthcare activity in California, namely Medi-Cal. The void in spending would have to be made up by State revenues. However, the State is currently in a horrific condition regarding its annual budget, for both fiscal 2024-2025 and 2025-2026.

Deficits of $45 billion in the current fiscal year and another $12 billion in 2025-2026 are facing the legislature.

It is likely that no cuts to Medi-Cal will occur, keeping the healthcare industry in California—one of only three labor market sectors to create jobs in 2024 and 2025—growing.

To date, the healthcare sector is not only the leading sector for job creation in the State, but the only private labor market that is creating jobs.  Employment in all other industries is now consolidating, largely due to the rapid onset of AI which has been the case since 2023.

California faces a shortfall in tax revenue that will likely result in some consolidation of state and local government employment this calendar year.

New Development in California

In February, the Associated General Contractors of California survey of respondents was optimistic regarding construction business activity in 2025. Nearly 63 percent of those surveyed expect modest growth in overall business activity this year.

Beginning in February however, tough tariff talk shook the stock market, and caused delays among some of the nation’s largest employers in hiring. The uncertainty associated with how tariffs might interrupt supply chains for construction materials along with unknown cost hikes due to tariffs has delayed project starts this year.

Building permits for housing are lower as builders grapple with the uncertainty. The NAHB Housing Market Index  is a gauge of home builder sentiment and expectations regarding the single-family housing market tracking builders’ perceptions of current sales, sales expectations for the next six months, and traffic of prospective buyers. Those perceptions are relatively pessimistic. Consequently, the pace of new housing permits in 2025 is now at the lowest level since 2015.

Nevertheless, there are many large housing projects that are moving forward this year, in many of the larger markets of the state. The largest include the Southeast Development project in Fresno, with 45,000 residential units, the Brooklyn Basin in Oakland, Silverwood in Hesperia, Riverstone in Madera, Related Bristol in Santa Ana, Valencia in Santa Clarita, and Stonestown in San Francisco.

Infrastructure projects in California continue to dominate construction activity in 2025, including the
airport modernization projects at LAX and San Diego International, the California High Speed Rail, and the BART Silicon Valley tunneling project.

The Bullet train however, is now facing significant funding challenges in addition to ongoing cost overruns. Last week, the Federal Department of Transportation proposed cutting $4 billion in funding, along with another $2 billion from the Federal Railroad Administration unless the project can demonstrate compliance.

The largest dam removal project in U.S. history is underway in northern California, called the Klamath River project.

The concerns regarding California’s construction industry last year were principally the scarcity of skilled labor.  The same concern is present this year.

Though prices for certain construction materials are still high, the worry over tariffs and how they might impact building material prices has generated uncertainty among builders. Consequently, a softening in the total construction workforce this year is due mainly to hesitancy in project starts.

More clarity regarding tariffs and building costs is unfolding as the year progresses. It appears that 10 percent tariffs will prevail, on most country’s products coming in. And a deal has been struck with China regarding rare earth minerals though the tariff rate is much higher on all goods. Construction products will be subject to a 55 percent tariff at this writing.  It is my opinion that much of this tariff will be borne by the manufacturers.

Construction costs in general have pushed higher over the last two months due to recent upward movements in steel and cement.

Recent Economic Evidence 

Tourism in California remains a key engine of growth. Though Canadian visitors have declined 14 percent this year, total international visitors are off about 1 percent compared to a year ago. And many tourist venues and attractions are still recording high levels of attendance largely from resident Californians. Hotel/motel utilization in 2025 is about the same as last year, though hotel prices are higher by three percent this year.

The Office market is still weak but turnarounds in office utilization are finally occurring in San Francisco, San Jose, Orange County, San Diego County, and the Inland Empire. Elsewhere in large metro areas, utilization continues to modestly decline.

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, and professional services.  A large part of these cost savings have come at the expense of jobs. In the technology services sector alone, AI has displaced an estimated 70,000 jobs since early 2023.

Foreign trade volumes at the Ports of Oakland, LA and Long Beach have faltered in recent months, due largely to the tough tariff talk that has reduced incoming container traffic and therefore goods flow into the states warehouses and distribution facilities.  This situation is likely to change when tariff policy is sorted out with our largest trading partners, including China, Canada, Mexico, and Europe. For now, however, there has been a decline in logistics employment (truck drivers, warehouse workers, water transportation workers) which has further placed a meaningful drag on the labor market this year.

Existing home selling prices are now at all-time record highs in most counties of California. Though the existing home market remains weak, sales are higher this year as inventory rises for the first time in nearly a decade.  With much of the uncertainty that bogged down new housing project starts in the first half of 2025 now dissipating, and with the likelihood of some mortgage rate relief over the next 6 months, the housing market should modestly improve going forward.

The Outlook for California in 2025

The resilience of consumer spending, amid contractions in (1) domestic investment due to prolonged uncertainty and (2) government spending from overdue government downsizing, a slight contraction in GDP growth occurred in the first quarter of 2025. Second quarter growth is much more stable and relatively strong.  Recession will be avoided at the national and state level, despite the weakness of the California labor market in the first 4 months of the year.

The most likely outlook for California is that the Trump administration’s economic policies will diminish economic activity but not derail it. The President has course corrected, and stock prices which were down 16 percent for the year on April 8, are now positive for the year at mid-June.  Consumers continue to spend and business investment in AI and other software and equipment will strengthen over the second half of the year.

With inflation becoming contained, it is likely that another Federal Reserve rate cut or two will occur before the end of 2025, modestly helping both the new and existing housing sector.

Growth in California is forecast to rise about 1.4 percent in 2025 and 2.2 percent in 2026.  There will be fewer tourists from Canada, and China for that matter, but the visitor industry will still remain busy.

There will be superior growth in advanced manufacturing in California in aerospace products, computer boards and products, and medical devices, but AI will continue to replace jobs.

New development will remain the largest engine of growth this year, likely offsetting the weakness in the State’s economy from downsizing labor markets, a weak office market, and recovering international trade.

Manfred Keil and Mark Schniepp
May 2025

A host of important economic statistics became available last week to give us insights into the current state of the U.S. economy. There was negative
quarterly growth of real GDP, with output shrinking by 0.3 percent; the unemployment rate remained unchanged at 4.2 percent but job numbers showing a better than expected increase of 177,000; and the yearly inflation rate fell slightly towards the Fed’s target judging by both the Federal Reserve’s preferred measure and the headline making consumer price index (2.3 percent and 2.4 percent respectively).

The recent data deliver a mixed picture and does not yield a clear answer of where we are heading. Certainly, these statistics alone do not justify forecasts of a downturn later in the year. It is the uncertainty that has raised the prospect of recession in 2025. The so-called soft-landing (reduction in inflation without causing a recession) is still a possibility, and the dreaded stagflation scenario (low GDP growth with stubborn inflation) has not materialized, yet.

Some have pointed to the fact that the negative growth in GDP was related to both households and firms hoarding imported goods to beat tariff related future price increases. After all, imports rose by over 41 percent (annualized) from the last quarter, which is of an order of magnitude only seen twice over the half century. Unfortunately, this is wrong, since GDP only measures domestic production or aggregate demand for domestic goods. GDP is neutral to imports, unless there are measurement errors.

Two quarters of negative GDP growth are commonly perceived as the start of a recession. This suggests that if we observe negative real GDP growth in 2025 Q2, then the recession started in the current quarter. Unfortunately, this definition of a recession is false. It is the dating committee of the National Bureau of Economic Research (NBER) that determines the start and end of recessions, and it does so by month. The Great Recession of December 2007 to July 2009 would not have been labeled such if you went by the “two quarter” definition: there was positive economic growth during the second quarter of 2008. Unfortunately the NBER typically publishes the start of a recession with a considerable delay: it took the committee 12 months (December 2008), to date the peak of the previous economic expansion. This does not make it useful to pursue alternative policies or to prepare for a downturn.

One of the earliest signs that we are in a recession will come from the so-called Sahm rule developed by Claudia Sahm in 2019 to identify early stages of a recession. The rule focuses on the unemployment rate and a warning is triggered when the rate rises by a certain amount relative to where it was over the last year. There have been almost no false positives using the Sahm rule to predict a recession over the last 80 years. The measure today is not  indicating a recession, and even another quarter of negative growth is unlikely to generate one.

A chart of the Sahm rule in action

There are other “sensors” that, similar to a volcano outbreak, predict disaster. The Conference Board summarizes these in a so-called Index of Leading Economic Indicators. The series is a weighted average of twelve measures including the S&P 500 composite index, housing starts, consumer sentiment index, new durable goods orders, etc., and, as a rule of thumb, rings alarm bells of a subsequent recession  if it turns southward for a series of consecutive months. This statistic is implying we may be reaching the threshold for recession.

Finally, 45 percent of economists polled by the Wall Street Journal have forecasted a recession within a year. However, this is the same bunch who, in October 2022, felt that a downturn was imminent (63 percent at that time). This became known as the “Godot Recession.” In Samuel Becket’s play ‘Waiting for Godot,’ the messenger repeatedly arrives to announce  that Mr. Godot could not make it today but surely would come tomorrow.

Consumers are clearly on edge as the consumer confidence and sentiment indices have fallen to recession territory levels. Given current fundamentals, it is difficult to forecast a reversal in confidence. But movements in consumer sentiment, even large ones like those seen recently, do not necessarily generate similar moves in real consumer spending. If there was such a correlation, we would undoubtedly be in a recession by now.

The case for a recession in 2025 stems from ongoing uncertainty which is delaying domestic investment decisions (and therefore domestic business spending), and less government spending by the administration to directly address corruption, fraud, and waste. However, domestic consumption – the largest component of GDP and the main driver of growth – is less likely to weaken. This is because consumer spending remained resilient in the first quarter and a near fully employed labor market continues to support household incomes, enabling continued consumer spending throughout the year.

The resilience of consumer spending, amid contractions in domestic investment due to prolonged uncertainty and government spending from overdue government downsizing, could result in another one or even two quarters of negative GDP growth this year, potentially prompting the NBER to declare a recession. However, given that consumer spending remains stable, the most likely scenario based on the current evidence is a recession that would be shallow and brief, with its duration limited by the eventual resolution of uncertainty.

The most likely baseline outlook for the economy is that the Trump administration’s economic policies will diminish the U.S. economy but not derail it. It is our belief that the president will pivot on his policies in time to avoid recession. This occurs when it becomes clear that without a course correction, stock prices will decline further, consumers would become so fearful they stop spending, and the economy would suffer a bona fide downturn.

Manfred Keil is Chief Economist, Inland Empire Economic Partnership, and Associate Director, Lowe Institute of Political Economy, Robert Day School of Economics and Finance, Claremont McKenna College. Mark Schniepp is the Director of the California Economic Forecast.

Mark Schniepp
April 2025

Rates and Tariffs

Interest rates have been benefitting from the market chaos that’s been hurting stock prices, especially the freefall declines in value on April 3, 4, and 7 which represented a 15 percent decline. In tandem with stock prices, yields on the 10-year Treasury bond have also been in a freefall during the first week of April. This has lowered the mortgage rate to its lowest level in months. However, it is now at 6.52 percent. Whether this was an intentional outcome or merely a fortunate byproduct, it represents a measure of relief.

As somewhat of a surprise, U.S. companies will now have to grapple with the implications of much larger-than-expected reciprocal tariffs announced on Liberation Day, April 2, and detailed on April 4. They will also have to consider impacts of any retaliation that follows.

The tariff formula put in place this month represents a major shift in our foreign trade strategy, designed to adjust global commerce incentives. Trump claims to be restoring fairness to a system long skewed against U.S. producers. The formula introduces a principal of proportional fairness on our trading partners which invites negotiation in the hopes of reducing the level of tariff or entirely eliminating it.

The tariffs imposed on all countries that the U.S. trades with—all 185—claim to embody a “half reciprocal” approach. Whatever tariff a country charges the U.S., only half as much will be charged on goods coming into the U.S. from that country. Consequently, the new tariff policy is actually restrained. The problem however is that actual trade barrier tariffs are not charged on our incoming goods, at least not to the extent to which the administration claims. The half reciprocal U.S. tariff is estimated as what is approximately necessary to balance trade value with each country, that is: Import value = export value, country by country.

The trade balance formula for “half reciprocal tariffs”

Tariff retaliation is not likely because our trading partners will find it more economically advantageous to lower their own tariffs rather than retaliate with higher ones. However, China did retaliate and now we are in a trade war. This is not being well received by the stock market.

DOGE

Most of the impact from DOGE-fueled spending and employment cuts have yet to be seen. The work of DOGE has reduced federal government payroll employment to date with many more layoffs likely in the coming months despite all the legal injunctions that have delayed thousands of job terminations.

Monitoring layoffs and unemployment

To date in 2025, there has been no evidence that private sector layoffs or unemployment are rising. We use the monthly Challenger Report on layoffs and the weekly unemployment insurance claim reports to monitor the possibility of higher rates of unemployment.

In the latest report, of the just over 275,000 job cuts in March announced by U.S.-based employers, 80 percent of those were federal government workers whose employment status was terminated by DOGE. This signals that the public sector will likely become a headwind to job growth over the next several months. The recent Supreme Court ruling that the order to reinstate thousands of fired federal workers be lifted, will substantially raise layoffs in April.

In March however, the employment report showed that job growth came in at 228,000 which was way above expectations.  During the first 3 months of 2025, employment gains are averaging just 152,000 per month. By comparison, the labor market averaged 168,000 jobs per month in 2024 and 216,000 in 2023. So, while there is a slowdown in job creation, there is also a more meaningful slowdown in immigration through the southern border which has limited the extent to which the labor market can create new jobs when there are fewer job seekers. The unemployment rate for March ticked up slightly to 4.2 percent and has been moving in a narrow range of 4.0 to 4.2 percent every month for the last 10 months.

Stock Market

The latest bear run has been alarming for the equity market.  All of the major market indices have been in a freefall. The Dow Jones Industrial Index declined 7.9 percent during the week ending April 4 and is off 9.9 percent for the year so far. The S&P 500 was down 9.1 percent during the week and is down 14.1 percent in 2025.  The Nasdaq was down 10 percent for the week and down 19 percent year-to-date in 2025. The mood of the Stock Market over the last month has been to shoot first and ask questions later.

This is occurring at a time when there are no clear signs that economic conditions are beginning to deteriorate — either domestically or globally. The recent evidence shows that manufacturing output is expanding, new orders for manufactured products are higher, residential construction spending is increasing in 2025, new car sales had a breakout month of March, labor markets are still creating jobs at a significant rate, and the unemployment rate is stable. So, while there is simply not much trauma in the U.S. economy, the uncertainty of how the new tariff and government downsizing regime will impact the economy is sending investors to cover.

On the bright side, U.S. equity markets are finally beginning to approach levels where valuations are becoming attractive enough to start planning for future purchases. While this may not yet be the time for buying in earnest, this is the moment to prepare. The more compelling entry point is when PE ratios drop below 20, if they at all get there.

Mark Schniepp
March 2025

With the nation now amid an age of uncertainty, I hope the “age” lasts just a month or two. Markets loathe uncertainty, especially the capital markets.

The uncertainty comes from the post haste implementation of policies of the new administration.  The uncertainty is supporting investor ambivalence in the stock market, consumer ambivalence regarding present and future opportunities for jobs, income and spending, and employer worry regarding the availability of an adequate labor force.

Policies

The principal policies of the new administration are as follows:

• Identify and terminate wasteful spending in government.

• Enforce immigration laws at the northern and southern borders, and deport illegal migrants who have entered the country over the last 4 years.

• Restructure international trade policy to focus on “America First” principles, prioritizing trade agreements that are advantageous to the U.S. This includes imposing tariffs on countries with unfair trade practices towards the United States.

DOGE has identified what it believes as obvious government waste in the form of bloated or nonsensical spending. Thousands of federal workers have been fired or asked to quit with a generous severance.

Border policies have now been enforced. Immigration has been reduced by over 90 percent. And deportations are well underway.

Tariffs were imposed on Canada, Mexico, and China. The tariff rate is 25 percent for the our neighbors and 10 percent on all Chinese imports.  On March 6 however, tariffs were paused on imports from Canada and Mexico until April 2, prolonging uncertainty further.

While many people believe that these measures are both necessary and noble, and support the America First principals
that the Trump candidacy espoused throughout the campaign, they will also disrupt the status quo and create economic impacts that will result in some short term pain.  That pain can manifest in the form of higher prices, perhaps leading to a spurt of inflation in coming months.  Inflation might be impacted by higher prices for imported goods coming from tariffed countries.  It might also be impacted by higher wages that must be paid to attract new and legal workers into those labor markets that employed illegal migrants who are now at risk of deportation. GDP growth in 2025 could also be impacted.

C + I + G + X – M                             

This is the equation for GDP, equal to the sum of consumption expenditures by consumers, investment spending by businesses, government spending, and export value minus import value.

G is on the chopping block, and even if you believe that many of the programs getting terminated and many federal employees being laid off are indeed wasteful and not in the best interest of Americans, reduced government spending will lower GDP this year, if the change is not offset by increased C, I, or X.

Trade policy will be characterized by reducing trade deficits, defined as X – M where M is greater than X.  Policies using tariffs will try to boost X and reduce M, this policy would increase GDP providing there is no reduction in C or I as a result of the imposition of tariffs.

But C and I may ultimately be negatively impacted by higher prices on imported goods due to tariffs.

Unknown Economic Impacts = Uncertainty

Border policy and enforcing U.S. immigration policy will reduce migration into the U.S. and the labor force of potential workers needed to fill positions in leisure and hospitality, healthcare, and construction.

Consequently, the uncertainty today is due to changes in the status quo that will likely impact the economy, but that are largely unknown.  Just how high and for how long will tariffs will be implemented, and will there be adequate and affordable substitution effects for consumers as alternatives to tariffed goods.

Moreover, the uncertainty today will also persist regarding how many deportations will occur that would meaningfully impact the workforce, increasing labor costs for employers. How many federal government employees will be laid off, which would raise the unemployment rate in D.C. and Virginia if replacement jobs are not found in a timely manner. Jobless claims will be critical to watch in the coming weeks to determine the magnitude of potential labor market disruption.

Ending wasteful government programs and reducing the federal government workforce would reduce overall government expenditures which would shrink the federal budget deficit providing Congress acts to cut programs permanently out of the FY25 and FY26 appropriations.  Successful budget cutting would rally the bond market, reducing longer term interest rates, which by itself, would increas consumption and investment.

The unknowns are generally unnerving to consumers, businesses and investors. And to date, consumer and business sentiment have declined, home builder confidence has declined, and stock prices are moving lower. In the aggregate their change since the beginning of the year is negative.

The next 3 months

Course correction is possible if current policies being pursued by the new administration lead to an erosion in economic growth, rising unemployment, or accelerating inflation. I don’t believe the economic impacts will be severe. Tariff policy may be short lived. Deportations may not be substantial enough this year to meaningfully affect the labor force and wage inflation. And large government expenditure reductions may not be embraced by a bold enough Congress willing to cut them out of this year’s budget, and the FY26 budget.

Over time, a reduction in government spending is imperative if federal debt is to be reckoned with, which is necessary to lower longer term interest rates.  Hopefully current policies are a signal that the new administration is serious in finding redress for government programs or directions that appear disconnected to an American First agenda.

Our forecast is for the unemployment rate to rise slightly to 4.1 percent after dropping to 4 percent in January.  We also predict that the threat of tariffs on Canada and Mexico are likely  to be reduced or never implemented if concessions from the two countries are made to help secure the northern and southern borders.

While the current environment is chaotic, I believe it presents a significant long-term opportunity, based primarily on U.S. market’s ability to adapt to change. Just as certain policy developments in the 1980s and 1990s ultimately sparked an era of growth, the changes to the status quo that we are witnessing today could have a similar transformative effect.

Mark Schniepp
February 2025

What the Indicators are Saying

GDP rose 2.3 percent in the fourth quarter of 2024, and 2.5 percent for the calendar year. GDP growth in the first quarter to date is estimated at 2.9 percent (February 7) by the Atlanta Federal Reserve’s GDPNOW model.

Manufacturing has now turned around and is expanding in the U.S. again

The Institute of Supply Management Purchasing Index pushed above 50, indicating positive growth in manufacturing orders during January.

Incomes are rising as expected. There is continued growth in wages. The outlook is bright for income growth looking forward, as the labor market remains on solid footing.

The Job Openings and Labor Turnover Survey remains steady regarding hiring, quits and layoffs in the labor market.  In December, hiring and separations through quits or layoffs both increased. Though still at a modest level, the slower pace of layoffs (which remain historically soft) continue to ensure job growth. The unemployment rate for January slipped further, to 4.0 percent.

Spending growth by consumers finished 2024 on a high note, rising as much as wages and contributing to a solid 4.1 percent year-over-year growth in retail sales during December.

New home sales were higher in December. As homebuyers contend with an increasingly limited supply of existing homes for sale, many are turning to the new-home market.

I expect a rate cut by the Fed in the first or second quarter, and perhaps a second cut in late summer.  Lower rates will reduce builders’ costs of loans for capital and land development, reducing the cost of construction.  This assumes no extraordinary increases in material costs. Over the last 9 months, construction cost
inflation has been unusually tame, averaging 1.9 percent in California.

Policy and the Economy in 2025

Fed cuts to the funds rate are unlikely to push mortgage rates down, but the progress being made toward balancing the federal budget by Elon Musk and DOGE would result in lower 10 year treasury bond yields and lower mortgage rates.

The Fed will remain concerned about rising inflation due to elevated wage growth. Consequently, after 100 basis points of federal funds rate reductions in 2024, the timing of further Fed cuts has become less certain, indicating a more gradual, data-driven approach in 2025.

Despite the volatility and seemingly lateral movement in prices since early December, the 3 major indices of the U.S. stock market are all higher to date in 2025.

The market is holding together relatively well despite the uncertainty that investors feel regarding tariff policy, the federal deficit, and interest rates.  Whereas DOGE can and is identifying where government spending appears to be wasteful, it is up to Congress to do something about it.  And there is nothing out of the House yet that would signal they are serious about cutting spending in a meaningful way.

Furthermore, any larger than expected government spending cuts would pose a downside risk to U.S. growth. But at the same time, this would likely push long term rates lower, offsetting less federal spending with higher levels of private investment and consumer spending.

The administration’s plan to renew the 2017 tax cuts and augment them with no taxes on tips, overtime, and social security would enhance growth prospects this year. Consequently, there is significant potential for higher-than-expected growth in 2025, providing the unknowns don’t slow the current momentum in the economy, which is now running at an above average pace. We are predicting that the economy will progress at a healthy clip near term, but the pace of growth will moderate.