The Compass Report: Jobless problems slow regional recovery

The fourth quarter 2010 economy in the Fort Smith region saw momentum weaken, primarily because of rising unemployment figures that offset moderate gains in sales tax collections.

According to The Compass Report, economic conditions in the fourth quarter of 2010 garnered a “C-/D+” grade. The grade means that relative to the region’s historic economic performance, the fourth quarter of 2010 saw no measurable economic improvement compared to the same period in previous years.

However, it reflected a slight improvement over the fourth quarter of 2009. Regional sales tax collections improved.

Employment figures were, frankly, lousy, with the unemployment rate reaching 8.6% in December and non-farm employment falling to 115,500 in December.

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

Economist Jeff Collins conducts the data collection and analysis for The Compass Report, which is presented by Fort Smith-based Benefit Bank.

Despite the economic headwinds, Collins was optimistic in his assessment of the regional economy.

"The Fort Smith regional economy continues to weather the economic storm.  Despite heavy losses in manufacturing and the sale of major regional employers, Fort Smith has made significant investments in future prosperity,” Collins noted. “Most economic forecasters predict employment will begin to rebound after the first quarter of 2011, although growth will remain sluggish. The regional economy is likely to benefit proportionally from national economic activity and to far better than areas still reeling from real estate related contractions in local economic activity."

Locally, current year-on-year tax collections at the county level indicate retail activity has stabilized. While there is a lag in sales tax collection reporting by the state, the data suggest local retail activity has recovered from the sharp downturn experienced during 2009. It does not indicate a return to the growth experienced during most of 2008.

“Despite stabilization in the sales tax collections, retail sector employment remains depressed.  From December 2009 to December 2010 the Fort Smith Metropolitan Area lost roughly 100 jobs in the trade, transportation, and utility sector of the metro area economy (-0.4 percent),” Collins explained.

Of the major sectors, the hardest hit has been the manufacturing sector. In December 2006 roughly 22.1% of non-farm employment was in manufacturing. By December of 2010, that percentage had declined to approximately 18.1%. Declining manufacturing employment has significant ramifications for other sectors including trade, transportation, and utilities and hospitality and leisure.

Collins, the former director of the Center for Business and Economic Research at the University of Arkansas, said the downward pressures of unemployment are not just a Fort Smith regional problem.

“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 spending levels. Moreover, financial institutions remain reluctant to ease credit standards to encourage consumption,” Collins noted in his assessment of the national economy.

To support his case, Collins referred to recent testimony from Federal Reserve Chairman Ben Bernanke: “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."

Also, Collins was somewhat dismissive of concerns about emerging inflationary pressures. He said the inflation rate “remains negligible,” with the consumer price index (CPI), up only a seasonally adjusted 0.5% in December and increased a non-seasonally adjusted 1.5% year-on-year.

“The core rate, that is the CPI less food and energy, rose a modest 0.1 percent in December. For the last 12 months the core rate rose an estimated 0.8 percent. This is the lowest 12 month increase since March, 1961,” 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 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 115,500 in December compared to 116,200 in December 2009.

• Change in metro area unemployment rate: D
The area unemployment rate, an important gauge in the health of the metro labor market, showed a large gain in the quarter compared to the 2009 quarter. Unemployment in December was estimated at 8.6%, compared to 8.2% in December 2009.

• Change in sales and use tax collections: C
Sales tax collections in the region and the city of Fort Smith slipped somewhat in the third quarter compared to the same period in 2009. However, the numbers recovered in the fourth quarter. The tax collections, which are good indicators of regional consumer confidence, were up in Crawford, Franklin, Logan and Sebastian counties ($3.028 million in November 2010 compared to $2.929 million in November 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 24.6% in December 2010, down from the 25.4% in December 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, overall, greater than those in the fourth quarter of 2009. However, the trend is lower than early in 2010, when the grade for the sector during the second quarter was an A.

• Change in construction employment: C-
This sector, which includes mining/natural resources employment, again showed slight employment decreases (7,500 in December 2009, compared to 7,400 in December 2010).

• Change in manufacturing employment: C-
The decline in manufacturing employment in the Fort Smith region has not slowed. Sector employment in December 2010 was 21,000, down 600 jobs from December 2009 employment of 21,600. Employment in the sector is down 31.59% 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. December 2010 saw 8,700 jobs in the regional hospitality sector down from the 8,900 jobs in December 2009.

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

Current Indicators
4Q 2010 — Change in non-farm employment: D
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-

4Q 2010 — Change in metro area unemployment rate: 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

4Q 2010 — Change in sales and use tax collections: C
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-

4Q 2010 — Change in goods-producing employment: B-
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
4Q 2010 — Change in building permit valuation: C-
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

4Q 2010 — Change in construction employment: C-
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

4Q 2010 — Change in manufacturing employment: C-
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

4Q 2010 — Change in hospitality 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