UCLA Forecast: Uncertainties Rise with New Economic Plan

As President Donald Trump and his team commence implementation of the economic policies they described during the election — including the mass deportation of undocumented workers and tariffs on major international trading partners — the outlook for the U.S. and California economies is rife with uncertainties.

As noted in the March 2025 UCLA Anderson Forecast for the nation, high levels of uncertainty surrounding economic policy are common before a change in administrations. What's unusual at the current time is for such uncertainties to increase two months into the new administration's tenure.

At present, uncertainty related to trade, fiscal policy and geopolitical risk have all surged to new heights with the onset of the second Trump administration. While the stock market has shown jitters, financial markets more generally have remained surprisingly sanguine in the face of this these elevated risks, with corporate bond spreads remaining near record lows.

The national economy

The forecast for the nation remains largely unchanged from that of December 2024, as the assumptions made then regarding many of the plans and intentions of the new presidential administration have held up. GDP growth remains strong, despite signs of weakening consumer confidence. Inflation is rising, owing to factors ranging from avian flu to climate change.

As a result of deportations and tariffs, the forecast is for GDP and productivity growth to decline in late 2025 by about 1 percentage point and to subsequently recover by the end of the following year. Unemployment will simultaneously rise, reaching 4.5% by the first quarter of 2026, then slowly recover to 4.0% in 2027. Inflation will remain elevated, hovering at about 3.0% throughout 2025 and 2026. Tariffs will be the main cause of higher prices this year, while deportations will drive up prices in 2026 because of higher food prices and wage inflation around 4.0%.

Mass deportations will likely lead to a decline among the non-immigrant workforce, a consistent by-product of historical mass deportations, from the Chinese Exclusion Act of 1882 through the Secure Communities program of 2008. This decline occurs because the deported cohort is not representative of the whole population but instead of a subset fulfilling certain economic roles. When the immigrant workforce is deported, the rest of the population suffers, as certain work tasks are no longer performed, which in turn inhibits the rest of the population's employment.

The forecast notes that many of the administration's goals are longer term, such as balanced trade, more economic sovereignty and resilience, a reduced government deficit, lower oil prices, and less regulation. Some of these goals do not differ from those of the previous administration, which also sought to boost economic resilience and competition in cutting-edge technologies. The forecast expects many of these to come to pass — however, only to minor degrees.

According to the current forecast, oil prices will likely soften further in the coming years, staying below $70 per barrel as global demand remains weak while other large economies like China and Germany teeter on the edge of recessions. The forecast expects productivity growth to rebound in 2027, pushing GDP growth into the high twos.

The national forecast does not predict a recession will take place over the coming years as there is simply too much uncertainty surrounding what economic policy the second Trump administration will implement. However, there is potential for the stars to align in such a way that would induce a recession in the United States, and a stagflationary one at that. Weaknesses are beginning to emerge in households' spending patterns, the financial sector is primed to act as a large contractionary amplifier, and the administration's policies will, each in their own way, impose a large contraction in economic activity on different sectors.

The California economy

Much of the story currently being told in regard to the California economy is rooted in immigration. Immigration policy will likely have two effects on California.

The first will be the withdrawal of millions of undocumented workers from the U.S. labor force — including in California — either through the deportation process underway or because such workers voluntarily leave jobs that put them at high risk of deportation. The current Forecast report for California assumes such deportations will commence and be carried out, as repeatedly promised by the current administration since the beginning of the election campaign. Studies have shown that past incidents of mass deportation decreased the number of undocumented workers but also decreased the rate of employment in the remaining population.

The second effect of immigration policy involves H1B visas issued to workers in the tech industry. The emphasis the new administration is expected to place on growth in technology suggests that H1B visas will benefit California's economy.

Three important factors will make meeting California's need for more housing challenging. First, deportations will deplete the construction workforce. The loss of workers the industry relies on for installing drywall, flooring, roofing and finishing, for example, will directly diminish production of single-family and smaller (non–high-rise) multifamily developments.

The second factor relates to persistent inflation in the U.S. The Federal Reserve is much less likely to lower the federal funds rate with the trend in consumer inflation moving away from their 2.0% target. This will increase the cost of funds for construction loans and, therefore, the cost of new construction.

The third factor relates to the tariff policy of the Trump administration. The source of building materials is international, with key inputs such as lighting and electrical fixtures and appliances originating in China. A 20% or more increase in the cost of these inputs will increase the cost of construction and further limit the demand for newly built homes. Moreover, nearly 70% of U.S. lumber imports come from Canada, and 71% of gypsum imports (the primary component of drywall) come from Mexico.

The California economy is forecasted to grow at about the same rate as the U.S. in 2025 and 2026, and slightly faster in 2027. The unemployment rate for the first quarter of this year is expected to average 5.5%, and the averages for 2025, 2026 and 2027 are expected to be 5.7%, 5.2% and 4.8%, respectively.

The current forecast for 2025, 2026 and 2027 is for total employment growth rates to be 0.5%, 1.2% and 1.1%. Non-farm payroll jobs are expected to grow at a rate of 1.1%, 0.9% and 1.7% during the same three years. Real personal income is forecast to grow by 2.5% in 2025, 2.4% in 2026 and 2.9% in 2027.

Higher interest rates, shortages of construction labor, and the rebuilding of damaged and destroyed homes lowered California's residential construction forecast from December. Permitted new units are expected to number 102,000 in 2025 and grow to 127,000 by the end of 2027. This rate of home building means that the private sector's prospects for building out of the housing affordability problem over the next three years are nil.

The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state's rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.