- The national economy, while resilient in early 2025, faces a period of deceleration owing to aggressive trade policies, fiscal instability and labor market disruptions.
- California is already experiencing a mild contraction, with job losses and stagnation in key sectors undermining the state's economic momentum.
LOS ANGELES, June 18, 2025 -- The UCLA Anderson Forecast's second quarterly report of 2025 presents a sobering view of the economic landscape for both the United States and California. The national economy, while resilient in early 2025, faces a period of deceleration owing to aggressive trade policies, fiscal instability and labor market disruptions. Meanwhile, California is already experiencing a mild contraction, with job losses and stagnation in key sectors undermining the state's economic momentum.
At the national level, the economy is grappling with a volatile policy environment. The effective tariff rate remains elevated at approximately 15%, and the threat of further escalation looms. These tariffs are increasing costs across manufacturing and trade-related sectors, contributing to inflation and weakening the competitiveness of U.S. goods.
In California, where the economy has, up to this year, consistently been outperforming the nation as a whole, the economic picture is even more concerning. The state lost 50,000 payroll jobs in the first four months of 2025, and the unemployment rate remains above 5.3%, more than a full percentage point higher than the national average.
The National Economy
The current economic forecast is subject to numerous risks, given the unprecedented levels of economic and geopolitical uncertainty. Geopolitical tensions remain elevated because of ongoing conflicts around the world, including in Ukraine, Iran and Gaza. Concerns about a broader conflict in the Middle East persist, and China's 2027 deadline to annex Taiwan is looming. In addition, tensions between the U.S. and China have increased as the U.S. has taken a more hostile stance toward China's geopolitical and economic agendas. The trajectory of tariffs remains unpredictable. Many tariffs are imposed merely to provoke a reaction, and as observed with the temporary decoupling from China, this strategy does not always yield the desired results. Other tariffs are implemented to promote domestic industries in the name of national security and are likely to be more enduring.
As tariffs shook financial markets, a rapid sell-off in the Treasury market prompted the administration to pause most of the newly announced tariffs. While this stemmed the bleeding, yields on U.S. government debt continued to climb as the administration criticized the independence of the Federal Reserve. Furthermore, the pending House bill on taxes and spending contains Section 899, which would give the administration new discretionary powers to tax foreign entities at will, and which will make the U.S. an even less desirable place for investment. This situation, in which the U.S. will need to borrow increasingly larger amounts while simultaneously increasing its perceived investment risk, suggests that greater strains are likely to appear within the financial system.
Although the labor market showed strength through the spring with robust job growth and low unemployment claims, this momentum is not expected to last. The unemployment rate is projected to rise to 4.6% by the end of the year, with further increases likely to continue into 2026. Inflation, which had been moderating, is expected to exceed a 4% seasonally adjusted annual rate in the second half of 2025 as tariff-related costs ripple through supply chains. Long-term interest rates are also on the rise, with the 10-year Treasury note projected to peak at 4.7% before gradually declining. Real GDP growth, which contracted slightly in the first quarter, is expected to slow to near zero in the second half of the year, with only modest recovery anticipated through 2027.
In California
The sectors that have historically driven California's superior growth — technology, durable goods manufacturing, entertainment and logistics — are either stagnant or contracting. Healthcare, education and government, which supported growth in 2024, have likely reached their peak. The housing sector is also under pressure, with deportations reducing the construction workforce, rising input costs owing to tariffs and high interest rates constraining new home development. Despite strong demand and rising prices, new permits remain subdued, and developers are cautious amid economic uncertainty. The logistics sector, a major employer in regions such as Los Angeles and the Inland Empire, is also slowing. A surge in port traffic earlier this year was driven by pre-tariff stockpiling, and with no sustained growth in trade volumes expected, logistics employment is unlikely to expand in 2025.
The forecast for the California economy is that it will grow slower than the U.S.'s in 2025, with several quarters of negative job growth. A recovery from California's 2025 economic doldrums could begin in mid-2026, and economic growth is expected to increase in 2027. The unemployment rate is expected to hit a peak of 6.1% this year. The averages for 2025, 2026 and 2027 are expected to be 5.8%, 5.6% and 4.4%, respectively.
The forecast for 2025, 2026 and 2027 is for total employment growth rates to be 0.1%, 0.8% and 2.5%, respectively. Non-farm payroll jobs are expected to grow at a rate of -0.1%, 0.4% and 1.9%, respectively, during the same three years. Real personal income is forecast to grow by 1.6% in 2025, 1.3% in 2026 and 2.7% in 2027. Higher interest rates, a shortage of construction labor and the rebuilding of damaged and destroyed homes lowered our residential construction forecast from March. Our expectation is for permitted new units to be 102,000 this year and grow to 115,000 by the end of 2027. This level of homebuilding means that the prospect of the private sector building out of the housing affordability problem over the next three years is nil.
About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state's rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.
uclaforecast.com
About UCLA Anderson School of Management
UCLA Anderson School of Management is a world-renowned learning and research institution. As part of the nation's No. 1 public university, its mission is to advance management thinking and prepare transformative leaders to make positive business and societal impact. Located in Los Angeles, one of the nation's most diverse and dynamic cities and the creative capital of the world, UCLA Anderson places more MBAs on the West Coast than any other business school, and its graduates also bring an innovative and inclusive West Coast sensibility to leading organizations across the U.S. and the world. Each year, UCLA Anderson's MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics and doctoral programs educate more than 2,000 students, while the Executive Education program trains an additional 1,800 professionals. This next generation of transformative leaders will help shape the future of both business and society.
anderson.ucla.edu
Follow Us
@UCLAForecast
@uclaanderson
This News is brought to you by Qube Mark, your trusted source for the latest updates and insights in marketing technology. Stay tuned for more groundbreaking innovations in the world of technology.
