The Compass Report: Economy remains robust in NWA

Second quarter 2012 economic conditions in the Northwest Arkansas metro area were slightly improved compared to the second quarter of 2011. Ongoing job growth and consistent gains in area sales tax collections are signs of the strong metro economy.

According to The Compass Report, the 2012 second quarter economy in the Northwest Arkansas area received a grade of B-, meaning that minor improvements were seen in most current and leading economic indicators. The metro area also received a B- for the first quarter of 2012.

The quarterly Compass Report is managed by The City Wire.

The unemployment rate in Northwest Arkansas was the lowest in the state amongst all MSAs in March (5.6%). It is a full percentage point lower than that for the Little Rock/North Little Rock/Conway MSA (6.6%).  The highest rate in the state was the Pine Bluff MSA at 9.2%.

To add perspective, of the 372 MSAs in the country, only 94 posted rates below 7% in June.

“Based on current growth rates, the region is significantly outperforming its peers. The primary growth drivers were not destroyed by the recession, and if anything, the region is likely to become more attractive as other parts of the state and country struggle to create jobs,” noted economist Jeff Collins, who conducts the data collection and analysis for The Compass Report.

The only concern is with housing.

“Real estate is heating up with a significant number of lot and home sales being recorded to the extent that some in the banking community are concerned that supply may be racing ahead of demand,” Collins explained.

The 2012 second quarter economy in the Fort Smith region continued from an economically flat fourth quarter of 2011. The second quarter grade of C- was unchanged from the first quarter of 2012, but below the C in the second quarter of 2011. (Link here to the complete Fort Smith metro report.)

Second quarter 2012 economic conditions in the Little Rock-North Little Rock-Conway (central Arkansas) metro area saw a minor decline in economic conditions compared to the second quarter of 2011. The 2012 second quarter economy in the central Arkansas area received a grade of C-. (Link here to the complete central Arkansas report.)

“The trends evident after the first quarter continue. The biggest risk across the three major MSAs in the state is to growth in Northwest Arkansas. Specifically, is the relatively strong rate of growth sustainable or an anomaly? The data over the next two to four quarters will be telling,” Collins said.

Collins also sees a real threat from national politics and the ongoing fiscal gridlock in Congress.

“On the national level, the outcomes of elections for executive and legislative positions could have profound impact on the state,” Collins noted in his analysis. “As a relatively poor state, Arkansas benefits disproportionately from federal redistribution of tax dollars. Should the fiscal cliff materialize and the country goes tumbling over, some states will fall harder than others.”

DATA LINKS
Link here for a magazine summary of The Compass Report.

Link here for more extensive narrative about regional and national economic analysis.

Link here for raw data used to prepare The Compass Report.

UNDERSTANDING THE COMPASS
The quarterly Compass Report is managed by The City Wire and presented by Fort Smith-based Benefit Bank. The report has been produced for the Fort Smith metro area since the first quarter of 2009. The first quarter of 2012 was the first quarter in which The Compass Report measured economic activity in the Northwest Arkansas and central Arkansas metro areas.

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.

NATIONAL ECONOMIC NOTES
Collins said President Barack Obama’s re-election likely depends on economic data released between now and election day.

“Unfortunately for millions of Americans (and the President), the economic recovery has been anything but robust. Unlike typical patterns of expansion coming out of a recession, particularly a deep recession, employment growth has been next to non-existent,” Collins noted. “Corporate profits, consumer spending, even real estate data indicates improvement nationally but to paraphrase an old idiom, ‘It’s the labor market, stupid.’”

Other than struggles with the labor market, Collins also notes the potential for Washington D.C. gridlock to further dampen economic activity.

“We are our own worst enemies. A sharp reduction in government spending coupled with the elimination of the Bush era tax cuts has the potential to push the economy back into recession. It will take political leadership from the executive and legislative branches along with the willingness to compromise to avert the potential disaster. Unfortunately, both qualities do not seem to be part of the collective DNA in Washington,” Collins opined.

Following are a few of Collins’ key points on U.S. economic realities during the second quarter of 2012.
• The unemployment rate has stabilized at just over 8%. Many believe the unemployment rate fails to adequately describe the true state of the labor market, because some potential participants have withdrawn from the labor market or are under-employed relative to their skill level.

• The labor force participation rate has fallen year-on-year 0.3%. The number of “long-term” unemployed, those unemployed 27 weeks or longer, was 5.2 million in July.

• For those underemployed, it is unclear that the current situation is an anomaly. Strong investment by global corporations in equipment and software has made many positions redundant.

• On the goods producing side, employment in manufacturing has shown improvement led by durable goods manufacturing employment. This can be partially attributed to improvement in housing demand.

• Growth in natural gas production implies the U.S. may soon be an exporter of energy.

• Slow economic growth has meant little pressure on prices. The CPI-U for all items was up a very modest non-seasonally adjusted 1.4%. The core rate, all items less food and energy, was up 2.1%. The index for energy was down 5% led by decreases in the indexes for gasoline and fuel oil.

According to Collins, following are some of the risks to U.S. economic growth.
• The Middle East remains a dangerous place. Particularly worrisome is the large stockpile of chemical weapons in Syria and the Iranian nuclear ambitions. Either could precipitate military action by either the U.S., Israel, or both.

• And then there is the ongoing inability of Europe to adequately address the financial crisis is an ever growing number of states.  The consensus is only the German economy is currently growing.

• Part of the good news in the U.S. was improved demand for exports. Unfortunately, several emerging economies have slowed, most notably China.

NORTHWEST ARKANSAS — THE COMPASS REPORT DATA SUMMARY
CURRENT INDICATORS
Non-farm employment — A
Non-farm employment is well ahead of 2011 figures, with employment in the metro area at 211,100 in June compared to 203,900 in June 2011.

Non-farm employment is an often quoted measure of employment growth. Moreover, it is disaggregated into various employment sectors such as manufacturing, education and health services, etc.

Change in employment drives population growth. The type of employment being created also determines in large part the change in income that drives growth in retail.

Goods-producing employment — C+
The decrease in manufacturing jobs as a percentage of the overall workforce helps diversify almost any metro economy. The percentage of manufacturing jobs in the overall workforce was 17% in June 2012, down from the 17.6% in June 2011.

This measure speaks to the risk in a local economy from being heavily weighted toward sectors that have been under economic pressure. One of the fundamental principles of reducing risk is diversification.

Metro area Unemployment rate — B-
The area unemployment rate, an important gauge in the health of the metro labor market, posted declines in the second quarter. Unemployment in June was estimated at 5.6%, compared to 6.7% in June 2011.

Like non-farm employment, the local unemployment rate is also often quoted. Increases in the unemployment rate are correlated with declines in consumer confidence.
The unemployment rate is an important gauge of the health of the local labor market.

Sales and Use tax collections — C+
Sales tax collections in the region have shown relatively steady gains since 2010. The tax collections, which are good indicators of regional consumer confidence, were up in Benton, Madison and Washington counties to $6.399 million during May 2012 — compared to $5.932 million in May 2011.

Sales and use tax collections provide an insight into both the total income and change in total income in an area as well as how consumers are responding to new information about the health of the national and local economy. Obviously, this measure is tied to retail activity.

LEADING INDICATORS
Building Permit (housing) valuation — A
The total value of permits issued in the second quarter (measured in a three-month rolling average) were higher than those in the second quarter of 2011. The rolling average in June was $28.335 million, ahead of the $21.574 million in June 2011.

Residential building is an indicator of current and expected population growth. As new households are created they induce growth in retail, education services, health care services and other types of businesses that provide goods and services to households. Also, new construction provides employment and tax revenues.

Hospitality employment — B
Hospitality employment in Northwest Arkansas has trended positive for several quarters. June 2012 saw 21,000 jobs in the regional hospitality sector, up from the 19,300 jobs in June 2011.

Growth in the hospitality and leisure sector as measured by growth in employment is included because of the emphasis on creating quality of place in local economic development initiatives.

Unlike enplanements/deplanements, which may or may not be tied to activity in restaurants, hotels, and cultural venues, hospitality and leisure employment most certainly are influenced by growth of these activities. Another possible measure is hospitality-related tax collections.

Manufacturing employment — C-
Manufacturing employment continues a slow decline in the area, not unlike most metro areas in Arkansas. Sector employment in June 2012 was 28,000, unchanged from June 2011. Employment in the sector is down more than 20% from more than a decade ago when January 2002 manufacturing employment in the metro area stood at 34,300.

Construction employment — D
This sector, which includes mining/natural resources employment, saw declines in employment compared to the second quarter of 2011, but ended June with 7,900 jobs, unchanged compared to June 2011.

The rationale for including construction employment is similar to that for building permits. The employment measure is influenced by changes in both the residential and commercial real estate markets.

Obviously, new space implies new residents and new businesses.