Since the June release of UCLA Anderson Forecast's second quarterly report of 2025, the U.S. economy has endured several inflection points that now inform the Forecast's third quarterly economic forecast.
First, the labor market deteriorated notably, marked by a decline in payroll employment in June. Second, the inflationary trend pivoted to a rising trajectory. And finally, Federal Reserve chairman Jerome Powell signaled a change in monetary policy — referred to as the "Powell pivot" — shifting the Fed's focus to a stronger emphasis on its employment mandate relative to its inflation mandate.
As a result, the latest forecast comes at a time when more extreme economic scenarios are possible, and, while they do not manifest in the current baseline outlook, they are plausible enough to mention and monitor.
The risk of rising layoffs leading to a recession is now a tangible possibility. Even if a recession is avoided, the current pivot toward monetary easing sets the stage for what the Forecast anticipates will be a "stagflation-lite" regime, marking a period in which both inflation and unemployment remain modestly elevated. And should the current administration's attempt to undermine the Fed's independence succeed, a full-blown stagflation scenario becomes a more significant risk.
California forecast
In California, previous reports pointed to signs of weakening in the economy. Data on employment over the past eight months suggest the state is in an employment contraction, one that will last through 2025. Data on income and production are collected with a lag, but it is reasonable to expect that they will also show a sharp slowing from last year and, possibly, a mild contraction in the state's economy.
The California sectors that have fueled better-than-U.S. growth rates since 2000 have been stagnant or contracting; these include tech, durable goods manufacturing, entertainment, and logistics. Entering 2025 growing at half the rate of the U.S. left the state's economy without the inertia evident in the national economy. Over the first seven months of the year, California lost payroll jobs, and the unemployment rate increased to above 5%. Once the state is past the current weakness — which is expected in late 2026 — a tech, durable goods manufacturing and construction resurgence should lead to California's superior growth once again.
Read the full UCLA Anderson Forecast news release.
