The Compass Report: Regional economy still struggling, but conditions improving

A positive view of Fort Smith regional economic conditions is that 2009 is history and 2010 is expected to deliver a better regional economy.

According to The Compass Report, economic conditions in the fourth quarter of 2009 garnered a “D” grade. The quarterly grade is 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 fourth quarter of 2009 saw economic decline, and saw no economic gain or loss compared to the third quarter of 2009 (D).

OVERALL GRADES — 2009 Fort Smith regional economy (per quarter)
4Q 2009: D
3Q 2009: D
2Q 2009: D-
1Q 2009: D+

“Despite the poor showing in terms of overall performance of the Fort Smith area economy, the recover is underway. Improved economic data is very likely over the next quarter,” noted Jeff Collins, economist for The Compass Report. “Evidence to support this conclusion can be seen in the employment and unemployment data, where the difference between last year and this year's monthly unemployment numbers has been declining. Further, the stability of the residential housing market bodes well for the near future. All told, we have, perhaps, given the regional economy its last grade of D for some time.”

NATIONAL ECONOMIC ISSUES
Collins said a common concern among economists is that the national economic recovery will be jobless, significantly slowing the rate of growth and having a strong negative impact on federal, state and local government budgets. He said there also remains the possibility of a double dip recession, although the chance is slight.

“One possible contributor to such a scenario is commercial real estate. A looming wave of commercial development loans are scheduled to come due in the second quarter of this year. Given the lack of job creation and related demand for commercial space, the news is unlikely to be good for lenders,” Collins explained.

Collins also noted that U.S. consumers continue to shed debt in response to the prolonged recession.

“Americans have not returned to previous consumption patterns. It remains to be seen whether these phenomena are temporary or indicate a sea change in the economic behavior of consumers,” Collins noted.

LOCAL CONSUMER SPENDING
Locally, year-over-year tax collections at the county level indicate retail activity is weak in the Fort Smith area. While there is a lag in sales tax collection reporting by the state, the discernible trend is “clearly negative,” Collins noted in his report. Local consumers are responding significantly to national and local economic news by spending less. Collins reminded that the consumer response to curtail spending has had and will continue to have serious implications for the ability of local governments to provide services.

“Declining sales tax collections also imply poor opportunities for retail and wholesale employment. Year-on-year employment for the Fort Smith Metropolitan Area indicates the loss of roughly 500 jobs in the trade, transportation, and utility sector of the metro area economy,” Collins wrote in his report.

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 fourth 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 123,400 in December compared to 124,700 in December 2008.

• Change in metro area unemployment rate: D-
The area unemployment rate, an important gauge in the health of the metro labor market, showed relative decline in the quarter compared to the 2008 quarter. Unemployment in December was estimated at 7.9%, considerably higher than the 6.1% in December 2008.

• 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 and fourth quarters. The tax collections, which are good indicators of regional consumer confidence, were down in Crawford, Franklin, Logan and Sebastian counties ($2.929 million in November 2009 compared to $3.421 million in November 2008).

• Change in goods-producing employment: B-
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 25.4% in December 2009, down from the 26.1% in December 2008.

LEADING INDICATORS
Leading indicators provide insight into the near-term direction of the local economy. Economic figures for the period 2005 to the fourth 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 fourth quarter (measured in a three-month rolling average) was higher than those in the fourth quarter of 2008. The indicator is one of the bright spots in the regional economy.

• Change in construction employment: C-
The sector, which includes mining/natural resources employment, showed minor employment decreases (8,700 in December 2009, compared to 8,800 in December 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 December 2009 was 22,600, down 1,100 jobs from December 2008 employment of 23,700,

• Change in hospitality employment: D-
After being relatively stable for several quarters, employment in the fourth quarter of 2009 (8,600 jobs as of December 2009) began to dip compared to the same period in 2008 (9,000 jobs as of December 2008).

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

Current Indicators
4Q 2009 — Change in non-farm employment: D+
3Q 2009 — Change in non-farm employment: D
2Q 2009 — Change in non-farm employment: D
1Q 2009 — Change in non-farm employment: D-

4Q 2009 — Change in metro area unemployment rate: 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

4Q 2009 — Change in sales and use tax collections: D-
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-

4Q 2009 — Change in goods-producing employment: B-
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
4Q 2009 — Change in building permit valuation: C+
3Q 2009 — Change in building permit valuation: C+
2Q 2009 — Change in building permit valuation: C
1Q 2009 — Change in building permit valuation: B

4Q 2009 — Change in construction employment: C-
3Q 2009 — Change in construction employment: D
2Q 2009 — Change in construction employment: D
1Q 2009 — Change in construction employment: D

4Q 2009 — Change in manufacturing employment: D
3Q 2009 — Change in manufacturing employment: D
2Q 2009 — Change in manufacturing employment: D
1Q 2009 — Change in manufacturing employment: D

4Q 2009 — Change in hospitality employment: D-
3Q 2009 — Change in hospitality employment: F
2Q 2009 — Change in hospitality employment: D-
1Q 2009 — Change in hospitality employment: D