Continued Job Growth Key to State?s Economy (Jeff Collins Commentary)

There are times when being an economist is as boring as most people probably imagine it to be.
Of course, excitement for my colleagues and me is usually just around the corner when some new economic data are released or the Federal Reserve Board of Governors meets to discuss short-term interest rates.
Then it is a veritable economist’s delight.
Unfortunately the economic news, both national and local, inspires little passion.
So what can be said of the year in review, or for that matter, the year ahead?
In 2006, the U.S. economy continued to grow and create jobs. The statistical evidence suggests a solid economy with most risk factors remaining muted.
Despite growth in employment, wage and salary data suggest only recently have average Americans begun to see their incomes grow.
The lack of growth in incomes coupled with hot real estate markets for the last several years may be behind declining savings rates.
It remains to be seen whether the U.S. consumer will continue to spend.
How much wealth is lost in the bursting of the housing bubble will likely determine the strength of consumption in 2007.
The national unemployment rate ran about a half percent below 2005. Moreover, the economy created approximately two million new jobs.
During the course of the year sharp spikes in energy prices, uncertainty in international affairs, and a sharp decline in regional housing markets threatened to derail growth but the worst fears of some economists remain unrealized.
Declining residential investment was offset by strong business investment and energy prices moderated.
Currently, U.S. Gross Domestic Product is growing at an annualized rate of 2.2 percent. Again, this is sustainable but hardly noteworthy.
For example, last year the annualized rate for the same period was 3.8 percent.
The cooling economy has kept the Federal Reserve from continuing its series of short-term interest rate hikes.
Expectations for the next twelve months are that the Fed will remain on the sidelines although some Fed governors continue to talk about high core inflation.
Interestingly, long-term rates did not mimic short-term rate trends. This led to the unusual situation of an inverted yield curve. Some analysts believe an inverted yield curve is an indicator of recession.
Employment growth continues to be concentrated in the service sector of both the national and state economy.
Strong productivity gains in manufacturing, implying fewer workers are needed to produce the same amount of output, coupled with globalization have heavily impacted manufacturing employment.
Since 1999, manufacturing employment has declined in the U.S. and in Arkansas by better than 15 percent.
What is perhaps not well understood is that the dollar share of GDP generated by manufacturing activity has not changed much for decades. This seeming incongruity is the result of high value added manufacturing becoming more significant relative to the low value added manufacturing which has been outsourced.
One U.S. industry that did not fair well during the last twelve months was the domestic auto industry.
Both Ford and General Motors announced cuts in production. Those cuts could have an effect on a company with a significant local presence, Superior Industries announced during the last year that it would be closing its plating operation in Fayetteville.
Most problematic for the state economy is the loss of roughly 4,800 manufacturing jobs over the last year. While the state economy was able to generate positive net new job creation, the sectors in which new jobs are being created often have lower average wages than manufacturing.
In the end, several key metropolitan areas may hold the key to state economic wellbeing in the coming year: Little Rock, Fort Smith and Northwest Arkansas metros.
These three metros were responsible for approximately 82 percent of net new job creation in the state from 1996 to 2006.
Modest growth in the Little Rock metro coupled with anemic job creation in the Fort Smith metro are essential to economic success of the state in 2007.
What is interesting is the ongoing growth in the state budget surplus, which seems to belie the job numbers.
First, many believe the current collection pattern is an anomaly and will not be sustained.
Further, the surplus is the difference between what forecasters expected would be generated by state economic activity and actual collections.
At the very least, the surplus will provide legislators with plenty to discuss in 2007. Economic news may be as kind to economists.