National and Statewide Economic Drivers
California Consensus
Forecast Report
June 2026
STATEWIDE
SALES TAX TRENDS
2025/26 | 2026/27 2025/26 | 2026/27
Overview: Recent sales tax analysis continues to diverge from broader economic sentiment, even as consumer confidence reached a low point in May. Despite this, spending on taxable goods and services is projected to finish FY 2025–26 approximately 3% above prior-year results, with modest growth expected in the coming year. Across sectors, inflation, interest rates, and price increases remain key factors influencing future revenues. While spending patterns vary across household income levels, recent trends point to a resilient economy. Overall, the near-term outlook remains positive heading into FY 2026–27.
Fuel and Service Stations 3.6% | 7.0%
Merchants reported stronger-than-expected first-quarter 2026 remittances, driven by elevated fuel prices. Since March, geopolitical tensions involving Iran have contributed to significant volatility in global crude oil markets, placing upward pressure on prices.
California’s market also faces structural supply constraints following the closure of the Phillips 66 Los Angeles refinery and production cessation at Valero’s Benicia facilities. As a result, forecasts spanning 2Q 2026 through 1Q 2027 have been revised upward compared to the prior March Consensus Forecast. Beginning in 2Q 2027, petroleum prices are expected to gradually moderate, leading to projected declines in taxable sales for the latter half of FY 2026–27 and into FY 2027–28 as conditions normalize.
General Consumer Goods 1.7% | 1.5%
Brick-and-mortar retail sales rebounded, increasing 3.5% compared to the same quarter a year earlier. Growth was driven by favorable comparisons in apparel, strong performance among discount department stores, and continued momentum in luxury segments such as designer brands and jewelry. Results were further supported by stable spending among higher-income households and larger-than-expected tax refunds. However, growth likely overstates underlying momentum, as early 2025 comparisons were depressed by national boycotts and wildfire-related disruptions.
Looking ahead, rising gasoline prices, persistent inflation, and increasing pressure on disposable income are expected to weigh on consumer spending through the remainder of 2026.
Restaurants and Hotels 2.5% | 2.0%
California’s restaurant and hotel industries entered 2026 in a mixed but increasingly strained position. Consumer demand for dining remained relatively strong, supported by off-premise sales and greater high dining frequency. However, patronage became more uneven and increasingly price-sensitive, particularly among lower- and middle-income households. Tax refunds
provided a temporary boost to spending. At the same time, major event-driven activity—especially surrounding the Super Bowl—exceeded expectations, strengthening performance
in key hospitality markets. This has contributed to cautious optimism for future demand, particularly with upcoming largescale events such as the World Cup and next year’s Super Bowl.
County and State Pools 7.7% | 4.3%
Evidence-based analysis indicates that consumers increasingly relied on online purchasing, supported by convenience, broad product availability, and flexible payment options. As a result, pool tax revenues rose sharply, with first-quarter 2026 receipts increasing 10% over year-ago levels. A portion of this growth reflects changes in tax reporting following a recent CDTFA audit decision. All top ten reporting segments recorded positive results. In addition to consumerdriven gains, business-related sectors—including medical/biotech, energy, and light industrial—contributed to improved performance.
Pool revenues are expected to increase significantly this fiscal year and capture a larger share of total retail spending in the coming year.
Autos and Transportation -0.3% | 2.5%
This category posted a slight gain in the first quarter of 2026, as higher average transaction prices offset weaker unit sales. These price increases reflect tariff impacts increasingly reaching consumers after a period of absorption by automakers, along with rising material costs. As in the prior quarter, the transition to the new DMV payment system for used vehicle dealers under AB 85 modestly reduced agency cash receipts, with adjustments still pending. Elevated vehicle prices, ongoing economic uncertainty, and consumer caution are expected to constrain unit sales in the near term. However, longer-term projections remain supported by substantial pentup demand, driven by the record age of the nation’s vehicle fleet.
Building and Construction -1.8% | -0.2%
Overall activity declined during the period, though some subsectors experienced growth. Roofing material sales increased modestly as property owners delayed major repairs from winter storm damage until the summer months. Infrastructure activity strengthened, with increased demand for concrete reversing several quarters of weakness. Home improvement retailers reported mixed results. In cases where sales rose more than modestly, gains are expected to be temporary, supported primarily by the use of income tax refunds.
Businesses tied to residential solar installations were negatively impacted by the expiration of the 30% federal tax credit, resulting in significant declines in sales volumes compared to last year.
Minimal change is anticipated in tax collections for the coming year.
Business and Industry 3.1% | 3.0%
Customers continued to prioritize the convenience of online and mobile purchasing, with in-state fulfillment centers accounting for approximately one-third of revenues. This concentration helped offset weakness in other segments, as well as shifts of some fulfillment-related revenues into countywide pools. Yearover-year comparisons were reduced by one-time transportation payments and elevated energy and utility returns in the first quarter of 2025, which are not expected to recur at similar levels. The outlook remains cautiously optimistic. Growth expectations are supported by continued expansion in e-commerce and adoption of AI-enabled technologies, though the pace will vary depending on the size, structure, and adaptability of local businesses.
Food and Drug -0.9% | 0.0%
Grocery store profits softened due to shifting food consumption patterns among GLP-1 users, increased interest in multicultural cuisines, and heightened competition from discount retailers.
Convenience stores reported encouraging results as they continue evolving into premium food-service destinations, emphasizing highquality, fresh, and made-to-order options to compete with fast casual restaurants. Cannabis sales showed modest improvement, with infused beverages emerging as one of the fastest-growing product segments. Drug stores faced continued challenges, including store closures. Remaining operators are focusing on capturing market share in an increasingly competitive environment. Overall revenues decline slightly in the current year, are flat in FY 2026–27.
TOTAL 2.7% | 2.3%
2025/26 | 2026/27
HdL Companies California Forecast
June 2026
NATIONAL AND STATEWIDE
ECONOMIC DRIVERS
U.S. Real GDP Growth 2.2% | 2.4%
The U.S. economy grew by 2.1% last year, representing slower expansion than the prior two years, partly due to reduced public spending and a prolonged government shutdown late in the year. Growth eased further to 1.6% in the first quarter of 2026, largely reflecting a sharp widening in the trade deficit earlier in the year. Continued investment in U.S. Treasury markets is expected to support ongoing economic expansion. However, the outlook depends on investor confidence, and future shifts in market sentiment could influence borrowing conditions and increase concerns about the sustainability of U.S. debt financing.
CA Unemployment Rate 5.4% | 5.2%
Although AI is often cited in recent layoff announcements, there has been no meaningful increase in the overall layoff rate or in initial unemployment insurance claims. This is true nationally as well as in technology-heavy California, where one might expect AI-related displacement to be most visible. In fact, continuing unemployment claims have drifted downward over the past year, suggesting that displaced workers are still finding jobs relatively quickly.
CA Total Nonfarm
Employment Growth 0.8% | 0.4%
California’s labor market is experiencing a significant slowdown in hiring. The state is tied with two other states for the highest unemployment rate in the nation, and job growth has been largely concentrated in the Health Care sector. Absent gains in Health Care employment, total jobs would be approximately 120,000 below prepandemic levels and roughly 253,000 fewer jobs when compared to the post-pandemic peak in the second half 2022, with notable declines in the Bay Area and Southern California. Labor market conditions reflect limited hiring activity across most industries outside of Health Care.
U.S. Unemployment Rate 4.3% | 4.3%
Despite concern about AI, labor markets remain relatively steady.
The U.S. economy has been adding jobs at a moderate pace, averaging slightly more than 100,000 new jobs per month in 2026. April’s job openings rate rose to 4.6%, the highest level since January 2025, while the unemployment rate held at 4.3% in May. The sharp decline in immigration last year temporarily reduced labor force growth, but this appears to have been a shortterm disruption rather than a lasting structural change. Overall, labor market trends are stabilizing at a slower, more typical pace.
CA Residential
Building Permits 107,578 | 99,253
The slight cooling in home prices does not appear to be driven by a meaningful expansion in California’s housing supply. State policymakers enacted several measures in recent legislative sessions aimed at encouraging development (including AB 130 and SB 9), but these measures have not yet generated a noticeable acceleration in new residential permits. Year-to-date, permit issuance in California has increased, with FY-2026 on pace to be the strongest year since FY-2022, although still below the state’s housing production targets.
CA Median Existing
Home Price $762,314 | $772,608
Soft labor market conditions help explain the sluggish housing market.
Year-to-date home sales in FY-2026 are roughly in line with FY-2025, but inventories have risen to a multi-year high, placing downward pressure on price appreciation. Approximately one in four homes sold had a price reduction, improving conditions for buyers. The estimated monthly mortgage cost based on the median list price declined 2.7% compared to a year ago and down 0.6% compared to the start of 2026. The housing market is still largely frozen but continues to thaw. 2026/27 | 2027/28 2026/27 | 2027/28
HdL Companies California Forecast
June 2026
Proposition 172 Note
Statewide Proposition 172 (P-172) revenues declined by 0.3% in fiscal year 2024–25, following a 0.9% decrease in the prior year.
The forecast projects modest growth of 2.1% in both FY 2025–26 and FY 2026–27. Current county projections are based on pro-rata allocation factors from the State Controller’s Office (April 2026), derived from calendar year 2025 data. Because Bradley-Burns sales tax results can shift due to audits, taxpayer adjustments, and changing economic conditions, these allocation factors—and resulting P-172 revenues—will vary across counties.
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Beacon Economics LLC
310.571.3399 | BeaconEcon.com
Beacon Economics has proven to be one of the most thorough and accurate economic research/analytical forecasting firms in the country. Their evaluation of the key drivers impacting local economies and tax revenues provides additional perspective to HdL’s quarterly consensus updates. The collaboration and sharing of information between Beacon and HdL helps both companies enhance the accuracy of the work that they perform for their respective clients.
HdL Companies
888.861.0220 | [email protected] | hdlcompanies.com California’s allocation data trails actual sales activity by three to six months. HdL compensates for the lack of current information by reviewing the latest reports, statistics and perspectives from fifty or more economists, analysts and trade associations to reach a consensus on probable trends for coming quarters. The forecast is used to help project revenues based on statewide formulas and for reference in tailoring sales tax estimates appropriate to each client’s specific demographics, tax base and regional trends.