California Unemployment Tops U.S. at 5.1% Despite Faster GDP Growth

California's unemployment rate reached 5.1% in August — the highest of any state and one full percentage point above the national average — even as the state's economy grew at a 3.7% annualized rate in the first quarter of 2026, according to the September UCLA Anderson Forecast released Wednesday.

The split between output and employment defines what UCLA economists call an "employment recession," a label they first applied six months ago. California payrolls added 138,500 jobs over the 12 months ending in August, but a separate household survey recorded 246,700 fewer employed Californians and a 351,100-person decline in the state's labor force over the same period.

What the jobs gap means for workers

For job seekers, the divergence between the two surveys indicates a labor market losing participants faster than it adds positions. Hiring so far this year has clustered in healthcare and social services, education, and retail — sectors the forecast does not expect to maintain the same level of support.

• Healthcare, social services, education, and retail account for most 2026 hiring
• Tech payrolls continue to decline, though at a slower pace
• Aerospace is expanding on commercial aircraft, defense, space, and satellite demand
• Future job growth depends on durable-goods manufacturing and an AI-driven tech rebound

When will California's labor market turn?

The forecast projects California's unemployment rate will average 5.2% in 2026, ease to 4.9% in 2027, and reach 4.4% in 2028. Total employment is expected to contract 0.2% this year, then grow 0.6% in 2027 and 1.8% in 2028.

UCLA economists attribute the recovery to "AI-related hiring and the end of contraction elsewhere in the technology sector," with job creation expected to begin in 2027 and accelerate in 2028.

How does California compare nationally?

California's 3.7% first-quarter annualized growth outpaced the 2.1% national rate. Only Washington state grew faster. Over the year ending in the first quarter, California gross domestic product expanded 3.3%, versus 2.7% nationwide.

Nationally, the forecast expects growth above 2% for the rest of 2026 and near 2% in 2027 and 2028. High-tech investment and the wealth effect from AI-related equities together account for nearly one percentage point of core GDP growth, the economists estimate.

What does the inflation outlook mean for pay and hiring?

Headline inflation is projected to move toward 4% this winter, with core inflation approaching 2.9% in early to mid-2027 before gradually declining toward the Federal Reserve's 2% target. The forecast expects the Fed to raise its benchmark rate by another quarter-point in December and hold it steady through 2027 absent another supply shock.

For employers setting compensation budgets, a December rate hike would keep borrowing costs elevated, while core inflation running 90 basis points above target implies continued wage pressure and constrained pricing power through 2027.

Where does housing and construction fit in?

Residential construction remains constrained. The annual pace of permits has held near 110,000 units, and the forecast projects 116,000 permits this year, rising to 118,000 by the end of 2028. Elevated mortgage rates, tariffs on imported building materials, and the loss of construction workers through deportations will continue to limit the sector.

UCLA's September forecast places California at an unusual juncture: the state's economy outproduces the nation's, yet its labor market keeps losing participants, with a tech-led recovery not expected to take hold until 2027.