High Fuel Costs Could Cut Into Northwest Arkansas Economy

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Gasoline prices have fueled plenty of media fire lately and their effect on the Northwest Arkansas market is still burning steady even as prices have cooled from dramatic hikes in May.
Complaints are keeping pace with consumption, however, as American gasoline usage increased year-over-year in April by 1.6 percent at the same time the national average per gallon jumped from $2.71 to $2.97.
Even in May, when prices topped $3.18 per gallon on the national averages and as high as $3.39 per gallon in Northwest Arkansas, consumption tracked just two hundredths of a percent downward according to U.S. Energy Department data.
In the immediate aftermath of Hurricane Katrina in 2005, gas prices quickly rocketed past $3 per gallon but were back to around $2.20 by Christmas as demand dropped by 6.5 percent.
Now that the $3 psychological barrier has been accepted, the only question remaining is what threshold will have to be crossed before Northwest Arkansans significantly alter their driving habits or curb their spending to a point where local economies begin to slow even further.
During a 90-day span from an average of $2.32 per gallon in February to the peaks in mid-May, Americans spent an additional $31 billion at the pump as the nation’s automobiles, trucks and tractor-trailers burned through a record 9.47 million barrels of gas per day.
To put that number in perspective in America’s multi-trillion dollar economy, $31 billion nearly represents Wal-Mart Stores Inc.’s entire sales growth in 2006 and is greater than the total revenue for companies like PepsiCo Inc. and American Express.
The Midwest region for gas distribution, of which Northwest Arkansas is a part, has the highest average prices east of the Rocky Mountains. For that reason, the local economy will be more affected by gas prices than it will by any regional issues such as slowing growth at Wal-Mart.
While Northwest Arkansas still has an unemployment rate far below the national average (3.3 percent compared to 4.5 percent), its growth rate has stalled at around 2 percent for the last 12 months after performing at a 4 percent to 6 percent rate from April 2004 to April 2006.
“Wal-Mart, you can’t overstate how important it is,” said Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas. “But its quarter-to-quarter performance doesn’t effect the Northwest Arkansas economy.
“The way I think about gas prices, you have to look more macro. The Northwest Arkansas economy is looking more like the national economy and we are subject to those same effects.”

Cutting Consumption
With an active hurricane season predicted, inventories still low and ongoing refinery issues, the market won’t need much more than a hiccup or two at any of these levels to approach the $4 average price point heretofore unheard of this side of the Atlantic.
While Americans clearly haven’t yet curbed their gasoline usage and Autodata Corp. reports 53 percent of auto sales in the U.S. are still in the guzzling SUV and light truck segments, studies are showing cutbacks taking place elsewhere.
Gas prices have been blamed in part for slowing sales at Wal-Mart’s existing stores and a survey commissioned by the National Retail Federation in May revealed 74.2 percent of Americans have reduced spending in other areas to make up for the disposable income being dispensed through their exhaust pipes.
Nearly a third of Americans surveyed in May said they are reducing their trips out to eat, nearly a quarter said they will spend less on clothing and a fifth have delayed major purchases because of the historically high gas prices.
Those responses jibe with a report issued by Retail Metrics, which stated apparel sales remained weak during May and Thompson Financial revealed more than half of the 48 retailers reporting data failed to meet analyst expectations for same-store sales.
Fayetteville’s hotel-motel-restaurant (HMR) taxes are down 4.9 percent year-over-year according to Advertising and Promotions director Marilyn Heifner and took their biggest slide in the most recent data available for March sales.
Fayetteville took an $8,000 hit in March collections compared to 2006.
During a month when the Midwest average price per gallon went up nearly 25 cents per gallon, the HMR decline in March represents $800,000 in lost restaurant revenue.
Neal Crawford has worked at Jose’s on Dickson Street for 19 years and is now the owner along with the adjoining Toothpicks restaurant. He said the latest gas spike has been far more noticeable on his sales than post Katrina.
“The whole nation was more tolerant of it because it was an act of Mother Nature,” Crawford said. “This last spike had a more significant impact because the reason for the spike was not caused by nature.
“It can be controlled and it’s not being addressed.”

Rising Costs
The latest data from the Consumer Price Index released in April shows large year-over-year increases in the energy and food sectors, which hit families and proprietors especially hard.
In the first four months of 2007, the CPI rose at a 4.8 percent annual rate compared to a 2.6 percent increase for all of 2006. Energy costs have advanced 40 percent and food costs have expanded 6.7 percent, again, compared to 2.1 percent for all of 2006.
Retail pricing advanced slower, said Deck, because predicted fuel costs are built into the cost on the shelf.
“Bigger companies have hedged against fuel prices,” Deck said. “They try to compensate for fuel increases and share risk. This is why you don’t see retail prices fluctuate with increases. Over time it will and cause inflationary pressures.”
At Jose’s, which is built around a family-friendly, affordable dining business model, Crawford said fighting with his suppliers over pricing is a daily battle.
“We have to constantly take a stand on it,” Crawford said. “We have seen substantial increases in all products over the last year and a half.”
Crawford said the Northwest Arkansas economy may not be growing at its former fast clip, but it is “stirring” and he believes his efforts to keep prices in line at Jose’s will help the Fayetteville fixture keep up.
“Anybody wanting to come into the market right now is crazy,” Crawford said. “It is so saturated. The restaurant industry has done what real estate industry has done. But the economy is not there to support it.”
Crawford said the biggest problem of the fuel price spike has been the unpredictability. Forecasting a busy summer period thanks to longer days and more people out and about isn’t as easy as it used to be.
“People feel the pinch in expendable income,” Crawford said. “Some people are modifying their behavior. It makes it real inconsistent when you’re busy, when you’re not.”
Crawford hasn’t cut back on hiring.
In fact, he said there is a manpower shortage within the hospitality industry thanks to all the recent hotel and restaurant openings.
While banking, trade, transportation and utility job growth has remained flat, nearly a third of the 2,000 new jobs reported in Northwest Arkansas since November have been in the leisure and hospitality sector.
How many people they serve in the latter half of 2007 will largely depend on the phantom forces of the “gas man” and Mother Nature.