A new report from the state-funded Legislative Analyst’s Office has found the California economy is “stagnant” and “fragile,” with “less revenue expected.” The report cites sustained job losses, declining consumer spending, an “unsustainable” stock market and “federal policy turbulence.”
“The state’s economy has been in an extended slowdown for over two years. The labor market has struggled, marked by a growing number of unemployed workers and slowed hiring. The state has added no jobs so far in 2025,” wrote the LAO. “Similarly, consumer spending (measured by inflation‑adjusted retail sales and taxable sales) has consistently declined.”
The Center Square has reported on how the state has lost nearly 200,000 net private sector jobs since January 2023. That was only offset by net gains in taxpayer-funded employment, the plurality of which has been from a welfare program in which low-income individuals enrolled in the state’s taxpayer-funded healthcare program “hire” household members for part-time, minimum-wage jobs as in-home care “providers.”
Private sector layoffs have exceeded taxpayer-funded hiring every month this year, resulting in net job losses.
A February report from the LAO highlighted the state’s falling sales and corporate tax revenues, finding these losses have been offset by personal income taxes buoyed by high stock market values.
“Income tax collections have surged over the last two years despite a weak labor market. Collections instead have been driven by the stock market, which, despite the recent volatility, is up almost 40 percent from two years ago,” continued the LAO. “Despite some declines, there are still reasons to be worried gains of the last two years may not be sustainable.”
Due to the state’s progressive tax structure, the state is highly reliant on taxes on capital gains and high salaries, making the state’s revenue more volatile and subject to wide swings based on stock market performance.
Amid structural weakness in California’s economy, the LAO warns federal policy could make matters even worse, as declining consumer sentiment and economic expectations signal a recession is likely.
“The risks posed by California’s stagnant economy and a potentially overheated stock market have been magnified by recent federal policy actions,” wrote the LAO. “Expectations for gross domestic product growth over the next few quarters are among the lowest in the survey’s history. Survey readings have only been this low three times.”
“Two of these episodes aligned with recessions,” continued the LAO. “The third was in 2023, when economists consistently anticipated a near-term slowdown in the U.S. economy that did not materialize.”
A January report from the U.S. Department of Treasury suggests that the anticipated 2023 recession was averted through sustained government and consumer spending, and business investments in productivity growth.
In February, the New York Federal Reserve reported household debt is continuing to grow rapidly, with credit card debt making up nearly half of all household debt growth, and credit card delinquency rising 13% between the end of 2023 and the end of 2024.
This suggests consumers are running out of cash and using debt to maintain post-COVID consumption levels.
With the Trump administration finally requiring the resumption of student loan payments that have been suspended since the start of the COVID-19 era, consumers could have even less cash on hand as confiscations for payment of delinquent student loans begins.
According to the Trump administration, fewer than four in 10 student loan borrowers are actively repaying their federal student loans issued by taxpayers. Should the loans not be repaid, taxpayers will be on the hook.
Federal student loan portfolio data show nearly four million Californians have a combined student debt load of over $151 billion.
This means, if national trends hold, nearly two and a half million Californians may suddenly face a resumption in student loan payments, whether voluntary or forced — which could prove to be a tipping point for California’s weak economy.
