A new report from California’s Legislative Analyst’s Office (LAO) paints a bleak picture of the state’s economy, describing it as “stagnant” and “fragile,” with job losses, falling consumer spending, and unsustainable reliance on stock market gains driving serious fiscal concerns. The warning is backed by multiple indicators showing the state slipping toward recession territory.
California has added no new jobs in 2025, with nearly 200,000 private sector jobs lost since January 2023, according to The Center Square. While some of this has been offset by gains in taxpayer-funded employment, much of that growth stems from a welfare program in which low-income Californians pay household members for part-time care work using state-funded healthcare dollars.
Private sector layoffs continue to exceed public hiring, compounding economic strain. Meanwhile, inflation-adjusted retail and taxable sales have declined, signaling ongoing weakness in consumer spending — a key economic driver.
The LAO’s February report also flagged falling corporate and sales tax revenues. These losses were temporarily offset by surging personal income tax receipts, driven not by wage growth or job creation, but by stock market gains. California’s tax structure, heavily dependent on capital gains and high earners, makes the state particularly vulnerable to market volatility. The LAO warned those recent market gains are likely unsustainable.
“Despite some declines, there are still reasons to be worried gains of the last two years may not be sustainable,” the LAO cautioned.
The Trump administration’s fiscal policies could further test the state’s economic resilience. With student loan payments now resuming after a pandemic-era pause, consumers face renewed financial pressures. The U.S. Department of Education reports that fewer than 40% of borrowers are actively repaying their loans. In California, nearly four million borrowers carry $151 billion in student debt.
If national trends hold, over two million Californians could be forced to resume or face collection on student loan repayments. That added financial burden, paired with high household debt and rising credit card delinquencies, could trigger a broader economic downturn in the state.
Federal Reserve data shows that household credit card debt is surging, now accounting for nearly half of all household debt growth, with delinquencies up 13% from late 2023 to the end of 2024. As consumers increasingly rely on debt to maintain spending levels, the return of student loan collections could be a tipping point.
The LAO concluded that recent federal policies, combined with ongoing economic fragility, place California at elevated risk. “Expectations for GDP growth over the next few quarters are among the lowest in the survey’s history,” the LAO noted, adding that previous readings this low aligned with past recessions.
