In this post, we provide context for recent declines in some commonly used economic measures and their implications for California’s economy and revenues.
California Labor Market Stagnant Since 2022 Amid Strong Revenue Growth. As we have noted elsewhere, recent strong state revenue growth has outpaced the broader economy. Over the past two years, the state workforce has grown slowly, with close to no net new jobs in 2025. Despite this, our current forecast projects strong revenue growth in the current year (2024-25). However, the state’s stagnant economy, combined with recent drops in real-time economic indicators, suggest that revenue growth could be weaker in the budget year than it has been this year.
Real-Time Economic Data Concerning. Real-time indicators show that consumers and investors are worried about the state of the economy. Two key real-time indicators—consumer sentiment and the stock market—fell quickly and deeply in early 2025. The figure below shows the University of Michigan Consumer Sentiment Index since 1983, with the dashed lines showing months in which the index fell by at least 20 percent within six months, as it did between December 2024 and April 2025. Over the past few decades, a similar fall has occurred only nine other times. Similarly, the S&P 500 stock market index fell just under 20 percent between February and April but recovered much of the losses by early May. Some of this stock market volatility came in response to the numerous actions taken by the Trump administration to enact and modify tariffs charged on imports from other countries, which has led to increased uncertainty about economic policies among consumers and businesses.
Economic and Revenue Downturns Often Follow Drops in Consumer Sentiment, But Sometimes Do Not. Consumer surveys provide useful information about consumers’ economic outlook but should be interpreted with caution. The figures below show growth in employment and state personal income tax revenues in the 24 months following a fall in consumer sentiment similar to the one recently observed. Employment and revenue growth are significantly lower in these periods than in a typical 24-month period. (In the most dramatic instance, driven by the unfolding COVID-19 pandemic, consumer sentiment and employment fell simultaneously). However, there are exceptions: in some periods after a large fall in consumer sentiment, growth exceeds historical averages. This suggests that observers should not conclude a downturn is imminent based solely on consumer survey data.
Revenue Outlook Muted While We Await Hard Economic Data. Potential economic shifts from recent drops in consumer sentiment—and changes in tariff policies—will not be reflected in economic measures for months, limiting information available for revenue forecasts. The analysis above suggests that, based on available real-time indicators such as consumer sentiment, the economic outlook may be worse than shown in currently available concrete measures of economic activity such as employment. However, drops in such indicators sometimes precede strong economic and revenue growth instead of downturns. Our revenue forecasts include real-time measures like the stock market and consumer sentiment surveys but also include less timely concrete measures of economic activity to temper potential overreactions seen in real-time measures. If hard economic data fall in-line with worrisome economic indicators, the state’s revenue outlook will turn more negative; however, recent history suggests this outcome is far from certain. As such, we urge policymakers to weigh the risks of both the possibility of a further downturn and of better than expected growth when making budget decisions.