The Compass Report: Regional economy relatively flat during second quarter

The good news is that the Fort Smith regional economy did not slip during the second quarter. The bad news is, it didn’t get better.

Second quarter economic conditions were relatively unchanged in the Fort Smith region compared to the 2009 period, with strength in the construction sector and slight gains in sales tax collections offset by continued declines in non-farm employment.

According to The Compass Report, economic conditions in the second quarter of 2010 garnered a “C-” grade. The grade means that relative to the region’s historic economic performance, the second quarter of 2010 saw relative economic improvement compared to the same period in previous years, and did not slip from the economic improvements seen in the first quarter of 2010. Economist Jeff Collins conducts the data collection and analysis for The Compass Report, which is presented by Fort Smith-based Benefit Bank.

OVERALL GRADES — Fort Smith regional economy (per quarter)
2Q 2010: C-
1Q 2010: C-
4Q 2009: D
3Q 2009: D
2Q 2009: D-
1Q 2009: D+

“Locally, current year-on-year tax collections at the county level indicate retail activity was weak but improving,” Collins said in his analysis. “While there is a lag in sales tax collection reporting by the state, the discernible trend is clearly positive. This is a fundamental change from data for most of 2009.”

Joe Edwards, president and CEO of Fort Smith-based Benefit Bank, said the lack of clear economic growth and results from The Consumer Compass Report are indicative of what he sees in business and customer circles.

“This information appears to reflect the huge amount of uncertainty that continues to accumulate with a lot of people today. This type of environment (uncertainty) is not conducive to growth,” Edwards explained.

Trends in retail activity are also indicated by employment in the sector. Year-on-year employment for the Fort Smith Metropolitan Area indicates the loss of roughly 500 jobs in the trade, transportation, and utility sector of the metro area economy (-2.1%).

Collins said local sales tax collection data shows that “local consumers are mimicking behavior observed nationally.” He said improved retail activity obviously has a positive impact on public revenue, but said the “extent of the rebound remains tied to national economic trends.”

Mixed signals on the national economic front suggest the remainder of 2010 will produce more mediocre or declining economic growth, Collins said.

“The macro-economy has stabilized but slow growth coupled with anemic labor markets indicates the recovery is going to take much longer than anticipated by some and hoped for by most,” Collins explained. “Despite the modest growth estimate for GDP, expanded manufacturing activity coupled with continued growth in retail sales were encouraging signs for continued expansion through the rest of 2010. That said, many forecasters have lowered their annual estimate for GDP growth for 2010.”

Collins also said the troubled commercial real estate market is behind much of the tight lending conditions around the country. He said the estimated $176 billion in under-performing commercials loans on the books of the nation's banks are causing bankers to push money into reserves rather than loans.

“With the percentage of commercial loans 30 days or more past due running at roughly 8 percent, more than four times the recent historical average, dollars that could go to new loans are likely being hoarded should the worst case materialize and all those suspect commercial properties revert to the banks,” Collins explained.

The U.S. unemployment rate is unlikely to improve, Collins predicts, with the lackluster economy and federal policies to result in political problems for national Democrats.

“The upcoming elections will be a referendum on the first two years of the Obama administration’s economic and other policies,” Collins said. “Unpopular banking and corporate bail-outs coupled with continued poor performance of the labor market weigh on the shoulders of incumbents, particularly those in the majority.”

UNDERSTANDING THE COMPASS
A key factor in understanding The Compass is in understanding the “grading” approach used to measure the current and leading economic indicators. The strategy is to place the most recent data in historical context. Average values for the percent change over the referenced time period were calculated, as were standard deviations for each measure.

The more similar current values are to historic averages the more likely the indicator grade is to be a “C.” The farther away the observed value, as measured by the standard deviation of the data, the more divergent the grade from “C.” In other words, “C” reflects no change in economic activity. The grades “B” or “A” indicate improvement above the historical average, and “D” and “F” indicate a decline in economic activity compared to the historical average.

CURRENT INDICATORS
Determining the current position of the area economy depends on reading the relative performance of the area economy based on the current indicators. Data for the period 2005 to the second quarter of 2010 are used to provide historical reference points for current data. Using the grading scale for each indicator, the current position of the economy is as follows:
• Change in non-farm employment: D
Non-farm employment continued to show weakness, with employment in the metro area at 115,700 in June compared to 118,000 in June 2009.

• Change in metro area unemployment rate: C
The area unemployment rate, an important gauge in the health of the metro labor market, showed relative decline in the quarter compared to the 2009 quarter. Unemployment in June was estimated at 7.9%, compared to 8.2% in June 2009.

• Change in sales and use tax collections: C
Sales tax collections in the region and the city of Fort Smith began to show weakness in the second quarter of 2009. That weakness abated somewhat but continued into the second quarter of 2010. The tax collections, which are good indicators of regional consumer confidence, were up in Crawford, Franklin, Logan and Sebastian counties — $3.217 million in May 2010 compared to $3.129 million in May 2009.

• Change in goods-producing employment: C+
In what is a counterintuitive concept, the decrease in manufacturing jobs as a percentage of the overall workforce is a good thing — however painful it might be in the process — in that it helps diversify the economy. The percentage of manufacturing jobs in the overall workforce was 25% in June 2010, down from the 25.3% in June 2009.

LEADING INDICATORS
Leading indicators provide insight into the near-term direction of the local economy. Economic figures for the period 2005 to the second quarter of 2010 are used to provide reference points for current data. Using the grading scale for each indicator, the near-term position of the area economy is as follows:
• Change in building permit valuation: A
The total value of permits issued in the second quarter (measured in a three-month rolling average) was significantly higher than those in the second quarter of 2009. The highest rolling average was $12.007 million in the quarter, compared to a high of $7.271 million in the second quarter of 2009. The indicator continues to be one of the bright spots in the regional economy.

• Change in construction employment: D
The sector, which includes mining/natural resources employment, showed employment decreases (8,000 in June 2009, compared to 7,400 in June 2010).

• Change in manufacturing employment: D
Declines continue in manufacturing employment in the Fort Smith region. Sector employment in June 2010 was 21,500, down 500 jobs from June 2009 employment of 22,000. However, the declines are becoming less steep.

• Change in hospitality employment: D-
Hospitality employment continued a decline that began in mid-2009. June 2010 saw 9,000 jobs in the regional hospitality sector down from the 9,700 jobs in June 2009.

COMPARATIVE CHANGES
Grade change comparisons between the first quarter of 2009 and the first quarter of 2010

Current Indicators
2Q 2010 — Change in non-farm employment: D
1Q 2010 — Change in non-farm employment: D+
4Q 2009 — Change in non-farm employment: D+
3Q 2009 — Change in non-farm employment: D
2Q 2009 — Change in non-farm employment: D
1Q 2009 — Change in non-farm employment: D-

2Q 2010 — Change in metro area unemployment rate: C
1Q 2010 — Change in metro area unemployment rate: C-
4Q 2009 — Change in metro area unemployment rate: D-
3Q 2009 — Change in metro area unemployment rate: D
2Q 2009 — Change in metro area unemployment rate: F
1Q 2009 — Change in metro area unemployment rate: F

2Q 2010 — Change in sales and use tax collections: C
1Q 2010 — Change in sales and use tax collections: D-
4Q 2009 — Change in sales and use tax collections: D-
3Q 2009 — Change in sales and use tax collections: D-
2Q 2009 — Change in sales and use tax collections: D-
1Q 2009 — Change in sales and use tax collections: C-

2Q 2010 — Change in goods-producing employment: C+
1Q 2010 — Change in goods-producing employment: B-
4Q 2009 — Change in goods-producing employment: B-
3Q 2009 — Change in goods-producing employment: C-
2Q 2009 — Change in goods-producing employment: B-
1Q 2009 — Change in goods-producing employment: B

Leading Indicators
2Q 2010 — Change in building permit valuation: A
1Q 2010 — Change in building permit valuation: A
4Q 2009 — Change in building permit valuation: C+
3Q 2009 — Change in building permit valuation: C+
2Q 2009 — Change in building permit valuation: C
1Q 2009 — Change in building permit valuation: B

2Q 2010 — Change in construction employment: D
1Q 2010 — Change in construction employment: D
4Q 2009 — Change in construction employment: C-
3Q 2009 — Change in construction employment: D
2Q 2009 — Change in construction employment: D
1Q 2009 — Change in construction employment: D

2Q 2010 — Change in manufacturing employment: D
1Q 2010 — Change in manufacturing employment: D
4Q 2009 — Change in manufacturing employment: D
3Q 2009 — Change in manufacturing employment: D
2Q 2009 — Change in manufacturing employment: D
1Q 2009 — Change in manufacturing employment: D

2Q 2010 — Change in hospitality employment: D-
1Q 2010 — Change in hospitality employment: D
4Q 2009 — Change in hospitality employment: D-
3Q 2009 — Change in hospitality employment: F
2Q 2009 — Change in hospitality employment: D-
1Q 2009 — Change in hospitality employment: D