HdL Companies presents an update on California’s retail economy based on current 2nd Quarter 2025 data. Download the presentation deck to follow along with the recording.

Overview of Q2 2025 Results

Statewide sales tax revenue increased by 0.6% at the close of the fiscal year, looking at the most recent data for the second quarter of 2025. This result was very close to projections anticipating a flat performance or slight decline of -0.1%.

Economic Indicators
Key indicators influencing the forecast include:

Credit card spending up 1.8% year-over-year as of July
Interest rate cut by the Fed: 25 basis points
Imported goods surged 12% year-over-year
Continued investment in AI and business infrastructure
Consumer sentiment remains mixed; payroll growth has cooled since May

Key themes influencing the outlook include ongoing concerns around tariffs and inflation. These continue to be challenging variables that affect pricing and consumer sentiment. There is also an increase in unemployment, particularly in the tech sector, which raises concerns about future spending.

There has been a notable shift in consumer spending trends. Goods purchases, which are taxable, surged following the pandemic and have started to pick up again in 2025. In contrast, spending on services, which are generally not taxable, has been in decline. Persistent inflation in goods continues to support elevated monthly spending levels.

For the full fiscal year, statewide revenue declined by 0.5% aligning closely with previous forecasts dating back to September 2024, which anticipated a general decline of approximately 1%. Overall, the current fiscal year (FY25–26) is projected to grow 1.4%, with further improvement expected in the following year.

Autos & Transportation

In the autos and transportation sector, new vehicle pricing rose just 0.3% in the most recent quarter. This modest growth follows nine out of ten quarters of decline. Inventory levels have begun to recover, suggesting improved supply chains, although they remain below historical norms. Tariffs are expected to increase prices over time, but for now, the main impact has been stockpiling of parts. Analysts expect vehicle prices to rise by year-end, with $5,000 increases on imports and $1,000 on domestic vehicles due to parts tariffs. Used car prices and repair costs are also climbing, tightening affordability for lower-income households.

Electric vehicle sales have surged, largely driven by a $7,500 federal tax credit expiring at the end of September. After this expiration, a slowdown is expected. While some manufacturers had strong quarters, others experienced notable declines, which affected the overall sector. Forecasts for 2025 are mixed, with estimates ranging from a 1.3% decline to nearly 2% growth. Despite this uncertainty, the industry appears to be stabilizing.

After two consecutive years of decline, the sector is expected to remain flat in FY25–26, followed by a 3% recovery in FY26–27 and more normalized growth of about 4% thereafter.

Fuel & Service Stations

Fuel and service station revenues continue to be driven by fuel prices. Prices declined again in the most recent data, down about 3% through late September, and consumption has also dropped for the second consecutive year. Key upward pressures include state environmental regulations, refinery closures in late 2025 and early 2026, and global supply constraints. Interest rate reductions may have a slight positive effect, but oil prices and legislation remain relatively stable. The sector declined nearly 10% in FY24–25 but is projected to grow 3.4% in FY25–26, followed by slow recovery in subsequent years.

Building & Construction

In building and construction, high mortgage rates and the expected end of the federal solar credit at the close of 2025 are dampening activity. While data centers and infrastructure projects provide some positive momentum, issues such as labor shortages, ICE enforcement actions, and rising material costs (especially metals) are contributing to a challenging environment. Lumber prices remain volatile, with a 13% drop in the past six months.

The sector has experienced two consecutive years of decline. FY25–26 is forecasted to be down 1.5%, with recovery starting in FY26–27 and returning to more typical growth rates in later years.

Food & Drugs

The food and drugs sector, which makes up 4.5% of total sales tax revenue, has remained largely flat. Grocery stores have seen little change, while convenience stores declined slightly. Drug stores experienced an 11.5% drop due to known closures, and cannabis revenue has continued to decline since the post-COVID surge. Recent legislation will keep the cannabis excise tax rate at 15% through at least July 2028. Despite innovation in lounges and product diversification, the market remains challenging. The sector declined 2.9% in FY24–25 and is projected to fall another 1.4% in FY25–26, with only modest recovery expected thereafter.

General Consumer Goods

Retail trends show that consumers continue to spend, though they’re increasingly value-conscious. Brick-and-mortar retail has declined for five consecutive quarters, while online sales have grown. Approximately one-third of consumers plan to increase spending over the next six months, one-third plan to maintain current levels, and one-third expect to spend less. National retail data confirms core retail sales growth across most categories, despite some slowing in building and garden supply.

Port activity at the Port of LA shows fluctuations likely tied to tariff-related behavior, with noticeable import surges prior to potential tariff enforcement. In general consumer goods, brick-and-mortar stores continue to face headwinds, though some sectors such as electronics and jewelry performed well. The sector came in down 0.6% for Q2, slightly better than expected. Annual decline was 1.7%. Gradual recovery is projected in FY25–26 and FY26–27.

County Pools

Countywide use tax pools, which capture much of the out-of-state online retail, rose 3.7% in Q2. This was slightly below the 4% projection. Marketplace sellers like Amazon and Etsy saw more modest growth compared to direct business-to-consumer sales. Business and industrial sales within the pools remain strong, particularly in medical biotech and light industry. Overall, pools are projected to grow 3.5% in FY25–26 and 3% in FY26–27.

Business & Industry

Business and industry remains a diverse and complex category. Fulfillment centers represent 28% of this group and have seen consistent growth, particularly among in-state facilities. Office equipment and electrical equipment, driven by AI-related investments, posted major gains this quarter. However, categories like medical biotech and agriculture continue to face challenges due to NIH funding cuts, labor shortages, and export issues tied to tariffs. Overall, the sector posted a 3.9% increase in Q2, higher than expected. Growth of 1.2% is forecast for FY25–26, rising to 3.1% in subsequent years.

Restaurants & Hotels

Restaurants and hotels have seen mixed performance. While consumers are still dining out, they’re looking for deals and are more selective. Fast food and fast casual restaurants experienced declines, in part due to rising menu prices and new labor cost requirements in California. Casual dining has performed better thanks to effective value promotions. Leisure and entertainment rebounded after fire-related disruptions. Food delivery and catering continue to grow, driven by campus demand.

Disposable personal income is projected to grow more slowly over the next two years, which may limit restaurant spending. Packaging costs and tariff-related expenses also pose challenges. Despite these, the sector is expected to grow about 2.1% in FY25–26 and 3.4% in FY26–27, though this remains below the long-term average of 5% to 6%.

Outlook Summary

In summary, after two years of decline, modest growth is projected statewide at 1.4% for FY25–26. However, revenues will not yet return to FY22–23 levels. For jurisdictions that rely heavily on sales tax revenue, growth remains insufficient to keep pace with rising costs, and full recovery is not anticipated until later fiscal years.

*This was an AI-generated summary from the transcript of our live webinar.

Q & A

Q: Projections here seem to see a “turning of the corner” in 2026. What are some of HdL's thoughts driving that assumption?

A: First, with two years of decline, FY 26 will get slightly better, but when compared to prior years, not making up for the statewide sales tax losses in FY 24 and FY 25. Certainly, we know prices will go up; thus, necessity household items that cost more for consumers will translate to more sales taxes (with quantities/volumes of sales stagnated or falling slightly).

Q: With a soft labor market, is it possible that wages might lag behind growth in prices, causing a drop in demand as prices rise? Will rising costs of non-taxable items in CA continue to squeeze disposable income available for taxable sales?

A: Yes, labor uncertainty could mitigate expected gains coming from higher prices. AI agents as well, taking over work humans have been providing, particularly in the tech sector. Over time, consumers have been navigating higher charges for non-taxable items and it does influence discretionary spending. All that said, the outlook integrates all of these variable factors. Of course, regional, and local results do vary based upon the composition of taxpayers/types of businesses in each jurisdiction.