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The Compass Report: Gains seen in regional economy

Second quarter 2011 economic conditions were slightly improved compared to the first quarter of 2011 and unchanged compared to the second quarter of 2010 — thanks to stability in sales tax collections and gains in hospitality industry employment.

According to The Compass Report, the second quarter 2011 economy in the Fort Smith region continued on a track that saw an improved grade (C- to C) when compared to the first quarter of 2011. The quarter was also an improvement over the C- grade of the 2010 second quarter. In fact, the second quarter 2011 grade is the best grade given since The Compass Report launched in the first quarter of 2009.

Locally, current year-on-year tax collections at the county level indicate retail activity has stabilized. While there is a lag in sales tax collection reporting by the state, the data suggest local retail activity has recovered from the sharp downturn experienced during 2009.

However, it does not indicate a return to the growth experienced during most of 2008.

Despite stabilization in the sales tax collections, retail sector employment remains depressed. From June 2010 to June 2011 the Fort Smith metro area gained roughly 200 jobs in the trade, transportation, and utility sector of the metro area economy (0.8%).

Of the major sectors, the hardest hit has been the manufacturing sector. In January 2005 roughly 24.4% of non-farm employment was in manufacturing. By June of 2011, that percentage had declined to approximately 18.1%. Declining manufacturing employment has significant ramifications for other sectors including trade, transportation, and utilities and hospitality and leisure.

OVERALL GRADES — Fort Smith regional economy (per quarter)
2Q 2011: C
1Q 2011: C-
4Q 2010: C-/D+
3Q 2010: C-
2Q 2010: C-
1Q 2010: C-
4Q 2009: D
3Q 2009: D
2Q 2009: D-
1Q 2009: D+

Economist Jeff Collins conducts the data collection and analysis for The Compass Report, which is presented by Fort Smith-based Benefit Bank. Collins said the second quarter results include a good news-bad news message because of uncertainty with the national economy.

“Burgeoning optimism driven by the improving local economy may be short lived as deteriorating national economic conditions are bound to have local implications,” Collins said. “Lacking clear direction, the near and long-term forecast are for anemic national growth through 2013. It is difficult to imagine the circumstances that would lead to rapid job growth given this scenario.”

Joe Edwards, president and CEO of Benefit Bank, hopes Collins’ optimism continues.

“I am a little surprised at the improved grade, but that’s good and it should be encouraging to everyone who is working so hard in our area to improve our economic situation,” Edwards said.

Edwards said “in the banking sense” the regional economy has “bottomed out” and conditions are slowly improving.

“Everybody would like to see it improve much faster, but I don’t see that happening. And, to some degree, I am concerned about the national situation,” Edwards said.

NATIONAL ECONOMIC NOTES
Collins, the former director of the Center for Business and Economic Research at the University of Arkansas, said the national economy stepped back from the optimism and gains in consumer demand that appeared evident in the first quarter of the year. He said tepid GDP growth, “modest” gains in consumer spending and reductions government spending and employment have created a fragile economy. Global issues and natural disasters haven’t helped.

“Analysts attribute slower growth to the impact of the European sovereign debt crisis, supply chain disruptions caused by lingering effects of the Japanese earthquake and tsunami, commodity price spikes, and finally the ongoing budget debate in Washington D.C.,” Collins explained in his analysis.

Collins’ analysis included the following points:
• The recently concluded battle over the federal budget did little to instill confidence in the financial markets or in U.S. consumers.

• During the early stages of the recovery, a recovery that now seems at issue; the over-riding concern was the frailty of consumer demand. While consumers remain committed to reducing debt rather than returning to past spending levels, demand does appear to be modestly improved.

• Many economists have characterized the recession as a “balance sheet” recession in that the destruction of wealth led businesses and consumers to reduce debt and boost savings. This transition has significantly increased cash balances of U.S. corporations. It has also significantly reduced households’ willingness to fund consumption with credit. Reduced demand has had substantial implications for employment.

• Exacerbating the employment situation, many older Americans whose wealth was impacted by the recession find themselves prolonging their work lives, adding to the available supply of labor even as demand for products and services has declined.

• Real GDP grew by 2.9% in 2010 according to the U.S. Bureau of Economic Analysis. This represented a substantial improvement from 2009 data which indicated an economy that contracted 2.6%. Analyst predictions are for GDP growth in 2011 to be between 1.5% and 2%.

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 2011 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: C
Non-farm employment continued to showed gains in the quarter, with employment in the metro area at 118,500 in June compared to 118,300 in June 2010.

• Change in metro area unemployment rate: D+
The area unemployment rate, an important gauge in the health of the metro labor market, showed a slight gain in the quarter compared to the 2009 quarter. Unemployment in June was estimated at 8%, compared to 7.7% in June 2010.

• 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 began to improve in the second quarter of 2010, and has been on a stable pace since. The tax collections, which are good indicators of regional consumer confidence, were up in Crawford, Franklin, Logan and Sebastian counties ($3.376 million in June 2011 compared to $3.352 million in June 2010).

• Change in goods-producing employment: B-
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 24.8% in June 2011, down from the 24.9% in June 2010.

LEADING INDICATORS
Leading indicators provide insight into the near-term direction of the local economy. Economic figures for the period 2005 to the first quarter of 2011 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: D
The total value of permits issued in the second quarter (measured in a three-month rolling average) were lower than those in the second quarter of 2010 — continuing to reverse what has been a positive trend in the sector. The grade in this measurement fell from a C- in the first quarter to a D in the third quarter.

• Change in construction employment: B-
This sector, which includes mining/natural resources employment, showed slight employment gains (8,000 in June 2011, compared to 7,700 in June 2010).

• Change in manufacturing employment: D
The decline in manufacturing employment in the Fort Smith region has not slowed. Sector employment in June 2011 was 21,400, down 300 jobs from June 2010 employment of 21,700. Employment in the sector is down 30.29% from a decade ago when January 2001 manufacturing employment in the metro area stood at 30,700.

• Change in hospitality employment: A
Hospitality employment continues to show gains. June 2011 saw 9,500 jobs in the regional hospitality sector up considerably from the 8,900 jobs in June 2010.

COMPARATIVE CHANGES
Grade change comparisons between the first quarter of 2009 and the first quarter of 2011

Current Indicators
2Q 2011 — Change in non-farm employment: C
1Q 2011 — Change in non-farm employment: C-
4Q 2010 — Change in non-farm employment: D
3Q 2010 — Change in non-farm employment: D+
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 2011 — Change in metro area unemployment rate: D+
1Q 2011 — Change in metro area unemployment rate: C
4Q 2010 — Change in metro area unemployment rate: D
3Q 2010 — Change in metro area unemployment rate: C+
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

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2Q 2011 — Change in sales and use tax collections: C
1Q 2011 — Change in sales and use tax collections: C+
4Q 2010 — Change in sales and use tax collections: C
3Q 2010 — Change in sales and use tax collections: C-
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 2011 — Change in goods-producing employment: B-
1Q 2011 — Change in goods-producing employment: B-
4Q 2010 — Change in goods-producing employment: B-
3Q 2010 — Change in goods-producing employment: 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 2011 — Change in building permit valuation: D
1Q 2011 — Change in building permit valuation: C-
4Q 2010 — Change in building permit valuation: C-
3Q 2010 — Change in building permit valuation: C-
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 2011 — Change in construction employment: B-
1Q 2011 — Change in construction employment: C-
4Q 2010 — Change in construction employment: C-
3Q 2010 — Change in construction employment: D+
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 2011 — Change in manufacturing employment: D
1Q 2011 — Change in manufacturing employment: D
4Q 2010 — Change in manufacturing employment: C-
3Q 2010 — Change in manufacturing 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 2011 — Change in hospitality employment: A
1Q 2011 — Change in hospitality employment: C+
4Q 2010 — Change in hospitality employment: D+
3Q 2010 — Change in hospitality 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

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