Silicon Valley Outperforms, But for How Long?

Jun 18

Beautiful aerial view of San Jose skyline during a stunning golden sunset. Photo by KEHN HERMANO

This article is based on a summary by Marcia Daszko of the Beacon Economics Santa Clara County Regional Intelligence Report, presented at the San Jose State University Economic Summit by economist, Dr. Chris Thornberg on June 9, 2026.

Santa Clara County is posting some of the strongest economic numbers in California, but a new report from Beacon Economics presented at the San Jose State University Economic Summit warns that turbulence at the state and national levels could put that momentum at risk.

The report, which covers the U.S., California, and the South Bay region, paints a picture of a local economy holding its own against significant headwinds — from a swelling federal deficit to immigration enforcement that is quietly shrinking the regional workforce.

South Bay Outperforms, Led by AI and Manufacturing

The numbers for Santa Clara County are, on their face, encouraging. Payrolls grew 1.5% over the past year, outpacing the U.S. average of 0.2%, California at 0.8%, the East Bay (flat), and San Francisco at 0.5%. Average annual wages climbed to nearly $199,000 — a 10.5% increase — with manufacturing wages surging 23% and information sector pay up 16%.

Consumer spending rose 3.7%, and the number of tech firms in the region hit a record high in 2025, growing 3.8%. Beacon Economics interprets this not as a hiring boom but as a structural shift: companies are becoming leaner and more productive rather than expanding headcount.

Artificial intelligence is driving much of the change. Skills related to AI now appear in nearly one in four South Bay job postings — 24.5% — up from just 2.9% in 2019. The region also captured nearly half of all U.S. venture capital in 2025, including a $12.5 billion investment into Palo Alto-based xAI.

Tech Employment Turns a Corner After Years of Decline

After seven years of overall contraction, South Bay tech employment grew 0.6% over the past year — a shift the report calls meaningful. Scientific research and development has been a particular bright spot, expanding 27% over the past seven years.

Still, the recovery is uneven. Amazon and Intel alone filed layoff notices covering more than 2,200 workers in the county between July 2025 and May 2026. Hotels remain far below their recovery elsewhere in the country, with revenue per available room only 1.3% above pre-pandemic levels compared to a national gain of 19.2%. Airport passenger traffic is down more than 30% over six years.

The city of San Jose faces a $50 million budget shortfall in the coming fiscal year, threatening cuts to public safety, libraries, and youth programs.

Immigration Decline Poses a Quiet Threat

One of the report's more striking findings concerns immigration. Foreign immigration into Santa Clara County fell nearly 38% in 2025. Without that inflow, the county's population would have declined outright. Given the South Bay's heavy reliance on H-1B visa workers, Beacon Economics warns this trend could become a serious constraint on the region's labor supply.

The firm recommends developing stronger domestic talent pipelines — including partnerships with institutions like San Jose State University — rather than continuing to depend on international recruitment.

California's Boom Hides a Jobs Problem

At the state level, the picture is more complicated. California's GDP grew close to 3% in 2025 and consumer spending rose roughly 5%. Yet the state now carries the highest unemployment rate in the nation at 5.5%, and total jobs actually shrank by 0.6%.

The explanation, Beacon Economics argues, lies in the dominance of the tech sector. The information industry is now California's largest by economic output at $458 billion, having recently eclipsed government. Its output has tripled over 15 years — but its workforce grew only 13%. Each information worker now generates more than $800,000 in annual economic output, compared to $292,000 in 2007.

The result is an economy that generates enormous wealth while creating relatively few jobs — and one whose state budget has become dangerously dependent on capital gains taxes and high-income tech earners. "When the NASDAQ wobbles, state finances collapse," the report notes.

Minimum wage increases are also cited as a factor in California's elevated unemployment, with Beacon's prior research suggesting aggressive hikes have locked younger and marginal workers out of the labor market.

Housing remains a stubborn problem. Despite legislative efforts including AB 130 and SB 9, residential permitting has not meaningfully accelerated. High mortgage rates suppress demand while thin inventory prevents prices from falling. The report describes the market as stuck.

The National Backdrop: Growth Projected, But Debt Is the Long-Term Story

Nationally, Beacon Economics projects roughly 2.5% GDP growth for 2026, a significant rebound from the 0.7% recorded in Q4 2025. That soft quarter, the report argues, was largely an artifact of the federal government shutdown, which alone subtracted more than a percentage point from growth.

Several tailwinds support the rosier near-term outlook: consumer finances remain solid, the Supreme Court invalidated most of the 2025 tariff regime (replaced by a more modest temporary 10% blanket tariff), oil prices — while elevated — remain well below prior peaks, and a stronger dollar is helping to dampen inflation.

But the report is blunt about the longer-term picture. The federal deficit for fiscal year 2026-27 is projected to exceed $2 trillion, pushing total federal debt past $40 trillion — a record relative to the size of the economy. That works out to roughly $15,000 per household annually, or nearly 9% of average disposable income.

"That implicit subsidy has been quietly inflating household purchasing power for years," the report states. "If interest rates rise modestly or growth slows, the fiscal outlook could deteriorate fast."

What to Watch

Beacon Economics flagged several conditions that could significantly alter the regional outlook:

The Middle East conflict: A prolonged engagement would push oil prices higher, keep interest rates elevated, raise construction costs, and further strain housing affordability.
Federal fiscal negotiations: Another government shutdown or debt ceiling standoff could repeat the Q4 2025 growth drag.
AI investment bubble risk: The firm warns of potential "Dutch Disease" dynamics, where tech dominance could hollow out manufacturing and construction competitiveness in the region.
California's governor's race: With no candidate currently polling above 20%, the next administration's economic and regulatory posture remains an open question.
Mortgage rates: Rising Treasury yields tied to the Middle East conflict are already affecting affordability; any sustained increase could stall the modest housing recovery underway.