Which industries are driving California's economic growth and which are declining?
Executive summary
California’s economic growth in late 2025–2026 is being driven primarily by AI and other high‑productivity technology sectors—backed by outsized venture capital and massive capital expenditures—while traditional industries such as construction (commercial), parts of manufacturing, hospitality/leisure, and office‑dependent services are under clear stress [1] [2] [3]. The picture is bifurcated: pockets of advanced manufacturing and industrial real‑estate investment show strength even as employment growth remains weak overall and risks from tariffs, immigration shifts, and elevated costs persist [4] [5] [6].
1. AI and tech: the headline engine
The single largest driver of state growth is AI and the broader tech ecosystem—software, data centers, and related services—which is generating both direct output and outsized business investment in infrastructure and data capacity that boost GDP even when hiring lags [1] [4]. UCLA and Comerica both flag massive AI investment as central to California outperforming the nation in productivity, and note that tech valuations and orders have surged with AI adoption even as firms are more cautious on net new hiring [2] [1].
2. Aerospace and advanced manufacturing: high‑productivity complements
Beyond pure software-oriented tech, aerospace and advanced manufacturing—medical devices, computer boards and other high‑value goods—are expanding and benefiting from venture capital and onshoring trends, making them co‑drivers of productivity growth in the state [2] [7]. Regional reports also single out advanced manufacturing and port activity as bright spots supporting goods production and trade flows [7] [8].
3. Real estate and construction: split between industrial and commercial
Real‑estate trends are mixed: investment in industrial buildings, data‑center‑support infrastructure, and some residential construction is strong or set to rise, while office development, hotel and retail project activity has slowed and vacancy rates remain elevated [4] [9]. Forecasts point to new residential construction picking up with lower rates, but non‑residential development is bifurcated—industrial and infrastructure up, office and hospitality down [4] [8].
4. Declining or underperforming sectors: hospitality, non‑durable manufacturing, and office‑centric services
Leisure and hospitality, non‑durable goods manufacturing, traditional retail, and office‑based professional services are the industries most clearly struggling: payroll job losses appeared through much of 2025, and UCLA warns of a prolonged employment recession into early 2026 concentrated in these sectors [3] [6]. Tariff uncertainty and elevated input costs are further squeezing non‑durable manufacturers and trade‑sensitive activities [5] [6].
5. Healthcare, public services and the state’s policy response
Healthcare continues to be a source of job creation and local demand—partly insulated by public funding and state programs—while Governor Newsom’s Jobs First investments are explicitly targeting workforce training, industrial sites and regional projects intended to shore up growth across regions and industries [7] [10]. State programs may blunt some headwinds, but fiscal constraints and federal spending shifts are cited as limiting factors for government‑funded services [5] [7].
6. Employment, wages and the overall growth narrative: productivity vs. jobs
A recurrent theme across forecasts is a productivity‑led expansion that outpaces job creation: strong capital spending in AI and higher output in select sectors lift GDP even as hiring remains muted and unemployment edges up before improving later in 2026 [1] [2] [5]. That two‑speed dynamic—high output in capital‑intensive, high‑pay sectors and weakness in labor‑intensive services—creates both concentrated wealth effects and policy challenges for broadly shared recovery [3] [11].
7. Risks, caveats and competing narratives
Analysts caution that the optimism around AI and tech investment can mask regional inequality and labor dislocation; tariffs, deportation policies, and high costs could blunt broader recovery and keep certain industries depressed [6] [5]. Independent forecasts and state reports largely align on which sectors are growing and which are declining, but differences remain on timing and magnitude of job recovery—UCLA expects muddling through into early 2026 with stronger growth later, while private forecasters emphasize pockets of construction and industrial strength now [2] [4].