California begins the second half of 2025 in a precarious economic position—still the nation’s most powerful state-level economy, yet grappling with fundamental constraints that cloud its longer-term outlook. The latest Beacon Economics report paints a picture of a state navigating uneven terrain: resilient in some areas, faltering in others. Amid a flurry of legal clashes with the federal government, a widening budget deficit, and intensifying immigration crackdowns, the question is no longer whether California can grow—it’s whether that growth is built to last.
The state’s $3.4 trillion economy remains the largest of any U.S. state, accounting for over 14 percent of national output. In 2024, real GDP grew by 3.6 percent—faster than the nation’s 2.8 percent. Yet momentum slowed in the first quarter of 2025, with a slight contraction of 0.2 percent. Given that U.S. GDP declined by 0.5 percent in the same period, California’s slowdown is not an outlier—but it is a reminder that strong topline figures don’t tell the full story.
Underneath the surface, California’s labor market is sending mixed signals. Analysts underline that the state’s unemployment rate stands at 5.4 percent, significantly above the national average of 4.1 percent. Stripping California out of the national numbers reveals an even starker contrast—unemployment elsewhere is below 4 percent. Among teens, the disparity is especially severe. Since mid-2022, unemployment for Californians aged 16 to 19 has surged by over 9 percentage points, compared to just 3.3 nationally. Even more concerning, teen labor force participation has declined, making the rise in unemployment all the more troubling. Unlike previous cycles, more teens aren’t entering the labor market—they’re exiting it. This labor weakness isn’t confined to the private sector. Surprisingly, government hiring is the main driver of job growth in California. Public sector employment rose by 5.7 percent in the last quarter of 2024, adding 138,100 jobs—more than six times the gain in the private sector. State and local governments (excluding health care) matched the full-year net job gains of all private industries combined. A similar pattern is playing out nationally, with public sector jobs rising by 6.4 percent quarter-over-quarter, while private sector employment has barely budged.
Certain industries continue to deliver growth. Health care and social assistance remains a steady performer, with job growth far exceeding national trends. Logistics also saw continued expansion, buoyed by e-commerce and regional warehousing demand. But productivity—not hiring—is carrying the load in other sectors. Retail trade employment remains 5 percent below its pre-pandemic base in California, even as inflation-adjusted output rose 18 percent year-over-year and more than 37 percent over five years. A similar story is unfolding in the information and manufacturing sectors. Tech and media jobs are down, yet the information industry now accounts for the largest share of California’s real GDP, having grown by 50 percent in five years and 141 percent over the last decade. In manufacturing, employment has shrunk by nearly 86,000 jobs year-over-year, but output continues to climb, underscoring the role of AI and automation in driving efficiency.
However, these gains are not evenly distributed. Accommodation and food services posted job losses even as national employment in the sector increased. While this segment includes a range of businesses beyond fast food, the implementation of the $20 minimum wage under the Fast Act likely contributed to job declines. Arts and entertainment, by contrast, saw job gains—suggesting that discretionary spending remains healthy. Agriculture remains a weak spot. Employment is down across the board, and while the past five years showed output gains, both jobs and real GDP in the sector declined over the last year. Labor shortages, trade disruptions, and federal immigration enforcement may be adding downward pressure.
Meanwhile, household incomes have continued to rise, and real disposable personal income per capita has stabilized following the extreme fluctuations of the pandemic era. Between 2020 and 2021, federal stimulus programs drove historic income gains, only to be followed by the steepest real income drop in six decades by 2022. Although incomes have since returned to a more typical growth path, many Californians still feel squeezed—partly because expectations were elevated during the stimulus boom. This psychological dynamic, known as reference dependence, helps explain why consumer sentiment has lagged economic fundamentals.
Based on the report, California’s housing market remains a critical bottleneck. As incomes rise and average household size declines, demand has strengthened—but supply hasn’t kept up. Permitting activity for both single-family and multi-family homes remains below pre-pandemic levels. Recent reforms to the California Environmental Quality Act (CEQA), aimed at accelerating infill housing development, may offer relief. But until new construction accelerates in meaningful ways, constrained housing supply will continue to limit labor mobility and business expansion—posing a significant headwind to the state’s competitiveness.
The fiscal picture is also darkening. California’s current-year budget deficit, paired with proposed federal cuts to Medicaid, is straining state finances. Governor Gavin Newsom’s May Revision outlines $16 billion in savings, including an $11 billion reduction in Medi-Cal and $5 billion in new borrowing. But even if all of these measures are enacted, the Legislative Analyst’s Office still projects ongoing annual deficits of $10 to $20 billion through 2028–29. Total budgetary borrowing this year is expected to reach $17.3 billion.
Since 2023, the state has managed $82 billion in shortfalls—relying on spending cuts, borrowing, and one-time solutions that fail to address structural imbalances. Beacon economists note that Medicaid cuts present perhaps the largest single risk. The Trump administration’s “One Big Beautiful Bill Act” would slash federal funding by an estimated $150 billion over ten years. While other states may face larger percentage cuts, California’s sheer size means the absolute dollar impact is unparalleled. Between 1.25 and 3.4 million Californians could lose coverage, disproportionately affecting low-income families, seniors, and people with disabilities. Research is mixed on Medicaid’s long-term health benefits, but its financial protections are well documented. Cuts of this magnitude will not only stress individual households but also challenge the capacity of hospitals and care providers across the state.
Population growth, long a tailwind for California, is barely back in positive territory after several years of stagnation and outright decline. The state’s population hasn’t yet returned to its pre-pandemic peak, and immigration restrictions are likely to stall further gains. With immigrants comprising 27.3 percent of California’s population—nearly double the national average—federal enforcement actions, such as renewed ICE raids, pose an outsized risk to the state’s labor force and long-term economic potential.
So where does that leave California in 2025? At a crossroads.
On one side, the state continues to demonstrate remarkable economic strengths: rising productivity, expanding household incomes, and leadership in key innovation sectors. On the other, it faces persistent labor market weaknesses, growing fiscal gaps, demographic headwinds, and a housing market that is increasingly out of sync with demand. The surge in public hiring may be propping up broader employment figures, but it also raises hard questions about sustainability—particularly in a state under pressure to rein in spending. California isn’t in crisis, but it is contending with growing cracks in the foundation. Whether those cracks deepen or are repaired will depend on the policy decisions made in the critical months ahead.
