The Compass Report: Central Arkansas economy improving

Third quarter 2012 economic conditions in the Little Rock-North Little Rock-Conway (central Arkansas) metro area saw limited gains in economic conditions compared to the third quarter of 2011. The quarter saw improvement in non-farm employment through the quarter and gains in sales tax collections.

The 2012 third quarter economy in the central Arkansas area received a grade of C+, meaning that the economy performed better than the third quarter of 2011.

Non-farm employment added just 1,900 jobs since September 2011, this is good but not great employment growth. Manufacturing lost 500 jobs year-on-year according to data for September of this year. Natural resources, mining, and construction lost just 200 jobs compared to September 2011.

One of the bright points for the region has been a consistent trend in sales tax collections, which is a good sign for consumer confidence. The gains in sales tax collections mirror the improvement in the regional jobless rate, which ended the quarter at 5.9%.

Third quarter 2012 economic conditions in the Northwest Arkansas metro area received a grade of B- based on slight improvements compared to the third quarter of 2011. Ongoing job growth and consistent gains in area sales tax collections are signs of the strong metro economy. (Link here to the complete Northwest Arkansas report.)

Third quarter 2012 economic conditions in the Fort Smith region were not improved compared to the 2011 period, with the number of employed in the region weighing negatively on the regional economy. The third quarter marks the fourth consecutive quarter of relative economic decline in the Fort Smith region. (Link here to the complete Fort Smith metro report.)

“The more things change the more they stay the same,” noted economist Jeff Collins, who conducts the data collection and analysis for The Compass Report. “Once again the Northwest Arkansas regional economy leads in terms of growth. Central Arkansas, the state’s largest metro continues to grow but at an anemic pace that cannot be satisfying to regional leaders.”

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.

NATIONAL ECONOMIC NOTES
President Barack Obama’s re-election coupled with continued control of the U.S. House of Representatives by the Republicans implies significant challenges to avoiding the economic impact of expiring Bush era tax cuts and mandated spending cuts otherwise known as the “fiscal cliff,” Collins said.

The biggest impediment to a budget deal may be the pledge by many Republican lawmakers to never raise taxes, a promise that probably won’t be kept by many. In the end, few options exist for policymakers unless entitlements and tax reform are on the table, Collins said.

“In the end, we should expect considerable posturing and drama ending in a mix of spending cuts and tax increases. What we shouldn’t expect is meaningful tax or entitlement program reform. The structure of any budget deal will have minimal impact on the current short-run trajectory of the economy. That trajectory implies slow but steady improvement,” Collins wrote.

He also suggests that the fundamental problems facing the U.S. economy remain the same; the Great Recession was driven by balance sheet issues that continue to be addressed by business and households. He also said the declining impact of the government sector is unlikely to be replaced by business investment given weak demand – domestically and abroad.

“Lack of demand and uncertain prospects for future demand make adding capacity or employment a risky proposition. This is bad news for the roughly 12.2 million of Americans unemployed,” Collins wrote.

Following are a few of Collins’ key points on U.S. economic realities during the second quarter of 2012.
• Third quarter real GDP increased at an annual rate of 2% according to the “second” estimate from the U.S. Bureau of Economic Analysis. This is an improvement from the final second quarter estimate of 1.3%. Real GDP has increased in every quarter since second quarter 2009.

• Economists will look to holiday retail spending for signs that improved consumer confidence means a loosening of the purse strings on the part of households. Even if consumers return to previous habits, tight lending requirements by financial institutions remain an impediment to full-fledged recovery.

• Federal government spending increased during the third quarter by 9.6% fueled by a 13% jump in defense spending. Second quarter data indicated a decrease of 0.2% in federal expenditures, with defense related expenditures falling by the same percentage.

• State and local government spending has also been affected by changing economic conditions and voter sentiments. Third quarter real state and local expenditures fell by 0.1% following a 1% decrease in the second quarter.

• U.S. housing prices have rebounded and are now growing at an annualized rate of approximately 7%. Housing starts and permits have also improved with starts up roughly 15% in September. Full recovery is still far off but given the depth from which the industry had to climb, the most recent data provides reason for optimism.

• Consumer demand has improved. Real personal consumption expenditures grew by 2% in the third quarter. For the same period, demand for durable goods was up 8.5%, while demand for non-durables rose 2.4%.

• On the goods producing side, employment in manufacturing has shown improvement led by non-durable goods manufacturing employment.

According to Collins, following are some of the risks to U.S. economic growth.
• Lack of political will. There are no easy or painless fixes to the current difficulties faced by policymakers. Mutual sacrifice that reflects economic reality rather than political ideology is required. In hind-sight we gave ourselves tax cuts we couldn’t afford and spent money we didn’t have.

• And as before, there is the ongoing inability of Europe to adequately address the financial crisis in an ever growing number of states. It remains to be seen whether or not the required unified financial structure and fiscal integration will occur.

• Israeli military action in Gaza and the potential for war with Iran remain atop the list of international risk factors. The U.S. has announced that Iran will not be allowed to join the list of nuclear powers.

CENTRAL ARKANSAS REGION — THE COMPASS REPORT DATA SUMMARY
CURRENT INDICATORS
Non-farm employment — C
Non-farm employment has lagged 2011 figures, with employment in the metro area at 338,300 in September, up from 336,400 in September 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. However, given the relatively small percentage of employment in the goods producing sector in the central Arkansas area, this metric is less meaningful than for the Fort Smith or Northwest Arkansas areas. The percentage of manufacturing jobs in the overall workforce was 10.4% in September 2012, down from the 10.7% in September 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 third quarter. Unemployment in September was estimated at 5.9%, compared to 6.9% in September 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
Overall, sales tax collections in the region were up in the third quarter. The tax collections, which are good indicators of regional consumer confidence, in the five counties in the region totaled $8.212 million during August 2012 — compared to $7.966 million in August 2011. Little Rock posted August tax collections of $5.834 million, up from $5.717 million in August 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 third quarter (measured in a three-month rolling average) were relatively significantly ahead of the third quarter of 2011. The rolling average in September was $62.48 million, almost three times the $21.301 million in September 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 central Arkansas has trended positive for several quarters. September 2012 saw 30,900 jobs in the regional hospitality sector, up from the 29,900 jobs in September 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 August or August 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 — D
Manufacturing employment continues a slow decline in the area, not unlike most metro areas in Arkansas. Sector employment in September 2012 was 19,000, down 500 jobs from September 2011 employment of 19,500. Employment in the sector is down more than 32% from more than a decade ago when January 2002 manufacturing employment in the metro area stood at 28,200.

Construction employment — D
This sector, which includes mining/natural resources employment, showed a small drop in the third quarter, ending at 16,300 jobs in September 2012, compared to 16,500 in September 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.