Economic forecast: Leaders chime in on what to expect in 2019

Talented people are the driving force behind any effective economic strategy.

As 2019 begins, one of Northwest Arkansas’ leading development officials believes attracting and retaining those individuals remains the defining assignment for the region’s continued success.

“We’re really focused on [attracting] talent that our companies need here to continue to grow,” said Nelson Peacock, president and CEO of the Northwest Arkansas Council.

Peacock said as long as Northwest Arkansas can continue to be attractive and appealing, population growth will continue.

The council estimated a little more than 551,000 residents in mid-November lived in the Fayetteville-Springdale-Rogers metropolitan statistical area (MSA), the region collectively referred to as Northwest Arkansas. While Northwest Arkansas is not yet among the top 100 MSAs in the country, its rate of growth from July 2016 to July 2017 was faster than 96 of the nation’s 100 largest MSAs.

Along with population growth, job growth and wage growth are three top indicators.

“All of those are looking good right now and have been for the past five-plus years,” Peacock said. “Based on the projections that we’ve seen, they all look good going forward.”

Peacock said providing necessary training and education opportunities will also be important to stay competitive. The council has long identified workforce development programs and career awareness as vital to increasing skilled labor in Northwest Arkansas. In October, a grant from the Walton Family Foundation in Bentonville allowed the council to hire Joe Rollins for a newly created position focused on expanding business-education partnerships in the region.

Related to that strategy is increasing the University of Arkansas’ economic impact on the region in terms of innovation and commercialization. In the 2017 Milken Institute report “Concept to Commercialization” that examined which American research universities were best at technology transfer through licensing and startup activity, the UA was ranked No. 119. The study was led by Ross DeVol, who was recruited and hired last year by the Walton Foundation to be its chief research officer.

“[Research and development] expenditures and how that relates to the commercialization of technology is an area where — and the UA would admit this — they have underperformed in recent years,” Peacock said. “How can we really amp up the economic development capacity at the UA? That’s going to help us not only develop and attract entrepreneurs and creatives, it will also help us diversify our economy in some core areas.”

The Walton Family Charitable Support Foundation made a $27.3 million gift to the UA in November to recruit researchers and bulk up commercialization efforts. According to the most recent data from the National Science Foundation, the UA ranked No. 128 in research expenditures with $157.79 million in fiscal year 2017.

“We’ve got a long way to go, but I think if you went and talked with the chancellor and others, you will see they are excited about the potential there,” Peacock said. “I think it’s a sleeping giant, and I think everyone here is excited about the prospects of really cranking that up.”

Peacock also said the work will continue in 2019 on EngageNWA, a four-year strategy unveiled in July by the council to foster a multicultural environment. Ensuring a diverse community is essential to the region’s long-term economic success.

“Demographics are changing nationwide and right here, and regions that embrace change and create an environment where everyone can contribute to the highest and best possibility are going to be the ones that succeed,” he said. “We have a lot of work we’re doing to make sure Northwest Arkansas does that. It’s part of our strategy of embracing the change in diversity and really taking advantage of it.”

Peacock said the continued effort to recruit a low-cost carrier to Northwest Arkansas Regional Airport (XNA) is important for the region in 2019. The high cost of airline fares continue to have a “downward drag” on the economy and quality of life, Peacock said.

“It’s something we have focused on. We just haven’t had a lot of success,” he said. “But we continue to work at it.”

As for policy discussions, Peacock said he is keeping an eye on any progress in the debate over comprehensive immigration reform.

“Unfortunately, it really gets political,” he said. “We have gaps in our workforce at the highest level through the lowest level. In addition to our efforts for workforce training, we would like for Congress to find a way to get a good, smart policy on immigration reform so that we could address some of those shortages.”

Here’s what leaders in a handful of other sectors had to say about the coming year:

RETAIL
Consumers are the key to a strong retail showing predicted for 2019, according to Moody’s Analytics Senior Economist Scott Hoyt. He expects retailers will enjoy brisk economic tailwinds in 2019 behind a strong labor market that inspires liberal spending and a robust business climate to fuel higher corporate profits.

“The coming 12 months should be a good year for retailers,” Hoyt said. “Core retail sales [which exclude auto and gasoline segments] are expected to grow a healthy 4.7% in 2019.”

He said consumers appear to be euphoric, and happy shoppers will support higher retail sales.

“The fiscal stimulus in the form of tax cuts, as well as the tight job market, mean there are very few negatives when it comes to consumer fundamentals,” Hoyt said.

He said the tight labor market has started to positively impact wages, and shoppers have a little more cash to spend. Hoyt said wealthier consumers will support higher price tags in the months ahead.

Hoyt also said retailers will continue to try to increase revenues by boosting prices, rather than moving more merchandise in an effort to keep inventory costs down, following a trend that began in 2017.

The nation’s largest retailer, Walmart Inc., is expected to grow its total revenues to $526.53 billion next year, a gain of 2.6%. Its U.S. segment sales are expected to reach $340 billion, up from $330 billion this year.

Statista projects U.S. retail sales of $5.32 trillion in 2019. While the industry expects somewhere between 4% and 4.7% growth, some conservative economists believe expansion is poised to slow a bit as 2019 progresses and the economy navigates more interest rate hikes and trade friction with China.

CONSTRUCTION
The construction industry in Northwest Arkansas is expected to remain strong in 2019, said Bill Roachell, president of trade group Associated Builders & Contractors of Arkansas.

“It’s unbelievable the amount of work going on up there,” Roachell said. “All the members I’ve talked to seem to have a good backlog of work. I look, for the next couple of years honestly, for work in Northwest Arkansas to be extremely strong.”

Contractors are seeing their Northwest Arkansas offices outperform their central Arkansas offices as they have more work there than in central Arkansas, he said.

One of the key metrics Roachell follows is the backlog indicator released by nationwide trade organization Associated Builders & Contractors (ABC), and it shows the amount of work being formed by contractors. In the South, the backlog is 11.18 months. About 10% of the work under contract is commercial and institutional work, and infrastructure accounts for another 10% of the work.

Roachell expects to see more infrastructure work in 2019, and the trade group is part of a coalition looking to work with the governor on a highway funding bill for the next legislative session.

Nationwide, the industry is experiencing a workforce shortage of nearly 500,000 positions, leading wages to rise. Also, rising interest rates have increased; materials prices rose 7.9% in October, from the same month in 2017; and the workforce shortage is expected to continue in 2019, said Anirban Basu, ABC chief economist.

In Arkansas, the construction unemployment rate was 5.6% in October and was tied with Kentucky for the third highest rate in the United States. But the October rate hasn’t been lower since 2006, when it was 5%.

TRANSPORTATION
The industry has been strong over the past several years and looks to be leveling off, said John Kent, clinical associate professor in the Department of Supply Chain Management in the Sam M. Walton College of Business at the University of Arkansas.

The number of new truck orders is a key metric Kent follows to show how the industry is doing, and North American orders of class 8 trucks, the largest truck class, declined 15% to 27,900 trucks in November, from the same month in 2017, according to analyst ACT Research.

“Based on the stock market, based on the confusion in the marketplace, global trade, there’s a lot of uncertainty,” Kent said. “And uncertainty would be another reason for tapping the break on placing new truck orders, besides just, we’re going into the first quarter. And that typically is a slower quarter.”

Kent explained the transportation industry is a leading indicator of how the economy is doing, and other metrics he follows include consumer buying and retail and the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index, which offers an upstream view of the supply chain as it relates to manufacturing.

The capacity to haul freight has been tight in 2018, and he said it’s starting to loosen. He expects the driver shortage to remain an issue in 2019, but as capacity becomes less tight, the number of trucks falls and fewer drivers are needed, driver demand likely won’t be as high. Also, rates aren’t expected to continue to rise as they have been over the past several years.

“With the economy potentially cooling off a bit, I think rates will level out,” Kent said. “And the shippers will have a little more leverage.”

RESIDENTIAL REAL ESTATE
Home sales are expected to drop 2% nationally next year, according to a 2019 housing forecast released in late November by Realtor.com. The group says rising interest rates — 5.5% (30-year fixed) by year’s end — and home prices will make it more difficult to buy or sell a home.

A separate housing survey released by Fannie Mae also determined that only one in five Americans think it is a good time to buy a home.

As for Northwest Arkansas, the market is poised for another year of gains, largely for one reason — population growth.

“As long as we continue to have people move to Northwest Arkansas, that creates a real estate market,” said Jonathan Moore, outgoing board president of the Northwest Arkansas Board of Realtors. “It’s still going to be a seller’s market, at least in the beginning of the year, because of our [low] inventory. That may ease somewhat as more construction is done. But I really expect a good market.”

Moore, a Realtor with Lindsey & Associates in Rogers for the past 23 years, said the overall average sales price of a home in Benton County is up about 5.5% this year. In Washington County, the growth is about 7.5%.

“It’s a basic economic principle: When supply is low, prices go up,” he said. “It’s the nature of real estate.” Moore noted the housing inventory in the market is about three or four months. “A six-month inventory is a good steady market, and we’re under that,” he said.

BANKING
A steady uptick in interest rates to keep the economy on a normalized pace has bankers closely watching moves by the Federal Reserve.

With four fed fund rate hikes in 2018, federal officials have hinted that more may be on the way in 2019. While the feds suggest it may be as few as two, BofA Merrill Lynch predicts up to four interest rate hikes could be coming as regulators do their part to balance steady GDP growth, low unemployment and inflationary pressures against a slowing national housing market. Financial institutions have had consistently strong earnings growth, especially in the past two years, as regulatory relief and a stimulus from corporate tax cuts have helped bottom line growth, but that may dissipate next year.

Consumers are doing their part with spending thanks to low unemployment that has added to incomes. Rising interest rates, however, could cool spending for bigger ticket items, such as homes, cars or major appliances. With consumer spending accounting for nearly two-thirds of all economic activity, bankers will be watching monthly reports on the spending front as well as consumer confidence.

Additionally, factors far beyond the control of local banks may make or break some institutions’ profitability margins. Tariff and trade concerns have produced a series of new winners and losers in the U.S. economy. For instance, agriculture and manufacturing — two areas of utmost importance in Arkansas — have been roiled by the international tariff wars. The steel industry is seeing a boon from the change in trade policy, but that has also inflated costs for construction that residential and commercial builders contend will curtail activity in the near future.

Lastly, disruptive technologies continue to challenge banks. As fintech companies create new ways to conduct commerce, banks that can’t adapt will see some small erosion in market share for interest and non-interest income streams that have been the bread-and-butter of the industry.

Editor’s note: With reporting from Roby Brock, Jeff Della Rosa, Paul Gatling and Kim Souza.