The Compass Report: Fort Smith regional economy down

Second quarter 2012 economic conditions dipped slightly compared to the 2011 period, with continued declines in overall employment weighing negatively on the regional economy. Unfortunately, it’s a pattern similar to the previous three fiscal quarters.

According to The Compass Report, 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.

The quarterly Compass Report is managed by The City Wire and presented by Fort Smith-based Benefit Bank.

Second quarter 2012 economic conditions in the Northwest Arkansas metro area received a grade of B- based on slight improvements 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. (Link here for the complete Northwest Arkansas 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 for the complete central Arkansas metro 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,” noted economist Jeff Collins, who conducts the data collection and analysis for The Compass Report.

FORT SMITH REGION
OVERALL GRADES
— Fort Smith regional economy (per quarter)
2Q 2012: C-
1Q 2012: C-
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+

SECOND QUARTER SUMMARY
Year-on-year tax collections at the county level show that consumer spending has not declined as a result of unemployment issues. While there is a lag in sales tax collection reporting by the state, the data suggest local retail activity has recovered and stabilized from the sharp downturn experienced during 2009.

“To me this economic data continues to reflect a challenging picture. Certainly we can be thankful for some appearance of stabilization and improvement in certain areas but we all really know the need to continue the work of creating more jobs still exists,” said Joe Edwards, president and CEO of Fort Smith-based Benefit Bank.

Given the substantial loss in non-farm employment it was surprising that the manufacturing sector added an estimated 300 jobs year-on-year. Employment growth in manufacturing for the second quarter was the first quarterly gain since third quarter 2010.

Collins said the job gains need to be consistent rather than surprising.

“Growth in manufacturing employment is welcome news and may be the first sign that the regional economy is stabilizing. However, for the Fort Smith MSA to recover employment growth will have to be broad based and prolonged,” Collins noted in his analysis. “Long-term negative growth will induce workers to leave the area or withdraw from the labor force. Currently, the June labor force estimate was 130,491. By comparison, the June 2011 estimated labor force was 132,874.”

In June the number of employed in the Fort Smith metro was an estimated 120,461. By contrast, total employment in June 2006, prior to the recession, was 133,061.

“Poor jobs data would usually be expected to negatively impact the unemployment rate however the Fort Smith unemployment rate improved, falling more than 1% year-on-year. The reason for the decline? Fewer people looking for work reduced the number of unemployed,” Collins said.

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
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.

FORT SMITH REGION — THE COMPASS REPORT DATA SUMMARY
CURRENT INDICATORS

Non-farm employment — D-
Non-farm employment reversed gains seen earlier in the year, with employment in the metro area at 110,900 in June compared to 115,800 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 the economy. The percentage of manufacturing jobs in the overall workforce was 24.1% in June 2012, down from the 23.5% in June 2011.

This measure tells us about the risk to the local economy from being heavily weighted toward sectors that have been under economic pressure.

One of the fundamental principles of reducing risk is diversification. The Fort Smith economy has been based on manufacturing for decades, but this heavy reliance on one sector for employment and wealth creation has left the region vulnerable. For several years the manufacturing sector in the U.S. has shed employment as technology and international trade have redefined the production process.

As the economy of Fort Smith becomes more diversified the risk of a downturn in any one sector causing a catastrophic loss of employment diminishes.

Metro area Unemployment rate — C+
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 7.7%, compared to 8.8% 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 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, was on a stable pace, but recently has seen a slowdown in the rate of growth. The tax collections, which are good indicators of regional consumer confidence, were up in Crawford, Franklin, Logan and Sebastian counties to $3.355 million during May 2012 — compared to $3.174 million in May 2011. During the March-May period, overall collections were up just 1.5% compared to the same period in 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 — C+
The total value of permits issued in the second quarter (measured in a three-month rolling average) were higher than those of the second quarter of 2011. The grade in the sector improved to a C+ in the second quarter of 2012 compared to a D in the second quarter of 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 — C
Hospitality employment, which began trending downward in the first quarter of 2012, leveled off during the second quarter. June 2012 saw 8,800 jobs in the regional hospitality sector, unchanged from 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-
The overall decline in manufacturing employment in the Fort Smith region has not slowed, but it did improve during the quarter. Sector employment in June 2012 was 19,700, up 300 jobs from June 2011 employment. Employment in the sector is down almost 36% from more than a decade ago when January 2001 manufacturing employment in the metro area stood at 30,700.

For better or worse, Fort Smith remains a manufacturing town. That implies the near-term economy rises and falls on the performance of the sector. Growth in employment or even stable employment in the sector bodes well for the near-term outlook for the local economy.

Construction employment — D
This sector, which includes mining/natural resources employment, saw employment decline during the quarter (7,000 in June 2012, compared to 7,200 in 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.

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Obviously, new space implies new residents and new businesses.

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

Current Indicators
2Q 2012 — Change in non-farm employment: D-
1Q 2012 — Change in non-farm employment: D-
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-

2Q 2012 — Change in metro area unemployment rate: C+
1Q 2012 — Change in metro area unemployment rate: C-
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

2Q 2012 — Change in sales and use tax collections: C
1Q 2012 — Change in sales and use tax collections: B-
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-

2Q 2012 — Change in goods-producing employment: C
1Q 2012 — Change in goods-producing employment: B
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
2Q 2012 — Change in building permit valuation: C+
1Q 2012 — Change in building permit valuation: D-
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

2Q 2012 — Change in construction employment: D
1Q 2012 — Change in construction employment: 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

2Q 2012 — Change in manufacturing employment: C-
1Q 2012 — Change in manufacturing 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

1Q 2012 — Change in hospitality employment: C
1Q 2012 — Change in hospitality employment: D+
4Q 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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