Northwest Arkansas continues pandemic recovery, affordability issue highlighted in annual report

Economic conditions in Northwest Arkansas are improving and some indicators, including the unemployment rate, have returned to pre-pandemic levels as the region works to establish a center to address housing affordability issues.

Area leaders discussed these topics in the 10th annual State of the Northwest Arkansas Region Report hosted virtually Wednesday (Oct. 27) amid the COVID-19 pandemic. Nearly 400 people registered for the virtual presentation on the report that was released by The Center for Business and Economic Research (CBER) in the Sam M. Walton College of Business at the University of Arkansas in collaboration with Springdale-based nonprofit Northwest Arkansas Council.

According to the report, the annual unemployment rate in Northwest Arkansas rose to 4.5% in 2020, from 2.6% in 2019. However, CBER Director Mervin Jebaraj said as of the most recent data in August, the rate has fallen to 2.7%, which was the same rate in August 2019. Later in 2019, the unemployment rate fell to about 2.2%, and he expects a similar trend for the region this year. He also noted the labor force participation is higher than pre-pandemic levels. As of the most recent data in August, the region has about 295,000 people in the labor force or about 10,000 more people than before the pandemic. Statewide, the labor force is down about 10,000 people.

“Most of the job growth at this point in our state is really happening up here in Northwest Arkansas,” Jebaraj said.

He said the region lost about 3,400 jobs in 2020, but between January and August, about 8,900 jobs were added in Northwest Arkansas.

“We’re getting close to where we would have been if we’d not had the pandemic,” he said. “We’re obviously still a little bit short of that. There’s still more jobs that we could add. … But it is going to be harder to add those jobs given that the unemployment rate is as low as it is and the labor force participation is fairly high.”

LABOR ISSUES, BUSINESS STARTS
Jebaraj expects a labor shortage to continue through this year and into next year. He explained the expanded unemployment benefits have had little impact on the shortage and cited a study showing those who were making more on unemployment were returning to work faster than those making less. He also noted the expanded benefits ended in June in Arkansas, but employment has not surged since then.

Amid the pandemic, Jebaraj said people have retired earlier, and mothers with children at home are less likely to be working than they were in January 2020. He said when wages rise amid a labor shortage, people who’ve retired often return to work, but that’s not happened likely because the pandemic is not controlled. Also, limited child care options and its expense have been a problem in Northwest Arkansas with the women’s labor force participation rate, and it’s worsened in the pandemic, he said.

Jebaraj said Northwest Arkansas added nearly 400 businesses in 2020 and about 1,800 businesses in the past five years. Business establishments rose by 2.8% to 14,129 in 2020, the report shows.

Average annual wages rose by 6%, or about $2,900, in 2020, from 2019, said Jebaraj, adding that the increase was strong and at a level that the region hadn’t seen in a long time. The wages increased to $50,470, from $47,600.

Jebaraj, who is a member of the Northwest Arkansas National Airport (XNA) board of directors, said the airport has added low-cost carriers in the past years, but he attributed the decline in the average domestic airfare largely to carriers slashing prices amid a decline in travelers in 2020. The Northwest Arkansas airfares declined by 22.9% to $374 in 2020, from $485 in 2019.

Following are other economic indicators of Northwest Arkansas in the report.
• The estimated population increased by 2.4% to 548,634 in 2020, from 535,746 in 2019.
• Real GDP rose by 0.6% to $23.86 billion in 2019, from $23.73 billion in 2018.
• Research and development expenditures rose by 2.7% to $180.23 million in 2019, from $175.5 million in 2018.

PEER REGION COMPARISONS, TOURISM RECOVERY
The report included comparisons of Northwest Arkansas to six peer regions, such as Austin, Texas; Des Moines, Iowa; Madison, Wis.; Provo, Utah; and Raleigh, N.C. Jebaraj noted these are aspirational peer regions. Northwest Arkansas was tied for second with Provo for population growth of 2.4% from 2019 to 2020. Austin’s population growth rate was 3% over the period. Northwest Arkansas was second in annual unemployment rate (4.5%) and nonfarm employment growth (-1.1%) in 2020. Provo was first in both of the previous categories, with a 3.7% unemployment rate and flat nonfarm employment growth.

Compared to the six peer regions, Northwest Arkansas ranked last in real GDP growth, research and development expenditures and average domestic airfare. Jebaraj explained that the airfare has fallen in all regions, but Northwest Arkansas had the highest airfare than the peers. He also said research and development expenditures have risen over the past five years, but the peers have large universities with some attached to medical schools.

According to a survey of Arkansas small businesses, respondents reported the impact of the pandemic has been moderating recently and that 40% expect a return to normal to take more than six months. Jebaraj explained the latter could be related to concerns of another surge in COVID cases, and more recently, the labor shortage and supply chain issues globally.

Sectors hardest hit by the pandemic, including restaurants and hotels, are doing better than they have been, but they have not recovered to pre-pandemic levels. Jebaraj said hotels have yet to recover as business travel has not returned. The majority of the recovery in the hotel industry can be attributed to leisure travelers, such as those coming for events like Razorback games, he noted.

Between 20% and 30% of people living in Benton and Washington counties are working from home, down from between 40% and 50% at the onset of the pandemic.

HOUSING PRICES
The topic of housing affordability in the region also was discussed. Jebaraj said the region hasn’t built enough homes to keep up with growth as the population growth rate has exceeded the pace of home construction. Meanwhile, fewer lots are available on which to build homes as land prices rise. This has led people to reside in homes that are further from their jobs or amenities. As a result, the cost of transportation becomes a bigger factor in living expenses.

In Northwest Arkansas, the average household spends about 52% of their income on housing and transportation expenses, he said. Compared to the six peer regions, the average Northwest Arkansas household spends more on housing and transportation expenses. The average household spends about 50% in Austin, 51% in Provo and 47% in Raleigh.

“We’re actually more expensive than our peer regions, which is not something we typically think about,” he said. “When we think about housing affordability, we just look at the housing price. But once you account for transportation… how much it costs to drive to these jobs and amenities, that’s a lot more expensive.”

Nelson Peacock, CEO of the Northwest Arkansas Council, said now is the time to act to address the housing affordability issue. In March, the council announced establishing a workforce housing center and that he expects a new director to be announced in a month and an advisory board to be announced by the end of the year. He also expects the center to be operating by early next year. It’s being supported by a grant from the Walton Family Foundation.

“If we don’t begin to address the issue of housing affordability now, we’re going to miss our window,” Peacock said. “We’re going to miss the chance to change the trajectory here in Northwest Arkansas. … If high housing costs displace our key workforce, not only do we risk our economy, but we risk losing that sense of community and small town feel that we have in Northwest Arkansas. It’s that small town feel combined with the economic prosperity that makes this place so special.”

Link here for a PDF of the 2021 State of the Northwest Arkansas Region Report.