The Compass Report: Regional economy suffering, but slight gains seen

The Fort Smith regional economy continues to struggle, but did see slight improvement in the third quarter compared to the second quarter, according to The Compass Report.

Funded and managed by The City Wire, The Compass is a quarterly regional economic report with data collection and analysis handled by Jeff Collins, a nationally respected economist based in Springdale and co-founder of Streetsmart Data Services. The Compass is the only comprehensive economic analysis of the Fort Smith metropolitan area.

The overall grade for the third quarter of 2009, based on eight sets of data and Collins’ analysis of the information, is a D. The grade means that relative to the region’s historic economic performance, the third quarter of 2009 saw economic decline, but saw economic gain compared to the second quarter of 2009 (D-). The first quarter of 2009 was given an overall grade of D+.

“Despite its regional strength as a manufacturing center, which has led to periodic announcements of new employers moving into the area, the losses outweigh the gains,” Collins said. “The conclusion to be drawn is the economy is at a bottom and is likely to show sporadic signs of recovery.”

Collins said it is becoming clear that the national economy has bottomed out. He predicted the recovery will be “slow and painful with at least a 10 to 20% chance of a ‘double-dip’ recession.” Also, he noted, the prolonged downturn is fundamentally changing the U.S. economy.

“Specifically, employment growth is likely to lag growth in output as many employers have found ways to do more with less during the recession. The near-term outlook for employment growth is decidedly weak, nationally and locally,” Collins explained. “Long-term, we are likely to see the ongoing consolidation of economic activity in urban areas. This bodes well for Fort Smith which already enjoys significant location advantages.” 

The current as well as leading indicators for the Fort Smith regional economy continue to show that the local economy is being “heavily affected” by the national economic situation, Collins said. Most importantly, Collins added, the current employment situation is “dragging down sales and use tax collections, the life-blood of area cities.”

However, there are clear signs the unemployment situation may have bottomed out. It is important to note that although the Fort Smith metro unemployment rate is relatively high (7.1%), the national rate has consistently been above 9%. Moreover, the local rate has stabilized and even receded slightly. The annual percent change in manufacturing employment was -8.9%. Comparing August 2008 to August 2009, 2,200 fewer area workers were employed in manufacturing. This is an improvement over second quarter data which showed year-over-year manufacturing losses of 2,600, Collins said.

“It is also extremely positive news that during the worst recession since the Great Depression, the Fort Smith area is announcing new jobs being created in the manufacturing sector,” Collins added.

Joe Edwards, president and CEO of Fort Smith-based Benefit Bank, was pleased that the third quarter information was better than the second quarter. Benefit Bank is the Presenting Sponsor of The Compass.

“As noted in the narrative and from the various indicators, we are at the bottom, but the job recovery is not going to happen overnight. The challenge is to stay in this battle over a long period of time,” Edwards said.

Joining to support The Compass as Participating Sponsors are Cox Communications and the Fort Smith Regional Chamber of Commerce.

Chamber President Paul Harvel said the report continues to show that “clear improvements” in the national economy will boost the health of the regional economy.

“Things are going to get better only as much as the national economy gets better,” Harvel said.

UNDERSTANDING THE COMPASS
A key factor in understanding The Compass is in understanding the “grading” approach used to measure the current and leading economic indicators. The strategy is to place the most recent data in historical context. Average values for the percent change over the referenced time period were calculated, as were standard deviations for each measure.

The more similar current values are to historic averages the more likely the indicator grade is to be a “C.” The farther away the observed value, as measured by the standard deviation of the data, the more divergent the grade from “C.”

In other words, “C” reflects no change in economic activity. The grades “B” or “A” indicate improvement above the historical average, and “D” and “F” indicate a decline in economic activity compared to the historical average.

CURRENT INDICATORS
Determining the current position of the area economy depends on reading the relative performance of the area economy based on the current indicators. Data for the period 2005 to the third quarter of 2009 are used to provide historical reference points for current data. Using the grading scale for each indicator, the current position of the economy is as follows:

• Change in non-farm employment: D
Non-farm employment continued to show weakness, with employment in the metro area at 123,600 in August compared to 125,500 in August 2009.

• Change in metro area unemployment rate: D
The area unemployment rate, an important gauge in the health of the metro labor market, showed encouraging improvement in the quarter compared to the 2008 quarter. Unemployment in August was estimated at 7.1%, considerably higher than the 4.6% in August 2008, but better compared to the 7.8% of June 2009.

• Change in sales and use tax collections: D-
Sales tax collections in the region and the city of Fort Smith began to show weakness in the second quarter of 2009 and that weakness continued into the third quarter. The tax collections, which are good indicator of regional consumer confidence, were down in Crawford, Franklin, Logan and Sebastian counties.

• Change in goods-producing employment: C-
In what is a counterintuitive concept, the decrease in manufacturing jobs as a percentage of the overall workforce is a good thing — however painful it might be in the process — in that it helps diversify the economy. The percentage of manufacturing jobs in the overall workforce was 27.5% in August 2009, up over the 27.1% in August 2008.

LEADING INDICATORS
Leading indicators provide insight into the near-term direction of the local economy. Economic figures for the period 2005 to the second quarter of 2009 are used to provide reference points for current data. Using the grading scale for each indicator, the near-term position of the area economy is as follows:

• Change in building permit valuation: C+
The total value of permits issued in the third quarter (measured in a three-month rolling average) was higher than those in the third quarter of 2008. The indicator is one of the bright spots in the regional economy.

• Change in construction employment: D
The sector, which includes mining/natural resources employment, showed minor employment decreases (8,900 in August 2009, compared to 9,200 in August 2008) but not enough to lower the sector grade from the first quarter.

• Change in manufacturing employment: D
The big story continues to be the decline in manufacturing employment in the Fort Smith region. Sector employment in August 2009 was 22,600, down 2,200 jobs from August 2008 employment of 24,800,

• Change in hospitality employment: F
After being relatively stable for several quarters, employment in the third quarter of 2009 began to dip compared to the same period in 2008.

COMPARATIVE CHANGES
Grade change comparisons between the first and third quarters of 2009

OVERALL GRADE
3Q 2009 — Overall grade for the Fort Smith regional economy: D
2Q 2009 — Overall grade for the Fort Smith regional economy: D-
1Q 2009 — Overall grade for the Fort Smith regional economy: D+

Current Indicators
3Q 2009 — Change in non-farm employment: D
2Q 2009 — Change in non-farm employment: D
1Q 2009 — Change in non-farm employment: D-

3Q 2009 — Change in metro area unemployment rate: D
2Q 2009 — Change in metro area unemployment rate: F
1Q 2009 — Change in metro area unemployment rate: F

3Q 2009 — Change in sales and use tax collections: D-
2Q 2009 — Change in sales and use tax collections: D-
1Q 2009 — Change in sales and use tax collections: C-

3Q 2009 — Change in goods-producing employment: C-
2Q 2009 — Change in goods-producing employment: B-
1Q 2009 — Change in goods-producing employment: B

Leading Indicators
3Q 2009 — Change in building permit valuation: C+
2Q 2009 — Change in building permit valuation: C
1Q 2009 — Change in building permit valuation: B

3Q 2009 — Change in construction employment: D
2Q 2009 — Change in construction employment: D
1Q 2009 — Change in construction employment: D

3Q 2009 — Change in manufacturing employment: D
2Q 2009 — Change in manufacturing employment: D
1Q 2009 — Change in manufacturing employment: D

3Q 2009 — Change in hospitality employment: F
2Q 2009 — Change in hospitality employment: D-
1Q 2009 — Change in hospitality employment: D