California’s economy expanded at a 3.7% annual rate in the first quarter of 2026, surpassing national growth of 2.1%, according to the latest UCLA Anderson Forecast. The state’s unemployment rate remained at 5.1% in August, highlighting a divide between relatively strong economic output and a labor market that continues to recover more slowly.
The forecast expects employment weakness to persist through the remainder of 2026 before a recovery begins in early 2027.
Key Takeaways
- California’s economy grew at a 3.7% annual rate in the first quarter of 2026
- U.S. economic growth was 2.1% during the same period
- California’s unemployment rate remained at 5.1% in August
- UCLA expects employment weakness to continue through the end of 2026
- The forecast projects an employment recovery beginning in early 2027
California Economy Outpaces National Growth
California recorded a 3.7% annualized economic growth rate in the first quarter of 2026, compared with 2.1% for the U.S. economy, according to the UCLA Anderson Forecast.
The figures show a state economy expanding faster than the national economy even as California continues to face weaker labor-market conditions. UCLA reported that California’s year-over-year GDP growth reached 3.3% in the first quarter, compared with 2.7% nationally.
The contrast is particularly visible in unemployment. California’s unemployment rate stood at 5.1% in August despite the stronger pace of economic output.
UCLA expects the state’s employment weakness to continue through the end of 2026. Its forecast calls for unemployment to average 5.2% in 2026 before declining to 4.9% in 2027 and 4.4% in 2028.
The different trajectories illustrate why economic growth and employment conditions can move independently. GDP measures the value of goods and services produced, while unemployment reflects the share of the labor force actively seeking work without a job.
Unemployment Remains Elevated Across California
California’s 5.1% unemployment rate remained unchanged in August, even as the state added 39,400 nonfarm payroll jobs during the month.
The UCLA forecast describes California as experiencing an employment recession despite continued growth in overall economic output. The state’s unemployment rate has remained above 5% for an extended period, underscoring the slower labor-market recovery.
UCLA projects total employment to decline 0.2% in 2026 before increasing 0.6% in 2027 and 1.8% in 2028. Nonfarm payroll employment is projected to grow 0.9% in 2026, 1.2% in 2027 and 2.2% in 2028.
Those forecasts point to gradual improvement rather than a rapid shift in labor conditions. The projected decline in unemployment from 5.2% in 2026 to 4.4% by 2028 reflects the same longer-term recovery pattern.
California’s labor market therefore presents a different picture from its headline GDP performance. Output continues to expand, while hiring and unemployment indicators show a more uneven recovery.
Technology and Aerospace Support Economic Output
California’s concentration in technology and aerospace is helping support its economic performance, according to UCLA.
The San Francisco Bay Area remains a major center for venture-capital activity. Six of the 10 largest venture investments in the Americas during the first quarter of 2026 were in the Bay Area and accounted for more than 95% of the value of those top deals. UCLA also reported that California received 82% of all venture-capital investment during the second quarter.
The concentration of investment reflects the continuing importance of the broader California technology economy, where artificial intelligence companies, startups and established technology businesses remain significant contributors to investment and high-productivity activity.
Aerospace is another source of growth. UCLA cited increased commercial aircraft production, defense purchases, space exploration and satellite production among the factors supporting the sector.
These industries can generate substantial economic output without producing employment gains at the same pace across the broader economy. That helps explain how California can record comparatively strong GDP growth while simultaneously experiencing weaker statewide labor conditions.
Housing and Business Costs Remain Economic Constraints
Housing construction remains one of the constraints identified in the UCLA outlook. New-home construction has changed little in recent months, with the annual pace of permits remaining around 110,000 units.
Elevated mortgage rates and construction costs continue to affect residential development. California has also pursued housing affordability reforms intended to streamline financing, reduce development costs and accelerate affordable housing construction.
Housing conditions influence the wider economy in several ways. Limited construction affects employment in building and related industries, while high housing costs can influence household finances, worker mobility and employers’ ability to recruit workers.
Energy costs represent another pressure on the state economy. UCLA’s September outlook was slightly weaker than its June forecast in part because of continued disruption in energy markets.
Together, housing supply, financing conditions and energy costs provide important context for California’s broader economic performance even as technology and aerospace continue to support output.
Economic Growth Has Yet to Translate Into Broad Hiring
California’s recent economic data show that gains in production have yet to produce equally strong employment growth across the state.
The distinction is important because rapidly expanding industries can account for a substantial share of economic output without generating enough jobs to materially change statewide unemployment.
Technology illustrates that pattern. Artificial intelligence companies and other specialized employers continue investing and hiring in selected areas, while other parts of the technology industry have undergone workforce restructuring.
California also contains a diverse mix of regional economies, meaning employment conditions vary substantially by location and industry. Growth in high-productivity Bay Area technology businesses does not necessarily translate into equivalent job growth in other parts of the state.
The UCLA forecast therefore treats economic output and employment as separate indicators when assessing California’s outlook. Stronger GDP growth provides evidence of economic expansion, while unemployment and job-growth data show that the benefits have yet to spread evenly through the labor market.
California Employment Recovery Is Expected in 2027
The UCLA Anderson Forecast expects California’s employment recovery to begin in early 2027, followed by stronger growth later in 2027 and during 2028.
The forecast projects an average unemployment rate of 5.2% for 2026, falling to 4.9% in 2027 and 4.4% in 2028. Total employment is expected to return to growth in 2027 after a projected decline in 2026.
Real personal income is also forecast to increase, rising an estimated 1% in 2026, 2.4% in 2027 and 2.6% in 2028.
Those projections leave California with a mixed near-term economic picture. Technology, aerospace and investment continue to support output, while unemployment, housing constraints and other costs remain important factors shaping the labor market.
The forecast ultimately points to stronger employment conditions beginning in 2027, with further improvement expected through 2028.
Frequently Asked Questions
How Fast Did California’s Economy Grow in Early 2026?
California’s economy grew at a 3.7% annual rate in the first quarter of 2026, according to the UCLA Anderson Forecast. The U.S. economy grew at a 2.1% rate during the same period.
What Was California’s Unemployment Rate in August 2026?
California’s unemployment rate was 5.1% in August 2026. The state added 39,400 nonfarm payroll jobs during the month, according to California employment data.
How Does California’s Economic Growth Compare With the U.S.?
California recorded annualized growth of 3.7% in the first quarter of 2026, compared with 2.1% nationally. Year-over-year California GDP growth was also higher, at 3.3% compared with 2.7% for the nation.
Which Industries Are Supporting California’s Economic Growth?
Technology and aerospace are among the industries supporting California’s economic performance. Venture-capital investment in the Bay Area and activity in commercial aviation, defense, space exploration and satellite production have contributed to the state’s output.
When Is California Employment Expected to Recover?
The UCLA Anderson Forecast expects California’s employment recovery to begin in early 2027. It projects average unemployment of 5.2% in 2026, 4.9% in 2027 and 4.4% in 2028.
