At the Turn: Where Were At, Where Were Going in 2016

Overall, Arkansas’ industries are performing well, and the head of the state’s economic development organization says the key to continued advancement is through broadened horizons.

“Statewide, things are moving in the right direction,” said Mike Preston, executive director of the Arkansas Economic Development Commission.

The Northwest Arkansas Business Journal editorial staff interviewed numerous experts and leaders in select industries for their analysis on the state of business so far in 2016, and their projections for the next six months.

Preston pointed to the latest statewide unemployment rate of 3.8 percent, the lowest it’s been since the U.S. Bureau of Labor Statistics started tracking the state’s rate in 1976, and also the number of Arkansans employed, at 1.3 million, an all-time high. The unemployment rate for Northwest Arkansas was reported as 2.4.

“The agricultural sector continues to thrive and be one of the drivers for our economy. We want to continue to see that happen,” Preston said.

He also said the significance of industries that serve agriculture cannot be discounted. “Some people don’t realize how many technology-driven jobs there are that support an agricultural industry such as ours and how important that is to be in the mix.”

Another positive for the state economy is an uptick in regional headquarters staking ground.

AEDC recently announced Sprint will open a regional headquarters in Little Rock and Orbea’s North American in North Little Rock will undergo expansion.

While that type of activity bodes well for the state of things in Arkansas, and economic indicators are looking good, Preston stresses that the national and global economies will always have an effect. “You can’t ever take it for granted because you never know when there might be a downturn in the economy,” he said.

However, Preston believes economic decline can be rebuffed by diversifying as much as possible, and that is something that is already happening. While existing industries continue to grow, advancements are being made in burgeoning industries for the state, especially tech, in part because of programs tied to the AEDC and the governor’s office.

Specifically, Preston pointed to Gov. Asa Hutchinson’s initiatives supporting computer science education, the national attention they have gotten, and the potential for growing that industry in the state.

The latest announcement on that front came June 15, as Arkansas became the second state to adopt the Learning Blade program, supported through $400,000 from the Arkansas Department of Education, to increase student awareness and interest in computer science and STEM careers.

“Arkansans might be up for these IT jobs,” he said. “Silicon Valley jobs don’t have to necessarily be on the East Coast or the West Coast. We can have a hub right here in the central part of the country.

“We need to make sure we’re not putting all our eggs in one basket, so if there’s a hiccup in one of those industries, we have the other industries that will continue our state’s overall economic growth,” Preston said.

Advanced manufacturing is another sector with potential for expansion.

“I think we’ll continue to be seen as a great state because of our low cost of doing business and the fact that we’re a ‘right-to-work’ state. I think we’ll see more advanced manufacturing jobs, especially with more reshoring or offshoring of jobs from overseas back in the U.S. I think Arkansas is primed for those,” said Preston, who recently received a $50,000 bonus for his economic development efforts, according to a June 1 report in the Arkansas Democrat-Gazette.

At AEDC, he is tasked with following through on a number of programs designed to prop up the state economy, and that includes plugging the organization’s message of, “Here’s why you should do business in Arkansas …” throughout the world.

This summer, Preston and Gov. Hutchinson will attend the Farnborough Airshow in London to support Arkansas’ aviation and aerospace industries, and the two will travel to Berlin to open the AEDC European Office for Trade and Business Development. “We hope to see a little more foreign investment from Europe coming into Arkansas, so we’ll be pushing hard on that,” Preston said.

A trip to Asia is also in the works for later this year, to build on results from previous recruitment efforts. Most recently, AEDC announced that a Chinese company, Sun Paper, has plans to build a $1 billion plant in south Arkansas.

“Our world is a global economy and we want to make sure we have the foreign direct investment coming into our state,” Preston said. “Some people don’t think of Arkansas as a global competitor, but we really are. We’re known on the national stage, and we want to continue to elevate our name and our business brand.”

While the overall local economy is moving in a positive direction, individual trades are experiencing varied levels of success.

Here’s a look at how several industries in the region are performing.

 

Construction

Patrick Tenney, president of the Northwest Arkansas division of Baldwin & Shell Construction Co., expects to see continued growth in the industry.

He gauges how favorable the economy is based on the current workload of architects and engineers.

“Right now they seem to be pretty busy,” Tenney said. Their workload represents a “good pipeline” of work for contractors.

One concern Tenney sees is a large number of general contractors and too few subcontractors. Subcontractors can “get choosy” about the projects they decide to work on, and this can affect overall project costs, he said. Contractors often have to look out of the area for subcontractors, and they are “coming in with a price premium.”

Another concern is the growing labor shortage. With a less than 3 percent unemployment rate in Northwest Arkansas, the availability of skilled workers is dwindling.

And it isn’t expected to get better. “I think it’s going to get worse,” he said.

A solution includes offering encouragement and support in attracting people to the trades. Northwest Arkansas Community College in Bentonville offers programs in the skilled trades, and this is a good start, Tenney said.

Other economic indicators Tenney and the Baldwin & Shell team in Northwest Arkansas follow are building permits, Associated Builders and Contractors  Inc. bulletins from economists, the workload of subcontractors and materials pricing.

Over the past six months, the company hasn’t experienced any surprises because of its diverse projects in manufacturing, health care, cultural centeres and education.

James Bell, director of business development for Baldwin & Shell, said with several large multifamily projects currently underway, this might impact the low vacancy rate, which in turn, could slow down high-density residential construction.

“Things get nervous when interest rates start to climb,” Tenney said.

A rate increase was on the table for June, but Federal Reserve Chair Janet Yellen told Congress that it might hold off on increases in the near future because of weak economic growth.

In the past, commodity pricing was a concern when China was growing at a strong rate, but that’s not been a factor recently as prices have been steady.

 

Health Care

Medical centers in Northwest Arkansas, especially those near Interstate 49, are faring well compared to other parts of the state, said Paul Cunningham, executive vice president of the Arkansas Hospital Association. There are about 7,500 health care establishments in Arkansas, according to the latest U.S. Census data (2012).

On the state level, he described the industry as merely “surviving,” mostly due to funding problems tied to Medicare payment cuts and rising pharmaceutical costs. 

NWA is faring better because it is less rural, he said. Access is not really a problem in the region, like it is in several pockets of the state, and the talent shortage is less pronounced — except maybe in nursing, which normally faces regular ups and downs, but has reached an especially deep dip.

On the financial side, he said Northwest Arkansas typically has a more diverse payer mix than other parts of the state.

But that doesn’t make the region immune to funding issues.

“Health care financing is a national issue,” said Mercy Northwest president Eric Pianalto. “Certainly, the financing equation in Arkansas is a little more challenging than other states I have worked in. However, thoughtful dialogue is occurring today about how the financing model will evolve to better reflect the cost of delivering exceptional outcomes and service.”

Pianalto predicts it will continue to be a hot topic nationwide leading up to this year’s political elections.

“I think it is important for people to be reminded that the health industry’s focus should be on what is best for those in need of essential health care services, as opposed to what is best for the industry or what the best political stance is,” he added.

Northwest Arkansas’ population growth prompted Mercy to announce a $247 million expansion during the next three years, and Arkansas Children’s Hospital is planning to open a Springdale campus in January 2018.

“The regional landscape of health care in Northwest Arkansas has seen incremental change over the last decade,” Pianalto said, “but the work currently underway in this community will provide visible signs of a leap forward in care delivery.”

 

Retail

While retail businesses face a wide range of challenges, Bill Thorne of the National Retail Federation in Washington, D.C., says the industry has adapted well and will enjoy solid sales the rest of the year.

 “NRF’s chief economist is projecting retail industry sales (which exclude automobiles, gas stations and restaurants) will grow 3.1 percent in 2016, higher than the 10-year average of 2.7 percent,” said Thorne, senior vice president of communications and public affairs.

“Make no mistake: Retail is not in decline,” he said. “The headwinds are stiff, particularly when considering that retailers across the board are suffering from deflationary prices, but … retailers are constantly assessing and reassessing plans to ensure they are meeting the demands of both the consumer and the business through tight inventory control, smart pricing and keeping a keen eye on the bottom-line costs of running a successful business.”

Thorne, former senior director of community affairs at Wal-Mart Stores Inc., said the Northwest Arkansas retail market generally reflects what is going on nationally, with challenges that include the effects of federal regulations, global economic uncertainty and a “very unpredictable political campaign season.”

“All of these things impact retailers large and small, and regrettably, none of these things are within the control of the business community,” he said.

Grocery retail, a major player in the industry, faces its own challenges, which have had a continued impact on sales.

“Retail sales in the grocery industry have been flat,” said Roger Collins, chief executive officer of Harps Food Stores Inc. in Springdale. “In my opinion, the next six months will be similar to the first half of the year. We don’t expect significant changes in unemployment, interest rates or fuel costs.”

Collins identified the addition of thousands of new grocery formats as a key challenge to his business, as dollar stores, convenience stores and pharmacies try to get into the grocery game.

To make up for it, Harps has been upping sales by building and acquiring new stores, and Collins plans to keep that going.

“Growth will continue to be a focus for Harps,” he said.

 

Tourism

One of the fastest-growing industries in Arkansas in recent years has been tourism, and that trend is continuing in 2016.

Kane Webb, executive director of the Arkansas Department of Parks & Tourism, said tourism tax collections so far this fiscal year are up 8 percent.

A 2 percent sales tax is collected in Arkansas on tourism-related business including lodging, theme parks, marinas and camping. The fiscal year for the ADPT is July 1 through June 30.

“Those collections are a real good way of tracking visitors who are coming into a certain [county] and spending the night, spending the money and investing in their trip,” Webb said. “We’re in a period of time right now that we’re living the dream. We really are. And Northwest Arkansas is certainly one of the engines for that.”

Fiscal year 2014 tax collections for the state were $13.09 million, and collections for fiscal year 2015 rose 7.7 percent to $14.09 million.

Webb said one of the highlights of the tax collections in fiscal year 2015 was the month of June when, for the first time ever, the collections exceeded $1.5 million. In the current fiscal year, there have already been two months that exceeded $1.5 million in tax collections — July and October.

“At the rate we are on, we’ll reach $15 million in tax collections this fiscal year, and that would be an all-time high,” Webb said. “[State tourism director] Joe David Rice and I talk about this all the time: You can’t expect to sustain this pace forever. Eight percent growth on top of 7 percent on top of 6 percent. But it’s strong again this year. It helps that we had a really good winter weather-wise, gas prices have been lower, but you also have to have a product to attract people to, and Arkansas’ certainly got that.”

Webb said Crystal Bridges Museum of American Art in Bentonville continues, of course, to be a game-changer for the entire state’s tourism industry. He also praised the Walton family’s commitment to enhancing the trail system and cycling culture in the region with their backing of the Razorback Regional Greenway.

A good indication of the cycling tourism that is being built in Northwest Arkansas will be seen in November when the International Mountain Biking Association (IMBA) brings its 2016 world summit to Bentonville.

It’s the first time that IMBA, the oldest and largest mountain biking organization, will host its annual event outside of a Mountain State. An estimated 800 people from 20 to 30 U.S. states and a dozen countries are expected.

“If you expose more people to what we have to offer, they will go back and spread the word,” Webb said. “It’s a win in the now and a win in the long term.”

 

Manufacturing

Globally, the industry is experiencing slow growth, and this might threaten the industry’s revenue outlook, said Mike Harvey, chief operating officer for the Northwest Arkansas Council.

But in Northwest Arkansas, the biggest concern for manufacturers has been finding skilled workers, such as welders and machinists, to fill open positions.

“There’s a big turnover going on,” Harvey said. Workers are starting to reach retirement age, and manufacturers are being challenged to replace them. “We’ve been hearing it since we started surveying them in 2011.”

In 2015, 69 percent of manufacturers had trouble filling openings for skilled workers. That’s up from 41 percent in 2013.

Each year, about 400 to 500 people are needed to fill production and maintenance jobs.

But in 2015, less than 90 people completed training and earned certificates for these jobs. Manufacturers are filling the gap by seeking out employees who show potential and train them in house.

“I wouldn’t be surprised if wages picked up because of the tightness in the labor market,” Harvey said.

Nearly 28,000 people work in manufacturing, accounting for about 6 to 7 percent of the Northwest Arkansas workforce. This is down from almost 25 percent 40 years ago, which marked the beginning of a downward trend in the jobs.

In 2013, some jobs were added, but the number of new jobs in manufacturing has been flat over the past two years.

About half work in food production. Average wage in this sector is $34,470.

Fabricated metal products has the second most workers with 2,676. Average wage is $48,186.

In third, plastics and rubber products has 2,155 workers, with average wages of $51,580.

“These are good paying jobs,” Harvey said. “These aren’t what you are thinking.”

A surprise in the industry over the past six months has been the quick decrease in the vacancy rate of industrial space. “They’ve run out of room to grow,” he said.

“The vigorous nature of growth over the past two years has really surprised us. We’re clicking along at rates comparative to the boom years in the late ‘90s and early 2000s. Manufacturing is certainly holding its own.”

 

Banking

As of June 23, according to the Federal Deposit Insurance Corp., there were 27 banking institutions holding deposits in Benton County, at a combined 92 offices.

In Washington County, the numbers were 26 banks and 100 offices.

In Arkansas, those figures rank only behind Pulaski County, which has 29 banking institutions and a combined 192 offices throughout the state’s most populous county.

Rogers banker Jon Harrell, chairman of Harrell Bancshares Inc., the holding company for Generations Bank, explained the plethora of banks in the two-county area very simply — Arkansas-owned banks feel required to have a Northwest Arkansas presence to remain viable.

“If you’re going to bank in this state, I think everyone feels like they have to have a presence up here going forward to continue to grow,” he said. “I think that’s what we’re seeing.”

It isn’t surprising, then, that the competition in Northwest Arkansas’ banking market remains high. Harrell said the number of banks in the market has benefitted consumers, but banking organizations are feeling the pressure to stand out.

“It puts a lot of pressure on what we can charge our customers to keep them,” said Harrell, a member of the Arkansas Bankers Association board of directors. “A lot of banks are offering longer term, lower rates than what we have historically been comfortable offering in our industry.”

Community banks, Harrell said, are still earning significantly higher margins than the rest of the banking industry, but interest margins, overall, remain under pressure in the entire sector.

Randy Dennis, president of DD&F Consulting of Little Rock, noted that Arkansas banks are doing much better than banks in many other states. He said he hears the whispers that the market is heating up too fast, particularly in Northwest Arkansas.

“It’s really not; banks are being cautious,” he said. “Nobody wants a replay of 2008 to 2011. We’d just as soon not see that movie again.”

As for consolidation, 2016 has been relatively quiet in the state. Dennis said banks are taking a wait-and-see approach, but would-be sellers holding out for higher pricing multiples shouldn’t hold their breath.

“I think there will be some mergers the second half of the year,” he said. “There are some banks out there that would be interested in selling if they could, but I think some of our banks may be disappointed if they think they’re going to get 1.6 or 1.7 [multiples to book value]. Rural banks, especially.”