Los Angeles – September 30, 2026 -- California's economy expanded at an annualized 3.7% rate in the first quarter of 2026, nearly double the 2.1% national growth rate, even as the state's unemployment rate climbed to 5.1% in August, the highest of any U.S. state, according to the UCLA Anderson Forecast's September 2026 outlook.
California outpaces every state but Washington in growth while shedding jobs by one measure
Over the year ending in the first quarter, California GDP grew 3.3% versus 2.7% nationally. Payroll employment rose by 138,500 jobs over the 12 months through August, but a separate household survey showed 246,700 fewer Californians employed and a 351,100 drop in the labor force over the same period. The state's unemployment rate has stayed above 5% for 31 consecutive months.
Venture capital concentrates in California as tech and aerospace drive output
Six of the 10 largest venture capital investments in the Americas in the first quarter landed in the San Francisco Bay Area, accounting for more than 95% of the top 10 deal value. In the second quarter, California captured 82% of all U.S. venture capital investment. Aerospace has added strength from higher commercial aircraft production, defense purchases and satellite manufacturing.
National GDP growth holds above 2% despite oil shock and tariff disruption
The UCLA Anderson Forecast credits AI-related capital spending and the wealth effect from rising technology equity valuations for nearly one percentage point of core U.S. GDP growth. National payrolls rose 162,000 in August but averaged only 71,000 monthly over the prior three months and 31,000 over the past year. The national unemployment rate fell to 4.1% in August from 4.5% in November 2025.
Inflation is set to climb back toward 4% this winter, keeping the Fed on a hiking path
Headline inflation eased to 3.4% in July and August after peaking at 4.2% in May, but the Forecast expects it to move back near 4% this winter due to disrupted oil supplies tied to the Iran conflict and attacks on Russian refining capacity. The Federal Reserve raised its target rate by 25 basis points in September to 3.75%-4%, with another quarter-point increase expected in December and no further changes through 2027 absent a new supply shock. The 10-year Treasury yield has risen from below 4% in February to around 5%.
California's labor recovery is pushed to 2027 as housing permits stall near 110,000 units
The Forecast projects California's unemployment rate will average 5.2% in 2026, easing to 4.9% in 2027 and 4.4% in 2028. Total state employment is expected to decline 0.2% in 2026 before growing 0.6% in 2027 and 1.8% in 2028. Residential permits are forecast at 116,000 units this year, rising only to 118,000 by 2028, constrained by elevated mortgage rates, tariffs on imported building materials and construction-labor losses tied to deportations. Job growth so far in 2026 has concentrated in health care, education and retail, sectors the Forecast expects to weaken on government budget constraints and reduced federal health-care support, shifting the burden of recovery to technology and aerospace hiring beginning in 2027.
UCLA economist separates AI investment gains from AI's actual productivity impact
In an accompanying essay, UCLA Anderson Forecast senior economist Clement Bohr writes that while AI-related infrastructure spending and equity valuations are already driving measurable GDP growth, evidence that the technology itself is reshaping employment or productivity remains inconclusive, noting that prior general-purpose technologies took years to generate economy-wide gains.