The Compass Report: Flat job numbers continue to stall regional recovery

Third quarter economic conditions were relatively unchanged in the Fort Smith region compared to the 2009 period, with declines in sales tax collections and building permit values and no employment growth likely preventing a better economic grade.

According to The Compass Report, economic conditions in the third quarter of 2010 garnered a “C-” grade. The grade means that relative to the region’s historic economic performance, the third quarter of 2010 saw relative economic improvement compared to the same period in previous years, and did not slip from the economic improvements seen in the first and second quarters of 2010. 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)
3Q 2010: C-
2Q 2010: C-
1Q 2010: C-
4Q 2009: D
3Q 2009: D
2Q 2009: D-
1Q 2009: D+

Joe Edwards, president and CEO of Fort Smith-based Benefit Bank, said the three consecutive quarters of static economic conditions reflects what is a slow and lengthy economic recovery.

“While the economists note the recession is over, it appears everyone is still guarded about what that really means for them. The process of coming out of this recession appears to be long and hard but I'm hopeful everyone will stay in the fight,” Edwards said.

Collins said the region’s employment situation (7.5% unemployment rate in September 2009 compared to 7.7% in September 2010) continues to be a drag on the regional economy.

"What is most concerning from the statistical evidence has been the continued erosion of the employment situation. While not dissimilar to the state or nation, the regional economy did not share proportionally in the good times,” Collins said in his
analysis. “Finally, the overall grade is once again passing, if barely. The consensus amongst forecasters is for economic activity to pick up in 2011. That would be a welcome gift as we look to the holiday season."

Although some economists and politicians objected to the Federal Reserve’s recent move to inject more money into the economy, Collins said such a move could help manufacturing regions.

“It will be interesting to witness the effects of Fed moves on the manufacturing sector in coming months. If the U.S. dollar slides significantly against foreign currencies, the beneficiaries may well be U.S. manufacturers. This can not help but be a positive for the Fort Smith regional economy,” Collins explained.

Collins, the former director of the Center for Business and Economic Research at the University of Arkansas, said an unknown for the Fort Smith region is the level of the all-important consumer spending. He said national trends suggest consumers are in no mood to spend.

“The over-riding concern is the frail nature of the recovery led by tepid consumer demand. Consumers remain committed to reducing debt rather than returning to past consumption patterns,” Collins said in the national economic review portion of The Compass 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 second quarter of 2010 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 116,100 in September compared to 117,600 in September 2009.

• Change in metro area unemployment rate: C+
The area unemployment rate, an important gauge in the health of the metro labor market, showed a slight gain in the quarter compared to the 2009 quarter. Unemployment in September was estimated at 7.7%, compared to 7.5% in September 2009.

• Change in sales and use tax collections: C-
Sales tax collections in the region and the city of Fort Smith began to show weakness in the second quarter of 2009. That weakness began to improve in the second quarter of 2010, but slipped somewhat in the third quarter compared to the same period in 2009. The tax collections, which are good indicators of regional consumer confidence, were down in Crawford, Franklin, Logan and Sebastian counties ($3.077 million in August 2010 compared to $3.247 million in August 2009).

• 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 24.7% in September 2010, down from the 24.8% in September 2009.

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 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: C-
The total value of permits issued in the third quarter (measured in a three-month rolling average) were lower than those in the third quarter of 2009 — reversing what has been a positive trend in the sector. The grade in this measurement fell from an A in the second quarter to a C- in the third quarter.

• Change in construction employment: D+
This sector, which includes mining/natural resources employment, showed slight employment decreases (7,500 in September 2009, compared to 7,600 in September 2010).

• Change in manufacturing employment: D+
The decline in manufacturing employment in the Fort Smith region has not slowed. Sector employment in September 2010 was 21,300, down 300 jobs from September 2009 employment of 21,600. Employment in the sector is down 31.27% from a decade ago when January 2001 manufacturing employment in the metro area stood at 30,700.

• Change in hospitality employment: D-
Hospitality employment continued a decline that began in mid-2009. September 2010 saw 9,000 jobs in the regional hospitality sector down from the 9,300 jobs in September 2009.

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

Current Indicators
3Q 2010 — Change in non-farm employment: D+
2Q 2010 — Change in non-farm employment: D
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-

3Q 2010 — Change in metro area unemployment rate: C+
2Q 2010 — Change in metro area unemployment rate: C
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

3Q 2010 — Change in sales and use tax collections: C-
2Q 2010 — Change in sales and use tax collections: C
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-

3Q 2010 — Change in goods-producing employment: C-
2Q 2010 — Change in goods-producing employment: 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
3Q 2010 — Change in building permit valuation: C-
2Q 2010 — Change in building permit valuation: A
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

3Q 2010 — Change in construction employment: D+
2Q 2010 — Change in construction employment: D
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

3Q 2010 — Change in manufacturing employment: D+
2Q 2010 — Change in manufacturing 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

3Q 2010 — Change in hospitality employment: D-
2Q 2010 — Change in hospitality 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