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.
The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.
