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The Compass Report: Economy dips in fourth quarter 2011

Fourth quarter 2011 economic conditions declined slightly compared to the 2010 period, with a decline in overall employment and building permit values weighing negatively on continued gains in regional sales tax collections.

According to The Compass Report, the fourth quarter 2011 economy in the Fort Smith region slowed from a track that saw improvements beginning in the second quarter of 2011. The fourth quarter grade of C- was down from the third quarter grade of C, but reflects a seasonal improvement compared to the 2010 fourth quarter (C-/D+) and the 2009 fourth quarter (D). The Compass Report launched in the first quarter of 2009. (Link here for the electronic magazine version of The Compass Report.)

OVERALL GRADES — Fort Smith regional economy (per quarter)
4Q 2011: C-
3Q 2011: C
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+

FOURTH QUARTER SUMMARY
Year-on-year tax collections at the county level indicate retail activity has stabilized and moderately improved. 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.

Despite stabilization in the sales tax collections, retail sector employment remains lower. From December 2010 to December 2011 the Fort Smith Metropolitan Area lost roughly 500 jobs in the trade, transportation, and utility sector of the metro area economy (-2.1%).

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. As of December 2011, that percentage declined to approximately 18%. Continued job losses in the sector imply that only 20,700 people were employed in the sector in December 2011.  The downward trend in absolute terms and as a percentage of total employment is expected to continue.

Expected jobs losses of up to 1,000 at Whirlpool when it closes in mid-2012, and concerns about future employment at Rheem and Trane manufacturing plants in Fort Smith make it difficult to be optimistic about stabilization in this important sector.

Declining manufacturing employment has significant ramifications for other sectors including trade, transportation, and utilities and hospitality and leisure.

‘GOOD SIGN’
Economist Jeff Collins conducts the data collection and analysis for The Compass Report, which is presented by Fort Smith-based Benefit Bank. Despite the lower grade, Collins continues the economic optimism he had about the third quarter 2011 report.

"The Fort Smith regional economy has been surprisingly resilient through 2011, despite a spate of negative economic news," Collins said. "National economic data suggests the economy is on firmer footing than it has been since 2009, which can only be good news for the Fort Smith regional economy."

Joe Edwards, president and CEO of Benefit Bank, has said the past several quarterly The Compass Reports are encouraging, but believes the recovery needs improvement in the job numbers.

Regional jobless numbers have struggled. The unemployment rate in the Fort Smith metro area was 8% in December, up above the November rate of 7.8% but below the 8.5% during December 2010.
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The number of unemployed during December was 10,342, ahead of the 10,292 in November but more than 1,000 jobs below the 11,354 during December 2010. However, the number of employed during December was an estimated 119,722, almost 2% below the 122,093 during November and below the 121,979 during December 2010.

TOURISM SECTOR GAINS
Collins said the region’s hospitality industry continues to be a consistent performer with respect to tax collections and employment.

Tax collections in Fort Smith — 3% tax on lodging — have shown gains since the second quarter of 2009, with collections up 8% in the fourth quarter of 2011 compared to the fourth quarter 2010. In Van Buren, hospitality tax collections — from 1% on lodging and 1% on prepared food — were up 8% in the fourth quarter comparisons.

“Overall, the improvement in collections is welcome news for the metropolitan area.  The leisure and hospitality services sector has gained 100 jobs from December 2010 to December 2011 according to the U.S. Bureau of Labor Statistics.  This was an increase of 1.2 percent.

December employment was an estimated 8,700, down from 8,900 during November, but up from 8,600 during December 2010. The sector reached an employment high of 9,800 in August 2008.

NATIONAL ECONOMIC NOTES
Collins, the former director of the Center for Business and Economic Research at the University of Arkansas, said the national economy has recovered but moves forward at a frustrating pace.

“Real GDP has increased in each of the last 10 quarters confirming the recovery is firmly entrenched,” Collins said. “The rate of growth has consistently disappointed economists and analysts leading to the widely held belief that the current anemic rate of expansion will continue for some time. This is in stark contrast to the typical post-recession pattern of above trend growth coming out of a trough.”

Making the situation worse is political uncertainty that causes businesses to be hesitant with investment.

“Despite cash reserves, political uncertainty implies a wait-and-see attitude that dominates the hiring behavior of U.S. corporations. Unemployment rates have trended downward at the national and local level but have not approached what would be considered full-employment,” Collins explained.

Collins’ report also included the following thoughts on the national economy.
• The underlying reason the economy has taken so long to recover is a technological revolution brought about by the integration of increasingly cheap computing power into an ever-expanding array of business sectors fundamentally changed the relationship between capital and labor. Because of technology, it simply takes fewer workers to produce the same quantity of output. The economic implications were that while output was increasing, effective demand was declining. This reality was hidden for a relatively long period in part because consumption was financed through appreciation in assets such as housing. This facilitated demand for goods and services despite flat to declining real incomes for most Americans. This is a deep structural problem that cannot be fixed simply by reducing marginal tax rates or reductions in government spending.

• Investment in plant, equipment, and software has often been the lone bright spot in otherwise dismal economic data. However, investment in non-residential structures decreased 7.2% in the fourth quarter compared to an increase of 14.4% in the third.  Investment in equipment and software increased 5.2% in the fourth quarter but this paled in comparison to a 16.2% increase in the third. As with new hiring, many companies are waiting to see what the political landscape looks like before committing to investment expenditures.

• The short-run reality is the U.S. has considerable idle capacity in terms of industrial utilization as well as labor. There is also little upward pressure on prices or interest rates, although there is increasing concern among analysts that long-term rates will begin to rise as economic activity continues to improve. The cost of increasing the money supply to stimulate output and employment growth would seem relatively small. However, continuing to pump money into the economy does not guarantee the policy goals will be met.

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 fourth 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 — D-
Non-farm employment reversed gains seen earlier in the year, with employment in the metro area at 115,000 in December compared to 116,700 in December 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 similar gain to that seen in the 2010 quarter. Unemployment in December was estimated at 8%, compared to 8.5% in December 2010.


• Change in sales and use tax collections: B+
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 to $3.284 million during November 2011 — compared to $3.028 million in November 2010.

• Change in goods-producing employment: B
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 24.5% in December 2011, down from the 24.6% in December 2010.

LEADING INDICATORS

Leading indicators provide insight into the near-term direction of the local economy. Economic figures for the period 2005 to the fourth 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 fourth quarter (measured in a three-month rolling average) were lower than those in the fourth quarter of 2010. The grade in this measurement fell from from a C in the third 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 (7,500 in December 2011, compared to 7,100 in December 2010).

• Change in manufacturing employment: D
As noted earlier, the decline in manufacturing employment in the Fort Smith region has not slowed. Sector employment in December 2011 was 20,700, down 300 jobs from December 2010 employment of 21,000. Employment in the sector is down 32.57% from a decade ago when January 2001 manufacturing employment in the metro area stood at 30,700.

• Change in hospitality employment: B-
Hospitality employment continues to show gains, although the pace of improvement has slowed compared to the second and third quarters of 2011. December 2011 saw 8,700 jobs in the regional hospitality sector up from the 8,600 jobs in December 2010.

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

Current Indicators
4Q 2011 — Change in non-farm employment: D-
3Q 2011 — Change in non-farm employment: D
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-

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4Q 2011 — Change in metro area unemployment rate: D+
3Q 2011 — Change in metro area unemployment rate: 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

4Q 2011 — Change in sales and use tax collections: B+
3Q 2011 — Change in sales and use tax collections: C+
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-

4Q 2011 — Change in goods-producing employment: B
3Q 2011 — Change in goods-producing employment: B
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
4Q 2011 — Change in building permit valuation: D
3Q 2011 — Change in building permit valuation: C
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

4Q 2011 — Change in construction employment: B
3Q 2011 — Change in construction employment: 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

4Q 2011 — Change in manufacturing employment: D
3Q 2011 — Change in manufacturing 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

3Q 2011 — Change in hospitality employment: B-
3Q 2011 — Change in hospitality employment: A
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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