Next year will be “no gangbuster year,” for the economy, according to one of Orange County’s leading economists, James Doti.
Last year, the president emeritus at Chapman University and its team of economists predicted the nation’s gross domestic product, used to measure economic health, would slow to 1.8% in 2025, down from 2.7% the previous year. Their latest prediction says 2026’s growth will edge upward to a modest 2%.
Without digging into the weeds of political commentary, Doti candidly said the economy would have expanded more had President Donald Trump’s tariffs not happened and California made efforts to trim its high taxes. He blamed both for driving away a chunk of the state’s population, leaving behind a challenging labor market.
“If it weren’t for the tariffs, the economy would be much stronger,” Doti said. “If we didn’t have that negative impact from tariffs, [offset] as a result of billions in AI spending and the wealth accumulation we’ve had, there would have been a much stronger economy than what we have now. There’s no question, the tariffs are having an impact.”
“My message for California and Orange County? It’s very clear: the focus needs to be on reducing taxes,” said Doti. “We’re experiencing the ramifications that taxes matter.”
Also see: Chapman, UCLA economists see clouds ahead in Trump’s policies
Tariff impacts
“The takeaway is that with all of these moving parts, all of these complications, all of these unprecedented policies and initiatives that we’ve never seen before — like tariffs and a federal government shutdown — the bottom line is we believe we’re going to have a year pretty much like last year, with growth of around 2%,” said Doti. “That should relieve some of the anxiety of those two groups of prognosticators — the one that thinks we’re going to have a recession, and the other that believes we’re going to have a much higher uptick in inflation. We don’t see this.”
Trump has made tariffs on foreign nations a major administration policy, saying they will raise revenue for the country and help create jobs domestically. The tariffs, which notably are paid by consumers, cover most goods and affect all trading partners with the United States.
“We view tariff-related concerns about significantly higher inflation rates as overblown,” Chapman economists wrote in the report. “The fact that those tariffs seem to be in a constant state of flux doesn’t make forecasting any easier, nor do the unprecedented reductions in government employees.”
The report was cowritten by Chapman economists Raymond Sfeir and Fadel Lawandy.
Their forecast calls for a mild increase in inflation from the current 3% rate to 3.3% by mid-2026, before settling back to 3.1% by year-end.
Job growth stalls
Since the rapid recovery following the pandemic-induced recession, California’s job growth slowed appreciably.
Over the three-year period from the second quarter of 2022 through June of this year, job growth across the state was only 2%. In a ranking of the nation’s 50 states, that lackluster growth put California in the 48th spot, according to figures cited by Doti from the Tax Foundation’s 2024 State Business Tax Climate Index.
The job market continues to worry Chapman economists.
“Our forecast calls for California’s weak job growth to continue into 2026. On average, the 0.3% increase in job forecast in 2026 translates to a gain of only 62,000 jobs,” according to the report. “More unsettling for California’s economic future is the sharp decline in the number of advanced industries, or high value-added sectors such as technology, software development, aerospace and medical products.”
In comparison to all advanced establishments in the U.S., the percentage of such jobs in major population centers in California dropped to 14.9% in the first quarter of 2025 from 17.5% in 2018.
Except for the tech-rich Silicon Valley’s 1.9% loss in jobs, Orange County’s job growth of 1.6% over the post-pandemic 2022 to 2025 period was the weakest among the major population counties in the state. The Inland Empire had 3.3% growth during the period, while Los Angeles County saw 1.8% more jobs.
“Even more alarming is that Orange County’s growth over this period was a full percentage point lower than the U.S., excluding California,” according to the report, which predicts virtually no growth for the county in 2026. “That’s roughly the same as the U.S. and California job growth forecasts. The only job sector in Orange County expected to register significant growth in 2026 is the education and health sector, at 3.8%. That growth will offset losses in most other job sectors.”
Doti cited the recent opening of two medical centers as the county’s bright spot: the City of Hope’s new six-story, 73-bed cancer specialty hospital in Irvine, with a staff of more than 700, and the UCI-Health’s 144-bed hospital, with a staff of 1,800. And next year, Hoag’s Sun Family Campus expansion opens.
Soft real estate
On Wednesday, the Federal Reserve cut its interest rate for the third time this year, pointing to a job market that Chairman Jerome Powell said may be weaker than it appears. The central bank lowered its key overnight borrowing rate by a quarter percentage point, putting it in a range between 3.5% – 3.75%.
Still, the real estate sector is soft, Doti said.
On the residential front, the Chapman forecast shows a decline in mortgage rates from an average of 6.6% this year to 5.6% in 2026, thereby increasing housing affordability.
“Following the pandemic, a sharp increase in U.S. home prices narrowed the housing affordability gap between the U.S. and Orange County in 2022,” according to the report. Since then, however, the gap has widened again.
Even with a forecasted decline in mortgage rates, the lack of housing affordability will constrain housing appreciation to about 2% in 2026.
Other Orange County findings in the forecast:
New residential construction: As measured by housing permit activity, the forecast for 2026 says activity will remain unchanged at almost 8,000 units, with an increasing proportion of residential construction in multifamily units. In 2022, 51.9% of all new residential permits were multifamily. The forecast for 2026 indicates that percentage will rise to 68.2%.
Future construction activity: Much depends in large part on population growth. In 2021, the population in Orange County declined by almost 24,000. The sharp increase in immigration during the Biden administration likely led to the increase in foreign immigration through 2024. That increase helped offset the continuing net loss in domestic migration, leading to virtually no population growth in 2024.
The change in population, however, may turn negative again if foreign immigration drops sharply. “Given lower family formation, lower documented and undocumented immigration and a declining birth rate, demand for new housing will be muted,” though a drop in mortgage rates will spur an increase in demand, according to the report.
Chapman is the last of a handful of universities in Southern California to deliver economic forecasts — all of which are reading the tea leaves similarly.
Last month, Cal State Fullerton economists Anil Puri and Nira Farka made their predictions, that the U.S. economy has shown “remarkable resilience,” “outperforming dire predictions, not just barely, but by a wide margin.”
And earlier this month, senior UCLA economist Clement Bohr told SCNG that the economy is expected to soften through the first quarter of 2026 before regaining strength later in the year. “There’s a lot of uncertainty, but the turning point is really going to be in the first quarter, and we expect most of 2026 to be fairly strong. You should see inflation stop rising early next year, because tariffs will have been passed through into final prices by then.”