Six of 10 key indicators paint a picture of a growing 2017 Tri-Cities economy, but trend lines for all but three show a flattening or pronounced growth rate declines. At the same time, the four-county Kingsport-Bristol Metropolitan Area (MSA) trailed the three-county Johnson City MSA in all but one key indicator. The picture isn’t complete because there’s a couple of major Gross Domestic Product (GDP) reports from the Bureau of Economic Analysis (BEA) and one from the Bureau of Labor Statistics’ (BLS) on total wages that won’t be available until later this year.

Two of those key BEA reports from 2016 show the Johnson City MSA’s real GDP declined after a one-year reprieve of lower GDP gains. Kingsport-Bristol’s real GDP had declined for the past four years. And productivity – as measured by per capita gross domestic product – was down $3,719 from the previous high in Kingsport-Bristol and $1,917 in the Johnson City MSA. The BLS’s Quarterly Census of Employment and Wages report for the first half of 2017 paints a much brighter picture of the wage growth, and it’s expected reports on the last haft of the year will show the same.

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Trailing indicators – like those in this report – don’t always offer a clear picture for the future but there is much to be gained by tracking the annual growth rates as trends for what to expect this year.

EMPLOYMENT

The Tri-Cities economy added nonfarm jobs for the seventh straight year in 2017 and all four key indicators: nonfarm jobs, private sector jobs, employment and the labor force were positive.

From a trends perspective annual growth for private sector jobs was the lowest it has been in three years. Nonfarm job growth was down 0.1% from 2016. Employment increased by 0.4%. And while the improving jobs market has brought more people back to the labor force last year’s growth was down 0.1% from 2016’s increase.

Jobs growth was strongest in the Johnson City MSA last year. The strongest performing sectors were other services, leisure and hospitality, professional and business services government and financial activities. The information sector took the biggest hit with a 7.1% year-over-year job loss. Education and health services were also down as was wholesale trade. The other sectors were flat.

Kingsport-Bristol’s sector performance showed the strongest growth in transportation and utilities, wholesale trade and other services. Government jobs were up by 0.6%. The information sector took the biggest year-over-year hit with a 6.7% loss. Leisure and hospitality, professional and business services, retail trade, and construction were also down for the year.

A worrisome trend that takes on new weight as job creation slows is the share of good-paying v. poor-paying jobs. According to the state Department of Labor and Workforce Development and the BLS, there are little more than 1,100 jobs being created each year in what agencies call the hot jobs list. Drilling down on the jobs created and what they pay shows that for every job that pays $50,000 or more six that pay less are being created.

WAGES

Private sector wages had their largest year-over-year increase since 2012 in the Johnson City MSA. They were up 8.5%. In Kingsport-Bristol they declined by 2%. Private sector wages have trended lower since 2015 In Kingsport-Bristol while they have been increasing since 2014 in the Johnson City metro area.

The region’s large public sector lifts the total wage picture to a better standing. Reports for the last half of 2017 are expected to show similar increased in total workers wage than what was reported during the first half of the year.

SALES TAX COLLECTIONS

Collections across the seven-county region were 1.3% better than they were in 2016, but the overall trend of a slowing growth rate shows up in this sector, too. The growth rate was the slowest in three years in all of the Northeast Tennessee MSAs. Growth in both of the region’s MSA was less than 1%.

Much of the spending in the past couple years was driven by credit card debt and lower gas prices. Consumer debt is now at a record level.

Real disposable income is up, but it too is seeing a slowing growth rate. This dovetails with local slower job creation rate. Key factors to watch are gas prices, consumer interest rates how much the tax increase puts in people weekly pay. The more spent at the pump, the less on retail and it’s questionable that consumers are will continue taking on more debt when their income is growing slower than interest rates. Early signs are that most people do not see a noticeable bump in take-home pay.

A local bright spot should be more spending at home centers as owners get into home improvement projects. The national forecast is for a 4.7% increase in all other goods.

HOUSING

Last year 6,836 Tri-Cities residents made a $1.2 billion bet on the future of the local housing market. That came on the heels of 6,554 existing home sales in 2016 at a total volume of $1.01 billion. That was a huge vote of confidence in the local housing market and economy. At the same time, new homes are selling faster than builders can keep up. But if you look closely at the tea leaves, you’ll see the growth rate of existing home sales and new home permits were slower in 2017 than they were in 2016.

There’s a tug-of-war in real estate that suggests 2018 may be a year of transition, one that will test some of the old assumptions.

Despite the lowest inventory that many real estate professionals can remember, record sales and higher prices housing remains affordable in the Tri-Cities, for now.

Rent affordability in Washington County is currently 26.8% of income while it takes 25.8% of median income to buy a median-priced home. And although Washington County has the region’s highest home prices its affordability index is 103, up 2 points from 2016. An affordability rating under 100 means housing is less affordable than the historic average.

Next door in Sullivan County the affordability index is 96, so housing in that area is slightly less affordable than its historic average. The affordable rental share of income is 28.1% and the share to buy a median-priced home is 25.4%.

Since property tax rates are low here the next tax bill has little affect, so does the cap on mortgage interest deductions. Last year there were 81 Tri-Cities home loans over $750,000. Three were in Greene Co., four in Sullivan Co. three in Washington Co. VA, one in Lee Co. Va., 29 in Carter Co. and 41 in Washington Co. Tenn.

The FHFA one-year all transaction home price index for Kingsport-Bristol in Q4 was up 2.65%, and the five-year HPI was up 9.42%. In the Johnson City MSA, the one-year index was up 6.43%, and the five-year index was up 10.4%. The index includes refinancing.

That tug of war mentioned earlier is the preference of both young and older residents to rent or buy and the number one driver of higher housing demand – population growth. The region has a rapidly aging population – about 29 turns 65 every week this year, the death rate is higher than the birth rate and new residents have so far flocked to Washington County. The rest of the region is seeing slow to no net population growth.

Much of the housing market growth that has been seen in the past two years was driven by pent-up demand. That growth and lower inventory are one of the factors pushing the new home sector. The question is how long pent-up demand will sustain the pace, and what will the new normal for the local resale churn. The new home permit growth is projected at 7% this year.

Owners moved into 17% of the occupied household in the region in 2016. Another 12% have been in their homes since 2012. Typically, local homeowners trade up every seven to nine years, so there’s room for growth – if sellers see something in the market they want and are in their price range.

CRE CONSTRUCTION PERMITS

Tri-Cities commercial real estate permits and permit values declined last year. The number of permits has been retreating since 2015. Unlike new home permits which are driven by the market, CRE permits are a function of the business cycle. Typically, they trail residential building trends by a couple of years. Last year’s permit value declines were across the board with one exception – Washington Co. Va. Permit values there increased 7%.

Mash all of these economic factors together, and you can find signs for an economy in 2018 that looks a lot like 2017. Others point to moderation – slower growth. It may be the plateau that defines the new post-recession normal.

Categories: CORE DATA, ECONOMY