The California Economy
Much of the story currently being told in regard to the California economy is rooted in immigration. Immigration policy will likely have two effects on California.
The first will be the withdrawal of millions of undocumented workers from the U.S. labor force — including in California — either through the deportation process underway or because such workers voluntarily leave jobs that put them at high risk of deportation. The current UCLA Anderson Forecast report for California assumes such deportations will commence and be carried out as repeatedly promised by the current administration since the beginning of the election campaign. Studies have shown that past incidence of mass deportation decreased the number of undocumented workers, but it also decreased the rate of employment in the remaining population.
The second effect of immigration policy involves H1B visas issued to workers in the tech industry. The emphasis the new administration is expected to place on growth in technology suggests that H1B visas will benefit California’s economy.
Three important factors will make meeting California’s need for more housing challenging. First, deportations will deplete the construction workforce. The loss of workers the industry relies on for installing drywall, flooring, roofing and finishing, for example, will directly diminish production of single-family and smaller (non-high-rise) multifamily developments.
The second factor relates to persistent inflation in the U.S. The Federal Reserve is much less likely to lower the federal funds rate with the trend in consumer inflation moving away from their 2.0% target. This will increase the cost of funds for construction loans and, therefore, the cost of new construction.
The third factor relates to the tariff policy of the Trump administration. The source of building materials is international, with key inputs such as lighting and electrical fixtures and appliances originating in China. A 20% or more increase in the cost of these inputs will increase the cost of construction and further limit the demand for newly built homes. Moreover, nearly 70% of U.S. lumber imports come from Canada, and 71% of gypsum imports (the primary component of drywall) come from Mexico.
The California economy is forecasted to grow at about the same rate as the U.S. in 2025 and 2026, and slightly faster in 2027. The unemployment rate for the first quarter of this year is expected to average 5.5%, and the average for 2025, 2026 and 2027 is expected to be 5.7%, 5.2% and 4.8%, respectively.
The current forecast for 2025, 2026 and 2027 is for total employment growth rates to be 0.5%, 1.2% and 1.1%. Non-farm payroll jobs are expected to grow at a 1.1%, 0.9% and 1.7% rate during the same three years. Real personal income is forecast to grow by 2.5% in 2025, 2.4% in 2026 and 2.9% in 2027. Higher interest rates, shortages of construction labor and the rebuilding of damaged and destroyed homes lowered California’s residential construction forecast from December. Permitted new units are expected to number 102,000 in 2025 and grow to 127,000 by the end of 2027. This rate of home building means that the private sector’s prospects for building out of the housing affordability problem over the next three years are nil.
Full release including the national forecast at https://www.anderson.ucla.edu/news-and-events/increased-uncertainties-persist-new-administration-enacts-economic-agenda.
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