UAFS Economic Outlook Report 1Q 2012

College of Business

CENTER

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

UAFS.edu Vol. 3, Num. 1

1st Quarter, 2012

Fort Smith REGIONAL Economic Outlook Report

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

UAFS.edu

Vol. 3, Num. 1

1st Quarter, 2012

From the Director......................................... 1 First Quarter Summary of Regional Economy................................ 2-4 Consumer Sentiment in the Fort Smith Region............................... 5-9 Regional Labor Market............................10-16 Sponsors................................................... 17

The Fort Smith Regional Economic Outlook Report is published quarterly by the College of Business and the Center for Business Research and Economic Development (CBRED). Subscriptions are available for $25 per year. For more information, please visit us on the web at www.uafs.edu/cob/cbred, or contact us at: Center for Business Research and Economic Development UAFS College of Business 5210 Grand Avenue BI 218 P.O. Box 3649 Fort Smith, AR 72913-3649 Phone: 479-788-7938 Fax: 479-424-6938 E-mail: 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. Cover image: The Historic Crawford County Bank Building was built in 1889 and is located in downtown Van Buren, Ark.

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Fort Smith Regional Economic Outlook, 1st Quarter, 2012

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From the Director

What looks the same? Well, looking from the perspective Kermit W. Kuehn, Ph.D. of the national economy, Director, Center for Business the stock market indices are Research and Economic Development starting to behave like last year. Take the DOW as an example. After revving up unabated the previous three months or so to well over 13,000 in March, it has since shown signs of fatigue. It has been bouncing up and down in a more sideways pattern around 13,000 in recent weeks. The job market has been starting to show some evidence of going soft as well, with recent numbers being less forceful maybe “squishy” is a good word. Then, recent retail sales numbers have shown some lack of strength as well, especially in looking at several key retailer reports – more squishiness. And, who could forget the declining dollar, ever-higher commodity prices, and the surge in oil prices (and the return of higher gas prices). Then, of course, the now perennial bad news story, Europe, seems to rear its ugly head at the most inopportune times – think Greek and French elections and European recession. Oh, and then there’s Spain. So, there it is. That sinking sense of “here we go again!” But wait, not all is the same as a year ago.

What is different? First, unemployment is lower than it was a year ago – in percentage terms and in real terms. More people have jobs in this country. Commodities have been under downward pressure for much of the first quarter. As I write this, gold has been pushing lower, testing $1,600 an ounce, and oil has dropped below $94 a barrel. Instead of $4 gasoline this summer, it’s more likely to be closer to $3. The dollar has started to gain strength versus the euro. Though not awesome, corporate expectations looking forward have been solid. Finally, it’s an election year – that’s different. Didn’t say it was better. The point in going through this exercise is to highlight that our economic stories may have a certain similarity to them year-to-year, but there are also distinct dissimilarities. This “new mix” will unfold in its own story as the summer progresses. I’m hopeful that it will be a better story than last summer’s.

FROM THE DIRECTOR

As we wrap up this first quarter’s issue of the Fort Smith Regional Economic Outlook Report, it seems that much remains the same as it did a year ago. In fact, my introduction in last quarter’s issue focused on the very idea that things felt much like we’d been there before. This time around, while some things may indeed be the same as a year ago, they’re never exactly the same – and that’s what makes for a different story in the end.

Either way – positive or negative – the regional economy will add its own flavor to the mix, its own issues, and the result of these ingredients looks to make for a more uncertain summer in the Fort Smith economy. In this report, we review the performance of the Fort Smith area economy. Home sales have continued to show improvement over last year, as have retail sales and airport traffic numbers. Auto sales were a mixed story, with unit sales up while the dollar value of these sales was lower. Residential construction permits were much lower than a year ago. The jobs picture is best described as challenging. Our survey of Fort Smith consumer sentiment for March improved from last quarter. In the final section, we look at the regional labor market, particularly the participation rate, and discuss some of the implications of our findings for our economy. I hope you enjoy reading this report. I want to again thank Arvest for their support of our work here in CBRED. Their commitment to what we do, along with our advertisers and subscribers, make our work possible. I truly believe that we are partners in the common cause of making the Fort Smith region the best it can possibly be. To our future.

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First Quarter Summary of Regional Economy The Fort Smith regional economy continues the spurt-and-sputter performance pattern that has become all too typical of late, based on first quarter data. Retails sales for DecemberFebruary were up as were home sales for the quarter, but auto sales, residential construction, and employment were down. The most recent economic activity index was for February and was estimated at 90.8, down from the 94 reading for the same period in 2011. Taking a closer look at the quarter, retail sales continued to post year-over-year improvement, up 5.5% for the threemonth period ending February 29, the most recent data available. Consumers continued to increase spending heading into spring, following a similar uptick in sales in the fourth quarter of 2011. U.S. retail sales activity for the first quarter has shown some weakening since then and suggests we may see some slowing

in the regional market as we move into the second quarter. However, area auto sales continued to show general weakness, moving lower for the quarter relative to a year ago. Sales dollars were down 11.7% in the first quarter. However, the 9,639 new and used autos sold in the quarter were actually over five percent higher than the number of units sold during the first quarter of 2011. New car units sold in the first quarter were up from 14.3% of total units in 2011 to 15.5% for this most recent quarter, yet total sales dollars were lower, suggesting lower priced units were being sold and/or that discounting was used more heavily this quarter relative to last year. Overall, the regional consumer has continued to spend at higher levels than a year ago and sentiment has improved somewhat over the past two quarters. If sentiment should continue to improve,

then the regional retail market might be able to sustain its modest rally into the second quarter (see our full discussion of consumer sentiment in the next section). The residential real estate sector continued to give mixed signals relative to the first quarter a year ago. Home sales were up modestly for the quarter, while residential construction activity was down dramatically from the same period a year ago. Home sales were up 5.2% from 2011 levels for the quarter. Based on MLS data, 427 units were sold. The results reflect a continuation of the solid rebound we’ve observed in the sector since the third quarter last year. While the sector has made significant progress since the recession, sales are still well off the 522 units sold during the 2005 base year.

Table 1. Summary of First Quarter Performance Base Year - Q1

1st Quarter 2012

2005

Sales (Qtr Total) Retail Sales (MSA, September, October, November, 000’s) Auto Sales (Seb., Craw., Frank. Counties, AR, 000’s) Residential Construction (MSA, Qtr Total) Residential Permits 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, Qtr Monthly Avg.) Wage & 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 (Qtr Monthly 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.)

Last Year - Q1

This Year - Q1

% Change

2011

2012*

2011-2012

$ 855,396 $ 86,835

$ 901,068 $ 74,454

$ 951,025 $ 65,722

5.5% -11.7%

237 $ 22,121

153 $ 20,073

85 $ 12,234

-44.4% -39.1%

522 $ 55,507 $ 106,335

406 $ 41,141 $ 101,332

427 $ 48,650 $ 113,934

5.2% 18.3% 12.4%

117,167 28,500 23,267 16,800 13,900 10,633 8,267 6,467 4,000 1,600 5.2% 5.9% 5.6%

114,967 20,767 23,500 19,300 16,200 10,767 8,333 6,533 4,100 1,100 8.9% 8.3% 9.5%

108,500 18,667 23,000 18,833 15,333 9,233 7,933 6,700 3,567 1,100 8.7% 8.0% 8.6%

-5.6% -10.1% -2.1% -2.4% -5.3% -14.2% -4.8% 2.6% -13.0% 0.0% -0.2% -0.3% -0.9%

15,065

12,174

13,716

12.7%

* Data as of March, except retail sales which includes December-February. 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, 1st Quarter, 2012

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The basic dynamics of the sector remain largely the same as they have for the past couple of years. Interest rates continue to reach record lows, inventories continue to be relatively high (thought declining), and home prices remain soft. It sounds like a broken record here. There is some evidence that qualifying for mortgages has eased some, however, but the process remains difficult. If consumer sentiment continues to improve through 2012, then we might expect home sales to continue to post respectable numbers. The drag on sentiment, however, is that consumer attitudes toward the Fort Smith economy remain less upbeat in the most recent survey. Further, qualifying buyers for loans has continued to be a challenge. A rather perverse set of incentives exists for buyers to wait. Interest rates and home prices continue to move lower. The regional jobs picture continues to look weak, based on recent BLS data. Non-farm employment declined 5.6% for the quarter. Based on the monthly average of total MSA employment for the first quarter, there are nearly 6,500 fewer jobs in the region than there were just a year ago. Taking a closer look at specific sectors, we find that the top three losers by headcount were in manufacturing (-2,100), business and professional services (-1,534), and education and health services (-867). Only the mining and construction (167) sector is estimated to have gained jobs during the period. This might be viewed as a downright crisis, if one believed the data. What actually happened was that the Bureau of Labor Statistics (BLS) recalibrated their statistical model used to estimate employment, something they do each year. This adjustment is based on several factors, all in the name of creating a better estimation model. The UAFS College of Business

net result was that all 2011 data and a good portion of 2010 data were restated with the January releases. For the Fort Smith MSA, the result was dramatic, almost shocking. Our view of these data is that the number of jobs estimated is less about the number reported, but the relative changes in the numbers reported. That is, since these are estimates, and reflect the best data we have at this point, we are most interested in relative improvement or decline in the jobs picture over time. This adjustment will affect the data with which we compare well into the latter part of the year. All this doesn’t change the actual jobs picture here in Fort Smith, but reflects some of the turmoil we already have observed in recent years. Looking at the unemployment rate, we saw modest improvement relative to a year ago. The 8.7% average unemployment rate for the MSA for the first quarter was two tenths lower than a year ago. As we’ve discussed before (and more extensively in the last section of this report), using the unemployment rate alone, adjusted or unadjusted, misses important underlying data. The decline in unemployment rate to eight percent in March, for example, was due to the combination of an 800-person decline in the labor force headcount as well as an 800-person increase over last month in the number of people estimated to have jobs. Recall that the unemployment rate is calculated by dividing the number of unemployed by the total civilian labor force.

SUMMARY OF REGIONAL ECONOMY

Residential construction declined again for the quarter, with new permit totals down nearly 45% from last year. The 85 permits issued are far less than the 237 units issued in 2005.

As is always the case, data are preliminary estimates and are likely to change month-by-month… and then change again annually. SUMMARY AND ANALYSIS At the writing of this report (first week of May), I observe that after a generally positive first quarter in the national economy and a strong stock market to match, the tone has turned more cautious in recent weeks. Employment data has been weaker, though corporate earnings continue solid overall. Markets seem more indecisive, yet consumer

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS confidence has continued to improve. And, Europe has begun to move back to center stage after a few months of hearing nothing from that part of the world. Even today, it appears the French and Greek electorates have voted for a change of direction from the austerity agendas that have dominated European conversations for most of 2011. It now looks very possible that the painful decisions forged last year under extreme duress may be renegotiated, or simply be reneged on. If this turns out to be the case, then we could see a repeat of last summer’s wild volatility in the markets. The relative calm and upbeat tone of the first quarter is already giving way to uncertainty as stock markets struggle to maintain recent highs. Markets seem listless, waiting for some unspecified catalyst to signal market direction going forward. Is it another “sell in May and go away” or should we stay and play? We’re waiting for a sign. It all has a déjà vu feel about it – think 2010 and 2011. All told, the macropicture seems fragile again. On the monetary side, the Federal Reserve has promised to continue to support the economy with easy money and low interest rates. The real question is what will happen when the QE2 “Operation Twist” expires at the end of June. The Fed chairman indicated that

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they would likely do nothing if markets continued to improve. Of course, if they in fact do what they did the previous two summers, then it is generally believed the Fed will be right back at the printing presses in some form or another. The June meeting is therefore a critical one in this regard. On the fiscal side, little is expected from Congress and the President between now and the November election. This seems both unfortunate and inevitable. Looking at some other indicators, national manufacturing and nonmanufacturing numbers for April, the most recent data reported by the Institute for Supply Management, were mixed relative to the January readings reported last quarter. The PMI (for manufacturers) was higher, recording a 54.8 for April, while the NMI, which includes such sectors as professional services, information, and wholesale and retail trade, came in lower at 53.5. Index scores that trend above 50 are interpreted as a growth mode for the sector. The March results from the Manpower Group’s Employment Outlook Survey found that Arkansas employers’ hiring intentions for the second quarter of 2012 were much improved, with 19% of employers indicating they intended to hire more people in the second quarter, up from nine percent in the previous survey, and five percent indicating they

planned to decrease payrolls for the quarter, down from nine percent from the previous report. This suggests that a stronger jobs picture could begin to take shape in the April through June quarter relative to last quarter. All told, expectations were higher for first-quarter hiring intentions across state employers. No report specific to the Fort Smith MSA was available. Where does that leave us in the Fort Smith regional economy as we move through the summer months? Consumer sentiment has recovered some, but still remains near record lows. Retail sales have shown improvement, as have home sales. But auto sales and jobs data have not done as well. While the broader macro issues will affect the regional economy, local factors seem likely to dominate sentiment and the economic outlook for 2012. Our economy remains weak. As stated numerous times, employment is the key, and the second and third quarters look to be difficult in that regard. Construction permit data suggest little is happening in that sector over the coming weeks and Whirlpool will finally pull the trigger on their plant shutdown in June. With clouds like that on the horizon, the least it could do is rain this summer.

Fort Smith Regional Economic Outlook, 1st Quarter, 2012

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

in the Fort Smith Region

INTRODUCTION The Index of Consumer Sentiment (ICS) for the Fort Smith region rose in the first quarter, continuing the quarter-overquarter improvements observed in the previous survey. The index for March, which measures consumer confidence for the Fort Smith MSA, was 59.3, an increase of 1.7% from the fourth quarter result of 58.3, and higher than the 58.5 reported for the first quarter of a year ago. The rise was consistent in direction with national results of 74.3 reported by the University of Michigan (UM) for March, which were up 6.3% from the previous quarter.1 The two sub-indices for Fort Smith were also higher for the quarter. The Index of Current Conditions (ICC) for the Fort Smith region, a measure of consumer attitudes toward their current economic situations, increased by 3.8% to 60.6, while the national ICC rose by 5.8%.

The Fort Smith Index for Consumer Expectations (ICE) score, which measures consumer feelings about future economic conditions, recorded a .3% improvement as well. National ICE scores jumped 6.9% from the fourth quarter. While national and Fort Smith consumers again viewed current conditions similarly, there were clearly considerable differences in perception regarding expectations going forward. Overall, area consumers registered less improvement in sentiment than did national respondents for the first quarter. TAKING A CLOSER LOOK As can be seen from Table 1, area consumer sentiment scores revealed more optimism in the first quarter relative to the fourth quarter of 2011. While the ICS and both sub-indices recorded improvements relative to the

December survey, closer examination of results reveals that the national and regional respondents diverged significantly on their views of the national economy going forward. The ICE consists of three items and seeks to measure consumer expectations going forward in areas of personal finances and national economic prospects. As to personal finances over the next twelve months, there was more optimism reported, with scores 3.7% higher than last quarter (81 to 84). National results were actually down .9% for this item. In percentage terms, 17% of respondents in the Fort Smith area felt their personal finances would be better off a year from now versus 34% who expected them to be worse.

CONSUMER SENTIMENT

Consumer Sentiment

When asked about prospects for the general economy over the next 12 months and over the next five years,

Table 1. March 2012 Index and Component Scores INDICES

Q1/2011

Q4/2011

Q1/2012

% Change Q4-Q1

UM*

Index of Consumer Sentiment (ICS)

67.5

58.5

69.9

58.3

74.3

59.3

6.3

1.7

Index of Current Conditions (ICC)

82.5

59.8

79.6

58.4

84.2

60.6

5.8

3.8

Index of Consumer Expectations (ICE)

57.9

57.6

63.6

58.2

58.4

6.9

0.3

16.9

6.5

103

108

107

-0.9

3.7

5.7

6.2

20.0

-7.1

133

128

127

-0.8

2.3

INDEX COMPONENTS Personal Finances – Current (ICC) Personal Finances – Expected (ICE) Economic Outlook – 12 Months (ICE) Economic Outlook – 5 Years (ICE) Buying Conditions – Durables (ICC)

*UM= University of Michigan Survey; FS = Fort Smith Survey 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: uafs.edu/cob/cbred. 1

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Fort Smith area respondents reported more optimism about short-term prospects of the U.S. economy. Area consumer scores registered a 6.2% increase relative to last quarter when asked about prospects for the economy over the next 12 months (65 to 69). National scores were up 5.7%, rising from 70 to 74. When looking at the five-year range, area respondents reported notably less optimism than last quarter with scores declining 7.1% (85 to 79). In contrast, national scores rose by 20% from last quarter. These differences in expectations accounted for the divergent ICE index scores observed, Qtr 1 and Qtr 2 significantly impacted the overall index UM ICS 63.1 University of for the period.

ICC Total 65.0 Two ICE Titems otal comprise the ICC: people’s 61.9 ratings of their current personal68.3 finances ICC Score and whether the time is right to make ICE Score 89.2 major purchases (referring to durable ICE Score 71.5more goods). Area consumers did report ICE S core 85.7 positive attitudes this quarter regarding ICC Scurrent core personal finances, 98.2 their up 6.5% last quarter. National numbers Fort Smith from FS ICS 66.1 were 16.9% quarter. FSICE higher Total than the previous66.8 Survey ICC second Score item in the ICC, which 68.3 The ICE Swhether core this was a good time 89.2to asks purchase durable goods, was 2.3% ICE Score 81.8 higher than last quarter (87 to 95.4 89). ICE Score National numbers were down .8% ICC Score 98.2from Michigan

last quarter on this item. Overall, area consumers appear to view their current economic reality this quarter relative to Figure 1. more positively. last quarter

Table 2. March 2012 Index Scores of Fort Smith MSA Fort Smith Scores

UM ICS Survey (Q1/12)

FS ICS Survey (Q1/11)

FS ICS Survey (Q4/11)

FS ICS Survey (Q1/12)

% Change Q4-Q1/12

FSICS

59.3

62.2

56.6

4.2

FSICC*

60.6

59.7

58.4

60.6

3.8

FSICE

58.4

63.9

55.5

57.9

4.3

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

To summarize at this point, regional expectations as opposed to current consumers reported more optimism conditions, the FS ICC scale is not regarding their own personal financial affected (thus, is the same as ICC results situations this quarter, but held more in Table 1 for Fort Smith). 2011 2010 views about the prospects for 2011 cautious Qtr 3 Qtr 4 Qtr 1 AsQtr can 2be seen from Table 2, Fort Smith Qtr 3economy Qtr 4 forward. Qtr 1 the national going 54.2 58.3 respondents’ overall sentiment (FS ICS) 65.3 notable in 62.3 64.5the less 58.2 57.3 Most the results was 54.7 and future57.5 prospects (FS ICE) of the58.4 optimistic tone62.1 expressed by regional 59.7 65.9 64.9 53.9 over last58.2 regional economy improved respondents toward 64.9 62.4 the intermediate 64.2 57.3 57.2 quarter, and ratings for the region were 61.1 62.3 prospects for the U.S. economy. This is 65.9 66.2 70.3 65.5 60.8 essentially the same, as were ratings in stark contrast to the relative optimism 78.6 81.4 96.2 84.0 78.3 81.0 for the U.S. economy on the same expressed by respondents in87.7 the 57.4 64.8 dimensions (UM ICS). Recall that last 75.9 70.7 79.7 survey. 68.7 68.2 University of Michigan national 77.3 84.9 quarter scores 86.8 93.6 88.6 80.5 78.0reflected the first time 78.3characterized 86.7 that Fort Smith consumers RESULTS SPECIFIC 103.0 92.7 TO THE 95.9 FORT 86.9 85.7 57.2 56.6 the regional economy’s prospects as less SMITH 69.2 ECONOMY 65.3 65.7 62.2 61.4 positive than the national economy as 58.7 55.5 For each quarterly modify 63.9 71.3 67.3survey we 66.1 63.9 from the unmodified a whole. Scores 61.1 62.3 two items in the UM scale to focus 65.9 66.2 70.3 65.5 60.8 from Table 1 and scale are restated participants on the Fort Smith regional 78.6 81.4 are presented 96.2 versus 84.0 87.7 81.0in the column labeled economy the national economy. 78.3 69.7 56.5 UM ICS. 83.4 87.6 two items 82.7 80.5 to 83.5 These ask respondents

85.1 82.1 rate their expectations business 92.8 101.1 101.8 about95.6 Results for90.3 the first quarter reflected 78.3 86.7 conditions in the Fort Smith95.9 economy 86.9 103.0 92.7 85.7 a 4.2% improvement in the overall over the next year and also five years from now. The overall FS ICS index and FS ICE sub-index are impacted by the change. As these items focus on future

index score (FS ICS) and a 4.3% increase in the Index for Consumer Expectations (FS ICE) relative to last

Figure 1. S Fort Smith Sentiment onoNational and Regional Scales Scales Fort mith SenKment n NaKonal & Regional 75.0

Index Score

70.0 65.0

UM ICS FS ICS

60.0 55.0 50.0 Qtr 1

Qtr 2

Qtr 3

Qtr 4

Qtr 1

Qtr 2

Qtr 3

Qtr 4

2010 2011 2012

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Qtr 1 Source: CBRED Source: CBRED

Fort Smith Regional Economic Outlook, 1st Quarter, 2012

59.2 60.6 58.3 66.1 83.6 68.8 79.4 88.7 59.0 58.0 66.1 83.6 67.3 79.4 88.7

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As can be seen in Figure 1, Fort Smith consumer sentiment has generally declined since we began collecting regional data in the first quarter of 2010. This has been the case for both ratings of the national and regional economy, though scores have moved higher in the past two surveys. BEYOND THE CORE MEASURES Seven additional questions were asked consumers in order to better understand their views and expectations about inflation, personal spending, jobs, and income. Three more items were included which asked consumers to rate their sense of job security, income expectations, and political views. The specific questions, comparative scores and percentage breakdown of positive-negative responses for each are contained in Table 3. A positive-neutral-negative response format is used in survey questions. In most questions, it is explicit. For example in Table 3, Q8 states the options “better, about the same, or worse” in the question. A positive response on Q8 is recorded when respondent selects “better”. In Q10, where options are not stated in the question, they are the response options provided in the survey: more, about the same, or less. GENERAL ECONOMY AND CONSUMPTION INDICATORS Perceptions of the current business conditions in the U.S. economy (Q8) were up from December ratings, with 14% of the respondents indicating they thought the economy was better now than it was a year ago. This was double the percentage who felt this way in the fourth quarter. Thirty-four percent (versus 64% in December) indicated it was worse.

Table 3. Additional Consumer Sentiment Scores and Current Quarter Percentages Index Scores 2011

SURVEY QUESTIONS

2012

Qtr. 1 Percentages

% pos

% neg

Q8) Are current business conditions in the country better, about the same, or worse than they were a year ago?

342

Q9) During the next 12 months, do you think that prices overall will go up, or go down, or stay the same?

103

Q10) Compared to the last three months, how much do you expect to spend overall as a household in the next three months?

115

100

107

Q11) Do you expect to spend more, about the same, or less per week in the next three months on dining out?

Q12) In the next three months, do you expect to purchase a major household item, such as furniture, appliances, or TV?

Q13) Thinking about the Fort Smith area, how would you describe the availability of jobs today?

Q14) A year from now, will there be more or fewer jobs available in the Fort Smith area than there are today?

Q15) If you are employed, do you feel more or less secure in your job now than you did 12 months ago?

Q16) A year from now, do you expect your household income to be higher, about the same, or lower than it is now?

Q17) With regard to managing the economy, which political party do you think would be most effective?

CONSUMER SENTIMENT

quarter. This improvement in optimism was consistent in direction with the ratings Fort Smith consumers gave the national economy and in contrast to the 5.5% decline observed in last quarter’s data.

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 More consumers think that higher inflation will be the rule over the next twelve months (Q9) than did so in December, with 93% indicating this view. This perspective was up from the 82% who felt that way in the previous quarter, but slightly less than the 95% that felt that way a year ago. The dominant expectation among area consumers is clearly biased toward inflation. When asked about overall consumption expectations over the next three months (Q10), respondents in this survey indicated they intended to spend more than respondents reported from last quarter (107 vs 100). Thirty-two percent of the respondents indicated that they would spend more overall in the second quarter 2012 versus 25% who intended to spend less. Those respondents indicating they intended to spend more were up nine percentage points from the previous quarter, while a slight increase was recorded for those intending to spend less (25% vs 23%). When it came to specific purchasing activity (Q11), nine percent expected to increase spending on such activities as dining out, while 43% indicated they would spend less during the 2012 first quarter. The index score for this item was largely unchanged from last quarter due to declines in the percentage of those who reported intentions to spend more being offset by those who intended to spend less. Spending intentions on dining out are still strongly biased toward the negative view. Ratings regarding intentions toward buying large-ticket items (Q12) in the second quarter declined noticeably in this quarter, with six percent of respondents (versus 13% last quarter) indicating they expected to make such purchases in the second quarter and 83% (versus 75% last quarter) who did not. This suggests that we might expect some weakening in the sale of large-ticket items as we move through the second quarter of 2012.

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from the previous survey. Index scores of current availability of jobs and prospects for job improvement over the next year ticked higher than last quarterâ&#x20AC;&#x2122;s scores, which were in themselves some of the lowest recorded. Ratings of current perceptions of job availability in the Fort Smith area (Q13) indicated that 54% of the respondents felt that jobs were hard to get now (versus 59% last quarter) and only two percent stating that jobs were plentiful (the same as last quarter). When asked about job prospects a year from now (Q14), respondent scores were essentially the same as last quarter, registering a 47 (versus 46). The percentage of respondents who felt job prospects would improve over the next year was 10%, while the number of people reporting that job prospects would be worse over the next year was 63%; both were identical to December results. With index scores in the forties, survey participants continue to hold rather pessimistic views of the regional employment situation, especially in attitudes toward future job prospects (Q14). The index score for respondents on this item in the first-quarter 2011 survey was 73. Views now are clearly gloomier. JOB SECURITY AND INCOME EXPECTATIONS Three questions asked respondents to rate their sense of job security, income expectations, and political views. Items Q15-Q17 in Table 3 relate to these themes. Consumers were asked to rate how secure they felt about their job situation right now relative to 12 months ago. Of the 327 surveys received, 180 respondents (55%) indicated they were employed. Of those employed, nine percent felt more secure and 41% felt less secure than they did a year ago.

The data suggest that consumers expected to spend more in general consumption during the second quarter, but this would not include large-ticket durables.

When respondents were asked to rate their expectations regarding household income a year from now, 12% indicated they expected higher household income and 23% expected lower income a year from now. Sixty-five percent expected no change in household income.

EMPLOYMENT Fort Smith respondents continue to report less optimism about the regional job market, but scores were improved

Finally, consumers were asked about their views on which political parties, if any, would better manage the economy (Q17). Forty percent indicated that

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From these data, consumers seem to feel considerable angst about their personal job security relative to a year ago. Layoff announcements in recent months and a fragile local recovery appear to have made many anxious about their job prospects. While some households (12%) expect an improvement in household income over the next year, most expect no change, or worse, a decline (23%). And when it came to rating which party would do a better job with the economy, no political perspective garnered the majority of respondent votes. Overall, results for this quarter reveal an area consumer who is more optimistic than those of the previous quarter, both in terms of national and regional indices. This was true across all indices and most items used in calculating the index. Regional survey participants this quarter recorded improvements in ratings of future prospects of the U.S. economy, but only in terms of the next 12 months. There was decidedly less optimism about prospects over the next five years. Scores related specifically to the Fort Smith region were higher as well and a similar pattern. The regional jobs picture continues to record low scores, but did improve over the previous quarter. Even with a more positive tone in the national economy, there is no escaping the generally less positive news on the jobs front in the Fort Smith MSA. On the consumption side, there was mixed evidence from which to divine the direction of consumer buying behavior going into the second quarter. General consumption is expected to be somewhat higher, with dining out largely unchanged from last quarter and durable goods likely charting lower than last quarter.

While national economic news couldn’t have been much rosier than it was this first quarter, the regional economic picture made a less-positive impression on consumer attitudes. It seems likely that area consumer moods will continue to be tested going into the second and third quarters of 2012.

CONSUMER SENTIMENT

Republicans would better manage the economy, 21% felt Democrats would, and eight percent indicated some other party. Thirty-four percent stated that it didn’t matter which party managed the economy, presumably meaning that no particular party would seem to do any better or worse than any other.

ABOUT THE SURVEY Of the 3,200 surveys mailed to the five-county MSA, 298 were returned undeliverable, and 327 usable surveys were returned, providing a return rate of 11.3%. The confidence level as a result exceeds 90% for this survey. The University of Michigan’s (UM) Index of Consumer Sentiment (ICS) survey is used to measure consumer attitudes on several economic themes. Collectively, these represent consumer optimism or confidence levels for any given period and can be used to compare any one period with other periods. The overall ICS score includes five core questions and constitutes a general measure of consumer sentiment for the period. These questions cover three general areas of consumer sentiment: personal finances, business conditions, and buying conditions. Two subindices within the ICS make up the Index of Consumer Expectations (ICE) and the Index of Current Economic Conditions or more simply, Index of Current Conditions (ICC). The ICE “focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term” (University of Michigan). The ICC focuses on consumers’ views of their current financial condition and whether they feel secure enough about their financial situations to engage in major consumption activity. 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 uafs.edu/cob/cbred.

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Regional Labor Market:

Employment, Participation, and Income Sources It has been two years since we first examined employment in the regional economy. Since then, weâ&#x20AC;&#x2122;ve reported on different aspects of the regional jobs picture, including wage rates, occupational growth areas, and income distribution across the Fort Smith MSA. There is no more important discussion than one related to income and the jobs that create it. We will begin this report by revisiting the jobs picture for the regional economy, beginning with a national overview and working down to the Fort Smith MSA. The primary focus of this report, however, will be on trends in the labor force itself â&#x20AC;&#x201C; size, participation, and employment.

NATIONAL EMPLOYMENT OVERVIEW To begin with, there is perhaps no more sobering picture of employment than the one charted in Figure 1. Figure 1 charts job-loss trends, in percentage terms, for the past eleven recessions, beginning with 1948. Recessions are anchored at zero (left side of chart) based on the employment peak reached prior to the recession that followed. Then, employment is tracked for each recession until the number of jobs returns to the pre-recession high. One thing becomes evident in looking at this chart, recessions are taking longer to recover from, with the current one (the red line) being the most difficult of the past 50-plus years. Even with the relatively positive employment news over recent months, the reality is not quite so upbeat.

On the other hand, nationally, unemployment rates have gone down considerably over the past several months, though rates have stalled somewhat in recent months. That has been less the case for the Fort Smith region, where unemployment rates have started to actually climb in recent months. Figure 2 compares unemployment rates for the past seven years across the U.S., Arkansas, and Northwest Arkansas and the Fort Smith MSAs. From the chart we see that U.S. rates show a clear downward trend since the 2009 high, while Arkansas data, MSAs included, have shown a more flat trend line. While Fort Smith joined the recession party a bit later than was the case nationally, the MSA is definitely staying longer, according to these data. Again, this is non-seasonally adjusted data and thus

Figure 1. U.S. Job Losses in Previous Recessions

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explains the up-and-down nature of the chart lines. While it may be worthwhile to examine some of the key factors that might explain the emerging pattern of longer job recoveries from recent recessions, our interest in this report is to analyze what is happening within the labor market itself as measured by trends in labor force size, participation, unemployment, and the implications of these going forward. LABOR FORCE TRENDS Unemployment rates typically make the headlines, and as stated earlier, these headlines have generally been

more positive of late. With so much bad economic news in recent years, most of us welcome any good news. However, our interest here is in grasping the underlying realities of the economy in the hopes of discerning future performance – whether good or bad. DATA USED IN ANALYSIS For our analysis of labor force trends, we will use or make reference to data from different government datasets which will differ in definitions used, timeframes of measurement, and methodologies. As is normally the case, data at the county or MSA level are the least current, due to priorities set by the Census Bureau (CB) or the Bureau of

REGIONAL LABOR MARKET

Figure 2. Non-seasonally Adjusted Unemployment Rates (2005 - Current)

Labor Statistics (BLS). That is, U.S. and state data are of higher priority than MSA or county data. This results in regional data being the least current. On a monthly basis, the Census Bureau conducts its Current Population Survey (CPS), also known as the household survey, which samples U.S. households regarding employment and other issues outside the scope of this report. This survey is conducted jointly with the BLS. Based on this survey, the BLS releases monthly estimates related to the labor force headcount, employment, and results in the calculation of the monthly unemployment rate.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Table Five Year Labor Regions Table 1. Five-Year Labor Force Selected Regions (2006-2010) (2006-2010) Table 1. 1. Five-‐ Year Labor Force Force Detail Detail aDetail cross Across Sacross elected Selected Regions (2006-‐2010) United States 2006 2007 2008 2009 2010 2006 In labor force (%) 65.0 64.8 65.8 65.3 64.4 61.5 Civilian labor force (%) 64.5 64.4 65.3 64.7 63.9 61.2 Employed (%) 60.4 60.3 61.2 58.3 57.0 56.9 Unemployed (%) 4.1 4.1 4.2 6.4 6.9 4.3 Armed Forces (%) 0.4 0.4 0.5 0.5 0.4 0.3 Not in labor force (%) 35.0 35.2 34.2 34.7 35.6 38.5 Percent Unemployed (%) 6.4 6.3 6.4 9.9 10.8 7.0 *5-yr Estimates (2006-2010) based on American Community Survey conducted by the Census Bureau Employment Status

The BLS separately conducts a Current Employment Statistics (CES) survey each month, also known as the establishment or payroll survey, where they sample individual business payrolls to estimate nonfarm employment, earnings, and hours worked.

LABOR FORCE PARTICIPATION RATES Participation in the labor force is an estimate of the number of noninstitutionalized persons, 16 years and older, in the workforce. That is, those who have work or are looking for work.

Finally, the Census Bureau releases results of the American Community Survey (ACS), an annual survey of households which asks a wide-ranging set of questions related to income, employment, housing, and various other aspects of American households. Data from this survey are released in annual, 3-year, and 5-year aggregates. From this dataset, we’ll generally use the 5-year data, which can be viewed as an average of the five annual surveys.

Based on the monthly Current Population Survey (CPS), Figure 3 plots three employment-related sets of data for the U.S. economy going back to 1960. Let’s briefly look at each of them, beginning with the most familiar and most publicized, the unemployment rate (red line). In looking at the chart, the unemployment rate has declined rather sharply since the recession officially ended in 2009 (on a seasonally-adjusted basis). Jobs reports in recent months have generally shown improvement, albeit at a sluggish rate.

We will use or refer to each of these sets of data in the figures and tables that follow. Like all surveys, they each have their limitations. Please refer to the respective sites for these discussions.

As important as the headline unemployment rate is, the underlying data that make up the headline number

2007 60.6 60.3 56.0 4.3 0.2 39.4 7.2

Arkansas 2008 61.2 60.9 56.9 4.1 0.3 38.8 6.7

2009 61.1 60.7 55.1 5.5 0.4 38.9 9.1

arguably have broader implications for the economy. We look closely at labor force participation, and more specifically the civilian labor force participation. The blue line in Figure 3 charts the U.S. civilian labor force participation since 1960. We see that participation reached a peak of just over 67% in the late 1990s and began to decline through the 2001 recession, stabilizing at around 66% through the first half of next decade. Since the most recent recession, participation rates have declined steadily to just under 64% through the first quarter of 2012. Finally, the black line charts the relationship between, and we’re quoting the BLS here, “[t]he proportion of the civilian noninstitutional population aged 16 years and over that is employed.” That is, the line reflects the percentage of people actually employed relative to

Figure 3. U.S. Employment Population Ratio, Participation and Unemployment Rates

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2010 60.4 60.1 54.4 5.8 0.3 39.6 9.6

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2006 63.0 62.0 57.0 5.0 1.0 37.0 8.0

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT Oklahoma 2008 63.9 63.1 60.2 2.9 0.8 36.1 4.6

2009 63.1 62.3 59.0 3.3 0.8 36.9 5.4

2010 62.8 62.3 58.5 3.7 0.6 37.2 6.0

2006 67.3 67.2 63.6 3.6 0.1 32.7 5.3

those who could be employed (16 years and older, etc.). As would be expected, we observe that the trend line (black line) dips during recessions and typically rebounds during post-recession recoveries. However, what we observe since the most recent recession is that the ratio has been essentially flat – the upturn has not yet occurred. What do we learn from this? First, the U.S. unemployment rate has declined significantly since the recession peak. However, it has dropped in large part due to the decline in participation rates. While the number of people without work has declined relative to the number of people who have work or are looking for work, the people looking for work relative to the number who could be looking for work has declined as well. In the end, the proportion of the population that actually has work relative to the total number who could be working has remained flat, and relatively low when compared to historical levels. Table 1 breaks down the labor force for the U.S., Arkansas, Oklahoma, and the two MSAs for the period 2006-2010, based on data from the annual American Community Survey (ACS) (the CPS doesn’t detail MSA/county data). Recall our earlier discussion of the various surveys used in this report and why differences in results are observed in the data. Further, more recent data are not yet available at the regional levels. In comparing U.S. data with state and MSA results, marked differences can be observed. First, labor force participation percentages vary considerably across the geographic areas examined in this report.

2007 64.7 64.6 60.8 3.8 0.1 35.3 5.9

NWA MSA 2008 66.5 66.4 63.8 2.6 0.2 33.5 3.9

2009 65.6 65.3 60.6 4.7 0.3 34.4 7.2

2010 65.5 65.4 60.3 5.2 0.1 34.5 7.9

2006 60.7 60.6 57.5 3.0 0.1 39.3 5

2007 58.2 58.0 54.9 3.2 0.2 41.8 5.5

Fort Smith MSA 2008 59.9 59.9 56.7 3.2 0.1 40.1 5.3

2009 59.1 58.8 53.4 5.5 0.2 40.9 9.3

2010 59.9 59.6 53.9 5.7 0.3 40.1 9.6

Table 2. Labor Force Participation by Selected Groupings Labor Force Participation* Females in civilian labor force (%) Husband & wife in labor force (%) Husband & wife not in labor force (%)

U.S.

Arkansas

Oklahoma

NWA-‐MSA

FS-‐MSA

59.3 54.1 16.4

55.6 50.4 19.8

56.9 51.4 17.4

59.7 53.7 15.7

53.7 48.7 19.8

*5-yr est. (2006-10) from ACS; Males-only data not specified in ACS.

Table 3. Labor Force Participation by Selected Groupings for Fort Smith-MSA Counties Labor Force Participation* Females in civilian labor force (%) Husband & wife in labor force (%) Husband & wife not in labor force (%)

Crawford 56.2 51.6 18.7

Fort Smith MSA Counties Franklin Sebastian Le Flore 51.7 54.6 51.5 47.8 49.5 47.0 22.5 17.2 22.6

Sequoyah 50.3 43.7 24.4

REGIONAL LABOR MARKET

2007 62.9 62.0 57.8 4.2 0.9 37.1 7.0

*5-yr est. (2006-10) from ACS; Males-only data not specified in ACS.

As observed in the U.S. data from Figure 3 discussed earlier, the participation rate has dropped into the 64% range. In looking at Table 1, Arkansas labor force participation rates are noticeably lower than U.S. and neighboring Oklahoma levels, and the Fort Smith MSA is lower than all the areas included in this study. The Northwest Arkansas MSA is near national levels, even slightly higher. Also note from Table 1 the relatively small portion the Armed Forces component makes up of the overall labor force headcount. Of course, the flip-side of participation rates is the rate of non-participation. While the U.S. rate approached 36% in these data, the Fort Smith MSA exceeded 40%. What explains the Fort Smith MSA deviation from the other regions included in this analysis? Table 2 provides further detail of participation based on a select set of participants where significant variation was observed. As can be seen from the table, participation rates for females are noticeably lower in Arkansas relative to Oklahoma and U.S. estimates. This UAFS College of Business

was also noted in the case where both husband and wife were in the labor force, and the flip side, where neither the husband nor wife was in the work force. The Fort Smith MSA was lower than all the regions contained in this analysis on both of these dimensions. Looking within the Fort Smith MSA using the same dimensions, we see considerable variation among the five counties of the MSA (see Table 3). Female participation ranges from a low of about 50% in Sequoyah County, while exceeding 56% in Crawford County. Generally, within the more densely populated counties of Sebastian and Crawford, we see more female participation in the labor force. Similarly, we see higher husband-wife participation in higher-density counties relative to the lower-density counties of Franklin (AR), Sequoyah (OK), and Le Flore (OK). It is also noted that a higher percentage of households in the lower-density counties reported more cases where neither husband nor wife are in the workforce relative to higher-density counties.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Table 4. Labor Force Participation by Age

Age

In Labor Force (%) 16 to 19 years 42.2 20 to 24 years 74.9 25 to 44 years 82.6 45 to 54 years 81.0 55 to 64 years 63.7 65 to 74 years 24.3 75 years and over 5.7 *5-yr est. (2006-10) from ACS.

United States Employed Unemploy (%) Rate (%) 31.7 23.9 63.5 13.2 76.0 7.1 76.1 5.9 60.2 5.5 23.0 5.3 5.4 4.8

Slicing the data by age groupings (Table 4), we see that Fort Smith MSA participation rates begin to diverge from other areas in this study, starting early on. While 16-19 year old participation rates in the MSA are at or above the other areas, these rates begin to decline in subsequent age groups. Most striking is that the age groups where we typically expect the highest income-earning years to occur have the lowest participation rates relative to national averages. For example, U.S. participation rates for the 55-64 age group of 63.7% is over eight percent higher than the Fort Smith MSA average of 55.3% for this group. Yet, the estimated unemployment rate in the Fort Smith MSA is nearly two percent lower than the national rate for this age group. How is it that the youngest group in the Fort Smith MSA (16-19 years) starts out participating at average or above-average rates, but proceeds to fall behind as they age? While one can speculate, these data don’t allow us to do more than that. What we can say is 1 2

In Labor Force (%) 42.7 74.5 80.2 76.1 57.4 21.4 5.3

Arkansas Employed (%) 31.9 63.3 73.9 71.9 55.1 20.4 5.1

that the trend negatively impacts the regional economy, assuming there are no substitutes for this loss of paychecks reflected in these data. RECESSION’S IMPACT ON THE CIVILIAN LABOR FORCE The story becomes even more challenging when we look at the changes that have taken place in the civilian labor force since the latest recession. Table 5 includes the prerecession labor force numbers for February 2007, a month where numbers were at or near their peak for the regions included in this study, and the numbers for the same month in 2012. According to these BLS data, the civilian labor force has grown over this five-year period for each of the regions included here, except for the Fort Smith MSA. From Table 5 we see that the Fort Smith MSA declined more than 6.5% over the period. Based on what we’ve examined thus far, not only have participation rates for the Fort Smith MSA been generally lower

Unemploy Rate (%) 25.1 13.9 7.2 5.4 3.9 4.5 3.7

Oklahoma Employed (%) 37.7 65.1 74.2 74.4 59.1 23.6 6.4

than the other areas included in this study, but the labor force itself has been shrinking. Recall that the civilian labor force is largely defined as those persons employed or seeking employment within the previous four weeks of when the survey was conducted (for the monthly Current Population Survey used in Table 5). This is a pretty low bar to begin with. It is typical for the labor force to shrink during extended and severe economic downturns, such as the one we’ve been through. As the economy recovers, those who checked out of the labor force begin to move back in as job growth returns. That has not yet happened in the local economy. INCOME FROM EARNINGS AND NON-EARNINGS SOURCES If a higher proportion of the eligible labor force in the Fort Smith MSA is not participating, what explains this, and how are they making a living? First, in general, the education level of a community relates to the level

See the third quarter issue of this publication (Volume 1, Number 3, pages 9-12) for this discussion. See the fourth quarter issue of this publication (Volume 1, Number 4, pages 9-12) for this discussion.

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In Labor Force (%) 47.5 74.7 80.0 77.9 61.3 24.4 6.5

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In Labor Force (%) 42.3 75.7 83.3 81.2 62.5 23.5 5.8

NWA MSA Employed (%) 35.1 69.1 78.8 78.8 78.8 78.8 78.8

Unemploy Rate (%) 16.9 8.4 5.1 4.8 3.4 7.0 1.1

of unemployment – higher average education levels tend toward lower unemployment rates. The opposite is also true. The lower the average education levels of a community, the higher the unemployment. Following from that, the harder it is for a person to find a job, the more likely that person will stop looking for one and seek alternatives. This reduces participation rates. As discussed in earlier reports, the Fort Smith MSA has lower education levels than the national average,1 as well as higher poverty levels.2 This suggests a partial explanation for what we have seen in the analysis to this point. Another part of the answer is suggested from data on household income, which are reported in Tables 6 and 7. Table 6 compares U.S., state, and MSA data for the regions of interest, while Table 7 examines the same items for the Fort Smith MSA counties. From Table 6, we see that the Fort Smith MSA has the lowest percentage of households where income is derived from earnings (wages, salary, selfemployment) and these households have the highest level of income derived from non-earnings sources. Specifically, Fort Smith-MSA households derive just over 74% of their income from earnings, typically related to a job. This is in contrast to the U.S. household average of nearly 80% and the NWA MSA average of over 82%. The contrast is quite startling when comparing the Fort Smith MSA to NWA. For example, 34% of households in the Fort Smith MSA derive some portion of household income from Social Security, versus just over 25% in NWA. This difference is observable across virtually every category listed in Table 6. The comparison across 3

Fort Smith MSA In Labor Employed Unemploy Force (%) (%) Rate (%) 42.9 33.6 21.7 73.2 64.8 11.2 78.0 72.8 6.4 74.6 71.0 4.7 55.3 53.0 3.9 19.1 18.0 5.8 4.9 4.6 4.7

Table 5. Civilian Labor Force Changes from 2007 Pre-recession Peak to Current

Civilian Labor Force* United States Arkansas Oklahoma NWA MSA Fort Smith MSA

Feb-‐07

Feb-‐12

151,879,000 1,364,875 1,736,230 226,536 137,345

% change

154,114,000 1,385,981 1,787,505 236,297 128,088

*Estimates taken from Bureau of Labor Statistics' monthly CPS

1.5% 1.5% 3.0% 4.3% -6.7%

REGIONAL LABOR MARKET

Unemploy Rate (%) 18.9 10.2 5.8 4.2 3.6 3.1 1.5

Table 6. Household Income Sources Household Sources of Income* Earnings (wages, salary, etc.) (%) Social Security (%) Retirement/pension (%)

U.S.

Arkansas

Oklahoma

NWA-‐MSA

FS-‐MSA

79.7 27.5 17.5 4.0 2.5 9.3

75.6 33.2 17.4 5.4 1.8 12.6

78.3 29.4 17.5 4.4 3.4 11.4

82.1 25.3 12.8 3.0 1.3 7.8

74.4 34.1 17.3 6.2 2.9 13.4

Supplemental Security (%) Cash public assistance (%) Food Stamp/SNAP benefits (%) *5-yr est. (2006-10) from ACS; SNAP=supplemental nutrition assistance program

Table 7. Household Income Sources by Fort Smith-MSA Counties Household Sources of Income*

Crawford 76.8 33.1 17.1 5.4 1.4 13.7

Fort Smith MSA Counties Franklin Sebastian Le Flore 67.0 76.9 71.2 43.2 31.9 34.8 19.4 16.2 18.9 6.5 5.0 8.7 2.5 2.1 5.0 14.2 11.3 17

Earnings (wages, salary, etc.) (%) Social Security (%) Retirement/pension (%) Supplemental Security (%) Cash public assistance (%) Food Stamp/SNAP benefits (%) *5-yr est. (2006-10) from ACS; SNAP=supplemental nutrition assistance program

the other regions covered here are similar, though not quite as dramatic in all cases. Taking a closer look within the Fort Smith MSA counties (Table 7), we see the same pattern emerge as was the case in our earlier discussions of participation rates among Fort Smith MSA counties. Counties with higher population densities reported lower percentages of households deriving income from non-earnings sources. Sebastian and Crawford Counties reported non-earnings percentages of

Sequoyah 70.1 37.7 18.6 7.8 5.1 14.8

61.5% and 70.7%, respectively, while remaining counties in the MSA reported between 79.4% to nearly 86% on this dimension. One obvious explanation is that the Fort Smith region simply has an older population, thus a higher proportion of the population relying on fixed-income programs for at least a portion of household income. Yet, the data do not support this argument particularly well. In an earlier issue of this publication,3 our analysis of regional demographics

See the third quarter issue of this publication (Volume 1, Number 3, pages 9-12) for this discussion.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS found that the regional age distribution is not significantly higher than the national average. For example, using 2009 data from that earlier report, we found that the proportion of the population 60 years and older was 18.5% in the Fort Smith MSA, while the national average was 18% (Arkansas average was 19.6%). Looking at the 45-59 age group, regional percentages are right at national averages, 20.4% versus 20.6% (Arkansas was 20.2%), respectively. We conclude from these data that age is not the central factor in explaining the lower participation rates we observe in these data. The lower cost of living makes the region relatively attractive for those with lower income realities, particularly in lower-density areas of the MSA. This is not unique to the Fort Smith region. SUMMARY AND DISCUSSION In summarizing our analysis of employment and the labor force trends for the Fort Smith region, we note three things that will impact economic growth in the years to come. First, regional labor force participation rates are significantly lower than the other regions included in this study. This pattern seems pretty well established in the data we examined here. Why that is the case is not perfectly clear. Part of the explanation may be that our lower cost of living makes it possible for single-income households to not only survive, but to do reasonably well. Further, this lower-cost

structure allows households to survive on alternative income sources. And as discussed earlier, it may be a result of lower education levels which tends toward lower participation.

likely constrain future growth in terms of consumption, related tax revenues, and ultimately the quality and availability of services and the willingness of a community to invest in growth over time.

Second, the regional labor force appears to be shrinking. This does not mean necessarily that the population is shrinking. Recall that in basic terms, the labor force is comprised of those persons 16 years and older who were working or looking for work in the four weeks prior to the employment survey. If people are not working or looking for work, then they are not part of the labor force. The bottom line is that we have fewer paychecks going into household bank accounts.

Further, these programs are less likely to keep up with real inflation. As a result, those households that are reliant on these vehicles for income will be under pressure to do more with less. This argument rests upon the assumption that CPI-based inflation adjustments do not actually keep up with the inflation experienced in the local reality.

Third, the regional economy is more dependent on income derived from non-earnings sources. Put simply, a proportionally higher number of households in the Fort Smith region depend on income from pensions, social security, and social safety-net programs (ie. food stamps) than is the case in the other regions we examined in this report. The implications of this are a two-edged sword. The good news is that there are income flows into the economy from outside sources that form a minimum income floor to a good portion of the economy. This money is largely spent on consumption. This may partially explain the relative stability of economic activity, even in the face of a challenging jobs environment. On the down side, higher dependence by households on fixed-income sources will

Beyond the general problem of a community dependent disproportionally on fixed income sources, our MSA faces a reality that the real wages of those who make their income from earnings (ie. a job) has been flat or declining in the past decade. Over the past three decades, but in particular the most recent decade, debt was used by households to make up the difference between lack of income growth and the aspiration to maintain a certain lifestyle. Under the more restrained credit environment we have today, this path seems increasingly unlikely, even if it were sustainable. Looking beyond the implications for economic growth under the current labor force trends, the best medicine for participation is job growth. Job growth draws people into the labor force. And the additional household paychecks bring long-term benefits to regional businesses as well as government coffers. That, of course, is the real hope in economic development initiatives.

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THE FOUNDATION FOR A SUCCESSFUL BUSINESS Whether your business is construction, retail, manufacturing or pretty much anything else, Arvest is an important part of your financial stability. Every day, we help businesses manage their money, improve their cash flow and realize their growth potential. With over 200 locations in Oklahoma, Arkansas, Missouri and Kansas, and convenient 7 to 7 hours, there are plenty of reasons that Arvest should be the foundation for your success. See one of our experienced bankers today or visit arvest.com.

Arvest Bank. The perfect bank for your changing world.

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