UAFS College of Business 2013 Third Quarter Economic Outlook Report

College of Business

CENTER

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

UAFS.edu Vol. 4, No. 3

Third Quarter, 2013

Fort Smith REGIONAL Economic Outlook Report

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

uafs.edu/cob/cbred Vol. 4, No. 3

Third Quarter 2013

Third Quarter Summary of the Regional Economy........................... 2-4

The Fort Smith Regional Economic Outlook Report is published quarterly by the College of Business and the Center for Business Research and Economic Development. Subscriptions are available for $25 per year.

Consumer Sentiment in the Fort Smith Region............................... 5-9

For more information, please visit us on the web at uafs.edu/cob/cbred, or contact us at:

From the Director......................................... 1

An Input-Output Analysis of Fort Smithâ&#x20AC;&#x2122;s Industry Clusters..................10-16 Sponsors................................................... 17

Center for Business Research and Economic Development UAFS College of Business 5210 Grand Ave., BI 218 P.O. Box 3649 Fort Smith, AR 72913-3649 Phone: 479-788-7938 Fax: 479-424-6938 Email: CBRED@uafs.edu The Center for Business Research and Economic Development seeks to be the primary source of Fort Smith regional economic information; a catalyst for bold, innovative ideas and strategies for economic development in the area; and an active partner in the execution of sound, integrative solutions for regional prosperity and health.

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Fort Smith Regional Economic Outlook, Third Quarter 2013

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

From the Director

Kermit W. Kuehn, Ph.D. Director, Center for Business Research and Economic Development

I want to somehow stop the bus I’m riding on and get off for a while in order to reflect on where all this is going – and why it’s going there in such a hurry. The reality is, however, that there is no real way to stop the procession, only to live it in the best way we know how – day by day.

Life is not unlike our economy, particularly as reflected in the stock markets this year. While I continue to expect some slowdown, and I’ve been looking for one for months now, the bus just keeps going as if it doesn’t know what a market correction is. It seems as if every other day or so the market indexes hit new highs. And with each new high I get increasingly uncomfortable in some vague, indefinable way – a sort of “waiting for the other shoe to drop” feeling. Based on the data, things appear to be steadily improving – on the national level as well as the regional. That is good news. When one looks below the headlines, however, there are reasons for this vague discomfort. Things remain tentative, fragile, even unhealthy.

this issue, Dr. Settlage looks at these clusters in terms of sourcing of inputs (within or outside the region) and the use of cluster outputs (whether they’re consumed by clusters within the region or outside of it). The value of such analysis is in the deeper understanding we get of our economy and how this information might help guide economic development decisions going forward. We also make our regular review of the performance of the Fort Smith area economy for the period. Overall, I think we can say things continued to improve this quarter over a year ago at this time. The disruption of data releases this quarter due to the government shutdown constrains our ability to assess how things are going in our regional economy. What we do know, with the exception of housing permits, is that the economy demonstrated broad improvement this quarter over a year ago. Our survey of Fort Smith consumer sentiment for September did come in lower than last quarter. In the final section, as we discussed earlier, we examine further the impacts of the regional economic clusters on our economy.

FROM THE DIRECTOR

The calendar tells me that we’re on the verge of closing the door on another year. It never ceases to amaze (and annoy) me how quickly a given year passes. As I’ve gotten older, I’ve become all too aware that my exit from this life is closer than my entrance – and that makes me increasingly uncomfortable in some vague, indefinable way.

For me, it is always a good time to recognize the support of our sponsors and advertisers in making our work possible. Arvest stepped up early on to provide key support for our research and publications. Arvest’s commitment to what we do, and that of our advertisers, have made our work not only possible, but a pleasure. We’ve been partners in a common cause of making the Fort Smith region the best it can possibly be. To our future,

Jobs are being created, but the quality is relatively poor. Consumers and businesses are spending, but there’s clear hesitancy in spending behavior. The housing sector has had a good run thus far this year, but there are signs of slowing. I could go on. We’ll just have to wait and see – day by day. In this issue, we take another look at regional industry clusters. In previous work using data from 2007, my colleague Latisha Settlage and our student Shana Gatzke identified key clusters within our economy as they pertained to job creation. In

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

Third Quarter Summary of the Regional Economy Data on the performance of Fort Smith regional economy revealed a more positive picture in the third quarter relative to a year ago. Key indicators were all positive for the quarter, with the exception of residential building permits. The federal government shutdown limited the availability of employment and building permit data for this report. The most recent economic activity index was for August and was estimated at 97.6, higher than the 2012 reading of 94.6. Regional retail sales posted a year-overyear improvement for the three months ending August 2013, up 2.6 percent in this report. This follows two consecutive quarters of decline and was bolstered

by a particularly strong July reading. According to the Oct. 29 release by the Census Bureau, U.S. retail sales activity weakened slightly in September, declining 0.1 percent. However, estimated sales for the third quarter were up 3.5 percent year over year. Regional retail sales have generally been weak for much of 2013, with the exception of July, and there is little reason to believe the fourth quarter will be much different. Area auto sales continued to show solid month-over-month growth in 2013, resulting in sales up nearly 7 percent for the quarter. Total unit sales were up 2.3 percent over last year, with 8,421 new and used autos sold in the

quarter. Recall that numbers are only available for Sebastian, Crawford and Franklin counties of Arkansas. Overall, regional consumer spending improved for the period in terms of general consumption. Consumer sentiment weakened, however, according to the September reading of the area consumer. This suggests that retail sales could remain weak in the closing months of 2013. See our full discussion of consumer sentiment in the next section. On the other hand, auto sales have held up well, suggesting pent-up demand remains solid. Overall, the general expectation regarding auto sales remains positive for the year.

Table 1. Summary of Third Quarter Performance 3rd Quarter 2013 Sales (Qtr. Total) Retail Sales (MSA, June, July, August, 000’s) Auto Sales (Seb., Craw., Frank. Counties, AR, 000’s) Residential Construction (MSA, July/August Total) Residential Permits (July and August only) Value of Permits (000’s) New and Existing Home Sales (MSA, Qtr. Total) Number Sold Value of Homes Sold (000’s) Average Price of Homes Sold (Qtr. Monthly Avg.) Employment (MSA unless noted, July/August Monthly Avg.) Wage and Salary Employment (Total Non-farm) Manufacturing Trade, Transportation, and Utilities Government Education and Health Services Professional and Business Services Leisure and Hospitality Natural Resources, Mining, and Construction Financial Activities Information Services MSA Unemployment Rate (July/August Avg., NSA) AR Unemployment Rate (Qtr. Monthly Avg., NSA) U.S. Unemployment Rate (Qtr. Monthly Avg., NSA) Airport Traffic (Fort Smith) Total Passenger Traffic (Qtr. Monthly Avg.)

Base Year - Q3 2005

Last Year - Q3 2012

This Year - Q3 2013*

% Change 2012-2013

$827,761 $94,621

$927,927 $81,721

$951,776 $87,374

233 $22,798

68 $10,650

47 $9,261

-30.9% -13.0%

677 $76,793 $113,432

488 $65,098 $133,398

611 $78,694 $128,796

25.2% 20.9% -3.5%

119,200 28,800 23,950 15,150 13,950 11,800 8,850 7,100 4,150 1,600

115,400 19,350 24,200 17,150 17,000 11,400 9,200 6,900 4,300 1,400

118,100 18,600 25,700 17,250 17,900 11,750 9,500 7,000 4,400 1,400

2.3% -3.9% 6.2% 0.6% 5.3% 3.1% 3.3% 1.4% 2.3% 0.0%

4.4% 5.1% 5.1%

8.2% 7.6% 8.4%

7.4% 7.4% 7.5%

-0.7% -0.2% -0.9%

17,634

14,365

14,569

1.4%

2.6% 6.9%

*Data as of September, except retail sales which includes June-August and construction permit and employment data, which included July and August only due to government shutdown. Dollars are not inflation adjusted. Data not seasonally adjusted (NSA). Auto sales Arkansas only. Prepared by the Center for Business Research and Economic Development, UAFS College of Business

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Fort Smith Regional Economic Outlook, Third Quarter 2013

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Taking a closer look at specific sectors, we find that the only sector to lose headcount over the period was manufacturing, recording a decline of 750 jobs relative to a year ago this time. The biggest gainer this quarter was the trade, transportation and utilities sector, which gained 1,500 jobs during the period. The other measure of job market strength is the unemployment rate, which declined this quarter relative to a year ago. The unemployment rate averaged 7.4 percent for the area for July and August, seven-tenths lower than a year ago. According to the Bureau of Labor Statistics, there were around 650 fewer people in the Fort Smith MSA labor force during the July-August period

than there were in 2012. There were also around 650 fewer people working in the MSA during the period. As is always the case, these are preliminary estimates and are likely to change month by month. The residential real estate sector diverged this quarter with construction permits showing a decline year to year, while

“The biggest gainer this quarter was the trade, transportation and utilities sector, which gained 1,500 jobs during the period.” home sales came in positive relative to the third quarter a year ago. Residential construction data revealed a 31 percent drop in new permits for the quarter relative to last year. The 47 permits issued for July and August (remember, September stats were missing) was below the 68 units issued in 2012, and well below the 2005 number of 233 permits for the same period. Home sales, on the other hand, were positive for the quarter. Based on Multiple Listing Service data, 611 units

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were sold during the third quarter, up 25.2 percent from a year ago. While unit sales were still below the 677 units sold during the 2005 base year for the third quarter, this was clearly a strong quarter for home sales in the region. As was the case at the writing of this summary last quarter, interest rates have begun to move higher again in the past week or so. This may have put some pressure on “lookers” to actually make offers during the third quarter. Whether this upswing continues will depend on how much pent-up demand is actually in the local market, a factor that is difficult to measure. As has been the case for some time now, conditions remain quite good for residential real estate. Interest rates remain low relative to historical levels and inventory levels appear to be adequate across most price ranges. Nationally, there is some evidence that the positive momentum in the sector over the past 12-18 months is about to stall. To what degree this slowdown will affect the regional market remains to be seen.

SUMMARY OF REGIONAL ECONOMY

Though September figures were unavailable for this report due to the government shutdown in October, the regional jobs picture looked decidedly better this quarter, based on recent Bureau of Labor Statistics data. Total nonfarm employment rose 2.3 percent for the quarter (based on July and August data). Based on the monthly average of total employment in the Fort Smith Metropolitan Statistical Area for July and August, there were an estimated 2,700 more jobs in the region than there were a year ago. This suggests that the area economy is making steady progress toward restoring jobs.

Finally, average monthly airport traffic counts for the quarter moved into positive territory, year over year. This aspect of our economy has struggled this year, so the modest resurgence in air travel is a nice addition to the generally positive report for this quarter.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS SUMMARY AND ANALYSIS At the writing of this report (second week of November), stock markets have continued to operate near record highs. While I’ve talked about this in each of the reports this year, the market has yet to have a serious correction – one that is well overdue, it seems to me. Overall, the tone is much the same as in recent reports – yes, I’ve said that before as well. Investors fear staying in the market but are more afraid of losing out on more upside action. It has been an impressive run thus far, so it’s hard to blame them. We can thank the Federal Reserve for its role in facilitating this fantasy run. A generous monetary policy continues to support markets, though corporate performance for the third quarter was again anything but robust. But that didn’t seem to matter much to investors as markets have tended to drift higher in recent weeks. According to CoreLogic, home prices nationally continue to rise, but at a much more modest pace. September numbers were up around 12 percent from a year ago. Homebuilder stocks are still off 20 percent from their highs in May, which suggests that the tone has turned more conservative as to the upside of the sector over the next few months. Weak job creation – specifically, poor quality of jobs created in terms of compensation – and rising interest rates look to make their mark on housing and elsewhere sooner or later. Even the surprisingly good jobs numbers for September reported by the Bureau of Labor Statistics did little to change these realities. Looking in on some other indicators, national manufacturing and nonmanufacturing numbers for October, the most recent data reported by the Institute for Supply Management, came in mixed relative to the July readings

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reported last quarter. The PMI (for manufacturers) recorded a 56.4 for October, above the 55.4 for July we reported in our last issue. This indicates the manufacturing sector continued to expand since the last report. The NMI for October, which includes such sectors as professional services, information, wholesale and retail trade, came in at 55.4. This compares with the July reading of 56, which we reported last time. Index scores that trend above 50 are interpreted as a growth mode for the sector. The September results from the Manpower Employment Outlook Survey found that Arkansas employers’ overall hiring intentions for the fourth quarter of 2013 were down slightly from thirdquarter intentions. Twelve percent of employers indicated they intended to hire more people in the fourth quarter, down from 14 percent in the previous survey. Five percent indicated they planned to decrease payrolls in the fourth quarter, unchanged from the previous report. This results in a net positive of 7 percent for the quarter and reflects a moderately positive prospect toward fourth-quarter hiring in the state and is very similar to the previous report. No report specific to the Fort Smith MSA was available. _____________ For the Fort Smith regional economy, results showed some improvement over the previous report. Home and auto sales, retail sales and jobs data posted positive numbers, while building permits were down for the quarter. The consistency of performance we’ve been looking for across key components of our economy is beginning to come together..

Fort Smith Regional Economic Outlook, Third Quarter 2013

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

in the Fort Smith Region

INTRODUCTION The Index of Consumer Sentiment for the Fort Smith region moved lower in the third quarter after solid moves higher in the March and June reports. The index for September, which measures consumer confidence for the Fort Smith Metropolitan Statistical Area, was 59.4, down nearly 8 percent from the second quarter reading of 64.5, and lower than the 61.2 reported for the third quarter a year ago. The decline in sentiment was consistent with national results of 77.5 reported by the University of Michigan for September, which declined 7.8 percent from the previous quarter. The two subindexes for Fort Smith were lower as well for the quarter. The Index of Current Conditions for the Fort Smith region, a measure of consumer attitudes toward their current economic situations, declined 6.3 percent to 67.1, while the national ICC fell by 1.3 percent. At the close of the third quarter, regional consumers expressed less-positive views of their current 1

financial situations than was the case last quarter but still well above the 60.6 recorded a year ago at this time. The Index for Consumer Expectations, which measures consumer feelings about future economic conditions, was down 9.2 percent from last quarter, recording a 54.4 for the Fort Smith regional consumer. The result was similar to national scores, which dropped nearly 13 percent from last quarter. National and Fort Smith consumers’ sentiment weakened relative to last quarter, both in terms of current conditions and expectations going forward. Overall, the less-positive sentiment reported by area consumers was likely influenced by the negative tone of the debt ceiling talks in Congress before the government shutdown.

TAKING A CLOSER LOOK As can be seen from Table 1, area consumer-sentiment scores gave up much of the improvement reported

in the second quarter report. The observed decline in overall sentiment was broadly supported across all subindexes and index items, both for national and regional respondents. Two items make up the ICC subindex: people’s ratings of their current personal finances, and whether the time is right to make major purchases (referring to durable goods). Area consumers did report noticeably less-positive attitudes this quarter regarding their current personal finances, dropping 11.3 percent from last quarter. National numbers were down a more modest 4 percent from the previous quarter on this item.

CONSUMER SENTIMENT

Consumer Sentiment

The second item in the ICC, which asks whether this was a good time to purchase durable goods, dropped 2.6 percent from last quarter with an index score of 101. National numbers were unchanged from last quarter on this item. The ICE subindex consists of three items and seeks to measure consumer

Possible reasons for the relatively lower scores compared to the national results are discussed in detail in the first quarter 2010 report, which is available online under our Publications link: http://uafs.edu/cob/cbred.

Table 1. September 2013 Indexes and Components INDEXES

Q3/2012

Q2/2013

Q3/2013

% Change Q2-Q3

UM*

Index of Consumer Sentiment (ICS)

78.3

61.2

84.1

64.5

77.5

59.4

-7.8

-7.9

Index of Current Conditions (ICC)

85.7

60.6

93.8

71.6

92.6

67.1

-1.3

-6.3

Index of Consumer Expectations (ICE)

73.5

61.6

77.8

59.9

67.8

54.4

-12.9

-9.2

100

-4.0

-11.3

113

115

109

-5.2

-7.4

Economic Outlook – 12 Months (ICE)

104

-17.3

-13.6

Economic Outlook – 5 Years (ICE)

-18.3

-8.9

132

143

104

143

101

0.0

-2.6

INDEX COMPONENTS Personal Finances – Current (ICC) Personal Finances – Expected (ICE)

Buying Conditions – Durables (ICC)

*UM= University of Michigan Survey; FS = Fort Smith Survey

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS expectations going forward in areas of personal finances and national economic prospects. As to personal finances over the next 12 months, there was less optimism reported, with scores down 7.4 percent from last quarter (from 83 to 77). National results were down 5.2 percent for this item. In percentage terms, 14 percent of respondents in the Fort Smith area felt their personal finances would be better off a year from now versus 37 percent who expected them to be worse.

Table 2. September 2013 Index Scores of Fort Smith Region Fort Smith Scores

UM ICS Survey (Q3/13)

FS ICS Survey (Q3/12)

FS ICS Survey (Q2/13)

FS ICS Survey (Q3/13)

% Change Q2-Q3

FS ICS

59.4

61.4

65.5

62.6

-4.4

FS ICC*

67.1

60.6

71.6

67.1

-6.3

FS ICE

54.4

61.9

61.6

59.6

-3.2

*Items included in the FS ICC are identical to the ICC; thus, no change.

When asked about prospects for the general economy over the next 12 months and over the next five years, Fort Smith area respondents reported less optimism for both short- and mediumterm prospects of the U.S. economy. Area consumer scores registered a 13.6 percent decline relative to last quarter (dropping from 77 to 67) when respondents were asked about prospects for the economy over the next 12 months. National scores were down by more than 17 percent from the June survey.

Results for the second quarter reflected a 4.4 percent decline in the overall index score (FS ICS) and a 3.2 percent decline in the FS ICE relative to last quarter. The slide in optimism was consistent in direction with the ratings Fort Smith consumers gave the national economy. The FS ICS score of 62.6 is noticeably better than the national score of 59.4.

RESULTS SPECIFIC TO THE FORT SMITH ECONOMY For each quarterly survey, we modify two items in the University of Michigan scale to focus participants on the Fort Smith regional economy versus the national economy. These two items ask respondents to rate their expectations about business conditions in the Fort Smith economy over the next year and also five years from now. The overall FS ICS index and FS ICE subindex are affected by the change. Because these items focus on future expectations as opposed to current conditions, the FS ICC scale is not affected (thus, is the same as ICC results in Table 1 for Fort Smith).

When looking at the five-year range, area respondents again reported less optimism than last quarter with scores down nearly 9 percent (79 to 72) relative to last quarter. National scores were down over 18 percent from last quarter on this item.

As can be seen in Figure 1, Fort Smith consumer sentiment moved lower in the third quarter.

BEYOND THE CORE MEASURES Consumers were asked 10 additional questions – seven focused on their views and expectations about inflation, personal spending, jobs and income, and three related to consumers’ retirement savings and health insurance. Where applicable, the specific questions, comparative scores and percentage breakdown of positive-negative responses for each are contained in Table 3.

As can be seen from Table 2, Fort Smith respondents’ overall sentiment (FS ICS) and ratings of future prospects (FS ICE) for the regional economy declined from last quarter, but ratings of the region continue to run higher than ratings of the U.S. economy on the same dimensions (UM ICS).

To summarize the results to this point, regional consumer sentiment moved lower in the third quarter, weakened by the very public conflicts in Washington over the debt ceiling.

Figure 1. Fort Smith Q3 Sentiment Toward National and Regional Economies 75

Index Score

70 65 ICS Total

FSICS Total

55 50 45

r 1

r 2

r 3

r 4

r 1

r 2

r 3

r 4

2010 2011 2012

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r 1

r 2

r 3

r 4

r 1

r 2

r 3

2013

Fort Smith Regional Economic Outlook, Third Quarter 2013

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More consumers continue to think that higher inflation will be the rule over the next 12 months (Question 9), with 88 percent indicating this view. This was down from the 91 percent who felt that way in the previous quarter, but higher than the 82 percent who felt that way a year ago. The dominant expectation among area consumers continues to be biased toward inflation. This view has remained consistently above 80 percent for years now, even though inflation has remained largely benign up to this point. When asked about overall consumption expectations over the next three months (Question 10), the percentage of respondents in this survey who indicated they intended to spend more in the fourth quarter of 2013 was unchanged from the last reading, while the number indicating they would spend less rose. This resulted in a slight decline in the index score from 115 to 112 for the quarter. Thirty percent of the respondents indicated that they would spend more overall in the fourth quarter of 2013 versus 18 percent who intended to spend less. When it came to specific purchasing activity over the next quarter (Question 11), 10 percent expected to increase spending on such activities as dining out, down from the 15 percent who responded this way last quarter. Thirtyfive percent indicated they would spend less during the 2013 fourth quarter, unchanged from the 35 percent recorded last quarter. There has been weakening in consumer consumption-intentions to dine out relative to last quarter. Ratings regarding intentions toward buying large-ticket items (Question 12) in the fourth quarter remained unchanged for the second quarter in

Table 3. Additional Consumer Sentiment Scores and Current Quarter Percentages Index Scores 2012

SURVEY QUESTIONS

2013

Qtr. 3 Percentages

% pos

% neg

8) Are current business conditions in the country better, about the same, or worse than they were a year ago?

452

9) During the next 12 months, do you think that prices overall will go up, go down, or stay the same?

133

10) Compared to the last three months, how much do you expect to spend overall as a household in the next three months?

115

112

11) Do you expect to spend more, about the same, or less per week in the next three months on dining out?

12) In the next three months, do you expect to purchase a major household item, such as furniture, appliances, or a TV?

13) Thinking about the Fort Smith area, how would you describe the availability of jobs today?

14) A year from now, will there be more or fewer jobs available in the Fort Smith area than there are today?

15) Do you feel you are currently saving enough to retire at your normal (or full) social-security retirement age?

16) Excluding social security, where will your primary retirement income come from?

17) Currently, is your primary health insurance coverage through a government program, an employer program or a private policy?

CONSUMER SENTIMENT

GENERAL ECONOMY AND CONSUMPTION INDICATORS Perceptions of the current business conditions in the U.S. economy (Question 8) declined from June ratings, with 15 percent of the respondents indicating they thought the economy was better now than it was a year ago. This was down from 17 percent who felt this way in the second quarter. Fortyfive percent (versus 41 percent in June) indicated the economy was worse.

Neutral scores are not included in calculating index scores. Positive responses to item Q9 are reflective of negative sentiment regarding pricing; thus, scores are reversed to reflect sentiment-score consistency. That is, a pessimistic tone regarding inflation should score lower relative to a more optimistic tone, consistent with the other items in the table.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS a row, with 9 percent of respondents indicating they definitely expected to make such purchases in the fourth quarter. Seventy-three percent indicated they would not make such purchases. Overall, the index score of 36 largely matches the 35 recorded in September 2012 on this item, suggesting little has changed in consumer intentions toward larger purchases. Overall, these data suggest that consumers reported generally lesspositive views toward consumption relative to last quarter, and this was largely true across the board – general spending, dining and durables. These results suggest that consumer spending may remain slow for the balance of the year.

EMPLOYMENT Fort Smith respondents were more pessimistic this quarter than last when asked about the regional job market. Ratings of current perceptions of job availability in the Fort Smith area (Question 13) indicated that 48 percent of the respondents felt that jobs were hard to get now, up from the 44 percent who felt that way last quarter. Only 3 percent stated that jobs were plentiful (down from 5 percent last quarter). When asked about availability of jobs a year from now (Question 14), regional consumers were less optimistic here as well, with only 15 percent of respondents indicating they expected more jobs to be available a year from now. This was down from

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the 20 percent who felt that way last quarter. However, the 42 percent of respondents who felt there would be fewer jobs available in the coming year was unchanged from the last survey. Survey participants had shown steadily improving views of the regional employment picture in the previous two surveys, but this changed in the third quarter. Jobs sentiment has remained generally pretty sour, even in an improved jobs environment.

PERSONAL FINANCES Three questions asked respondents about their personal retirement plans and health insurance. Questions 1517 in Table 3 relate to these themes. Respondents were asked whether they were saving enough to retire at their “normal” retirement age (Question 15). Fourteen percent of area consumers who responded to this item indicated that they were saving enough to retire at their normal retirement age, while 41 percent indicated they were not. The remaining 45 percent indicated that they were already retired. Clearly, most respondents who have not yet retired do not expect to have saved enough to retire at their normal retirement age. When asked about the primary source of their retirement income, excluding Social Security, 17 percent reported that an employer pension program would be their primary source of

Fort Smith Regional Economic Outlook, Third Quarter 2013

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT Economic headlines have generally been positive in the third quarter, however, but seemed to have done little to lift consumer attitudes. This more-negative tone is also reflected in the generally lackluster performance in retail sales observed in the region in recent months.

CONSUMER SENTIMENT

retirement income. Fourteen percent indicated that a private pension plan (such as a 401k plan) would be their primary source, and 17 percent reported “other” income sources as primary. Fourteen percent of the respondents indicated they would not be able to retire at their normal retirement age.

ABOUT THE SURVEY Finally, consumers were asked (Question Of the 3,250 surveys mailed to the five-county MSA, 458 were returned 17) how they were saving toward their undeliverable, and 304 usable surveys retirement, as a percentage of pay (they were returned, providing a return rate of were asked to exclude Social Security 11 percent. As a result, the confidence deductions). Twenty-three percent level exceeds 85 percent for this survey. indicated they were saving nothing toward retirement, 25 percent indicated The University of Michigan’s Index of they were saving less than 10 percent, Consumer Sentiment survey is used to and 11 percent indicated they were measure consumer saving more than attitudes on several 10 percent toward economic themes. their retirement. The Thirty-eight percent of Collectively, remaining 41 percent those who have yet to these represent indicated they were retire are saving nothing consumer already retired. optimism or toward retirement, confidence levels Recasting these while and additional 43 for any given results in terms of percent are saving less period and can be those who have yet used to compare to retire, 75 percent than 10 percent. any one period of the respondents with other periods. who have yet to retire indicate that they are not saving enough The overall ICS score includes five to retire at their normal retirement age. core questions and constitutes a general Thirty-eight percent of those who have measure of consumer sentiment for the yet to retire are saving nothing toward period. These questions cover three retirement, while an additional 43 general areas of consumer sentiment: percent are saving less than 10 percent. personal finances, business conditions, and buying conditions. Two subindexes These results confirm various national within the ICS make up the Index of surveys that indicate many Americans Consumer Expectations and the Index of perceive they are not saving enough Current Economic Conditions or more to retire and that a sizable number simply, Index of Current Conditions. do not expect to be able to retire The UM says the ICE “focuses on three by their normal retirement age. areas: how consumers view prospects for their own financial situation, how they Overall, third-quarter results view prospects for the general economy reflected a weakening of sentiment over the near term, and their view of among regional consumers. prospects for the economy over the long term.” The ICC focuses on consumers’ The tone in this report is more negative. views of their current financial condition The shenanigans in Washington and whether they feel secure enough leading up to the federal government about their financial situations to engage shutdown likely contributed to the lessin major consumption activity. positive tone observed in this report. For more information on the Consumer Sentiment Survey, methodology used and discussion regarding results, a more extensive narrative is provided in the first quarter 2010 report that is available online under our Publications link at http://uafs.edu/cob/cbred.

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An Input-Output Analysis of Fort Smith’s Industry Clusters by Latisha Settlage

A study conducted earlier this year by the Center for Business Research and Economic Development used location quotient analysis, growthshare matrices, shift-share analysis and export strength to identify eight potential industry clusters for the Fort Smith Metropolitan Statistical Area:

emerging or transforming. Figure 1 is taken from the earlier publication and is presented here for your convenience.1 From Figure 1, we see that only the metal and metal products industry cluster was classified as a mature cluster from a job creation standpoint. That is, the cluster possesses higher employment ratios relative to the U.S. but a declining trend in job creation. The industry clusters of mining and energy, food manufacturing, transportation and warehousing as well as wood product manufacturing were all categorized as performing clusters. They have higher industry employment ratios relative to the nation as well as positive annual compound growth rates for employment (indicating job gains in excess of the national average in recent years).

• Mining and energy • Food manufacturing • Wood and wood products manufacturing • Metal and metal products manufacturing • Transportation and warehousing • Health care • Recreation/food service • Retail

Employment headcount was used to identify these clusters. These eight clusters were then grouped into four categories: mature, performing,

The remaining three industry clusters (recreation/food service, retail and health care) were identified as emerging clusters or clusters for which job creation is likely in the near future. This forecast is based on their belownational-average employment ratios and positive and unusually high annual growth rates. In general, industries in these clusters added jobs in recent years in the Fort Smith MSA at a rate that outpaced national averages. In order to gain a better understanding of the competitive advantages these industry clusters may possess, an input-output analysis was conducted of the Fort Smith MSA. IMPLAN software and 2007 data were again used for this analysis (the same data used to identify these clusters in the previous research). The analysis will seek to do the following:

For a full discussion of this figure, see Vol. 4, No. 1, of this first quarter 2013 report, Page 12.

Figure 1. Growth-Share Matrix for Fort Smith MSA, 2010

2010 Average Loca9on Quo9ent

CAGR Mining and Energy 21.89% Food Manufacturing 5.54% Mature Wood Product Manufacturing 1.96% Metal and Metal Products Manufacturing -‐6.00% Transportation and Warehousing CAGR LQ7.65% Health Care 10.34% 25 Mining and Energy 21.89% 4.6226727 Recreation/Accommodation/Food Service 5.54% 20.185188 39.79% Food Manufacturing Mature Retail 9.90% Wood Product Manufacturing 1.96% 3.3346488 Metal and Metal Products Manufacturing -‐6.00% 14.163001 20 Transportation and Warehousing 7.65% 2.8538005 Health Care 10.34% 1.0767993 Recreation/Accommodation/Food Service 39.79% 2.0435661 Retail 9.90% 1.6542903 15

LQ 2010 Employment 25 4.6226727 2538 20.185188 9145 Performing 3.3346488 1734 14.163001 Food 7999 Manufacturing 20 2.8538005 5955 2010 Employment 1.0767993 15,553 2538 2.0435661 5441 9145 Performing 1.6542903 8926 1734 15

Metal and Metal Products 7999 Food Manuracturing Manufacturing

5955 15,553 5441 8926

5/15/13

Metal and Metal Products Manuracturing TransportaOon and Warehousing

Mining and Energy RecreaOon/ AccommodaOon/Food Service

5/15/13

Wood Product 10 M anufacturing Retail

-‐60.00%

Transforming

Mining and Energy

TransportaOon and Warehousing 0

-‐40.00%

-‐20.00%

0.00%

Wood Product Manufacturing

20.00%

RecreaOon/ 40.00% AccommodaOon/Food Service

Healthcare

Emerging

-‐5 Retail

-‐60.00%

Average Compound Annual Growth Rate of the Loca9on Quo9ent Source: U.S. Census Bureau: Fort Smith MSA and U.S. County Business0 Patterns -‐40.00% -‐20.00% 0.00% 20.00% 40.00%

Transforming

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Emerging Fort Smith Regional Economic Outlook, Third Quarter 2013

-‐5 Average Compound Annual Growth Rate of the Loca9on Quo9ent

60.00%

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2) Evaluate the relative strengths of cluster interrelationships as well as potential economic development opportunities resulting from further connectivity.

INPUT-OUTPUT ANALYSIS Input-output analysis is used to examine the interdependence of clusters and to identify or confirm the most important clusters in the economy. Within the inputoutput framework, there are two types of linkages: backward (input) linkages and forward (output) linkages. Figure 2 displays the relationship between inputs and outputs in a conceptual sense. Input relationships or coefficients define the interconnection of industry clusters as they relate in the supply chain. The input coefficient represents the proportion of inputs that an industry cluster sources from other industries within the Fort Smith MSA. For example, an input coefficient of 0.35 means that a cluster is purchasing 35 percent of the intermediate inputs required to produce its products or services from other firms within the region. Clusters with higher input coefficients purchase larger proportions of their intermediate inputs from within the MSA. As an example, a cluster having an input coefficient of 0.50 sources 50 percent of its input from other firms within the region, and

this would illustrate a stronger set of input relationships within the region as compared to the previous input coefficient example of 0.35 for which only 35 percent of inputs are purchased within the region. Output relationships or coefficients are defined as the interconnections of an industry to other industries to which it sells its outputs. A cluster’s output coefficient becomes larger as more firms in the region purchase the cluster’s output for use in their production processes (as an intermediate output rather than as a final product or service). For example, a cluster with an output coefficient of 0.15 sells 15 percent of its production (physical goods or services) to other firms within the MSA to be used in their production processes as intermediate inputs. The remainder then is either sold outside the MSA as intermediate input or as final output (within or outside the MSA). A larger output coefficient means that more of the production for that cluster remains in the MSA and is sold to other firms for intermediate use rather than sold as final output or sold to outside firms as intermediate input.

SIGNIFICANCE OF LARGE INPUT AND/OR OUTPUT COEFFICIENTS According to Michael Porter’s theory on clustering, some of the most valued industry groups to a region are those that are highly interconnected to other local industries via input-output relationships. As such, economic development investments in clusters

having high input and/or output coefficients have the potential to result in significant economic payback because of the many interdependencies with other industry clusters. As an illustration, we can compare the economic impact of two industry clusters having equal payroll, equal value of output, but different input coefficients (that is, the two industry groups pay roughly the same average salaries, their output is priced about the same, but one has a larger input coefficient than the other). Economic impact measures the overall expansion of production in a region in response to a stimulus of job additions – perhaps from a new firm entering the region or from an existing firm deciding to increase scale of operations. In this hypothetical analysis, the industry with the larger input coefficient will generate the larger economic impact. This is because more dollars to pay for input costs stay in the region to be recirculated in the economy.

INPUT-OUTPUT RELATIONSHIPS Using data obtained from the IMPLAN input-output modeling software, seven of the eight clusters identified in previous economic analysis of the MSA are further broken down into a total of 28 subgroups. Retail is not chosen for this subsequent analysis of the Fort Smith MSA because its industries do not possess traditional production functions. That is, the retail cluster does not purchase inputs from other clusters in the MSA in order to produce output as manufacturing and

Figure 2. Interdependence of Inputs and Outputs

INPUTS

Input Coefficients

To final consumers OR Intermediate inputs (outside MSA)

Production process

OUTPUTS

INPUT-OUTPUT ANALYSIS OF FORT SMITH’S INDUSTRY CLUSTERS

1) Identify the interrelationships present between industry clusters and

Output Coefficients

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS service sectors do. Rather, retail adds value to the region as a supporting cluster – one that distributes final output to ultimate users or acts a middleman in distributing inputs. The groups constituting each cluster are shown in Table 1 as are their respective input and output coefficients. It is noted that the input coefficients represent what proportion of inputs are sourced within the MSA from all industries (not just those listed in the Table 1). Similarly, the output coefficients represent how much production (as a percentage of total production) is sold within the MSA as intermediate inputs – regardless of whether the industry group is mentioned in the Table 1. Again, the input and output coefficients reported are obtained directly from a model estimated for the region using the IMPLAN software and regional data for 2007.2 Table 1 shows that more than 22 percent of the inputs required to produce the output for each group listed is sourced within the MSA. From the table we see that input coefficients range from a low of 0.223 for couriers and messengers to as high as 0.937 for transit and ground passengers.

Table 1. Input-Output Analysis for Fort Smith MSA Clusters and Subclusters

Number of Jobs

Average Value Added

Output Coefficients

Input Coefficients

2,821

$91,574

0.476

0.399

Mining and Energy Oil and gas extraction Mining

535

105,833

0.454

0.413

2,071

122,091

0.386

0.530

7,885

$69,325

0.341

0.846

361

101,672

0.332

0.627

239

$173,206

0.287

0.672

1,189

65,829

0.357

0.822

601

52,219

0.374

0.490

Brick, glass and cement

526

$75,681

0.448

0.641

Primary metal

545

113,493

0.378

0.765

Fabricated metal

1,388

64,159

0.312

0.692

Machinery

1,899

67,559

0.295

0.795

Electrical equipment and appliances

3,759

105,179

0.291

0.743

Furniture and related

592

73,502

0.318

0.702

Miscellaneous

279

64,795

0.289

0.694

Mining services Food Manufacturing Food products Wineries and distilleries Wood and Wood Products Manufacturing Wood products Paper Printing Metal and Metal Products Manufacturing

Transportation and Warehousing Truck transportation

5,762

$55,667

0.439

0.549

Transit and ground passengers

24,816

0.327

0.937

Pipeline transportation

824,136

0.386

0.449

Sightseeing transportation

153

12,805

0.509

0.292

Couriers and messengers

341

69,666

0.412

0.223

560

53,251

0.541

0.332

Warehousing and storage

Billion Cubic Feet Per Day

Health Care Ambulatory health care

6,968

$62,207

0.449

0.331

Hospitals

4,082

51,674

0.485

0.513

Nursing and residential care

3,760

31,859

0.497

0.273

As clusters, metal/metal Recreation/Accommodation/Food Service products manufacturing, food 20 $62,849 0.586 0.233 Museums and historic sites manufacturing and wood/wood 636 20,730 0.530 0.393 Gambling and recreation products manufacturing have 8,391 21,699 0.469 0.576 Food services and drinking places the largest input coefficients. This means they purchase more 1,808 40,217 0.379 0.514 Repair and maintenance inputs from within the MSA Source: Computed from IMPLAN model of Fort Smith MSA than all other groups considered in the table. The smallest input coefficient found in the metal/metal percent of the inputs required to greatest percentages of inputs from products manufacturing cluster is 0.641, produce metal/metal products, food within the MSA. The top five are: the smallest input coefficient for the and wood/wood products, respectively, transit/ground transportation, food food manufacturing cluster is 0.627, are sourced from within the MSA. products, paper manufacturing, and the smallest input coefficient for machinery manufacturing and the wood/wood products manufacturing Figure 3 demonstrates the 12 industry primary metal manufacturing. cluster is 0.49. This means that more clusters having the largest input than 64 percent, 63 percent, and 49 coefficients – those purchasing the

Input coefficients reported are IMPLAN’s gross absorption coefficients for each cluster in the region, and output coefficients are IMPLAN’s regional purchase coefficient for each cluster.

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ENERGY AND MINING: CHALLENGES AND PROSPECTS

Table 1 also lists all output Table 2. Hypothetical Impact of 100 Job Addition – Health Care vs. Manufacturing coefficients for the Fort Smith Jobs Added to Additional Labor Additional Output MSA subgroups to be in excess MSA Income (millions) (millions) of 0.28, which means that more than 28 percent of the AMBULATORY HEALTH CARE output produced is used by Initial Stimulus 100 $5.4 $9.7 other industries in the MSA Multiplier Effect 52 1.6 4.9 as intermediate inputs in their production functions. The Total Impact 152 7.0 14.7 clusters having the strongest output coefficients are: health PAPER MANUFACTURING care (smallest output coefficient Initial Stimulus 100 $6.0 $35.6 equal to 0.45, or 45 percent of output purchased within Multiplier Effect 139 5.5 18.3 MSA for input use), mining Total Impact 239 11.6 53.8 (smallest output coefficient Source: Computed from IMPLAN model of Fort Smith MSA equal to 0.39, or 39 percent of output purchased within MSA as production input), Fort Smith MSA are confirmed to have and recreation/food service (smallest percent of inputs sourced from within the either significant output coefficients or output coefficient equal to 0.38, MSA, respectively. The seventh MSA significant input coefficients. Health or 38 percent of output purchased cluster (transportation and warehousing) care, mining and recreation/food service within MSA for input use). should not be considered insignificant. were identified as having the largest Two of its subgroups ranked in the output coefficients. This means that Health care outranks all other clusters top 12 output coefficients. This is not among all clusters, relatively large by a fair margin because all three surprising given that almost all physical proportions of output in their industries of its subgroupings rank as having clusters utilize the transportation are purchased by others within the the highest output coefficients of all and warehousing sector as a critical MSA to be used as intermediate clustered industries. The individual component of their intermediate demand. input. Health care had the strongest subgroups having the highest output output relationship of all clusters. coefficients in the Fort Smith MSA Supporting Industry Groups. In further are graphed in Figure 4. The top analysis of the Fort Smith region, some The manufacturing clusters – metal/metal additional industry groups that fall five are: museums/historic sites, products, food and wood/wood products warehousing/storage, gambling/ outside of the seven clusters previously – were found to have the largest input recreation, sightseeing transportation identified are noted as significant. They coefficients. Of all clusters, these groups and nursing/residential care. are of particular importance because the source more input from within the MSA industries represented therein appear Discussion than any other. Metal/metal products and in the supply chains of four or more Not surprisingly, six out of the seven food manufacturing were almost tied subclusters listed in Table 1. These production clusters identified for the for the top spot with 64 percent and 63 supporting industry groups are shown in

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Figure 3. Percent of Inputs Sourced Locally

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order of significance in Figure 5. The top five are: professional/scientific/technical services (which represents the legal, accounting, architectural, advertising, engineering and computer programming/ systems design fields), management of companies and enterprises, administrative support services (including employment services, business support services, office administrative services and travel services), utilities, and wholesale trade.

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Input Coeﬃcient

1.000 0.900 0.800 0.700 0.600 0.500 0.400 0.300 0.200 0.100 0.000

There is no doubt of the economic impact played by these supporting clusters – if these clusters were less developed or absent in the region, then the input coefficients listed in Table 1 would decline. Implications for Economic Development. In terms of economic development opportunities, we discussed previously that subclusters having large input and/ or output coefficients would result in

the greatest economic impact to the region. That is, there would be significant impacts from those industries represented by these subclusters if they were to add additional jobs from either a new firm locating in the MSA or an existing firms increasing scale of operations. Our earlier hypothetical comparison assumed industry groups had the same value of output as well as paying the same average salary per worker.

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0.600 Output Coeﬃcient

0.500 0.400 0.300 0.200 0.100

ou sin

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ist

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g & tes st S bl in or igh g & ag ts e re ee cr in N ea g t ur =o ra sin ns n po g & r ta re =o sid n en =a l c ar F e O oo H il & os d se pi ga ta rv s e ls ice xt s & r ac d =o rin n kin g p A la ce m s bu M la to B in ry in ric g h k, ea gla lth ss ca , a T re n d ru ce ck m tr en an t sp or ta =o n

0.000

However, we can see from Table 1 that average compensation per worker varies greatly between the industry groups constituting each cluster. Average compensation per worker is calculated as the sum of wages and benefits,

proprietor income and corporate profit divided by number of workers.

hypothetical model of the Fort Smith MSA whereby it is assumed that 100 jobs were added in the ambulatory health care industry versus 100 jobs added in the paper manufacturing industry. Recall from Table 1 that average compensation per worker in ambulatory

In order to illustrate the differences in economic impact from adding jobs in an industry with a “low” versus “high” input coefficient, Table 2 (page 13) displays a

25 20 15 10 5

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Figure 5. Most Signiﬁcant Suppor=ng Industry Clusters

ENERGY AND MINING: CHALLENGES AND PROSPECTS

Figure 4. Percent of Output Sold Locally

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS health care industry is $62,207 and the input coefficient is 0.331, whereas the average compensation per worker in the paper manufacturing is $65,829 with an input coefficient of 0.822. As Table 2 shows, the overall economic impact is much higher for manufacturing. This is due to the multiplier effect, which captures the relative strength of input relationships of paper manufacturing firms in the MSA relative to ambulatory health care. Note also, that even though ambulatory health care has a somewhat higher output coefficient relative to paper manufacturing, this slight advantage is more than offset by manufacturing’s much larger input coefficient. This example has two implications for economic development in the MSA: (1) strong input coefficient advantages lead to significant positive economic outcomes (that is, we can expect large multiplier effects stemming from input relationships in industries for which input coefficients are highest) and (2) slight output coefficient advantages are easily offset by input coefficient advantages when it comes to measuring the expected impact of new economic stimuli to the region. This means that although industries like health care may have the largest output coefficients, we should not expect to see the same level of multiplied job creation in the industries to which they are linked. In our example, the input coefficient advantage held by paper

manufacturing over ambulatory health care was more than 2 to 1 (0.822 is more than twice 0.331), and this resulted in a predicted job expansion (from the same 100 job initial stimuli) of more than 2 to 1 (1.4 jobs created for every job added in paper manufacturing versus 0.5 jobs created for every job added in ambulatory health care). This result occurred despite the fact that ambulatory health care sells a greater proportion of its output to other industries in the region as intermediate output (it has a higher output coefficient than paper manufacturing; 0.449 versus 0.357). In general, policymakers and city officials can use the results of this analysis to identify specific industries and firms to target for relocation to the Fort Smith region. Results have shown that not all industry groups result in the same economic payoff in terms of total jobs created. Rather, it is those industries having the largest input coefficients that can be expected to generate the most economic output, and the greatest number of jobs for the region. That said, this study is not meant to negatively judge those industries having lower input coefficients. Instead those involved with economic development should seek opportunities to increase the value of those input coefficients by attracting inputsupporting firms for those industries.

Latisha Settlage, Ph.D., is a Bess and Hill Williams Endowed Chair of Business and associate professor of economics in the UAFS College of Business as well as a research associate in CBRED.

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