Californian conundrum: high growth but high unemployment

California, the epicenter of the AI ​​boom, continues to grow its economy faster than the nation, but more people are losing their jobs and the cost of living remains high.

New economic indicators released this week show how the Golden State is grappling with the effects of the Iran war and the artificial intelligence boom, which has led to massive investments and layoffs.

The state’s unemployment rate reached 5.3% in April; this was about 1 point higher than the country’s. California’s unemployment rate is expected to peak at 5.6% by the end of this year, according to the UCLA Anderson Forecast released this week.

According to the report, the state surpassed the country in economic growth in the fourth quarter of 2025. The report stated that it likely continued to outperform the country in the first three months of this year.

“Income and output will continue to grow faster than the U.S. even as job growth moderates,” senior economist Jerry Nickelsburg wrote in the forecast. “Once the current weakness is overcome, expected by the middle of next year, the resurgence in technology, durable goods manufacturing and construction will once again lead to superior growth in both employment and income in the Golden State.”

The state’s growth is fueled by many local companies that are spending and attracting hundreds of billions of dollars in the race to build the software and infrastructure needed for artificial intelligence. But there are signs that the same race could lead to fewer jobs in some sectors.

Tech employers in the U.S. announced 123,653 layoffs from January through May, up 66% from the same period a year earlier, according to a report Thursday by global employment and executive coaching firm Challenger, Gray & Christmas. There were nearly 77,000 layoffs across all industries in California; This is double the number of other states.

Although AI is being cited more often for cuts, layoffs are not as bad as pessimists fear, said Andy Challenger, business and workplace expert and chief revenue officer at Challenger, Gray & Christmas.

“AI is not yet the job apocalypse some have predicted,” he said in a statement. “Like spreadsheets and emails before it, the technology will ultimately make employees more productive.”

California saw job growth in sectors including healthcare and social services. But entertainment, technology and manufacturing businesses are making cuts.

UCLA’s outlook paints a mixed picture of California’s future; It paints a picture full of uncertainty as the Iran war pushes up fuel prices, inflation soars, and government policy changes and tariffs disrupt supply chains.

The state is particularly vulnerable to the effects of the Iran war because it uses expensive low-emission gasoline and California ports accept large amounts of cargo from ships that require more expensive oil, estimates suggest.

California is also more dependent on oil from outside the country than other states.

It’s too early to predict the effects of the Iran war, but economists expect it to negatively impact employment later this year and into 2027, according to a quarterly forecast from UCLA. National real GDP growth is projected to fall from around 2.3 percent this year to 1.8 percent next year.

The UCLA report did not provide an estimate of the state’s GDP but noted that early indicators show California continues to outperform the nation. The report stated that the national real GDP growth rate last year was around 2%. California’s was closer to 2.5%, according to U.S. Bureau of Economic Analysis data.

Some worry that AI could worsen the so-called “K-shaped” economy, where the rich see growth and most other people struggle with stagnant opportunities. In California, this could also lead to an “E-shaped” economy in which low-, middle-, and high-income people experience slight growth.

Economist William Yu said it depends on whether AI will help or replace workers.

“If the issue is labor substitution, we will see this [as] more of a K-shaped economy. If there is more labor growth, we will see more [an] “The E-shaped economy,” he said at a conference on the report.

Tech companies say they are using artificial intelligence to achieve more with fewer people. Most AI spending goes toward building AI data centers rather than hiring, Yu said.

Citing data from a job search website, he said that AI is indeed slowing growth in job postings in software, information technology, marketing and media. However, the demand for civil and electrical engineers is still high. AI may not be affecting these roles, or reindustrialization policies may be increasing hiring in these areas.