By Dr. Patrick Jones
Have the greater Tri Cities been visited by a downturn over the past two years? From the perspective of taxable retail sales, hardly.
Recent year-over-year increases tracked by the Trends indicator taxable retail sales may surprise a few readers. Recently released data for the third quarter of last year show a nearly 14% increase. Glancing back a little further, we see nearly a 33% spike for the second quarter of last year and a 16% jump in the first quarter. These are unprecedented year-over-year results.
Admittedly, a comparison of the second quarters presents an outlier since it was this quarter in 2020 when the most severe anti-pandemic measures were put into place. The accompanying graph shows, however, that the local downturn in that quarter was far more mild than for the state as whole: -4% vs. -13%.
A quick inspection of the graph also shows that for the three reported quarters of 2021, taxable retail sales, in aggregate, were far above those of pre-pandemic 2019. A complete recovery? Not quite, as aggregate measures can conceal strong variation and they do here.
In a recently completed study for the Port of Kennewick, the Institute examined the quarterly path of the pandemic on the local economy by three measures: employment, total wages, and taxable retail sales. Not surprisingly, some sectors thrived during the worst of the pandemic; others did not.
Several retail sub-sectors, for example, experienced strong sales surges in the two counties. The three benefiting the most, ranked by the size of the year-over-year increase in the second quarter of 2020 were: building materials & garden supplies, electronics & appliances, and general merchandise stores. As elsewhere, work-from-home directives led to local “investments” in both the home office and the home generally. On a percentage basis, sales increases ranged from approximately 2% to 22%.
On the other hand, several industries in the greater Tri Cities suffered plunges in sales. The three that fared the worst, in order of year-over-year losses, were: hospitality (accommodations as well as eating & drinking establishments), apparel & accessories, and wholesale trade. The collective decline of sales of these three was far greater than the collective gain of the three sub-sectors listed above, contributing to the overall decline in taxable sales in that quarter. Eating and drinking establishments, in particular, suffered a huge drop in sales.
Since then, apparel & accessories firms have chalked up, continual increases since the 4th quarter of 2020. The accommodations sector, however, continued to struggle until the 2nd quarter of last year, when year-over-year comparisons turned green. Wholesale trade actually recovered immediately in the following quarter.
Given the very positive aggregate results of 2021, it shouldn’t be a surprise that every sector in the greater Tri Cities economy subject to the sales tax has put up big increases from the 2nd quarter onward. In fact, the industries hit with the steepest declines in 2020 registered the steepest increases in 2021. Besides hospitality, apparel and wholesale trade, these comebacks included the hard-hit sector of arts, entertainment & recreation.
We will not know how the local sales ended the year until the next data release from the Washington Department of Revenue, scheduled for late June. But we have a strong clue, thanks to early releases of statewide sales tax data by the Economic Research & Forecast Council (ERFC). The Council reported that in the final quarter of last year, taxable retail sales went up statewide by 20%!
Keen eyes on the accompanying graph will observe that local taxable retail sales move in close tandem with those of the state. In fact, the correlation over the past decade between the same quarters here vs. Washington is nearly perfect, at 0.98. The implication for the final quarter of last year in the two counties? We can likely expect a year-over-year percentage sales increase in the mid-teens.
These are head-spinning numbers. But so was the amount of fiscal stimulus from the federal government in the second half of 2020 and the first half of 2021. It also worthwhile to note that while local employment took a hit of 8,000 jobs that have been slow to return, total wages paid to the workforce kept climbing. In other words, wage increases more than offset the lower number of people working, leading to more money to spend, in aggregate, in the local economy.
How might quarterly taxable retail sales turn out this year? In its most recent forecast of Washington State personal income, the ERFC put the year-over-year increase at a mere 3.6%. Adjusted for inflation, the forecasted change is actually negative. This matters because personal income drives spending (see this indicator on the Trends site). Here, too, the economic cycle of the two counties shows itself to be in synch with that of the state, with a high annual correlation over the past decade - 0.96.
Why might the 2022 forecast for Washington portend such a small uptick? First, the comparison will be to a huge increase in 2021. Second, there will be little federal direct stimulus circulating through businesses and households this year. Over the past decade, the average year-over-year increase of taxable retail sales in the two counties has been a slightly larger than 7%. This year may bring a number a little below that. But even a reversion to the mean should be welcome since taxable retail sales have done so well here for so long.