Recession Could Help Wal-Mart, Tyson

If a recession hits the United States, many residents of Northwest Arkansas will never notice. In fact, the two largest companies here may even benefit from it.

Northwest Arkansas appears to be more recession-proof than the rest of the country, largely because the two biggest companies in the area sell inexpensive consumables, goods that might even sell better during a recession than during prosperous economic times.

When times are tough, people switch from beef to chicken because it’s less expensive, and sales at Tyson Foods Inc. are likely to increase as a result.

“People got to eat,” said Ed Nicholson, a spokesman for Tyson Foods.

Dick Lobb, a spokesman for the National Chicken Council in Washington, D.C., said growth in poultry consumption is usually about 3 percent per year regardless of recessions. It’s beef sales that tend to nosedive during a recession, he said.

Wal-Mart Stores Inc. thrives during bad economic times because, no matter how bad things get, people still need groceries, clothing and items such as laundry detergent.

If those two companies are doing well, the prosperity trickles down through much of Northwest Arkansas’ economy.

Wal-Mart, based in Bentonville, sells groceries and staple goods at prices generally lower than any of its competition. The company had $191 billion in sales in the fiscal year that ended Jan. 31 (fiscal 2001). Wal-Mart has 1.2 million employees worldwide and about 10,000 in the Bentonville/Rogers area (not including store employees).

Tyson Foods produces 45 million broilers a week. The company had sales of $7.16 billion in 2000. Tyson has 1,900 employees at its Springdale headquarters and 7,500 in Washington and Benton counties combined (not counting 350 chicken growers in the area).

On top of that, the fact that Arkansas never really became part of the technology boom may be a blessing in disguise.

Crunching

To help us decipher all this, we asked the University of Arkansas’ Center for Business and Economic Research to crunch some numbers.

We gave Jeffrey Collins, the center’s director, gross sales figures for Wal-Mart and Tyson Foods over the past 19 years (from 1982 through fiscal 2000). We were curious to see if the locally based companies had a decline in revenue during recession years like 1991 and 1992.

Many people think a recession occurs when the stock market dips into bear territory — 20 percent below its previous high. But that’s only one factor affecting the economy. Alan Greenspan, chairman of the Federal Reserve Board, said the stock market has predicted five of the last two recessions. In other words, a dip in the market doesn’t necessarily signal a recession.

Collins said the textbook definition of a recession is when there’s a negative growth rate in the country’s real gross domestic product for three quarters in a row (although some economists say two quarters is enough to qualify). GDP is the total value of all final goods and services produced in an economy in a given year. “Real” numbers are adjusted for inflation, as opposed to “nominal” figures, which aren’t adjusted for inflation.

The United States hasn’t had three-consecutive quarters of negative GDP growth since 1993. It also happened in 1982, so our graphic (see Page 1) begins with the growth from that year to 1983 as the country was coming out of a recession.

In spite of all the “recession” hullabaloo, the United States hasn’t had a single quarter of negative real GDP growth since the 1993 recession.

“We need at least two [quarters of negative GDP growth to qualify as a recession,] and we haven’t had one,” said Wayne Lee, chairman of the UA’s finance department. “This is the paradox.”

Seasonally adjusted GDP growth peaked in the fourth quarter of 1999 with an unprecedented 8 percent growth that was “way above its historical norms,” Lee said.

Since then, Greenspan stepped in with interest-rate hikes to slow the economy down. The real GDP growth rate dropped to 2.2 percent in the third quarter of 2000 and 1.1 percent in the fourth quarter.

Lee describes the decline as “normal,” although GDP growth hasn’t been that slow since the second quarter of 1995 and some economists say it’s one of the fastest economic decelerations in U.S. history. The quarterly numbers aren’t reflected in the Page 1 graphic because it’s based on annual deviations from an 18-year average of GDP growth.

Since the beginning of the year, Greenspan has lowered interest rates three times to jump start the economy.

Lee speculates we’re at or near the bottom of the trend, and GDP growth will likely increase in the near future. He said 2000 was a slower year for the economy because it was an election year.

“I would expect [the election] to cause a blip,” he said. “This is a political economy, so you’d expect politics to have an effect on the economy.”

So, currently, the United States is in what is referred to as “an economic slowdown,” not officially a recession.

Greenspan has noted that the employment rate is still good and this slowdown appears to be tied primarily to the stock market. As of March 22, the Nasdaq was down 60 percent over the past year, and the New York Stock Exchange was down almost 20 percent (teetering on the edge of a bear market) from its high of 11,722.98 on Jan. 14, 2000.

But, between March 22 and March 27, the Dow Jones Industrials gained 5.9 percent, showing possible signs of a strengthening economy.

18-year Average

Using the average annual growth rate for the years from 1982 to 2000 as zero, Collins plotted the deviations from the norm for Wal-Mart and Tyson. He also plotted the GDP growth for our graph (but used smaller percentages for GDP on the right side of the graph since GDP didn’t deviate from zero by as much as Wal-Mart and Tyson’s growth). This provided a graph that is “untrended,” Lee said.

Throughout the graph, Wal-Mart growth remained steady, even when the GDP took a nosedive in 1991. Tyson’s numbers, however, are more erratic, due primarily to acquisitions in 1984 and 1990.

Tyson bought Valmac Industries in 1984. The added sales from that acquisition amounted to an increase of 35.3 percent above the 18-year average (or 51.4 percent above the 1984 sales figure) to $1.13 billion in 1985.

After a hostile takeover of Holly Farms in 1990, Tyson’s sales growth increased by 34.5 percent above the 18-year average (or 50.7 percent over the 1989 sales figure) to $3.8 billion for 1990.

The graphic shows a spike of almost 20 percent after Tyson acquired the beleaguered Hudson Foods Inc. of Rogers in January 1998, but the increase just got Tyson back to its 18-year average growth rate increase because Tyson was down from it’s average the previous year.

The largest ground beef recall in history had crippled Hudson in 1997, and Tyson Foods spent several months selling divisions of Hudson it didn’t want. At the time of the recall, Hudson was the third largest poultry company in the United States.

But the graphic also shows Tyson’s sales increasing (compared to its 18-year average) in other years such as 1988, 1996, 1997 and 1998 as the GDP decreased and vise versa.

During the recession of 1991, Tyson followed the GDP into negative growth-rate territory (-13.7 percent for Tyson), but that could have been due to problems digesting Holly Farms.

Coming out of the 1982 recession, Wal-Mart remained steady for the next two years with little change in growth rate while the GDP shot up by almost 5 percent in 1984.

Although Wal-Mart’s sales have increased regularly the company’s line in our chart declined slightly because of Wal-Mart’s sheer mass. The world’s largest retailer has become so large that it’s not growing now (percentage-wise) as rapidly as it was in the 1980s (the earlier part of our 18-year average).

Predictions

Chances are, Arkansas won’t be affected by the economic downturn because the economy here isn’t based on technology, Lee said. The states that will be hardest hit, he said, are California, New York and Massachusetts.

In addition, Lee said Arkansas will also benefit from its proximity to energy producing states like Oklahoma, Texas and Louisiana. And Tyson Foods is benefiting now from the mad-cow scare in Europe, which is causing sales of chicken to increase, he said.

“The companies and the states that are going to be hurt are those that are part and parcel of the technology boom,” Lee said. “They’re all on the West Coast and the East Coast. They gained from the dot com prosperity, and they grew. They’re now going to pay the price. The pain in the recession [if one hits anytime soon] is going to be on both coasts, not in the middle.

“[Arkansas] is not in technology. That helps us. The grass is always greener on the other side, so you should stop getting envious of your neighbor’s lawn.”