The latest Federal Reserve Burgundy Book, which provides a snapshot of Arkansas’ economy in the second quarter, highlights more evidence of a “two steps forward, one step backward” recovery.

The report, which was issued last week, provides statistical and anecdotal notes on 62 of the state’s 75 counties. The Little Rock Zone covers six MSAs, including Little Rock/North Little Rock/Conway, Pine Bluff, Hot Springs, Texarkana, Fort Smith and Fayetteville/Springdale/Rogers. Neither the Jonesboro nor Memphis/West Memphis MSAs are included in the study.

Categories including housing, real estate, construction, employment, manufacturing, banking, consumer debt, and agriculture are covered in the economic report.

Kevin L. Kliesen, Business Economist and Research Officer and author of the Burgundy Book, noted that the housing market is improving in the region, but he warned that manufacturing activity is slowing down.

“On balance, economic activity strengthened in the Little Rock zone in the second quarter,” Kliesen writes. “Real estate activity continued to strengthen across most areas of the zone, with residential activity generally outpacing commercial activity.”

Kliesen said that manufacturing employment “declined modestly” from the second quarter of 2012, but he said service sector jobs from Fayetteville to Fort Smith, and trade and transportation jobs in central Arkansas were “especially brisk.”

Some notes and highlights from the Burgundy Book include:

MANUFACTURING
Manufacturing employment declined in the second quarter, although there was some positive news in the lumber industry brought about by construction demand that the Fed described as “strong.”

Arkansas’ nondurable goods employment dropped significantly in the second quarter of 2013.  It also declined by 2.5 percent compared with 12 months ago.

In contrast, Arkansas’ nondurable goods earnings increased by 4.5 percent in the first quarter of 2013, outperforming the national rate.

“Anecdotal evidence continues to indicate that a limited supply of workers at the prevailing wage could hinder employment growth and put upward pressure on wages. In fact, average hourly earnings are up over 4 percent from the same time last year,” the report said.

REAL ESTATE, CONSTRUCTION
The Burgundy Book noted that in the Little Rock region, the residential real estate market is improving.

Single-family home sales increased by 21.5 percent from a year ago during the second quarter, resulting in the strongest first half since 2010. Anecdotal evidence indicated that more people were looking for houses than current inventory of homes for sale could support, pushing up prices by 3.4 percent, the report said.

The office real estate market also strengthened. In the second quarter, office vacancy rates further declined to 12 percent, while the nation’s vacancy rates remained at 17 percent. Asking rents continued slowly increasing on a year-over-year basis.

The improvement of commercial real estate construction remained “modest,” according to the Feds.

The vacancy rate for apartments in the region was 6.7%; for office space it was 12.1%; for retail space it was 13%; and for industrial space it was 7.9%.

DEBT
Households continued to reduce non-automotive debt and the report noted that loan delinquencies fell further from the previous quarter.

“Across Arkansas, mortgage delinquency rates were down in the second quarter of the year. The balance of loans in delinquency was 1.15 percentage points below its peak and remained well below the national average,” the report said.

It also noted that while credit card debt was down year-over-year, the rate at which borrowers were de-leveraging has been slowing. “Evidence suggests consumers are becoming more comfortable with their credit card balances,” according to the report.

That trend could change in the coming few months, however, The survey noted that income growth slowed in Arkansas during the first quarter of the year, mirroring U.S. trends. The slowdown was largely due to the expiration of the payroll tax holiday.

BANKS
“Commercial bank profits at Arkansas banks in the second quarter were well above their Eighth District and U.S. peer banks,” the Burgundy Book said.

Stronger net interest margins and declining loan loss provisions helped boost bank health. However, return on average assets (ROA) at Arkansas banks declined two basis points from the previous quarter, while nationally ROA for U.S. banks rose six basis points. Still, average ROA for Arkansas banks was up 17 basis points from its year-ago level.

“Although our revenue is double that of last year, the gains are coming from fewer bad loans, rather than loan growth. Competition for good quality borrowers is very stiff and some bankers are making loans they shouldn’t,” said one anonymous northwest Arkansas banker. The Burgundy Book relies on anecdotal evidence from various in-the-field sources in the region.

You can access the full Burgundy Book report at this link.

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