The Compass Report: NWA economic growth strong
Third quarter 2012 economic conditions in the Northwest Arkansas metro area were improved compared to the third quarter of 2011. Ongoing job growth and consistent gains in area sales tax collections are signs of the strong metro economy.
According to The Compass Report, the 2012 third quarter economy in Northwest Arkansas received a grade of B+, meaning that improvements were seen in most current and leading economic indicators.
The quarterly Compass Report is managed by The City Wire.
The unemployment rate in Northwest Arkansas was the lowest in the state amongst all MSAs in September (4.9%). It is a full percentage point lower than that for the Little Rock/North Little Rock/Conway MSA (5.9%). The highest rate in the state was the Memphis/West Memphis MSA at 8.4%.
To add perspective, of the 372 MSAs in the country, only 41 posted rates below 5% in September.
Based on current growth rates, the region is significantly outperforming its peers. The primary growth drivers were not destroyed by the recession, and if anything, the region is likely to become more attractive as other parts of the state and country struggle to create jobs.
“The more things change the more they stay the same,” noted economist Jeff Collins, who conducts the data collection and analysis for The Compass Report. “Once again the Northwest Arkansas regional economy leads in terms of growth. Central Arkansas, the state’s largest metro continues to grow but at an anemic pace that cannot be satisfying to regional leaders.”
Third quarter 2012 economic conditions in the Fort Smith region were not improved compared to the 2011 period, with the number of employed in the region weighing negatively on the regional economy. The third quarter marks the fourth consecutive quarter of relative economic decline in the Fort Smith region. (Link here for the complete Fort Smith region report.)
Third quarter 2012 economic conditions in the Little Rock-North Little Rock-Conway (central Arkansas) metro area saw a minor decline in economic conditions compared to the third quarter of 2011. The 2012 second quarter economy in the central Arkansas area received a grade of C-. (Link here to the complete central Arkansas report.)
Collins said the Northwest Arkansas housing sector “appears to have stabilized.”
“Interestingly, while the number of permits recorded in Northwest Arkansas is roughly a quarter of those recorded in Central Arkansas, the value is roughly equal to two-thirds the total according to data for the third quarter. This indicates far fewer projects but more high dollar projects are being undertaken in the region compared to Central Arkansas,” Collins said.
However, Collins said Northwest Arkansas banking community concerns “that supply may be racing ahead of demand has not abated.”
Link here for a magazine summary (large PDF file) 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.
UNDERSTANDING THE COMPASS
The quarterly Compass Report is managed by The City Wire and presented by Fort Smith-based Benefit Bank. The report has been produced for the Fort Smith metro area since the first quarter of 2009. The first quarter of 2012 was the first quarter in which The Compass Report measured economic activity in the Northwest Arkansas and central Arkansas metro areas.
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.
NATIONAL ECONOMIC NOTES
President Barack Obama’s re-election coupled with continued control of the U.S. House of Representatives by the Republicans implies significant challenges to avoiding the economic impact of expiring Bush era tax cuts and mandated spending cuts otherwise known as the “fiscal cliff,” Collins said.
The biggest impediment to a budget deal may be the pledge by many Republican lawmakers to never raise taxes, a promise that probably won’t be kept by many. In the end, few options exist for policymakers unless entitlements and tax reform are on the table, Collins said.
“In the end, we should expect considerable posturing and drama ending in a mix of spending cuts and tax increases. What we shouldn’t expect is meaningful tax or entitlement program reform. The structure of any budget deal will have minimal impact on the current short-run trajectory of the economy. That trajectory implies slow but steady improvement,” Collins wrote.
He also suggests that the fundamental problems facing the U.S. economy remain the same; the Great Recession was driven by balance sheet issues that continue to be addressed by business and households. He also said the declining impact of the government sector is unlikely to be replaced by business investment given weak demand – domestically and abroad.
“Lack of demand and uncertain prospects for future demand make adding capacity or employment a risky proposition. This is bad news for the roughly 12.2 million of Americans unemployed,” Collins wrote.
Following are a few of Collins’ key points on U.S. economic realities during the second quarter of 2012.
• Third quarter real GDP increased at an annual rate of 2% according to the “second” estimate from the U.S. Bureau of Economic Analysis. This is an improvement from the final second quarter estimate of 1.3%. Real GDP has increased in every quarter since second quarter 2009.
• Economists will look to holiday retail spending for signs that improved consumer confidence means a loosening of the purse strings on the part of households. Even if consumers return to previous habits, tight lending requirements by financial institutions remain an impediment to full-fledged recovery.
• Federal government spending increased during the third quarter by 9.6% fueled by a 13% jump in defense spending. Second quarter data indicated a decrease of 0.2% in federal expenditures, with defense related expenditures falling by the same percentage.
• State and local government spending has also been affected by changing economic conditions and voter sentiments. Third quarter real state and local expenditures fell by 0.1% following a 1% decrease in the second quarter.
• U.S. housing prices have rebounded and are now growing at an annualized rate of approximately 7%. Housing starts and permits have also improved with starts up roughly 15% in September. Full recovery is still far off but given the depth from which the industry had to climb, the most recent data provides reason for optimism.
• Consumer demand has improved. Real personal consumption expenditures grew by 2% in the third quarter. For the same period, demand for durable goods was up 8.5%, while demand for non-durables rose 2.4%.
• On the goods producing side, employment in manufacturing has shown improvement led by non-durable goods manufacturing employment.
According to Collins, following are some of the risks to U.S. economic growth.
• Lack of political will. There are no easy or painless fixes to the current difficulties faced by policymakers. Mutual sacrifice that reflects economic reality rather than political ideology is required. In hind-sight we gave ourselves tax cuts we couldn’t afford and spent money we didn’t have.
• And as before, there is the ongoing inability of Europe to adequately address the financial crisis in an ever growing number of states. It remains to be seen whether or not the required unified financial structure and fiscal integration will occur.
• Israeli military action in Gaza and the potential for war with Iran remain atop the list of international risk factors. The U.S. has announced that Iran will not be allowed to join the list of nuclear powers.
NORTHWEST ARKANSAS — THE COMPASS REPORT DATA SUMMARY
Non-farm employment — A
Non-farm employment is well ahead of 2011 figures, with employment in the metro area at 209,800 in September compared to 203,900 in September 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 — C
The decrease in manufacturing jobs as a percentage of the overall workforce helps diversify almost any metro economy. The percentage of manufacturing jobs in the overall workforce was 17.2% in September 2012, unchanged from the 17.2% in September 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 — B+
The area unemployment rate, an important gauge in the health of the metro labor market, posted declines in the first quarter. Unemployment in September was estimated at 4.9%, compared to 6% in September 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 — C
Sales tax collections in the region have shown relatively steady gains since 2010. The tax collections, which are good indicators of regional consumer confidence, were up in Benton, Madison and Washington counties to $6.703 million during August 2012 — compared to $6.256 million in August 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.
Building Permit (housing) valuation — B+
The total value of permits issued in the first quarter (measured in a three-month rolling average) were higher than those in the third quarter of 2011. The rolling average in September was $27.791 million, ahead of the $22.784 million in September 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 Northwest Arkansas has trended positive for several quarters. September 2012 saw 20,400 jobs in the regional hospitality sector, up from the 19,200 jobs in September 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 August or August 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 — B
Manufacturing employment in the region showed signs of stability during the quarter. Sector employment in September 2012 was 28,000, up from the 27,300 during September 2011. Employment in the sector is down more than 18% from more than a decade ago when January 2002 manufacturing employment in the metro area stood at 34,300.
Construction employment — C+
This sector, which includes mining/natural resources employment, saw gains in employment compared to the third quarter of 2011, ending September with 8,000 jobs, up over the 7,800 jobs in September 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.