HdL Companies presents an update on California’s retail economy based on current 4th Quarter 2025 data. Download the presentation deck to follow along with the recording. 

Overview of Q4 2025 Results

California’s fourth quarter 2025 sales tax results showed a 1.2% year-over-year increase, closely aligning with prior expectations of approximately 1.4% growth. As the peak holiday spending period, the fourth quarter remains the highest revenue-generating period of the year, with gains driven primarily by consumer spending and business activity. Growth was concentrated in select sectors, while others experienced declines that tempered overall performance. The results reflect a continuation of moderate growth trends observed throughout 2025, alongside emerging economic uncertainty.

Economic Indicators
Key indicators influencing the forecast include:

• Elevated gas prices and reduced refinery capacity

• Global conflict impacting oil supply and market volatility

• Interest rate uncertainty and fewer expected rate cuts

• Tariff-related import patterns and prior inventory stockpiling

• Labor market conditions and broader economic uncertainty

Autos & Transportation

Auto sales declined more than anticipated, with fourth quarter results down approximately 3.3%, compared to an expected 1% decline. Contributing factors included high vehicle prices, affordability constraints, and the expiration of federal electric vehicle tax credits, which shifted demand into earlier quarters. Rising fuel prices are also influencing consumer behavior, pushing demand toward lower-cost and more fuel-efficient vehicles, which typically generate less sales tax revenue. Despite these short-term pressures, underlying demand remains supported by an aging vehicle fleet averaging 12.8 years, indicating potential future replacement demand. The fiscal year 2025–26 outlook reflects a modest decline of approximately 0.5%.

Building & Construction

The building and construction sector continues to underperform, with fourth quarter receipts down approximately 2.4%. Persistent affordability challenges driven by high home prices and elevated mortgage rates have effectively stalled the housing market. Limited housing turnover has reduced demand for construction materials, appliances, and home improvement goods, as reflected in reduced retail activity at major home improvement stores. While there has been slight stabilization in home prices, rising mortgage rates tied to broader economic conditions may prolong this slowdown. The sector is expected to experience a third consecutive year of decline, with modest recovery projected in fiscal year 2026–27.

Food & Drug

The food and drug sector has experienced modest declines over recent years, driven by structural changes such as retail consolidation, reduced cannabis sales, and declining alcohol consumption. Behavioral shifts are also emerging, particularly related to health trends, including increased use of GLP-1 medications, which are associated with reduced spending on alcohol and certain food categories. These factors are contributing to lower taxable sales within a sector that traditionally includes limited taxable items. Stabilization is expected, with modest growth projected in fiscal year 2026–27.

General Consumer Goods

General consumer goods posted 0.8% growth in the fourth quarter, matching expectations. Performance was strongest in value-oriented retail segments, with family apparel increasing 6.2% and variety stores rising 9.5%, reflecting heightened consumer price sensitivity. In contrast, electronics and appliance stores declined 3.5%, due to both delayed purchases of durable goods and reporting adjustments. Overall retail trends indicate continued consumer spending, with a growing preference for online shopping, value pricing, and convenience. The sector is forecast to grow approximately 1.1% in fiscal year 2025–26, with continued moderate gains thereafter.

Countywide Pools

Countywide pools experienced strong fourth quarter growth of approximately 8.5%, driven by e-commerce activity and business-related transactions. Marketplace sellers, including major online platforms, remain the largest component and grew 1.3%. Significant fluctuations were observed in categories such as energy and electronics, partially due to reporting adjustments. Growth is also supported by ongoing investment in technology and artificial intelligence infrastructure. The outlook includes 5.3% growth in fiscal year 2025–26, followed by normalization to approximately 2.5% in fiscal year 2026–27.

Business & Industry

Business and industry recorded modest overall growth of 0.3% in the fourth quarter, with fulfillment centers driving much of the increase. Fulfillment center activity, representing 34% of the sector, rose 9.3%, reflecting continued expansion in e-commerce logistics. Excluding fulfillment centers, the sector would have declined 2.2%, highlighting mixed performance across industries. Positive trends include growth in medical and biotech sectors and modest manufacturing expansion, while agriculture faces headwinds from capital constraints, labor challenges, and environmental factors. The sector is projected to grow 2.3% in fiscal year 2025–26 and approximately 3% in fiscal year 2026–27.

Restaurants & Hotels

Restaurants and hotels grew approximately 1.5% in the fourth quarter, slightly exceeding expectations but remaining below historical averages of around 5% annual growth. Casual dining, representing 44% of the sector, increased 2.7%, while fine dining declined 2.5%, reflecting reduced discretionary spending. Rising menu prices, currently increasing at approximately 4% annually, combined with declining customer traffic indicate continued pressure on the sector. Additional factors include reduced alcohol consumption, lower tourism activity, and sensitivity to rising gas prices. Growth is expected to remain modest, with some support from major tourism events in 2026.

Outlook Summary

The overall outlook reflects continued modest growth, with fiscal year 2025–26 projected at approximately 1.8%, followed by additional gains in fiscal year 2026–27. While results remain positive, forecasts have been slightly revised downward due to heightened uncertainty related to global conflict, energy prices, and consumer behavior. Growth is expected to continue at a slow and steady pace, with inflation and essential spending supporting sales tax revenues, though not at levels sufficient to fully offset declines experienced in prior years.

Q & A

Q: Are there potential changes to how sales tax from online transactions is allocated?

A: A proposal to shift allocation from fulfillment centers to destination-based distribution was considered but is not moving forward at this time. Future discussions may revisit the issue, but no near-term changes are expected.

Q: Will there be changes to countywide pool allocations?

A: Discussions are ongoing. Any potential changes would require legislative action and would not take effect in the near term. Current forecasts should not assume any changes.

Q: What percentage of the population is using GLP-1 medications, and how does this affect spending?

A: Approximately 12% of the population has used these medications. They are associated with reduced spending on alcohol and certain food categories, which may impact taxable sales.

Q: How are hard seltzers categorized for reporting purposes?

A: Hard seltzers are generally categorized within the spirits category.

Q: Will updated revenue forecasts be provided to clients?

A: Yes. Updated forecasts will be included in upcoming reports over the next several weeks.