Three days after immensely destructive and deadly wildfires broke out in and around Los Angeles, Gov. Gavin Newsom proposed a $322.3 billion state budget with a positive revenue forecast “based on an assumption of continued but slowing economic growth.”
The new 2025-26 budget is already outdated because the fires, which are still growing, will have a heavy impact on both the income and outgo sides of the budget, by reducing economic activity in Southern California and increasing pressure for fire suppression and recovery aid from Sacramento.
The fires struck as California’s economy was still recovering from the brief but sharp recession that hit the state five years ago when Newsom ordered shutdowns to battle the COVID-19 pandemic. About 3 million workers were idled, and recovery has been mediocre at best. California’s unemployment rate, 5.4% in November, the latest month for which data are available, was the second highest of any state, with more than a million unemployed workers.
A broader federal Bureau of Labor Statistics measure of unemployment or underemployment provides an even dimmer picture. The U-6 rate, as it’s dubbed, counts “total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.”
(Marginally attached workers are people who aren’t working or looking for work but who want a job and have looked for one in the last 12 months.)
California’s current U-6 rate is 10%, by far the highest of any state and more than twice the national rate. It’s even higher — 11.8% — in Los Angeles.
Beacon Economics, in an analysis of the latest data, says that employment growth in California has trailed the nation in recent years: “Since February 2020 (the start of the pandemic), total nonfarm employment in the state has grown 2.5% compared to a 4.6% increase nationally.”
“There are a mix of influences both driving and constraining the state’s job growth,” Justin Niakamal, Beacon’s research manager, commented. “On one hand, California is seeing comparatively high incomes, strong consumer demand, and high economic output, but our critical lack of housing supply has led to the state’s well-known labor force contraction, and that is most certainly holding back job growth.”
The wildfires are obviously one uncertain factor in how California’s economy fares over the next few years — but not the only one.
Newsom’s budget, without mentioning him by name, cites Donald Trump’s recapture of the White House as “the most immediate risk to the forecast,” listing Trump’s vows to impose tariffs on imported goods and deport undocumented immigrants.
“California would also be especially vulnerable to tariffs as the ports of Los Angeles, Long Beach, and Oakland and the logistics industry that is concentrated in the Inland Empire are highly dependent on foreign trade,” the budget declares, adding, “To the extent that existing workers are deported and potential new workers banned or discouraged from immigrating, many sectors of the U.S. and California economies could face labor shortages, leading to price increases in the goods and services produced by these sectors.”
However, even if the fires had not occurred and Trump not been elected, the state would still face a declining labor force, as a new report from the Public Policy Institute of California notes.
“In the last two decades, the share of the population participating in the labor force has fallen five percentage points (from 67% to 62% today) due to the aging of California’s population,” PPIC analyst Sarah Bohn writes. “As the population continues to age and the state faces a shrinking workforce, preparing Californians who can and want to work will become more essential.
“California’s current economic realities reflect the volatile macroeconomic conditions we’ve weathered since the pandemic as well as long-term challenges that have been brewing for decades,” she continues.
