The Compass Report: Fort Smith economy stable, but down

Third quarter 2012 economic conditions were not improved compared to the 2011 period, with the number of unemployed 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.

According to The Compass Report, the 2012 third quarter economy in the Fort Smith region continued from an economically flat fourth quarter of 2011. The third quarter grade of C- was unchanged from the second quarter of 2012, and is at the same grade seen in the third quarter of 2011.

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

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 Little Rock-North Little Rock-Conway (central Arkansas) metro area saw a minor decline in economic conditions compared to the third quarter of 2011. The 2012 second quarter economy in the central Arkansas area received a grade of C-. (Link here to the complete central Arkansas 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.”

Collins said numbers in the Fort Smith area, while certainly not impressive, suggest the economy appears stable – or at least for four quarters it has not become worse.

“What is surprising is the increasing stability of the Fort Smith regional economy. After suffering a long precipitous slide the economy appears to have found its footing,” Collins explained.

Joe Edwards, president and CEO of Fort Smith-based Benefit Bank, said stable numbers are nice, but said “energy” is needed to regain more secure economic footing.

“Stabilization is good and I continue to be thankful for the pockets of employment growth that occur from time to time, but our challenge remains to focus our energy on selling others on our area of the world in order to grow,” Edwards said.

FORT SMITH REGION
OVERALL GRADES — Fort Smith regional economy (per quarter)
3Q 2012: C-
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+

THIRD QUARTER SUMMARY
The 2012 third quarter economy in the Fort Smith region continued from an economically flat fourth quarter of 2011. The third quarter grade of C- was unchanged from the second quarter of 2012, and below the C in the third quarter of 2011.

Year-on-year tax collections at the county level show that consumer spending August reflect the persistent unemployment problems. While there is a lag in sales tax collection reporting by the state, the data suggest local retail activity is struggling to maintain the past year of relative stability following the sharp downturn experienced during 2009.

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.”

Considering the trouble with regional employment, it is surprising that the manufacturing sector added an estimated 700 jobs year-on-year (September 2012 compared to September 2011).

Growth in manufacturing employment is welcome news and the September numbers could be a 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.

In September the total number of employed (non-farm employment) in the Fort Smith metro was an estimated 111,600. By contrast, total employment in September 2006, prior to the recession, was 124,000. 

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

“The Fort Smith area lost approximately 10,000 workers during the course of the recession. Despite continued erosion of core employment, retail data suggests spending is stable,” Collins noted in the report. “Growth in manufacturing employment was a welcome sign for the regional economy. Given the area’s heavy concentration of manufacturing any recovery must include a rebound in the sector. Long-term growth prospects however, depend on diversification of employment for the region.”

DATA LINKS
Link here for a magazine summary (large PDF file) 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
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.

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 111,600 in September compared to 116,000 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 the economy. The percentage of manufacturing jobs in the overall workforce was 23.7% in September 2012, up from the 23.1% in September 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 September was estimated at 7.6%, compared to 8.4% 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-
Sales tax collections in the region and the city of Fort Smith began to show weakness in the third quarter of 2009. That weakness began to improve in the third 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 $3.35 million during August 2012 — compared to $3.314 million in August 2011. During the June-August period, overall collections were down 1.8% 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 third quarter (measured in a three-month rolling average) were lower than those of the third quarter of 2011. The grade in the sector fell from a C+ in the second quarter of 2012, but improved compared to a D in the third 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 second quarter of 2012, leveled off during the third quarter. September 2012 saw 8,600 jobs in the regional hospitality sector, up 100 jobs from 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 — B
Manufacturing employment in the Fort Smith region continues to be a concern, but numbers did improve during the quarter. Sector employment in September 2012 was 19,500, up 700 jobs from September 2011 employment. Employment in the sector is down more than 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 — C
This sector, which includes mining/natural resources employment, saw employment remain flat during the quarter (7,000 in September 2012, compared to 7,000 in September 2011).

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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.

COMPARATIVE CHANGES
Grade change comparisons between the first quarter of 2009 and the third quarter of 2012

Current Indicators
3Q 2012 — Change in non-farm employment: D
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-

3Q 2012 — Change in metro area unemployment rate: C+
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

3Q 2012 — Change in sales and use tax collections: C-
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-

3Q 2012 — Change in goods-producing employment: 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
3Q 2012 — Change in building permit valuation: C-
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

3Q 2012 — Change in construction employment: C
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

3Q 2012 — Change in manufacturing employment: B
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

3Q 2012 — Change in hospitality employment: C
2Q 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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A pledge not to raise taxes is not the same as..

..we won't increase your costs to survive. Remember these 535 people are for the most part lawyers. Retail sales up? Federal free money. Construction up? Federal free money. Manufacturing up 700 in Sept? When did Whirlpool finally slam the doors shut? This town is hurting because it is a manufacturing town and it can't compete with the tinder boxes out there.