2023 Will Likely be a Difficult Year for Taxable Retail Sales Here

by Dr. Patrick Jones

One year a trend does not make. But two quarters give us a good idea how a year will end. For taxable retail sales in the two counties, 2023 is not shaping up as a stellar one.

As Trends indicator Quarterly Taxable Retail Sales reveals, year-over-year growth for quarters one and two of this year has been negative:  -4.8% and -1.8%, respectively. We won’t know the results for the third quarter for another 6 weeks and the final quarter until June. But it will take significant year-over-year increases in the second half of the year for area taxable retail sales to finish positive for 2023.

Unfortunately, that prospect seems unlikely. We do know the results for the state as a whole for third quarter. Year-over-year taxable retail sales in July were up 0.6%, while sales in August and September fell, -1.6% and -2.7%, respectively. While the correlation between sales in the two counties and in Washington isn’t as high as in other Eastern Washington metros, at 60%, it is this writer’s sense that the state results gives us a good direction.

If sales in 2023 stay on the course of the first half of the year, it will be the first year since 2009 that this broad measure of economic activity declined.

What lies behind this deceleration locally? Surprisingly, it’s not diminished activity at actual retail. That component, “Retail Trade,” reveals little change (+1%) from 2022. It is other categories of this measure that have dipped; they have nothing to do with what most of us consider retail.

Taxable construction activity, the second largest category in the measure, has slid in the first half of this year. The amount:  about $54 million, representing a 10% decline. As Trends 2.4.3 shows, new construction in 2022 represented the second-highest year on record. 2021 represented the highest, and 2020 the third highest. This year might simply be a pause in such leaps. Significantly higher interest rates are likely a suspect among the various causes.

More puzzling, wholesale trade in the two counties dipped during the first half. Yes – wholesale trade may be taxed in Washington state as a retail activity! Wholesale trade typically represents the fourth largest component of this measure, with activity in “durable” wholesale goods much more important than non-durable (perishable) goods. Wholesale trade declined by 20% in the first half of 2023.

Thankfully, the third largest contributor to this measure – the hospitality trade – showed an increase of nearly $14 million, or 7% over 2022. Given consumers’ recent penchant for purchasing services such as travel, entertainment and dining, it could very well be the case that hospitality will contribute positively to taxable retail sales in the second half of the year – the more important half for tourism.

But any boost from this industry will likely not be enough to offset the continued tepid results in “retail trade,” if local consumers are anything like their national counterparts. Across the country, goods purchases have declined, sometimes precipitously, in favor of services. We’ve accumulated lots of stuff over the pandemic. And a decline in housing doesn’t augur well for big-ticket items such as furniture and appliances, not to mention the construction component of retail sales tax collections. While consumer, here and nationally, are still spending, it is not in these areas. And the state retail sales tax codes rests heavily on “goods.”

What about 2024? It is a truism of economics that income drives consumption. Currently, Americans spend 70% of their income on goods and services. A forecast by the Washington State Economic & Revenue Forecast Council (ERFC) points to 2024 as a better year.

The ERFC income forecast calls for a +5.1% in nominal income. Per capita incomes in the two counties move nearly identically with those of Washington. Consequently, if the group’s forecast is directionally correct, it follows that taxable retail sales in Chelan and Douglas Counties will enjoy a better year.

In addition, the ERFC anticipates a state-wide jump in housing starts of 8.5%, while it anticipates a double-digit drop in 2023. The five-year average growth rate of this key metric of the local economy was a bit over 7%. My guess is that most readers and certainly local governments will be very happy with a return to that “normal,” should this forecast come to pass.