?07 Economic Prognosis: Little Change

The Arkansas economy in 2007 should resemble the moderate growth the state saw in 2006.
“The best forecast I can give you is: Look at where we are now; it’s where we’re likely to be for awhile,” said Kathy Deck, interim director for the Center for Business & Economic Research at the University of Arkansas’ Walton College of Business.
But all eyes will be on north-central Arkansas, where the natural gas formation called the Fayetteville Shale Play could see a boom.
“[In] 2007, we’re going to see some substantial things from the investments that have been taking place over the last couple of years,” Deck said.
On Dec. 18, Southwestern Energy Co. of Houston said it planned to spend $875 million in the Fayetteville Shale Play in 2007, drilling 400 to 450 wells there.
Three days earlier Boardwalk Pipeline Partners LP of Owensboro, Ky., said it would spend $590 million building two extensions from its existing pipeline system to transport gas for producers operating in the play.
Still some economists wonder what impact the gas production will have on Arkansas. Some of the companies doing the drilling are from out of state and using their own construction crews to do the work, taking the earnings out of state, said Mark Thompson, an economic forecaster for the Institute for Economic Advancement at the University of Arkansas at Little Rock.
“Those are some of the concerns on just how much of [the Fayetteville Shale Play] is going to have an effect on Arkansas.”
A recent study by the Sam Walton College of Business said the play would create nearly 10,000 jobs and result in nearly $360 million in state and local revenue through 2008.
But it could create more tax revenue if the state’s severance tax were higher.
The severance tax is three-tenths of a cent per 1,000 cubic feet. Some states base their severance tax on the market value of the gas extracted instead of the volume.
Unless the severance tax laws are changed, the state won’t see many of the gains the Fayetteville Shale Play could bring, Thompson said.
“I don’t think it’s as good as I’ve heard others talk about for the state,” Thompson said.
The Jobs Picture
More manufacturing jobs are expected to vanish in 2007.
“I don’t think the bleeding is done for the manufacturing sector,” Deck said.
Between 2000 and 2005, manufacturing employment fell 4.3 percent from 251,000 jobs to 201,000. In 2006, manufacturing jobs fell to 196,000, and they’re expected to slip again in 2007 to 195,400.
Manufacturers are leaving the state for cheaper workers.
“Unless we were willing to accept very low wage rates, we’re not likely to be the place of choice for manufacturers,” Deck said.
Thompson said it was good for the state to move away from manufacturing jobs.
Some government officials, however, mourn the loss of the manufacturing jobs that paid relatively well compared with the service jobs replacing them, Deck said.
“Rather than sitting back and crying, obviously, we should be working on retraining,” Deck said. “Looking at the future, what kind of labor force do we need and what can we do to get there?”
She said health care services would be in demand as baby boomers age, and “we can always invest in math and science and come out on top.”
The unemployment rate is expected to climb from 5.2 percent in 2006 to 5.8 percent in 2007.
Arkansas’ unemployment rate is higher than the nation’s, which was 4.5 percent in November 2006.
“But I think that reflects the structure of the Arkansas economy,” Deck said. “And until we make some big changes to look a little more like the rest of the country, we’re likely to remain there.”
Housing Market
The housing market will continue to cool in 2007. Housing starts are expected to drop from 17,621 in 2006 to 16,120 in 2007.
“We’re not going to be hurt as bad as some of the other areas of the country,” Thompson said.
The housing market in Northwest Arkansas might be hit harder than the rest of the state as the supply of houses has steadily in-creased.
“I think there is a huge oversupply of homes in that area,” Thompson said.
But in other parts of the state, the housing market should be stable.
“We didn’t have home-price appreciation growing [in Arkansas] as rapidly as other parts of the country,” Thompson said. “In fact, … housing still remained very affordable for the state.”
In 2007, the median existing home price is expected to fall to $111,600 from $112,000 in 2006. But home prices will shoot back up again in 2008 to $114,100.
With the slowdown in the appreciation of the prices of houses, consumers aren’t feeling quite as wealthy, Deck said.
“They saw paper gains in their housing stocks, and they could either take that money out of their house through loans or they just felt better,” Deck said. “Obviously, that’s not going to be happening in the next year.”