The Compass Report: Regional economy sees conditions improve in early 2010

Gains in regional building permits and a leveling off in the unemployment rate helped boost the economic “grade” of the Fort Smith regional economy during the first quarter of 2010.

According to The Compass Report, economic conditions in the first quarter of 2010 garnered a “C-” grade. The grade means that relative to the region’s historic economic performance, the first quarter of 2010 saw relative economic improvement compared to the same period in previous years, and enjoyed economic gain compared to the fourth quarter of 2009 (D). Economist Jeff Collins conducts the data collection and analysis for The Compass Report, which is presented by Fort Smith-based Benefit Bank.

OVERALL GRADES — Fort Smith regional economy (per quarter)
1Q 2010: C-
4Q 2009: D
3Q 2009: D
2Q 2009: D-
1Q 2009: D+

Collins noted in his summary analysis: “While first-quarter 2010 non-farm employment declined year-on-year, other indicators showed improvement. Specifically, improvement in tax collections as well as construction activity provided encouraging signals. Even the rate of change in the unemployment rate, which had been deteriorating rapidly, appeared to be moderating. March-to-March the unemployment rate was up roughly 0.6%. By comparison, the difference between between the December 2009 rate and the December 2008 rate was 2.1%. Finally, last quarter I said the regional economy had, perhaps, been given its last grade of D. The economy in the first quarter certainly deserved an improved grade. I expect second quarter data will affirm that the economy is recovering, and provide evidence of the rate of recovery that may be expected in the future.”

Leading the subtle improvement in the regional economy was the value of building permits. The permit values — a leading indicator of current and future economic activity — were greater in each month of the first quarter of 2010 than the months in the first quarter of 2009. March 2010 regional building permit values (measured in a three-month rolling average) totaled $10.576 million, almost twice that of the $5.458 million in March 2009.

The decline in sales tax collections — a key measure of consumer activity and confidence — improved compared to previous quarters, according to Collins.

“Locally, current year-on-year tax collections at the county level indicate retail activity was weak but improving,” Collins said in the report. “While there is a lag in sales tax collection reporting by the state, the discernible trend is clearly positive. This is a fundamental change from data for last quarter.”

But the overall decline in sales tax collections reflects an uncertain consumer.

“What can be concluded from the changing rate of sales tax collections is local consumers are responding significantly to national and local economic news. Their response has had and will continue to have direct implications for the ability of local government to provide services,” Collins said.

He also said the macro-economic view for the national economy is also one in which the consumer is uncertain of economic direction.

“U.S. consumers continue to shed debt in response to the prolonged recession. In addition, despite the retail sales numbers, Americans have not returned to previous consumption patterns. It remains to be seen whether these phenomena are temporary,” he explained.

Joe Edward, president and CEO of Fort Smith-based Benefit Bank, said he is encouraged by the first quarter 2010 The Compass Report, but is cautious in his optimism.

“Any improvement is encouraging, but we all feel these positive signs are fragile and could change quickly. Hopefully this is the start of a positive trend,” Edwards 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 first 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 116,000 in March compared to 118,900 in March 2009.

• Change in metro area unemployment rate: C-
The area unemployment rate, an important gauge in the health of the metro labor market, showed relative decline in the quarter compared to the 2009 quarter. Unemployment in March was estimated at 8.3%, compared to 7.7% in March 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. That weakness continued into the first quarter of 2010, although the declines were less steep. The tax collections, which are good indicators of regional consumer confidence, were down in Crawford, Franklin, Logan and Sebastian counties ($2.996 million in January 2010 compared to $3.022 million in January 2009).

• 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 24.9% in March 2010, down from the 25.7% in March 2009.

LEADING INDICATORS
Leading indicators provide insight into the near-term direction of the local economy. Economic figures for the period 2005 to the first quarter of 2010 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: A
The total value of permits issued in the first quarter (measured in a three-month rolling average) was significantly higher than those in the first quarter of 2009. 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 (7,400 in March 2009, compared to 8,300 in March 2009). Considering the relative strength in building permit values,

• Change in manufacturing employment: D
The big story continues to be the decline in manufacturing employment in the Fort Smith region. Sector employment in March 2010 was 21,500, down 700 jobs from March 2009 employment of 22,200. However, the declines are becoming less steep,

• Change in hospitality employment: D
Hospitality employment continued a decline that began in mid-2009. March 2010 saw  8,800 jobs in the regional hospitality sector down from the 9,300 jobs in March 2009.

COMPARATIVE CHANGES
Grade change comparisons between the first quarter of 2009 and the first quarter of 2010

Current Indicators
1Q 2010 — Change in non-farm employment: D+
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-

1Q 2010 — Change in metro area unemployment rate: C-
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

1Q 2010 — Change in sales and use tax collections: D-
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-

1Q 2010 — Change in goods-producing employment: B-
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
1Q 2010 — Change in building permit valuation: A
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

1Q 2010 — Change in construction employment: D
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

1Q 2010 — Change in manufacturing 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

1Q 2010 — Change in hospitality 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