A study released by the UCLA Anderson economists sums up California’s economic outlook for early 2026 as: “Both the nation and the state are poised to muddle through early 2026 before experiencing stronger growth in 2026 and 2027.”
That phrase—“muddling through”—captures a divided economy where AI-driven optimism collides with tariff-induced uncertainty and a weakening labor market, according to the study.
Another survey by George Mason University’s Mercatus Center, a libertarian, free-market-oriented non-profit think tank, found the national economic landscape similar to California’s: productivity gains from AI will help offset weak job creation, but inflation and trade uncertainty remain stubborn challenges.
Jobs: A tale of two Californias
The report highlights a stark split: “In California, the outlook is further complicated by a bifurcated economy in which AI, aerospace, and other high-productivity sectors continue to expand while construction, non-durable goods, leisure and hospitality, and government-funded services face significant headwinds.”
Payroll job losses through most of 2025 marked the first sustained decline since the pandemic, and UCLA warns, “California faces a prolonged employment recession into early 2026, driven by elevated costs, weak job growth, and the early effects of deportation policies.”
Housing: High prices, new supply of houses low
Housing remains a choke point. UCLA notes: “Building permits have stayed subdued despite elevated home prices and the urgent need for new construction following the December 2024 and January 2025 wildfires.” Workforce shortages linked to deportations and tariff-driven material costs are key culprits.
California’s small businesses squeezed by tariffs, costs
Tariffs imposed throughout 2025 are still rippling through supply chains, the report found. The forecast warns: “Tariffs imposed throughout 2025 continue to move through supply chains, raising the price of goods and placing pressure on consumers and small businesses.”
Policy uncertainty—including pending Supreme Court decisions on tariff authority—has made long-term planning difficult, forcing many firms to adopt a cautious hiring stance.
What does this mean for California’s economy?
UCLA economists stress that this is not a collapse but a holding pattern: “The slowing but resilient national economy, buffeted by investment in AI, continues to face tariff-related uncertainties.”
AI-related investment has already surpassed $405 billion in 2025, far above the original $250 billion estimate, and the One Big Beautiful Bill Act’s fiscal stimulus will reinforce this surge, the study found.
This article originally appeared on Palm Springs Desert Sun: California economy balances 2026 AI growth versus tariff headwinds
Reporting by James Ward, Palm Springs Desert Sun / Palm Springs Desert Sun
USA TODAY Network via Reuters Connect
