The Compass Report: Economy good in Central Arkansas

The 2012 first quarter economy in the central Arkansas area received a grade of B-, meaning that minor improvements were seen in most current and leading economic indicators.

Year-on-year tax collections at the county level show a positive trend with consumer spending. While there is a lag in sales tax collection reporting by the state, the data suggest retail activity in the capital city has remained relatively steady in recent years.

Sales and use tax collections are up significantly for the region over the last 3 months.  This is not likely to be sustained but it does point to resurgent retail activity and perhaps, improved consumer confidence.

However, retail sector employment in the region struggles to return to levels reached in 2007. From March 2011 to March 2012 the metro area gained 200 jobs in the trade, transportation, and utility sector of the metro area economy. March 2012 employment in the sector stood at an estimated 64,900.

The overall job picture continues to shine in the area. The regional labor force — estimated number of working-age people in an area — totaled 349,834 during March, ahead of the 346,846 during March 2011. The workforce size is on a three-year positive trend. The average annual monthly labor size was 347,204 during 2011, 344,304 during 2010 and 341,256 during 2009.

The quarterly Compass Report is managed by The City Wire and presented by Fort Smith-based Benefit Bank.

Also, the first quarter of 2012 is the first quarter in which economic activity was measured in the Northwest Arkansas and Fort Smith metro areas.

First quarter 2012 economic conditions in the Northwest Arkansas metro area saw improvements compared to the first quarter of 2011, garnering the region a B- grade. The gains were primarily the result of higher employment and continued increases in area sales tax collections.

The Fort Smith region’s first quarter grade of C- was unchanged from the fourth quarter of 2011 and also unchanged from the first quarter of 2011.

“The data provide compelling evidence for the conclusion that Arkansas policymakers and economic developers need to look beyond manufacturing to grow employment and incomes in the state,” Collins said about data from all three regions. “It is imperative that the metro areas in Arkansas continue to work to attract or build internally employment opportunities that are correlated with increased educational attainment.”

DATA LINKS (Pdf)
Link here for a magazine summary of The Compass Report.

Link here for more extensive narrative about regional and national economic analysis.

Link here for raw data used to prepare The Compass Report.

NATIONAL ECONOMIC NOTES
The U.S economy continues to rebound but at a pace that is disappointing to analysts and below trend.  Most striking, is the lack of employment growth given the depth of the recession and historical rates of recovery in the labor market.  Output growth remains the primary measure of improved economic performance.

Following are a few of Collins’ key points on U.S. economic realities during the first quarter of 2012.
• The recession has fundamentally changed the structure of the U.S. economy with significant implications for what types of jobs will be created in the future. Gone is the cycle of boom and bust where manufacturers laid off and rehired workers. Many of those jobs are permanently gone, either outsourced to plants overseas or lost to technological displacement.

• While this phenomenon is well documented, what is less apparent is the restructuring and flattening of U.S. corporations, reducing the number of white collar jobs. With government also shedding employment, it would be fair to ask, “Where will the new jobs come from?”

• The answer lies in the jobs data by sector. Growth has been and will continue to be relatively strong in the services, particularly in professional and business services and health care services.

• On the goods producing side, look for construction and natural resources and mining to add employment as the economy continues to expand.

• Economic growth nationally will also imply increased demand for natural gas. This is good news for Arkansans as prices have fallen almost 40% over the last 12 months.

According to Collins, the following are some of the top risks to future U.S. economic growth.
• The ongoing saga of EU sovereign debt. Specifically the Greeks, followed by several other countries. Default could imply a deeper recession across the E.U. with reduced demand for U.S. exports.

• The Iranian nuclear stand-off could flare into conflict that would reduce the flow of oil and spike prices in the U.S. This would in turn reduce U.S. growth rates.

• Aggressive debt reduction policies (either increased taxes, reduced spending, or both with the first and the last being unlikely) coupled with slower growth rates due to either of the above.

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
Non-farm employment — D+
Non-farm employment has lagged 2011 figures, with employment in the metro area at 337,800 in March compared to 339,800 in March 2011.

Non-farm employment is an often quoted measure of employment growth. Moreover, it is disaggregated into various employment sectors such as manufacturing, education and health services, etc.

Change in employment drives population growth. The type of employment being created also determines in large part the change in income that drives growth in retail.

Goods-producing employment — B
The decrease in manufacturing jobs as a percentage of the overall workforce helps diversify almost any metro economy. However, given the relatively small percentage of employment in the goods producing sector in the central Arkansas area, this metric is less meaningful than for the Fort Smith or Northwest Arkansas areas. The percentage of manufacturing jobs in the overall workforce was 10.6% in March 2012, down from the 10.8% in March 2011.

This measure speaks to the risk in a local economy from being heavily weighted toward sectors that have been under economic pressure. One of the fundamental principles of reducing risk is diversification.

Metro area Unemployment rate — C+
The area unemployment rate, an important gauge in the health of the metro labor market, posted declines in the first quarter. Unemployment in March was estimated at 6.7%, compared to 7% in March 2011.

Like non-farm employment, the local unemployment rate is also often quoted. Increases in the unemployment rate are correlated with declines in consumer confidence.
The unemployment rate is an important gauge of the health of the local labor market.

Sales and Use tax collections — B+
Sales tax collections in the region posted healthy gains in the first quarter. The tax collections, which are good indicators of regional consumer confidence, in the region totaled $8.129 million during February 2012 — compared to $7.434 million in February 2011.

Sales and use tax collections provide an insight into both the total income and change in total income in an area as well as how consumers are responding to new information about the health of the national and local economy. Obviously, this measure is tied to retail activity.

LEADING INDICATORS
Building Permit (housing) valuation — C
The total value of permits issued in the first quarter (measured in a three-month rolling average) were relatively flat compared to the first quarter of 2011. The rolling average in March was $80.66 million, slightly ahead of the $79.591 million in March 2011.

Residential building is an indicator of current and expected population growth. As new households are created they induce growth in retail, education services, health care services and other types of businesses that provide goods and services to households. Also, new construction provides employment and tax revenues.

Hospitality employment — B-
Hospitality employment in central Arkansas has trended positive for several quarters. March 2012 saw 31,000 jobs in the regional hospitality sector, up from the 30,000 jobs in March 2011. Sector employment set a record in March 2011.

Growth in the hospitality and leisure sector as measured by growth in employment is included because of the emphasis on creating quality of place in local economic development initiatives.

Unlike enplanements/deplanements, which may or may not be tied to activity in restaurants, hotels, and cultural venues, hospitality and leisure employment most certainly are influenced by growth of these activities. Another possible measure is hospitality-related tax collections.

Manufacturing employment — D
Manufacturing employment continues a slow decline in the area, not unlike most metro areas in Arkansas. Sector employment in March 2012 was 19,000, down 800 jobs from March 2011 employment of 19,800. Employment in the sector is down more than 32% from more than a decade ago when January 2002 manufacturing employment in the metro area stood at 28,200.

Construction employment — C-
This sector, which includes mining/natural resources employment, showed a small decrease in the first quarter, ending at 16,700 jobs in March 2012, compared to 17,000 in March 2011.

The rationale for including construction employment is similar to that for building permits. The employment measure is influenced by changes in both the residential and commercial real estate markets.

Obviously, new space implies new residents and new businesses.