Burgundy Book: Despite strong 1Q growth, businesses still concerned about Arkansas economy

Anxieties about the Arkansas economy have grown significantly in the first quarter as business executives are increasingly concerned that economic conditions in 2016 will be much worse than in 2015, according to the Federal Reserve’s February Burgundy Book survey for the Little Rock region.

According to Kevin Kliesen, business economist with the Federal Reserve Bank of St. Louis, a little less than 50% surveyed expect that economic conditions will worsen in 2016 compared with 2015. “Those expectations for 2016 are a marked decline from three months earlier, when only 14% of contacts expected economic conditions to worsen in 2016,” Kliesen wrote in the quarterly report.

The Burgundy Book survey was released Thursday ahead of the Bureau of Economic Analysis’ third and final revised Gross Domestic Product (GDP) report on Friday (March 25). The growth rate of real GDP is a key indicator of economic activity, but the official estimate is released with a delay.

Economists surveyed by the Wall Street Journal expect no changes to last month’s measure, which tracks the value of the goods and services produced by the U.S. economy in a given time period. Fourth quarter GDP was revised upward from the preliminary reading in January, to 1% percent from 0.7%. That level of GDP growth is significantly weaker than the second and third quarter of 2015, when the nation’s economic activity increased at an annual rate of 3.8% and 1.9%, respectively

The Fed’s Burgundy Book report for the Little Rock MSA provides statistical and anecdotal notes on 62 of the state’s 75 counties. The Little Rock Zone covers six state metro areas, including Little Rock/North Little Rock/Conway, Pine Bluff, Hot Springs, Texarkana, Fort Smith and Fayetteville/Springdale/Rogers. The other three zones in the expansive St. Louis Federal Reserve district are the St. Louis, Memphis and Louisville metropolitan areas (MSAs).

Categories including housing, real estate, construction, employment, manufacturing, banking, consumer debt, and agriculture are covered in the economic report.

In the Little Rock MSA, Kliesen highlighted the fact that nonfarm payroll employment in the region increased by 1.5% in the fourth quarter of 2015 compared to a year ago. Payroll employment growth was stronger in the Fayetteville and Texarkana areas at 4.7% and 2.2%, respectively, but was mostly flat in the Fort Smith MSA. “Revisions released by the U.S. Bureau of Labor Statistics in March 2016 showed significantly faster employment growth in Little Rock and Fayetteville in 2015 than initially reported,” Kliesen said.

Overall, the zone’s unemployment rate averaged 4.7% in the fourth quarter of 2015, down 0.4 percentage points from the previous quarter and its lowest level since 2001. Residential building activity was mixed across the zone in the fourth quarter, as single-family building permits rose in some areas and fell in others. Commercial vacancy rates, though, increased modestly in most segments.

Arkansas bankers reported that loan demand in the second quarter of 2016 is expected to be little changed from a year earlier. According to the USDA estimates, Arkansas cropland values increased by 3.5% in 2015, its slowest growth since 2009.

Here are other highlights of the quarterly Burgundy Book report for the Little Rock MSA.

· The Little Rock zone saw mixed labor market conditions at the end of 2015. Employment steadily increased, but growth was slower than in the third quarter in all MSAs. The private service-providing sector in Fort Smith grew slightly in 2015, but the strong decline in the goods-producing sector more than offset the gains.

· Manufacturing employment contracted in the Little Rock zone in the fourth quarter. Statewide employment fell by 0.4% relative to one year ago. Employment declines in durable goods outweighed employment gains in nondurable goods, pushing growth into negative territory. Consistent with job losses in the sector, manufacturing exports from Arkansas fell 25% from one year ago, driven by declines in exports of transportation equipment, food and beverage products, and chemical products.

· Employment in the transportation sector ended the year on a positive note. Transportation employment statewide increased by 3.8%, buoyed by strong growth in the Fayetteville region. Contacts in the transportation sector report that trucking freight volumes are weak for this time of year. Others report that low oil prices have resulted in reduced demand from the energy sector.

· Consistent with the rest of the country, low winter wheat prices have led to a large drop in acres planted for the 2016 crop. Further, December flooding may have damaged the crop, but the extent of the damage will be unclear until the crop comes out of dormancy and can be analyzed. For the spring crops, cotton, which has seen its land share decline over the past few years, is going to reverse its planting trend according to a National Cotton Council survey. Those seeking to explain the reversal note that the price received for the crop is now more competitive with those of other crops. However, it could be a temporary increase similar to that in 2014.

· In the face of reduced farm income, cropland values continued to increase in 2015, but at a much slower rate than the 10-year average. While the near-term outlook for farm income has remained bleak, some contacts are hopeful that future international developments will increase global grain demand and put upward pressure on commodity prices.

MEMPHIS ZONE REPORT
In the Memphis zone of the Federal Reserve, which comprises northern Mississippi, eastern Arkansas, and western Tennessee, business contacts were also less optimistic about local economic conditions in the region where nearly 3.1 million people reside.

One of the highlights in the Memphis MSA was employment growth in the Jonesboro area, where a rapid rise in the service-providing sector in Northeast Arkansas saw the strongest uptick in jobs.

Nonfarm payroll employment growth accelerated in the Memphis MSA in the fourth quarter of 2015, significantly narrowing the gap with the nation’s growth. The Memphis zone’s unemployment rate averaged 6.7% in the fourth quarter of 2015, unchanged from the previous quarter.

Commercial real estate activity in the Memphis MSA remained strong, bolstered by several large projects that have recently been completed or are in progress. The industrial sector is a notable exception, as asking rents fell sharply in the fourth quarter of 2015.

Residential real estate activity exhibited significant softness in the fourth quarter compared with the nation. Delinquency rates generally fell across most loan segments in the Memphis zone in the fourth quarter. Per capita mortgage debt continued its six-year decline.

Commercial bankers reported that loan demand was about unchanged in the first quarter, and they are split on the direction of loan demand in the second quarter of 2016. Because of sharp declines in planted acreage last fall, winter wheat production is likely to be sharply lower in 2016.