Northwest Arkansas economy grows despite workforce challenges, housing costs

Without approximately 6,600 new jobs year-over-year in Northwest Arkansas, the state would have lost ground, according to Mervin Jebaraj, director for the Center for Business & Economic Research at the University of Arkansas.

The region of more than 500,000 residents continues to add about 1,000 new people a month, with roughly 70% of those moving into the area.

Jebaraj updated the business community during the quarterly economic analysis luncheon in Fayetteville on Thursday (May. 24.) He said Northwest Arkansas continues to set the bar high for the rest of the state in terms of employment and wage growth. He said central Arkansas added about 2,200 jobs year-over-year and Jonesboro added about 1,200. Fort Smith, Hot Springs and Pine Bluff metros reported flat job growth from a year ago.

Benton and Washington counties had the highest weekly wages of any other counties in the state during 2017, according to the U.S. Bureau of Labor Statistics. Jebaraj said higher paying jobs are in partly the result of the tight labor force. With an employment rate of 2.8% and the kinds of jobs being created, the region looks different from the state workforce data. While the largest growth categories in Northwest Arkansas were leisure & hospitality, construction, manufacturing, government and health and education, statewide it was professional & business services, manufacturing and banking.

HIGHER HOME PRICES
Jebaraj said Northwest Arkansas is not without its challenges, particularly a tight labor force, high childcare costs and rising home prices, which are already out of reach for the lower part of the buyer spectrum. He said the biggest obstacle to hiring by small businesses is finding job candidates. He also said as land and lumber costs continue to escalate, so have the cost of new homes. The average home price in Benton County is $230,000 and in Washington County it’s $220,000.

“The average home price has gone up by $50,000 in the past five years and this growth rate is causing prices to be unattainable for some people, especially with interest rates also approaching 5%,” he said.

Jebaraj said there is a low number of new homes being built under the $200,000 price tag, and those which do come on the market are often snapped up by investors who turn them into rentals. With already the highest home prices in the state, 40% of transplants who locate here do so from elsewhere in the Natural State. He said about 25% of the transplants relocate from neighboring states like Texas or Oklahoma.

“Home prices in this region are higher than in Tulsa and Oklahoma City and St Louis and on par with Dallas,” he said. “This is something to watch because affordability has been an advantage we previously had and now it is disappearing.”

Lack of single family housing has pushed transplants into apartments, which have kept vacancy rates at a low 4.5% across the region. At the same time, lease rates have increased 21% in the past five years and there are 8,000 new units expected to be introduced into the market in the next year or two. Jebaraj doesn’t think all of them will get built because vacancy rates are likely to push higher as more units come online.

He said the local labor force participation rate among younger women with children remains much lower than elsewhere in the state because childcare costs are high. He said there are not enough affordable daycare options for young families. Because the one parent who has to stay home is often a skilled worker not available to local employers, that further reduces available labor.

TARIFF, INFLATION CONCERNS
Wildcards in the national economy which could hinder the expected  2.9% GDP growth this year include trade tariffs, which limit exports. Jebaraj estimates loss of trade with China if the tariffs imposed by each side are carried out, and that could impact 5,000 Arkansas jobs. He said as the North American Free Trade Agreement (NAFTA) is being modernized it’s important for Arkansas that a deal be reached because 46% of the state’s exports last year went to free trade partnering nations.

Jebaraj also said business investment has been strong among large companies following the change in federal tax law. However, smaller and mid-size businesses have been much slower to announce investments, in part because they are waiting on more clarity from the IRS on tax rules. He said if companies not now investing do ultimately begin to do so, it will give some upside to the overall economic growth.

When asked about inflationary pressures on fuel and transportation capacity restraints, Jebaraj told Talk Business & Politics the Federal Reserve is closely watching inflation and pricing pressures on consumers are already baked into the 2.9% growth expectation. He said it’s likely the Fed will only raise interest rates twice more this year in an effort to keep inflation around 2%.

“There are plenty of levers that can be pulled to keep inflation in check so it’s not really a concern at this point,” he added. “Consumer optimism remains high and so does their spending on the heels of the tax cuts. But in reality the raises they got from tax cuts are likely going into their gas tanks and we’ll see how they adjust spending if fuel prices continue to escalate.”