The Compass Report: Economic ‘resilience’ helps Fort Smith region

Relative gains in area sales tax collections and tourism industry employment helped third quarter 2011 economic conditions remain stable compared to the 2010 period.

According to The Compass Report, the third quarter 2011 economy in the Fort Smith region continued on a track that enjoyed a satisfactory grade (C) when compared to the second quarter of 2011. The quarter was an improvement over the C- grade of the 2010 third quarter. The third quarter 2011 grade reflects the best two-consecutive quarter grade given since The Compass Report launched in the first quarter of 2009.

OVERALL GRADES — Fort Smith regional economy (per quarter)
3Q 2011: C
2Q 2011: C
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+

THIRD QUARTER SUMMARY
Locally, current year-on-year tax collections at the county level indicate retail activity has stabilized and moderately improved. 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. However, 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 September 2010 to September 2011 the Fort Smith metro area lost roughly 300 jobs in the trade, transportation, and utility sector of the metro area economy (-1.2%).

Of the major sectors, the hardest hit has been the manufacturing sector. In January 2005 roughly 24.4% of non-farm employment was in manufacturing. As of September 2011, that percentage had declined to approximately 17.8%. Recent news that Whirlpool will close its production facility and eliminate the remaining 1,000 jobs was a stark reminder of the persistent erosion of the sector, both locally and nationally.

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

‘GOOD SIGN’
Economist Jeff Collins conducts the data collection and analysis for The Compass Report, which is presented by Fort Smith-based Benefit Bank. Collins said the regional economy remains stronger than expected, but fears future job losses could push back the recent gains.

"Despite the much anticipated announcement that Whirlpool would shutter its Fort Smith manufacturing facility, the Fort Smith regional economy continues to show surprising resilience,” Collins said. “Sales tax and employment data will bear scrutiny over the next four to six quarters given continued erosion of the manufacturing sector and the forecast for slow growth nationally."

Joe Edwards, president and CEO of Benefit Bank, said The Compass Report for the third quarter “is encouraging.” He is surprised by the region’s relative economic strength — especially considering the unemployment rate.

“The number that strikes me the most is the unemployment number, and I would like to see that improve. But I’ll take the positives that are out there. Obviously the consumer is still buying and that’s a good sign, a very good sign,” Edwards said.

The area jobless rate is troubling. The Fort Smith metro area jobless rate ticked up to an estimated 8% in September, rising from 7.9% during August, and above the 7.6% during September 2010.

On the up side, the region’s hospitality industry appears to be holding steady.

“Examining the year-on-year percent change data, the trend for both municipalities is positive during the last three quarters,” Collins wrote in his analysis. “In percentage terms the data collections have been more volatile for Fort Smith hoteliers. This is likely due to the inclusion of restaurant related tax receipts in the Van Buren data which tend to smooth the monthly returns.”

NATIONAL ECONOMIC NOTES
Collins, the former director of the Center for Business and Economic Research at the University of Arkansas, said the national economy is not likely to improve in the near term.

“Real GDP has increased in each of the last nine quarters confirming the recovery remains underway. Growth, however, continues to disappoint economists and analysts leading to the widely held belief that the current anemic rate of expansion will continue for some time. This is in stark contrast to the typical post-recession pattern of above trend growth coming out of a trough,” Collins explained.

Collins report included the following notes about the national economy.
• The seemingly never-ending budget battle in Washington has delivered little in the way of guidance for consumers and business looking for direction and leadership. What remains to be seen is whether Congress will successfully address the primary drivers of fiscal imbalance, healthcare spending and taxes. There is little reason for optimism.

• Economists continue to examine the degree to which government intervention in the macro-economy impacted output and employment, but that it impacted key economic measures is not seriously questioned. What most analysts also agree is softening growth could imply the economy has lost momentum and may not be able to sustain the recovery. Should the economy slip back into recession, there is little fiscal ammunition and even less willingness to provide additional stimulus.

• Fortunately, commodity prices have subsided and corporate profits have been relatively strong. Evident in the GDP statistics is the impact of the supply chain disruptions caused by the Japanese earthquake and tsunami, the ongoing sovereign debt crisis in Europe and the impact on government spending and employment at all levels due to the outcome of last year’s elections.

• What is particularly troubling to observers is the lack of economic leadership or well-constructed policies to improve employment. The slowly eroding recovery may be the harbinger of slow growth for the foreseeable future. The hope is that the U.S. economy can avoid replicating the Japanese economic experience of the 1990’s, essentially a lost decade of growth perpetuated by amongst other things, a collapse of the domestic real estate market.

• During the early stages of the recovery, 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. Quarterly data for personal consumption expenditures indicates improvement since the third quarter of 2009. Real personal consumption expenditures increased at an annualized rate of 2.4 percent in the third quarter of 2011, compared with an increase of 0.7 percent in the second quarter of the year.

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 third 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 — D
Non-farm employment reversed gains seen earlier in the year, with employment in the metro area at 116,300 in September compared to 117,500 in September 2010.

• Change in metro area unemployment rate: D+
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 2010 quarter. Unemployment in September was estimated at 8%, compared to 7.6% in September 2010..

• 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, and has been on a stable pace since. The tax collections, which are good indicators of regional consumer confidence, were almost unchanged in Crawford, Franklin, Logan and Sebastian counties — $3.357 million three-month average in the June-August period compared to $3.36 million in the 2010 period.

• Change in goods-producing employment: B
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 24.5% in September 2011, down from the 24.3% in September 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 second quarter (measured in a three-month rolling average) were higher than those in the third quarter of 2010. The grade in this measurement improved from a D in the second quarter to a C in the third quarter.

• Change in construction employment: B+
This sector, which includes mining/natural resources employment, showed slight employment gains (8,000 in June 2011, compared to 7,700 in June 2010).

• Change in manufacturing employment: D-
The decline in manufacturing employment in the Fort Smith region has not slowed. Sector employment in September 2011 was 20,700, down 700 jobs from September 2010 employment of 21,400. 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: A
Hospitality employment continues to show gains. September 2011 saw 9,200 jobs in the regional hospitality sector up considerably from the 8,900 jobs in September 2010.

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

Current Indicators
3Q 2011 — Change in non-farm employment: D
2Q 2011 — Change in non-farm employment: C
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-

3Q 2011 — Change in metro area unemployment rate: D+
2Q 2011 — Change in metro area unemployment rate: 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

3Q 2011 — Change in sales and use tax collections: C+
2Q 2011 — Change in sales and use tax collections: C
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-

3Q 2011 — Change in goods-producing employment: B
2Q 2011 — Change in goods-producing employment: B-
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
3Q 2011 — Change in building permit valuation: C
2Q 2011 — Change in building permit valuation: D
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

3Q 2011 — Change in construction employment: B+
2Q 2011 — Change in construction employment: 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

3Q 2011 — Change in manufacturing employment: D-
2Q 2011 — Change in manufacturing 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

3Q 2011 — Change in hospitality employment: A
2Q 2011 — Change in hospitality employment: A
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