Burgundy Book: Arkansas economy, labor market improving, yet outlook for rest of 2016 remains subdued

The near-term outlook for most of the Arkansas economy improved slightly according to a May survey of business contacts. Still, the vast majority (69%) expect that conditions in 2016 will be about the same as last year, according to the Federal Reserve’s Burgundy Book survey for the Little Rock region released Tuesday (June 21).

As suggested by the zone’s low unemployment rate in the first quarter (4.1%), labor market conditions remain vibrant in most areas. For example, the Fayetteville metropolitan statistical area (MSAs) unemployment rate was 2.9% in the first quarter, its lowest rate in 15 years.

Measured from a year earlier, payroll employment growth was stronger than the nation’s growth in the Fayetteville and Texarkana MSAs. Anecdotal evidence suggests mounting upward pressure on nominal wage growth.

Measures of housing activity were mostly good across the zone in the first quarter. Measured from a year earlier, single-family building permits were up in four of the six MSAs, while house prices were up in five of the six MSAs. In the Little Rock MSA, office rents rose at their fastest rate in five years.

Growth of household credit card balances accelerated modestly in the first quarter compared with three months earlier, while credit card and automotive loan delinquency rates edged higher. In the first quarter, return on average assets at Arkansas commercial banks rose to its highest level since 1998.

Bankers reported that loan demand in the third quarter of 2016 is expected to be unchanged from a year earlier.

Arkansas farmers nearly doubled their planted corn and cotton acreage this year relative to 2015, while significantly reducing their planted acreage of soybeans and sorghum.

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). Economic conditions for Jonesboro and parts of northeast Arkansas are captured in the Burgundy Book report for the Memphis area.

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

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

· Overall labor market conditions in the Little Rock zone were positive during the first quarter. Employment growth in all MSAs was slightly higher than at the end of 2015, with most gains coming from stronger growth in the service providing sectors. However, employment growth in Little Rock and Fort Smith remains below the national average.

· In Fayetteville, the fastest growing MSA in the zone, employment growth has been at least twice the national rate since early 2014. The largest job gains have come from the professional and business services and the trade, transportation, and utilities sectors. Together, these sectors contributed over half of the total job gains in the area.

· Transportation employment growth accelerated slightly in the Little Rock MSA in the first quarter, while growth slowed in Fayetteville and in Arkansas as a whole, mirroring the slowdown in transportation nationwide. In the past five years, the transportation sector has grown 18% in Little Rock, compared with 10% in Arkansas and 15% in the U.S. as a whole.

· Manufacturing employment continued to decline in Arkansas. Slight growth in the nondurable goods sector was offset by declines in the durable goods sector. In the Fayetteville MSA, manufacturing employment declined significantly.

· Residential activity improved modestly in the first quarter of 2016. Year-to-date home sales in Little Rock were up 12.7%. However, home prices have remained relatively flat across most MSAs. Residential construction activity has been generally positive. Building permits were up compared with a year ago in most MSAs. A local contact indicated that speculative home building has continued to be low as most builders refuse to start construction unless the house is presold.

· Households within the zone continued to unwind their mortgage debt, whereas nationally households left their mortgage debt relatively unchanged. The zone’s mortgage delinquency rate dropped for the fourth consecutive quarter. Real income per capita growth slowed to 2.5% in Arkansas during the fourth quarter of 2015.

· Survey respondents expect business lending to be slightly lower in the third quarter than it was at the same time last year. For mortgage loans, half of respondents expect loan demand to be slightly higher in the third quarter. Return on average assets (ROA) increased 5 basis points at Arkansas banks in the first quarter, despite a 14-basis-point decline in the average net interest margin. At 1.3%, the average ROA at Arkansas banks is now at its highest level since 1998.

· According to the USDA, Arkansas corn, cotton, and rice planted acreage will increase from last year, while soybean acreage will fall about 10%. However, the size of the planned nationwide increase in corn acreage was greater than expected, which has resulted in corn prices being relatively stable while other major crops have risen in price. While crop prices have improved, zone contacts remain adamant that prices still need to come up more to prevent a continuation of the widespread profit reductions that have occurred over the past few years.

Of note, real income per capita decelerated across Arkansas, Mississippi, Tennessee, and the U.S. as a whole in the fourth quarter of 2015. Only Tennessee’s growth exceeded the nation’s.

Return on average assets (ROA) declined 19 basis points at Mississippi banks, but increased 5 basis points at Arkansas banks and 14 basis points at Tennessee banks.