The Compass Report: Positives emerge for regional economy

First quarter 2011 economic conditions were mostly unchanged compared to the 2010 period, but sales tax gains and improving employment figures indicate improving momentum.

According to The Compass Report, economic conditions in the first quarter of 2011 garnered a “C-” grade. The grade means that relative to the region’s historic economic performance, the first quarter of 2011 saw no measurable economic improvement compared to the same period in previous years.

The good news is that the first quarter 2011 The Compass Report is up from the C-/D+ grade the regional economy had in the fourth quarter of 2010.

Employment figures, which have struggled to improve even when other state metro areas have seen clear gains, finally began to stabilize during the first quarter.

Locally, year-on-year tax collections at the county level continue to indicate improving retail activity (consumer confidence). However, the first quarter figures represents a continuance of the weak upward trend that emerged during the fourth quarter of 2010.

OVERALL GRADES — Fort Smith regional economy (per quarter)
1Q 2011: C-
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, and managed by The City Wire.

Collins said the first quarter figures suggest the remainder of 2011 could see continued economic improvement.

“The Fort Smith regional economy is recovering and recent statistics indicate momentum exists that will likely lead to increased employment in the near future,” Collins said in the report. “Several sectors, including hospitality and leisure and business and professional services, exhibited significantly improved employment year-on-year.”

Joe Edwards, president and CEO of Benefit Bank, hopes Collins’ optimism continues.

“It is hard to see any improvement on a day to day basis. That is why the independent quarterly/yearly comparisons generated by The Compass Report helps us see any improvement. Hopefully, as everyone works hard, the trend lines will continue in a positive direction,” Edwards said.

Sales tax collections present a mixed bag in terms of reading economic direction in that the relative gains in collections did not result in increased retail sector employment.

“Despite stabilization in the sales tax collections, retail sector employment remains depressed. From March 2010 to March 2011 the Fort Smith Metropolitan Area lost roughly 100 jobs in the trade, transportation, and utility sector of the metro area economy (-0.4%),” Collins wrote.

The largest employment loss in an area sector has been with manufacturing. The decline in manufacturing employment in the Fort Smith region did not slow in the first quarter of 2011. Sector employment in March 2011 was 20,700, down 600 jobs from March 2010 employment of 21,300. Employment in the sector is down 32.57% from a decade ago when January 2001 manufacturing employment in the metro area stood at 30,700.

Declining manufacturing employment, according to Collins, has significant ramifications for other sectors including trade, transportation, and utilities and hospitality and leisure.

Overall, Collins is optimistic about prospects for growth in the regional economy.

“The regional economy is likely to benefit proportionally from national economic activity and to fair better than areas still reeling from real estate related contractions,” he said.

NATIONAL ECONOMIC NOTES
Collins, the former director of the Center for Business and Economic Research at the University of Arkansas, said the closely watched U.S. consumer demand figures also indicate a steady but slow recovery.

“During the early stages of the recovery, a recovery that now seems sustainable, the over-riding concern was the frailty of consumer demand. While consumers remain committed to reducing debt rather than returning to past spending levels, demand does appear to be improving,” Collins said in his review of the national economy.

The U.S. GDP in 2010 was up 2.9%, “a substantial improvement” over the 2.6% contraction in 2009. The first quarter 2011 GDP estimate was up 1.8%, down from the fourth quarter 2010 estimate of 3.1%.

“Analysts attribute slower growth than expected to the impact of harsh winter weather across much of the country, rising commodity prices, and reduced government spending at all levels during the quarter,” Collins explained.

Some analysts have also expressed concern that rising inflation will curtail or end economic gains. But Collins is not overly concerned about recent price increases.

“Inflation, the key concern amongst central bankers, remains negligible. The consumer price index (CPI), which is a measure of the average change in the price of goods and services over time, increased a seasonally adjusted 0.4 percent in April and increased a non-seasonally adjusted 3.2 percent year-on-year. The core rate, that is the CPI less food and energy, rose a modest 0.2 percent in April. For the last 12 months the core rate rose an estimated 1.3 percent. While up slightly from previous estimates, the rate remains historically very low,” Collins said.

Energy index figures are troubling. The energy index increased significantly (2.2% in April), particularly the indexes for gasoline and fuel oil (3.3% and 3.2%, respectively). Food was up only slightly in April. The gasoline index rose for the 10th consecutive month and for the last 12 months was up 33.1%.

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 2011 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: C-
Non-farm employment continued to struggle. Employment in the metro area at 116,700 in March compared to 117,100 in March 2010.

• Change in metro area unemployment rate: C
The area unemployment rate, an important gauge in the health of the metro labor market, showed an improvement in the first quarter compared to the 2010 quarter. Unemployment in March was estimated at 8.4%, compared to 8.6% in March 2010.

• Change in sales and use tax collections: C+
Sales tax collections in the region and the city of Fort Smith also improved in the first quarter compared to the same period in 2010. The tax collections, good indicators of regional consumer confidence, were up in Crawford, Franklin, Logan and Sebastian counties ($3.005 million in February 2011 compared to $2.965 million in February 2010).

• 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 23.8% in March 2011, down from the 24.3% in March 2010.

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 2011 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 quarter (measured in a three-month rolling average) were lower than those in the first quarter of 2010. Early 2010 will prove to be a tough comparison because of strong building activity during the first half of the year.

• Change in construction employment: C-
This sector, which includes mining/natural resources employment, again showed slight employment decreases (7,100 in March 2011, compared to 7,200 in March 2010).

• Change in manufacturing employment: D
The decline in manufacturing employment in the Fort Smith region has not slowed. Sector employment in March 2011 was 20,700, down 600 jobs from March 2010 employment of 21,300. Employment in the sector is down 32.57% from a decade ago when January 2001 manufacturing employment in the metro area stood at 30,700.

• Change in hospitality employment: C+
Hospitality employment attempted to reverse a decline that began in mid-2009. March 2011 saw 8,900 jobs in the regional hospitality sector, up from the 8,600 jobs in March 2010.

COMPARATIVE CHANGES
Grade change comparisons between the first quarter of 2009 and the first quarter of 2011

Current Indicators
1Q 2011 — Change in non-farm employment: C-
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-

1Q 2011 — Change in metro area unemployment rate: C
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

1Q 2011 — Change in sales and use tax collections: C+
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-

1Q 2011 — Change in goods-producing employment: B-
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
1Q 2011 — Change in building permit valuation: C-
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

1Q 2011 — Change in construction employment: C-
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

1Q 2011 — Change in manufacturing 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

1Q 2011 — Change in hospitality employment: C+
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