Increasing Optimism Predicted for Northwest Arkansas Economy

The taco salad lunch buffet served at Thursday’s final Quarterly Business Analysis luncheon seemed to reflect the information delivered by Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas.

It was not a boring catered pasta casserole, but not so unexpected as to make anyone uncomfortable.

Deck began her presentation — held at the Donald W. Reynolds Center for Enterprise Development on the UA campus — by sharing she recently attended an event in San Francisco that was a gathering of “the best and the brightest” in the field of economics from across the country. Deck described the event as “three days, eight hours a day” of discussion on the state of the economy, broken down in every way possible, and, as expected, there was no consensus on the forecasts presented. That said, Deck was happy to say overall, her presentation would consist of “relatively good news.”

Deck began by covering national numbers, and tackled Gross Domestic Product (GDP) first. She predicted that the United States has issues structurally that will continue to affect the GDP, and while several efforts have been made to adjust the economic effect on this number, they won’t be able to sustain a growth of more than 3 percent over the next year, which is consistent with recent past growth.

Small business was a popular topic among the approximately 120 attendees at the luncheon, and said the National Federation of Independent Business (NFIB) Small Business Optimism Index is very close to its post-recession high, which Deck explained is a good indicator that business owners are feeling more confident than they did this time last year and into early 2013.

The sentiments of purchasing managers in the manufacturing sector plateaued in mid-2013, but the last two readings are described by Deck as being “very healthy” and are being interpreted as increased demand for manufacturing in this country.

She explained that as more manufacturers are transitioning to automated operations to reduce costs, the number of computer programmers and machine repair personnel it takes to create products is far fewer than the thousands of workers formerly required to create a product.

Deck mentioned one example of a positive move in this regard is the effort announced by Wal-Mart Stores Inc. in May to work closely with their suppliers to source an additional $50 billion in goods manufactured in the United States over the next 10 years.

With unemployment numbers staying low, and increasing job stability being reported, the consumer sentiment index has steadily improved since 2009. Also contributing to this trend is a reduction in consumer debt from $12.5 trillion when the recovery began to the current estimate of $11 trillion. This optimism could be affected by the lack of change in income levels being reported across the country moving forward, but Deck doesn’t anticipate much change in the current trend in coming months.

One bit of sobering news in the debt sector is the rampant increase in student loan debt being taken on by graduating college students. As Deck explained, student loans cannot be charged off with bankruptcy, and will follow an individual throughout their life.

She reported that in the first quarter of 2003, student debt was $241 billion. In the second quarter of 2013, it had increased to $994 billion.

Deck shared one bit of good news as she shared the Financial Obligation Ratio trends. This rating includes mortgage payments or rent, consumer debt payments, auto lease payments, rental payments, homeowner insurance and property tax payments. For home owners, the percentage of monthly income that is being used to cover these items has decreased, from 17.5 percent before the recession, to a current 13 percent. Unfortunately, renters are still struggling with a whopping 25 percent of their income being tagged for these expenses, which makes the student loan numbers even more challenging, Deck pointed out, as those young people who are saddled with educational loan payments are also paying more to simply “live somewhere other than their parents’ basement.”

Retail sales were next on the list of topics, and Deck reported a modest 5 percent increase over the past year, with prices not increasing dramatically and inflation remaining stable.

An attendee asked how inflation can be reported to be flat, when prices increasing in at local grocery stores? Deck explained that it simply depends on the “items in the basket” that the aggregate pulls from. Some things in the basket, such as small appliances, are not increasing in price, while others, such as bacon and dairy products, are.

Another question was posed in regards to retail sales increasing vs. small business owners who state that they have a low demand for their goods. Deck explained that increasing sales in other areas, such as supplies and goods required in manufacturing and homebuilding sectors are included in the retail sales numbers, not just purchases by individual consumers.

Long-term interest rates are remaining at extremely low levels, while short-term loans are starting to see a slight increase in rates. Deck affirmed that while the increase is not dramatic, seeing an increase at all can affect consumer sentiment, and may play a part in the increasing number of home purchases in Northwest Arkansas.

Nationally, there has been sluggish growth in the labor force and Arkansas has seen their numbers declining as well. The labor force includes individuals who are employed together with those who are reported as unemployed. Deck said that while there is an increase in college attendance in the state, that number is not big enough to account for the decline overall. Other possible factors include people leaving the state for other areas of the country, people reaching retirement age (or retiring regardless of their age), or people simply giving up their job search.

Even though numbers are declining, Arkansas’ labor force numbers are still two to three times the national level. However, rural regions of the state are experiencing continued depression, Deck stated, and “are not seeing anything that resembles recovery.”

Unemployment numbers in Arkansas are not recovering as quickly as the national numbers, but Northwest Arkansas is improving and is moving in tandem with the trends state-wide and nationally. Initial unemployment claims in Arkansas are now back to pre-recession levels.

Deck said Northwest Arkansas blew by the pre-recession employment numbers in early 2012, and has continued to make gains.

The greatest job growth between July 2012 and July 2013 happened in the Education and Health Services with an almost 9 percent increase.

Deck said the declining vacancy rates in multifamily residences in Northwest Arkansas could lead to a future increase in the number of construction permits and available jobs in the sector. Available square-footage in commercial real estate continues to decrease as well, and Deck doesn’t anticipate this changing, although she says marquee projects and speculative space could affect future reports.

Deck reported that residential building permits have doubled in the last two years, but pointed out the current number of around 250 permits in July 2013 was nowhere near the pre-recession filing of 750 in January 2008.

The number of houses sold in Northwest Arkansas has seen an increase, which could have been fueled by homeowners trying to get ahead of a predicted rise in interest rates. Deck stated that this increase may level out in coming months, or it could continue if homeowners who haven’t acted yet fear those rates may continue to rise.

Residential home prices have steadily been creeping upward, and, according to Deck, “you are getting very close to not being underwater if you purchased a home just before the bust.”