Soaring Middle East tensions and a dearth of refining capacity based in the Strait of Hormuz. Questions over the future of AI in the workforce and potential security concerns. Continuing affordability woes in the housing market and rising inflation. A shift in the Fed’s strategy on interest rates, which are now climbing.

In this atmosphere of uncertainty, Cal State Fullerton College of Business and Economics economists Anil Puri and Mira Farka continue to demonstrate their abilities to light the way for fellow academics, policymakers and professionals. Their skill was again on display at the 32nd Annual Economic Forecast Conference, co-presented with the Orange County Business Council at the Hyatt Regency Irvine on Oct. 22.

Resilience in the Face of Geopolitical Turmoil

The U.S. economy continues to demonstrate remarkable resilience despite geopolitical instability, persistent inflation, elevated borrowing costs and trade uncertainty, according to Puri and Farka.

They anticipate continued expansion rather than recession or stagflation, projecting growth in the mid-2% range, inflation in the mid-3% range and unemployment in the mid-4% range over the next 18 months. AI is seen as a major source of strength, contributing an estimated 0.9 to 1.1 percentage points to economic growth through infrastructure investment and increased consumer wealth. However, much of the expansion remains concentrated in technology-related industries. “Growth is too narrow, and inflation too broad, for comfort,” says Puri and Farka.

Consumer spending, business investment and industrial production remain relatively strong, even as housing affordability deteriorates and consumer confidence plummets. The labor market is characterized by limited hiring and layoffs, with declining immigration and an aging population helping maintain equilibrium despite modest job creation. AI is simultaneously creating employment opportunities and eliminating certain positions, with the economists estimating a net gain of approximately 465,000 jobs attributable to the technology since 2022. Their analysis also challenges the prevailing narrative of a worsening K-shaped economy divided by income. Instead, they identify a more pronounced generational divide, with younger Americans facing greater disadvantages in wealth accumulation, homeownership and debt obligations.

Looking ahead, the economists identify energy disruptions, particularly shortages of refined petroleum products, as a significant threat to price stability. Combined with inflationary pressures from AI investment, these challenges are expected to keep inflation above the Federal Reserve’s target, with personal consumption expenditures inflation averaging 3.5% in 2026 and 3% in 2027.

Nonetheless, they do not expect soaring inflation as in 2022-2023 – in part because money supply growth is now running at 6% pace, much lower than the more than 25% back then. The Fed does not need to tighten too much. “All this calls for restraint, not a crusade: a pinprick, not a gaping wound” say Puri and Farka. They anticipate an additional interest rate increase this year and two in 2027, while elevated Treasury yields could place further pressure on housing, borrowing and financial markets.

Although they acknowledge the possibility of a stock market correction and continued economic volatility, their overall outlook remains optimistic, supported by technological investment, corporate profitability and the economy’s demonstrated ability to withstand successive shocks.

The Orange County View

California’s economy continues to outperform the nation, driven largely by the AI-focused tech sector, even as employment growth remains sluggish throughout Southern California. The state’s economy expanded 3.6% in the first half of 2026, compared with 2.4% nationally, with AI investment accounting for a substantial share of the increase.

Orange County’s economy remains supported by professional services, advanced manufacturing, health care and tourism, while aerospace and defense has emerged as a particularly promising growth sector. However, an aging workforce, reduced immigration and productivity gains are limiting hiring across the region. “Clearly, this is a boom you can see in the GDP data, but not in the help-wanted ads,” says Puri and Farka. The economists forecast little change in Orange County payroll employment this year, followed by 0.44% growth in 2027, with unemployment increasing modestly from 4.1% to 4.3%.

AI presents significant opportunities and challenges for Orange County’s highly educated workforce, particularly in professional services and finance, where exposure to automation is considerable.

The Orange County Business Survey, conducted by the Woods Center, offers a glimpse into how Orange County businesses are adopting and using AI. “For now, Orange County firms see AI as a tool rather than a replacement,” says Puri and Farka. Despite uncertainty surrounding technological disruption, inflation and elevated borrowing costs, local business confidence has strengthened.

The Orange County Business Expectations Index climbed to 70.2 for the fourth quarter, up from 62.9 in the third, reflecting increased optimism about regional economic conditions. Inflation and fuel prices remain executives’ leading concerns, while housing affordability continues to strain households as mortgage rates reach 7.6% and limited inventory sustains elevated home prices. Although the region faces continued economic headwinds, the report identifies expanding technological investment, aerospace innovation and improved business sentiment as encouraging signs for the years ahead.

For More on the Woods Center

Learn more about the Woods Center by reading our articles on economic forecasting at Cal State Fullerton.