IE Business Daily Business news for the Inland Empire.
California’s economy is slowing down.
Unemployment is rising, growth has cooled, housing is still too expensive and difficult to build, and energy prices are higher than in most parts of the country, according to Beacon Economics in Los Angeles.
That’s not to say California is not relinquishing its status as a global superpower. It’s the fourth-largest economy in the world behind the United States, China, and Germany, and ahead of Japan, which it passed last year.
The state’s economy remains a rare blend of technology, entertainment and agriculture, with a workforce of 19.2 million. It also remains one of the most influential state economies, accounting for roughly 14 percent of the $29.2 million US GDP.
But the most recent economic data compiled by Beacon shows California’s economy is “cooling” because of slow growth, rising costs associated with doing business and layers of regulation that accumulated over time.
“California has absorbed more than most states – more wage floors, more housing-production policy, and more rent rules, all of which amount to more pressure,” said Nike Kodaverdian, a research manager at Beacon Economics and the co-author of its Fall 2025 analysis of California’s economy, released earlier this month.
“But even California has its limits.”
The report is careful to note that the state economy “is slower, but not in a downturn.”
“Growth and hiring have cooled, prices remain high, housing is tight, and energy bills are rising,” the report states. “The path forward seems simple, but it’s extremely fraught politically: build more homes, keep the (energy) grid reliable and affordable, and avoid piling on policies that make it harder to work, build, and invest.
“That doesn’t mean adding a new set of “pro-growth” programs that often, albeit unintentionally, distorts markets and raises costs.”
The third quarter report lays out five areas that show California’s economy is slowing:
- In the first quarter of this year, growth of the state’s gross domestic product slowed to 1.8 percent, about half the pace of exactly one year earlier, and well below its long-term average of 2.7 percent;
- Unemployment reached 5.5 percent in August, the highest level of the last three years, and well above the 4.3 percent national average rate;
- Teen employment dropped between July 2024 and July of this year. Participation in the labor force – anyone who is employed, unemployed but looking for work or temporarily absent from a job – also declined among that demographic;
- Recent college graduates (22–27 years old) across the country are also experiencing higher-than-normal unemployment, probably because of slower-than-normal hiring, and some disruption among traditional entry-level jobs for college graduates that are being filled by artificial intelligence;
- Some policies passed by the state legislature in Sacramento are having a negative impact on California’s economy, according to the report.
To cite one example, the minimum wage rose to $16.50 in January, with special “carve out” rates in some cities and industries: $20 an hour in the fast food, and up to $30 and hour in the Los Angeles hospitality industry by 2028.
Critics of the minimum wage increase say it has led to a loss of jobs and working hours, particularly in fast food, making it more difficult for young people to find entry-level work.
The base minimum wage is scheduled to go up to $16.90 an hour Jan. 1.
“It’s not fair to pin all the blame on Sacramento, although some of the culpability certainly lies there,” the report states.
Also, the Trump Administration’s crackdown on immigrants is affecting California, where one-third of the state’s workforce is immigrant.
The state’s housing market is also slowing down.
High mortgage rates mean people aren’t moving as often as they usually do, which has lowered then number of transactions. Not as many homes are selling, and the ones that are sold spend more time on the market than houses have in the past, the report states.
Before the pandemic, California averaged about 400,000 home sales a year. That number began to fall in the spring and summer of 2020, when the pandemic took hold. It ended up topping 500,000 for about one year thanks to low mortgage rates and the government stimulus programs that helped keep the housing market afloat.
After the economy recovered and mortgage rates returned to where they were before the pandemic, home sales in California move closer to 300,000 a year.
Despite its negative numbers, the report is not predicting an economic collapse and should not be interpreted too harshly, said Christ Thornberg, Beacon’s founding partner.
California incomes are at a record high compared to the rest of the nation, and wages are as also on the rise. Unemployment is up, but that’s because of California’s “stupid” minimum wage hike, according to Thornberg.
“The California economy is slowing down like the rest of the nation, no doubt about it, and that’s worrying a lot of people in Sacramento because they need revenue coming in to pay their bills,” said Thornberg, who helped research the report. “The state is looking at a lot of red ink, but the solution to getting rid of that is more economic growth.”
