Gov. Gavin Newsom’s outlook for California’s economy: Slow growth, less inflation, but higher unemployment and a lot of uncertainty.

There are plenty of risks in the revised budget’s economic outlook released Friday. Among them: The deadlock over the federal debt limit, tech industry layoffs, banking issues and the impact of climate change.

The forecast tries to be cautiously upbeat. “Both the U.S. and California economies are now firmly in the post-pandemic and subsequent recovery period,” it says.

But it projects economic growth to slow this summer “as high interest rates and tighter financial conditions dampen consumer and business demand, slowing interest-sensitive consumption and investment.”

The report sees the state’s unemployment rate, 4.4% in March, climbing to an average of 5.1% next year and 5.2% in 2025.

The rate has been consistently above the national average for some time, and is projected to remain higher. The budget outlook, using federal projections and data, sees the U.S. rate, 3.4% last month, climbing to 4.1% next year and 4.4% in 2025

The forecast for higher state and national jobless rates is in line with private projections. They see the nation’s economy slowing and possibly moving into a recession later this year as the Federal Reserve’s push for higher interest rates has an impact on sales and services.

Those higher rates are meant to cool inflation, and so far they have. The Newsom forecast sees price increases easing further in California.

The nation’s annualized rate of inflation peaked at 9.1% in June 2022, and California’s top rate of increase was 8.3%. The governor’s forecast, in line with private projections, has price increases slowing to 3.1% next year and 2.9% in 2025.

Risks and uncertainty

The report cites several risks to the economy.

Most immediate is the deadlock over how to raise or suspend the federal government’s debt ceiling, which could be reached as soon as June 1.

“A protracted standoff over the federal debt ceiling later this spring…could roil financial markets,” the report says.. President Joe Biden and congressional leaders are expected to meet next week to discuss a compromise plan to avoid default.

Climate change also poses a threat, with “more frequent extreme weather events such as wildfires, drought, and floods, and chronic stock market volatility, high housing and living costs, and income inequality.,” the state outlook says.

Among other risks to the forecast is the future of tech firms and banks.

“The tech firms that employ many of the state’s highest earners could see further layoffs to correct for over-hiring during the height of the COVID-19 pandemic,” the report says.

It notes the collapse of Santa Clara-based Silicon Valley Bank in March and two other major banks recently. “The economic outlook could worsen if banks further curtail lending to bolster their reserves,” the outlook warns.

The financial and tech sectors lost 8,500 jobs in the first three months of 2023, after gaining 14,600 jobs in the same period a year ago.

In the report, though, the governor sees “no further major financial or tech industry-related disruptions” between now and 2026.

All those risks have made economic forecasting even more uncertain than usual in recent months. When the UCLA Anderson School made its state forecast in March, it offered two scenarios, one if a recession occurred and one if it didn’t.

The Newsom forecast also offers a recession scenario. If the economy contracted, the forecast sees the number of jobs stabilizing and at times declining slightly beginning later this year and continuing throughout 2024.