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By Michael Pakko, March 29, 2012 1:00 PM

At the Arkansas State University Economic Outlook Conference today, we presented revised and updated forecasts for some key economic indicators for the Arkansas economy.  At the time that the original forecasts were complied in late October 2011, data for some series were available only through the first half of the year (e.g., personal income).  Some of the statistics that were available through the third quarter have subsequently been revised (particularly employment data).  Hence, the original projections for 2012 and 2013 incorporated forecast estimates of how 2011 would turn out.  Now that we have at least preliminary data for all of 2011, it seems a propitious time to revisit the forecasts.

In general, the data have confirmed our expectations that 2011 would show a slowdown in the pace of  the economic recovery overall, but with clear signs of improvement in the final months of the year.  In some cases, our expectations for improvement in the waning months of 2011 were exceeded — in other cases our outlook was overly optimistic.  Accordingly, the forecast revisions are mixed. And the outlook — in broad strokes — continues to be one of steady but unremarkable growth as we slowly emerge from the aftermath of the 2008-09 recession.

Personal Income
Yesterday’s data-release from the Bureau of Economic Analysis showed that total Personal Income in Arkansas grew by 3.7 percent in 2011 (Q4/Q4).  This fell closely in line with our forecast of 3.6% growth for the year.  Hence revisions to the outlook are minor.  Due, in part, to lower-than-expected transfer payments in the second half of 2011, the forecast for personal income growth in 2012 has been revised down from 5.1% to 5.0%.  The forecast for 2013 is unchanged at 3.9%.

Sources: Bureau of Economic Analysis, Institute for Economic Advancement

Arkansas Taxable Sales Including Gasoline
Our proxy for state retail sales, Arkansas Taxable Sales Including Gasoline (ATSIG), finished 2011 with a Q4/Q4 growth rate of 5.0% — slightly higher than the 4.4% rate in the forecast.  Some of this strength is expected to continue into 2012, prompting a slight upward growth revision from 3.2% to 3.3%.  (The slowdown from 2011 reflects, in part, the expectation of slightly lower inflation rate.)  Our original forecast included a (somewhat anomalous) slowdown in growth for 2013 (2.0%).  Such a slowdown now appears less likely, and we are now forecasting 2013 growth of 3.9%.

Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Home Sales
Arkansas home sales had been steadily improving during 2011 (on a seasonally-adjusted basis), but after having been supported by home-buyer tax credit programs in the previous two years, 2011 was still expected to be have the lowest total annual sales volume in recent memory.  Sales in the last three months of the year were fairly strong, but were somewhat below our expectations.  Compared to the previous year, total sales volume was down slightly more than forecasted: down 2.5% from the previous year’s (revised) sales figures.  Carrying this weakness forward into the projected sales trajectory, the forecasts for 2012 and 2013 have been revised downward.  Expectations of a double-digit growth rate in 2012 have given way to a revised forecast of +7.5%.  Sales are still expected to improve by 4.3% in 2013, but end the year with a lower sales volume than previously forecasted.

Sources: Arkansas Realtors Association, Institute for Economic Advancement

Payroll Employment
At the UALR Arkansas Economic Forecast Conference, we predicted that downward revisions to the payroll employment data would show that the year would end with a lower level of employment than the previous year — in sharp contrast to data that was available at the time.  The actual data revision was slightly larger than anticipated, showing a Q4/Q4 employment loss of 0.4%, rather than the 0.2% that had been forecasted.  Nevertheless, relatively strong job growth did materialize in the fourth quarter of 2011, as anticipated.  Accordingly, the growth path for employment has not been revised (+1.3% in 2012 and +1.5% in 2013), but the path has been benchmarked to a slightly lower starting point.

Source: U.S. Bureau of Labor Statistics, Institute for Economic Advancement

Unemployment Rate
Unemployment rate data for 2011 were also recently revised.  The updated statistics showed that unemployment was not quite as high in mid-2011 as previously estimated.  Moreover, the rate dropped over the last three months of the year much more rapidly than expected.  Consequently, our unemployment rate forecasts have been revised downward significantly.  2011 ended with a rate of 7.9%, instead of the expected 8.2% rate.  The downward trajectory of unemployment has been adjusted downward from this lower starting point.  We now expect the unemployment rate to average 7.4% in the fourth quarter of 2012 (instead of 7.9%) and to fall to 7.0% by the fourth quarter of 2013 (instead of 7.6%).  These would be welcome developments, if realized.  The risk to this revised forecast is that new entrants and re-entrants to the labor force might put upward pressure on the unemployment rate as the labor market continues to improve.

Sources: U.S. Bureau of Labor Statistics, Institute for Economic Advancement

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Methodological Note:  The original forecasts of November 2011 were produced using the Moody’s Economy.com Arkansas model, benchmarked to a composite of national economic forecasts.  The revised projections presented here represent adjustments to the original forecasts in light of new and revised data.   Underlying forecast assumptions and model estimates were not generally re-evaluated as a part of this exercise, but updated model forecasts for the unemployment rate and retail sales were factored into the analysis.

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By Michael Pakko, March 19, 2012 4:19 PM

Final data on Arkansas Taxable Sales (ATS) for 2011:Q4 are now available, but there is little news to report.  Based on new information from the Department of Finance and Administration on sales tax and gasoline tax receipts, the data on both ATS and the broader measure — Arkansas Taxable Sales Including Gasoline (ATSIG) — were nearly identical to our preliminary estimates.  Growth rates for both measures are summarized in the table below.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Preliminary data for January are now available as well.  Taxable sales in January were up 0.55% from the previous month (a 6.7% annual rate).  Compared to the previous January, ATS was up 6.0%.  With gasoline prices rising, ATSIG rose even more sharply in January.  Compared to the previous month, ATSIG was up by over a full percentage point (approximately a 12.6% annual rate).  From the previous year, ATSIG was up by 6.4%.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

#  #  #

The Arkansas Taxable Sales (ATS) series is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales.  The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here:  Arkansas Taxable Sales Data 2011:Q4 (Excel file)

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By Michael Pakko, February 2, 2012 12:58 PM

Preliminary data show that Arkansas Taxable Sales Including Gasoline (ATSIG) rose by 1.8% in the fourth quarter of 2011, and were up 5.1% from the previous year.  Excluding gasoline, Arkansas Taxable Sales (ATS) were up 1.9% in the fourth quarter.  After a period of approximately zero growth from mid-2010 through mid-2011, ATS expanded by 4.2% in the second half of 2011.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The preliminary ATS data are based on monthly revenue reports from the Department of Finance and Administration.  Their latest report indicated fairly strong growth in Gross Receipts in January (+4.9% from the previous year).  Gross Receipts is a measure that primarily reflects sales and use taxes, with approximately a one month lag.  Hence, the report suggests that holiday sales in December 2011 were much improved over the previous year.  Final figures for Arkansas sales and use tax receipts will be available with the release of the January 2012 issue of Arkansas Fiscal Notes.

Gasoline sales data for the fourth quarter are incomplete, but preliminary estimates suggest an increase of approximately 1% — in spite of lower gas prices.  According to the oil price information service, the average price of gasoline in Arkansas was $3.22 in the fourth quarter — down from $3.49 in the third quarter.

The growth in ATSIG in the second half of 2011 brings Arkansas sales growth back in line with national retail sales.  According to the Census Bureau, U.S. Retail Sales increased by 1.2% in the third quarter and 1.9% in the fourth quarter.  ATSIG had been lagging behind in early 2011, but slightly outpaced U.S. retail sales in the second half of the year.  For the year as a whole, U.S. retail sales rose 6.9% compared to the 5.1% figure for ATSIG.

Sources: Census Bureau, Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

 #  #  #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales.  The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here:  Arkansas Taxable Sales Data 2011:Q4 (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for January 2012, and will be updated when information becomes available.

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By Michael Pakko, November 9, 2011 9:00 AM

The latest monthly revenue report from the Department of Finance and Administration indicated another slow month for sales tax collections in October (corresponding to transactions in September).  Nevertheless, strength in the previous month propelled the non-gasoline component of Arkansas Taxable Sales to a healthy increase of 1.8% in third quarter (seasonally adjusted).*  And despite a decline in gasoline prices relative to the second quarter, gasoline expenditures rose by 3%.  Overall, Arkansas Taxable Sales Including Gasoline (ATSIG) rose by 1.9%.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The third-quarter increase in ATSIG represents a wecome recovery from the decline recorded in the second quarter.  And in fact, growth in the previous two quarters would have been slower had it not been for higher gasoline expenditures associated with a price spike.  The third quarter growth rate appears to indicate a resurgence of growth after a year-long slowdown.

Relative to U.S. Retail Sales, the third quarter increase in ATSIG also represents an improvement (see chart, below).  Arkansas had fallen behind in the pace of overall sales growth during late 2010 and early 2011, but the 1.9% increase in the third quarter exceeded the U.S. growth rate of 1.1%.

Sources: U.S. Census Bureau, Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

One important caveat to the third quarter figures should be mentioned:  The totals for ATSIG do not include tax-exempt expenditures associated with the new back-to-school sales tax holiday in August.  Information is sketchy on the magnitude of this sales surge.  But if DF&A estimates are correct,  August sales were actually about 1% higher than implied by the sales tax data.  This corresponds to a 0.3% increase in quarterly growth, raising ATS growth in the third quarter to over 2%.

#  #  #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales.  The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here:  Arkansas Taxable Sales Data 2011:Q3 (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for October 2011, and will be updated when information becomes available.

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By Michael Pakko, August 16, 2011 8:10 AM

Arkansas Taxable Sales decline — and this time high gas prices can’t be blamed

Arkansas Taxable Sales (ATS) registered another slow quarter in 2011:Q2, with the basic series (based on state sales tax data) showing a decline of 0.5% from the previous quarter (seasonally adjusted).  Following weak growth in the previous three quarters, the quarterly drop leaves ATS only 0.1% above the level of a year earlier.

Source: Institute for Economic Advancement (based on data from the Arkansas Department of Finance and Administration and the Oil Price Information Service)

In the first quarter of the year, sharp increases in gasoline prices appeared to be a contributing factor to slow ATS growth of 0.4% (revised).  A measure of taxable sales that includes gasoline expenditures — Arkansas Taxable Sales Including Gasoline (ATSIG) – rose 1.6% from the previous quarter, suggesting that spending on gasoline was sapping some of the purchasing power that would otherwise have been reflected in the sales tax figures.  But the second quarter data show a decline in this broader measure as well (-0.4%). 

Although Arkansas gasoline prices declined during the latter part of the quarter, falling from $3.74 in May to $3.50 in June, prices were higher on a quarterly average basis — $3.63 in the second quarter compared to $3.16 in the first quarter.  However, slow gasoline sales volumes kept ATSIG from growing much faster than the ATS measure without gasoline expenditures.  Relative to a  year earlier, ATSIG was up only 2.1% in the second quarter. 

Source: Institute for Economic Advancement (based on data from the Arkansas Department of Finance and Administration and the Oil Price Information Service)

Nationwide retail sales growth slowed in the second quarter (from 2.5% in 2011:Q1 to 1.2% in 2011:Q2), but not as dramatically as the slowdown in Arkansas Taxable Sales.  As shown in the figure below, ATSIG had been showing growth commensurate with U.S. Retail Sales during the early stages of the economic recovery.  The data for 2011 indicate a troubling slowdown compared to the national statistics.

Sources: Institute for Economic Advancement, U.S. Census Bureau

Recent reports on employment and unemployment in Arkansas have suggested economic weakness in the second quarter, and the statistics on Arkansas Taxable Sales provide corroborating evidence.  Forthcoming data releases for the second quarter should help to clarify the situation (e.g., Personal Income data for 2011:Q2 will come out next month).  Looking forward, recent declines in gasoline prices might relieve some of the strain on household budgets and contribute to a rebound in the second half of 2011.  Stay tuned.

#  #  #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely measure of Arkansas retail sales.  The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here:  Arkansas Taxable Sales Data 2011:Q2 (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for July 2011, and will be updated when information becomes available.

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By Michael Pakko, June 21, 2011 8:54 AM

High Gasoline Prices Divert Spending

Preliminary data indicated that Arkansas Taxable Sales (ATS) increased only modestly in the first quarter of 2011 (+0.7%), and had shown little net growth over the past three quarters (+0.6%).  Based on information released last week from the Arkansas Department of Finance and Administration (DF&A),  revised statistics show an even smaller increase in the first quarter, +0.6%.  As shown in Figure 1, the sluggish growth in ATS since mid-2010 contrasts with national retail sales statistics, which have shown steady recovery from the recession. 

Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, Institute for Economic Advancement

In the Arkansas Economist report on the preliminary figures we speculated that the difference might be related to the recent spike in gasoline prices.  (This factor was also mentioned in the most recent General Revenue Report from DF&A.) National retail sales statistics from the Census Bureau include expenditures on gasoline.  But because gas is not subject to sales tax in Arkansas, it is not included in ATS. 

As shown in Figure 2, the share of total U.S. retail sales reported at gasoline stations varies directly with the price of gasoline.  In the short run, the demand for gasoline tends to be price inelastic — that is, the quantity of gasoline purchased remains fairly stable when prices change.  Consequently, an increase in gasoline prices raises the share of total spending devoted to gasoline.

Sources: U.S. Census Bureau and U.S. Department of Energy

Arkansas Taxable Sales includes the non-gasoline items that are sold at gas stations, but it doesn’t include the gasoline iteslf.  When gas prices increase dramatically, this means that ATS is missing a component that is of growing importance.  Although gasoline is not subject to sales tax in Arkansas, it is subject to a motor fuel tax that is assessed per gallon sold.  Therefore, the Department of Finance and Administration has monthly records of the quantity of gasoline sold in the state.  Multiplying the quantity sold by the average price for gasoline in Arkansas (obtained from the Oil Price Information Service), we can construct aggregate gasoline sales to be included in an expanded measure of ATS — Arkansas Taxable Sales Including Gasoline (ATSIG).  Figure 3 compares ATS with and without this newly-constructed measure of gasoline expenditures.

Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The data that include gasoline sales show considerably greater strength in recent quarters than the original version of ATS:  In the past three quarters, ATSIG has grown by 2.8%, compared to the meager 0.6% growth without including gasoline expenditures.  The difference is particularly marked in the first quarter of this year, with ATSIG expanding by 1.9%.  In the most recent two quarters, ATSIG shows that total sales growth in Arkansas expanded more than 1% per quarter faster than ATS (without gasoline) suggests.

With gasoline included, the recent growth of taxable sales in Arkansas more closely mirrors the statistics on national retail sales, as shown in Figure 5.

Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

So how should we interpret the surge in recent spending on gasoline?  From a strictly utilitarian standpoint, it is appropriate to include gasoline in total sales so that it more closely matches the U.S. Retail Sales statistics.  But the economic significance of an increasing gasoline share in total spending is trickier to evaluate.  To the extent that a gasoline price increase is considered permanent, it should have a negative wealth effect that reduces overall spending.  On the other hand, a temporary price spike should have negligible wealth effects, but might induce households to borrow more and/or save less in order to maintain planned spending on non-gasoline items.  This is likely to be a factor in explaining the sharp surge in ATSIG in response to the surge in gasoline prices in early 2008.  But, if households are effectively credit constrained, the increased spending on gasoline is likely to crowd out other spending — leaving total spending at about the same rate as it would be without the gasoline price spike.  The reaction of non-gasoline spending to the 2011 price spike suggests this scenario might be relevant for interpreting recent data.  The difference between 2008 and 2011 is illustrated in Figure 6, which shows the gasoline expenditure share in ATSIG alongside Arkansas average gasoline prices.  In 2011, the rise in gasoline prices was slightly smaller than the 2008 spike, but the share of spending on gasoline has exceeded the 2008 peak.  This indicates that the 2011 price surge has resulted in a larger cut-back in non-gasoline expenditures.

Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Gasoline prices have fallen considerably in recent weeks.  According to the AAA Fuel Guage Report, gasoline prices in Arkansas have declined by nearly 23 cents over the past month.  This is likely to reverse the substitutions we’ve seen in the early-2011 data, with non-gasoline items again constituting a larger share of total spending.  For state general revenues, which depend heavily on sales taxes, this should result in more rapid growth for the remainder of 2011.

#  #  #

A spreadsheet with data for ATS and ATSIG is available here.

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By Michael Pakko, May 5, 2011 8:00 AM

Preliminary figures indicate that Arkansas Taxable Sales rose slightly in the first quarter of 2011, up 0.7% from the previous quarter.   Following sluggish growth in the third quarter of 2010 and a decline in the fourth quarter, the most recent data show that sales have been essentially flat since the middle of last year. 

Sources: Department of Finance and Administration; Institute for Economic Advancement.

Raw monthly data from the Department of Finance and Administration (DFA) show that recent sales tax collections have been above the levels of the previous year, and totals for the fiscal year-to-date have been running close to official forecasts.  But recent monthly figures have been less than robust, coming in below forecast. 

As shown in the figure below, Arkansas Taxable Sales had risen sharply during the first half of 2010, but slowed in the latter part of the year.  The sharp decline in December prompted speculation in a previous post as to whether unusual holiday spending patterns might be to blame.  Sales during the first three months of 2011 have rebounded somewhat, but remain below the peak levels of mid-2010.

Sources: Department of Finance and Administration; Institute for Economic Advancement.

The sluggish figures for the first three months of 2011 suggest that the weakness in December sales was not an anomaly.  However, there is one important factor to consider in interpreting recent data:  Gasoline is not subject to sales and use taxes in Arkansas, so it is not included in the Arkansas Taxable Sales figures.  Data from AAA shows that  gasoline prices in Arkansas rose by more than 40% between September 1, 2010 and April 1, 2011.  Even with slowing demand due to conservation responses, that rate of price increase suggests that people have been devoting a larger share of their total spending to fuel consumption, and a smaller share to other categories that are included in Arkansas Taxable Sales.  This factor is likely to continue to restrain Arkansas Taxable Sales growth in coming months.

#  #  #

The Arkansas Taxable Sales series is calculated by the Institute for Economic Advancement to serve as a timely measure of Arkansas retail sales.  The series is derived from sales and use tax data from DFA, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.

A spreadsheet of the data is available here:  Arkansas Taxable Sales data (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for April 2011, and will be updated when information becomes available.

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By Michael Pakko, February 3, 2011 12:02 PM

Recent data on sales tax collections from the Arkansas Department of Finance and Administration (DFA) show that taxable sales growth stalled at the end of 2010.  After adjusting for the timing of tax collections, changes in tax law, and recurring seasonal fluctuations, the latest tax collection data show that Arkansas Taxable Sales declined by 0.7%  in the fourth quarter of 2010.*   After revision of seasonal factors, the fourth-quarter decline almost exactly offsets a gain of 0.7% seen in the third quarter.  For 2010 as a whole, total taxable sales were up 4.2 from the previous year.

Sources: Department of Finance and Administration, Institute for Economic Advancement

The fourth quarter decline was primarily attributable to a sharp drop-off in December.  DFA reports sales tax collections as of the month they are received by the state — generally after a one month lag.   Consequently, the decline in December sales corresponds to sales tax receipts for January, as reported by DFA yesterday.  The DFA monthly general revenue report noted the decline, citing a 3.1 percent decline in gross receipts collections that resulted in a total that was 4.9 percent below forecast.   The holiday shopping season is usually associated with a surge in December sales, so the process of seasonally-adjusting the data reinforces the unusual nature of the decline at the end of 2010.

Sources: Department of Finance and Administration, Institute for Economic Advancement

The weak sales growth in December is surprising given anecdotal information about the relative strength of the holiday shopping season.  It is possible that the source of the weakness is in non-retail areas of sales and use tax collections.  For instance, tax collections from utilities might have been low due to relatively favorable weather and low energy costs.  It might also be the case that holiday shoppers spent more money on online purchases, for which sales and use tax collection is not always complete.  However, there is really no solid evidence available to explain the downturn.

The fourth quarter decline in Arkansas Taxable Sales is surprising — and disconcerting.  However, we should be cautious about putting too much emphasis on a single monthly data observation.  We’ll just have to wait and see how the numbers come in for the first few months of 2011 before concluding that the December number represented either a change in trend or an anomaly. 

#   #   #

The Arkansas Taxable Sales series is calculated by IEA to serve as a timely measure of Arkansas retail sales.  The series is derived from sales and use tax data from DFA, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.

A spreadsheet of the most recent data is available here:  Arkansas Taxable Sales data (Excel file)

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By Michael Pakko, November 10, 2010 9:30 AM

Recent data on sales tax collections from the Arkansas Department of Finance and Administration show that taxable sales continued to expand in recent months.  After adjusting for the timing of tax collections, changes in tax law, and recurring seasonal fluctuations, recent sales tax growth suggests that Arkansas Taxable Sales increased by 0.9 percent in the third quarter of 2010.* 

This is the fourth consecutive quarterly increase, confirming that sales growth in Arkansas is continuing to recover substantially from the 2007-09 recession.  Over the past four quarters, Arkansas Taxable Sales have risen by 7.2 percent.

Sources: Arkansas Department of Finance and Administration, UALR Institute for Economic Advancement

Sources: Arkansas Department of Finance and Administration, U.S. Census Bureau, UALR Institute for Economic Advancement

The third-quarter increase is likely to be characteristic of sales growth over the next several quarters.  Rapid growth in the first half of the year reflected pent-up demand from the recession, and sales are now likely to settle into a more sustainable long-run pace.  Over the next two years, Arkansas Taxable Sales are forecast to grow in the range of 3 to 4 percent annually.

__________

*In early November, we would typically be reporting preliminary figures for the third quarter based on information from the DFA General Revenue Report for October and Arkansas Fiscal Notes for September.  Thanks to Dr. George Foy at DFA for providing the data needed to calculate final figures for the third quarter in advance of the usual publication schedule.

#   #   #

The Arkansas Taxable Sales series is calculated by IEA to serve as a timely measure of Arkansas retail sales.  The series is derived from sales and use tax data from DFA, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.

A spreadsheet of the most recent data is available here:  Arkansas Taxable Sales data (Excel file)

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By Michael Pakko, September 1, 2010 8:00 AM

“Sales rose by 3.0 percent, rather than the 4.0 percent previously reported.”   

The reason:  “Grocery sales, as a percent of total sales, dropped sharply in June.  This could actually be a positive development.”

The preliminary estimate for second quarter growth of Arkansas Taxable Sales (ATS), announced in a previous post, was based on information from the July 2010 General Revenue Report from the Arkansas Department of Finance and Administration (DFA).  With the recent release of more detailed information in the DFA publication Arkansas Fiscal Notes, a revised estimate of ATS shows a somewhat smaller increase in the second quarter of 2010:  Sales rose by 3.0 percent, rather than the 4.0 percent previously reported.

The downward revision is disappointing.  But as shown in the chart below, it doesn’t really change the qualitative interpretation of second quarter data:  Sales accelerated in 2010:Q2 and have risen significantly since the apparent trough of 2009:Q3. 

Sources: Arkansas Department of Finance and Administration and author's calculations.

Investigation of the reason for the downward revision in ATS reveals an interesting observation:  Grocery sales, as a percent of total sales, dropped sharply in the June.  This could actually be a positive development.  

Preliminary estimates of ATS are based on gross receipts, which primarily reflect total sales tax collections.  But total sales taxes represent a mix of taxes on groceries (at a current tax rate of 2 percent) and taxes on non-groceries (at a tax rate of 6 percent).  Changes in the mix of these two categories alter the effective tax rate on total sales.

The revised figures for ATS are based on data on receipts from the Arkansas Conservation Tax.  Because it is written into the Arkansas constitution, the Conservation Tax was not altered by reductions in the tax rate on groceries in July 2007 (from 6 percent to 3 percent) and in July 2009 (from 3 percent to 2 percent).  Instead, the lower sales tax on groceries is reflected in proportional reductions in the other three components of Arkansas’ Sales and Use Tax (the General Sales Tax , the Educational Adequacy Tax, and the Property Tax Relief Tax).

When groceries decline as a fraction of total sales, these three taxes show a disproportionate increase in overall tax receipts (because a larger share of sales are taxed at a higher rate).  The preliminary ATS estimates (which are implicitly based on the assumption of a constant share of grocery sales) would therefore overstate the increase in total taxable sales if this were the case.

This appears to be exactly what happened in June.  By comparing changes in tax receipts from the conservation tax with receipts from the other sales tax components, it is possible to estimate the share of grocery sales as a proportion of total sales (see technical note).  The results of this estimation are shown in the chart below.  Before the national recession began at the end of 2007, groceries constituted about 6 percent of total sales.  This proportion rose during the early stages of the recession in 2008, and increased sharply at the end of the year when the financial crisis intensified the economic downturn.  Estimates for June 2010 show a sharp decline, from about 12 percent to just over 8 percent.

Sources: Arkansas Department of Finance and Administration, and author's calculations.

Economic theory distinguishes goods by the responsiveness of their demand to changes in income.  Some basic grocery items are considered “inferior goods,” reflecting the fact that fewer are purchased as income increases (in favor of higher-quality goods).  In general, groceries are considered “normal goods,” for which demand increases when income rises, but typically less than one-for-one.   In contrast, some  goods are considered “superior goods” or “luxury goods,” for which demand increases in greater proportion to income.

The observation that grocery sales increased as a percent of total sales during 2008 and into 2009 is therefore consistent with a downturn in household income during the recession.  The recent decline in the grocery sales suggests that households are increasing their purchases of superior goods relative to normal and inferior goods.  This provides indirect evidence of higher household incomes (or at least expected incomes).

This observation is supported by data for only one month, so it should be taken as conjectural.  However, it suggests that the downward revision in ATS for the second quarter is not unambiguously bad news.

#  #  #

The Arkansas Taxable Sales series is calculated by IEA to serve as a timely measure of Arkansas retail sales.  The series is derived from sales and use tax data from DFA, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.

A spreadsheet of the most recent data is available here:  Arkansas Taxable Sales data (Excel file)