California, the epicenter of the artificial intelligence boom, continues to grow its economy faster than the nation, but more people are losing their jobs and the cost of living remains high.

New economic indicators released this week show how the Golden State is grappling with the effects of the Iran war, as well as an AI explosion, which is driving huge investments as well as layoffs.

The state’s unemployment rate reached 5.3% in April, roughly 1 percentage point higher than the nation’s. California’s unemployment rate is expected to peak at 5.6% later this year, according to the UCLA Anderson Forecast released this week.

The state outpaced the nation in economic growth in the fourth quarter of 2025. It probably continued to outgrow the country in the first three months of this year, the report said.

“Income and output will continue to grow faster than the U.S. even as employment growth is tepid,” senior economist Jerry Nickelsburg wrote in the forecast. “Once past the current weakness, expected by the middle of next year, a tech, durable goods manufacturing, and construction resurgence should lead to superior growth in both employment and income in the Golden State once again.”

The state’s growth is being bolstered by many local companies that are attracting and spending hundreds of billions of dollars in the race to build the software and infrastructure needed for AI. However, there are signs that the same race may be leading to fewer jobs in some sectors.

From January to May, U.S. tech employers announced 123,653 job cuts, up 66% from the same period a year earlier, according to a report Thursday by global outplacement and executive coaching firm Challenger, Gray & Christmas. California had close to 77,000 job cuts across all sectors, double the number of any other state.

Although AI was cited more often than any other reason for cuts, the layoffs haven’t been as bad as the pessimists feared, said Andy Challenger, a labor and workplace expert and chief revenue officer of Challenger, Gray & Christmas.

“AI isn’t yet the jobpocalypse some predicted,” he said in a statement. “Like spreadsheets and email before it, the technology will ultimately make workers more productive.”

California has seen job growth in sectors including healthcare and social services. But entertainment, tech and manufacturing businesses have been cutting back.

UCLA’s outlook paints a mixed picture of California’s future, one filled with uncertainty as the Iran war pushes up fuel prices, inflation rises, government policy changes and tariffs disrupt supply chains.

The state is particularly vulnerable to the effect of the war on Iran because it uses pricey low-emissions gasoline, and California ports accept cargo on ships that require large amounts of more expensive oil, according to the forecast.

California also is more dependent on oil from outside the country than other states.

The Iran war has caused gas prices to jump. Above, prices are at and over $6 a gallon at a station in Los Angeles on June, 2, 2026.

(Justin Sullivan / Getty Images)

It’s still too early to predict the fallout from the war on Iran, but economists expect it to negatively affect employment by the end of this year and into 2027, the quarterly forecast from UCLA said. It projected that national real GDP growth would shrink from around 2.3% this year to 1.8% next year.

The UCLA report did not provide a state GDP forecast, but said early indicators suggest California continues to outperform the country. Last year, the national real GDP growth rate was around 2%, the report said. California’s was closer to 2.5%, according to data from the U.S. Bureau of Economic Analysis.

Some are concerned that AI could worsen what’s called a “K-shaped” economy, in which the rich see growth and most other people struggle with stagnating opportunities. In California, it could also lead to an “E-shaped” economy, in which low, medium and high-income people each see slight growth.

That depends on whether AI ends up helping workers or replacing them, economist William Yu said.

“If it’s labor substitution, we are going to see this [as] more of a K-shaped economy. If it’s more of labor augmentation, we’re going to see more of [an] E-shaped economy,” he said at a conference about the report.

Tech companies say they are using AI to do more with fewer people. Yu said a lot of the AI spending is going into building out AI data centers rather than hiring.

Citing data from job search website Indeed, AI appears to be slowing down growth in software, information technology, marketing and media job postings, he said. But demand for civil and electrical engineers remains high. AI might not be affecting those roles, or reindustrialization policies are boosting hiring in those areas.