UAFS Regional Economic Outlook 2nd Quarter 2012

College of Business

CENTER

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

UAFS.edu Vol. 3, Num. 2

2nd Quarter, 2012

Fort Smith REGIONAL Economic Outlook Report

Sponsored by Arvest Bank

UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS uafs.edu/cob/cbred

Vol. 3, Num. 2

2nd Quarter, 2012

From the Director......................................... 1 Second Quarter Summary of Regional Economy................................ 2-4 Consumer Sentiment in the Fort Smith Region............................... 5-9 A Sector Analysis of the Fort Smith MSA...............................10-16 Sponsors................................................... 17

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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 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 Oklahoma General Store is part of the 14 Flags Museum in Sallisaw, Okla.

Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

From the Director

Dr. Latisha Settlage, my faculty colleague and research associate in CBRED, has just wrapped Kermit W. Kuehn, Ph.D. up the first phase of a project Director, Center for Business that sought to analyze the Research and Economic Development most recent data on the main sectors that drive our regional economy from the perspectives of employment, compensation, and GDP. This research also examined the top industries (subsectors) within some of the major sectors, such as manufacturing and services. Finally, the report examines the full economic impact of these key sectors on our regional economy. We hope to have a better understanding as to the key sectors and subsectors that drive our economy, their relative and overall impacts, and a sense of the shifts taking place in our economy between the pre-recession performance in 2007 with the postrecession performance of 2010 (the most recent data available for this analysis). Based on the results of this analysis, and other data sources, our intent is to examine more carefully those sectors and subsectors that would seem to have the greatest growth potential for our economy going forward. Of course, that’s a discussion for another day. I hope you enjoy this very informative, though preliminary, analysis. There’s more going on in the analysis than we have room to discuss here. Changing gears a bit, let’s briefly review what’s been happening in the broader economy since our last report.

data indicates we’re in a slowing economy. Talk of recession is in the air again. In spite of all this, markets are largely back up to March/April highs with the DOW above 13,000, after dropping to a low of around 12,000 in June. It has been moving higher over the past few weeks, but few know why. The general belief seems to be that some form of QE3 in the U.S. is inevitable, and Europe will be in their own QE program in earnest as soon as it flounders around trying to figure out how to simultaneously save the Euro and the individual economies of the EU. Just swap Greece of last year with Spain this year, and you have a juicier nugget to talk about over coffee. Oh, and China’s economy has slowed more than expected and may be still slowing. Then there’s the election-year economy, a land where our political leaders do what they can to avoid upset the voter during their re-election campaigns.

FROM THE DIRECTOR

I must admit that I’m particularly excited about this issue of the Fort Smith Regional Economic Outlook Report. One of our goals as a center is to be able to conduct more complex analyses of our economy using tools that are sophisticated enough to do the job. So, when a colleague of mine from the College of Business is able to conduct this kind of research for us, I’m pretty excited.

Where’s all this going? Nobody knows. This broad context doesn’t help the Fort Smith regional economy, though, that’s for certain. We have our own challenges and could use a little help from the broader dynamics, something that does not appear to be in the cards at this time. In this report, as is typical, we review the performance of the Fort Smith area economy. Housing permits were up, but home sales were lower for the second quarter. Retail and auto sales were both higher. The jobs picture continues to be difficult, however. Our survey of Fort Smith consumer sentiment for June improved from last quarter. And, as discussed earlier, the final section examines the contributions of major sectors and subsectors of our economy. There’s a lot going on in this report. I hope you enjoy reading it. I always want to thank Arvest for their ongoing support of our work here in CBRED. Their commitment to what we do, along with our advertisers and subscribers, makes our work possible. I affirm again my belief that we are partners in a common cause of making the Fort Smith region the best it can possibly be. To our future.

Employment data has been generally weaker in the second quarter and much the same since the June reading. Consumer spending has slowed and sentiment has vacillated from one month to the next, but generally drifting lower. Manufacturing

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Second Quarter Summary of Regional Economy The second quarter performance of Fort Smith regional economy had some definite positives to show this quarter relative to the same period in 2011. Unfortunately, not all components of the economy reflected the same tone. Retail sales for March-May were up, as were June auto sales and construction permits for the quarter. But, home sales were off, as was the number of jobs in the MSA compared to a year ago. The most recent economic activity index was for April and was estimated at 89.8, down from the 93.4 reading for the same period in 2011. Taking a closer look at the quarter, retail sales continued to post year-overyear improvement, up 5.3% for the three-month period ending May 31, the most recent data available. Consumers continued to increase spending heading into early summer, following a similar uptick in sales in the first quarter of 2011. U.S. retail sales activity in May

and June were noticeably weak, based on the July 16 Census Bureau release, while the preliminary report by the International Council of Shopping Centers released on August 2 found surprising strength in July. As we move into the back-to-school mode of the third quarter shopping season, hopefully the positives we’ve seen to date will continue in the regional retail market. Area auto sales have been less robust month-by-month in 2012, but they did show improvement relative to the second quarter of 2011. Sales dollars were up 10.5% in the second quarter. Unit sales were up as well, with 8,560 new and used autos sold in the quarter. This was nearly six percent higher than the number of units sold during the same quarter of 2011. Recall that data is only taken from Sebastian, Crawford and Franklin counties of Arkansas.

New car units sold in the first quarter were up 15.7% from 2011 and 2.5% higher than the previous five-year average for the quarter. Units of used cars sold in the quarter were nearly four percent higher than 2011, but 5.1% lower than the previous five-year average. Overall, the regional consumer has continued to spend at higher levels than a year ago and sentiment has stabilized some over the past few quarters. While auto sales have struggled some, they have remained stable through the first half of the year, and well above the rough second quarter of 2011. Retail sales have been kept aloft thus far by broad and steep discounting by major retailers. It remains to be seen if this is sustainable in light of the general weakness in jobs data for the region. See our full discussion of consumer sentiment in the next section.

Table 1. Summary of Second Quarter Performance 2nd Quarter 2012 Sales (Qtr Total) Retail Sales (MSA, March, April, May, 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.)

Base Year - Q2

Last Year - Q2

This Year - Q2

% Change

2011

2012*

2011-2012

$ 809,257 $ 82,445

$899,322 $ 73,877

$947,293 $ 81,643

5.3% 10.5%

167 $ 19,710

122 $ 18,036

150 $ 21,094

23.0% 17.0 %

749 $ 86,520 $ 115,514

553 $ 64,810 $ 117,198

529 $ 68,008 $ 128,559

-4.3% 4.9% 9.7%

120,567 29,033 23,600 17,367 13,900 11,267 8,767 7,100 4,133 1,600 4.5% 5.1% 5.0%

114,900 20,167 24,067 18,933 16,100 10,167 8,733 7,100 4,100 1,133 7.9% 8.0% 8.9%

110,567 19,300 23,467 18,800 15,000 9,500 8,700 6,833 3,600 1,100 7.6% 7.2% 8.0%

-3.8% -4.3% -2.5% -0.7% -6.8% -6.6% -0.4% -3.8% -12.2% -2.9% -0.3% -0.8% -0.9%

18,436

14,588

15,267

4.7%

2005

* Data as of June, except retail sales which includes March-May. 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, 2nd Quarter, 2012

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Residential construction improved markedly for the quarter, with new permit totals up 23% from last year. The 150 permits issued were not far off the 167 units issued in 2005 for the same period.

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Home sales, however, dropped off a bit for the quarter, recording a 4.3% decline relative to last year. Based on MLS data, 529 units were sold. The results suggest that while activity has slowed, there are qualified buyers in the market. The sector has made significant progress since the recession, but sales are still below the 749 units sold during the second quarter of the 2005 base year. The basic dynamics of the sector remain largely the same as they have been for the past couple of years. Interest rates continue to test record lows, inventories continue to be sufficient, and home prices remain largely in the buyer’s favor. Qualifying for mortgages remains difficult. However, the regional jobs picture continues to look less-than robust, based on recent BLS data. Total non-farm employment declined 3.8% for the quarter. Based on the monthly average of total MSA employment for the second quarter, there are over 4,300 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 government (-1,100), manufacturing (-867), and business and professional services (-667). No sector was estimated to have gained jobs during the period. The Bureau of Labor Statistics’ (BLS) year-end revisions to their statistical model used to estimate employment continues to result in year-over-year declines in regional job estimates. We’re reminded that these are estimates and reflect the best data we have at this point. We are most interested in relative

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improvements or declines in the jobs picture over time. This adjustment effect will continue to impact the data with which we compare well into the latter part of the year. Looking at the unemployment rate, we saw improvement relative to a year ago. The 7.6% average unemployment rate for the MSA for the second quarter was three-tenths lower than a year ago. As we’ve discussed before (and more extensively in the last section of last quarter’s report), using the unemployment rate alone, adjusted or unadjusted, misses important underlying data. The decline in unemployment rate to 7.6% in June from 7.9% in 2011, for example, was due to the combination of a 2,300-person decline in the labor force headcount and only a 1,700-person decline in the number of people estimated to be unemployed. Recall that the unemployment rate is calculated by dividing the number of unemployed by the total civilian labor force.

SUMMARY OF REGIONAL ECONOMY

The residential real estate sector continued to give mixed signals relative to the second quarter a year ago. Home sales were down modestly for the quarter, while residential construction activity was up significantly from the same period a year ago.

As is always the case, data are preliminary estimates and are likely to change month-by-month… and then change again annually. Finally, average monthly airport traffic counts for the quarter were up 4.7% over 2011. June results, however, were down 8.2%, a performance we would not want to see repeated very often. SUMMARY AND ANALYSIS At the writing of this report (first week of August), corporate reports have been decidedly more subdued for the second quarter and “guidance” given for the rest of the year is generally more negative. Markets are undecided, charging upward on a scrap of good news (today it was the jobs numbers) only to drift lower over three or four sessions as a series of less-than-good news comes out. Overall, the tone is more cautious, even skiddish. Except for today’s report, jobs data has been disappointing for some weeks previous to this release. Retail sales were down in May and June and auto sales have slowed some.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Manufacturing output has been weaker as well. In sum, broad economic performance of the U.S. economy shows signs of slowing. I would say stalling, but that may be too harsh at this point. Markets remain indecisive and for good reason. Europe’s troubles continue to haunt us. Concerns over China have added fuel to the angst, while emerging markets are less “emerging.” Europe still has the ongoing financial system problems, only this time Greece (which was the focus of last year’s troubles) is being overshadowed by Spain and Italy. A recession has further complicated the progress toward a solution for these stressed economies. Greece, for example, is missing austerity targets set in earlier bail-out agreements and is facing continued social unrest for commitments already made. The European Central Bank publicly took a wait-and-see attitude toward the mess this week. They seem to have gotten comfortable dancing on the edge of a cliff before decisions get made. They have considerable practice now. On the monetary side in the U.S., the Federal Reserve this week disappointed the market some with their own waitand-see position, offering little more than promises to continue to support the economy with easy money and low interest rates. Many observers of the Fed think that September is the earliest the Fed will act, depending on how the data falls in coming months.

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On the fiscal side, little is expected from Congress and the President between now and the November election. A side deal was agreed to that avoided any ugliness over budget extensions during the election season. Neither side wanted any of that unpleasant conversation just before election. One less drama to watch this fall. Looking at some other indicators, national manufacturing and nonmanufacturing numbers for July, the most recent data reported by the Institute for Supply Management, were both lower than the April readings reported last quarter. The PMI (for manufacturers) dropped below the important 50 level, recording a 49.8 for July, up slightly from the 49.7 in June. This indicates that the manufacturing sector is contracting and is well below the 54.8 recorded in April. The NMI, which includes such sectors as professional services, information, wholesale and retail trade, came in lower at 52.6. This compares with an April reading of 53.5. Index scores that trend above 50 are interpreted as a growth mode for the sector. The June results from the Manpower Group’s Employment Outlook Survey found that Arkansas employers’ hiring intentions for the third quarter of 2012 continued to be solid, with 20% of employers indicating they intended to hire more people in the third quarter, up from 19% in the previous survey, and six percent indicating they planned to decrease payrolls for the quarter, up from five percent from the previous

report. This results in a net positive of 14% for the quarter and reflects a somewhat positive tone toward third quarter hiring. All told, expectations were unchanged for third-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 head into the downside of summer? Consumer sentiment has remained more-or-less stable, but is still quite low. However, retail sales have continued to show strength, largely on the back of aggressive promotions in most stores. Home sales have slowed some, but auto sales have been generally solid. The broader breakdown in the economy that began in the second quarter last year has not developed this year. While the data reveals less-than-stellar performances to date, the catalyst dysfunction has yet to appear. Markets have managed to hold up reasonably well in this season of nervousness, and consumers have not gone home and locked themselves in their houses. This is good news. The economic landscape remains tentative, however, and there’s no real confidence builder in the data yet that signals the good times are just around the corner.

Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

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in the Fort Smith Region

INTRODUCTION The Index of Consumer Sentiment (ICS) for the Fort Smith region was up again in the second quarter, continuing to register quarter-over-quarter improvements observed in the past two surveys. The index for June, which measures consumer confidence for the Fort Smith MSA, was 59.8, a slight increase of .8% from the first quarter result of 59.3, and higher than the 55.3 reported for the second quarter of a year ago. The rise was not consistent with national results of 73.2 reported by the University of Michigan (UM) for June, which was down 3.9% from the previous quarter. The two sub-indices for Fort Smith were mixed 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 4.3% to 63.2,

while the national ICC declined by 5.2%. At the close of the second quarter, regional consumers revealed more positive views of their current financial situations than was the case in last quarter and well above the 55.1 of a year ago at this time. The Index for Consumer Expectations (ICE), which measures consumer feelings about future economic conditions, was down 1.5% from last quarter, recording a 57.5 for the Fort Smith regional consumer. While the negative direction was consistent with national scores, the magnitude of the change was again more subdued than the national data which was down nearly 3% from the previous quarter. National and Fort Smith consumers viewed current conditions quite differently, but held similar views expectations going forward.1 Overall,

area consumers registered greater improvement in sentiment than did national respondents for the second quarter. TAKING A CLOSER LOOK As can be seen from Table 1, area consumer sentiment scores revealed a slight improvement in optimism in the second quarter relative to last quarter. While the ICS recorded improvement relative to the March survey, closer examination of results reveals that the national and regional respondents diverged significantly on their views of their own personal finances and the national economy going forward.

CONSUMER SENTIMENT

Consumer Sentiment

Two items comprise the ICC sub-index: 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 more positive attitudes this

Table 1. June 2012 Index and Component Scores INDICES

Q2/2011

Q1/2012

Q2/2012

% Change Q1-Q2

UM*

Index of Consumer Sentiment (ICS)

71.5

55.3

76.2

59.3

73.2

59.8

-3.9

0.8

Index of Current Conditions (ICC)

82.0

55.1

86.0

60.6

81.5

63.2

-5.2

4.3

Index of Consumer Expectations (ICE)

64.7

55.5

69.8

58.4

67.8

57.5

-2.9

-1.5

-12.4

13.6

108

112

110

-1.8

-2.4

Economic Outlook – 12 Months (ICE)

0.0

-1.4

Economic Outlook – 5 Years (ICE)

-9.0

-1.3

128

125

0.0

-2.2

INDEX COMPONENTS Personal Finances – Current (ICC) Personal Finances – Expected (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 quarter regarding their current personal finances, up 13.6% from last quarter. National numbers were 12.4% lower than the previous quarter. The second item in the ICC, which asks whether this was a good time to purchase durable goods, was 2.2% lower than last quarter (89 to 87). National numbers were unchanged from last quarter on this item. Taking a closer look at the regional consumers shift in sentiment toward their personal finances, we find that 16% indicated they were financially better off than they were a year ago, up from 13% for last quarter. Fortyone percent of current respondents indicated they were worse off than a year ago versus 47% who indicated this last quarter. The index is influenced most when the percentage of positive attitudes increases while the percentage of negative attitudes declines, as was the case in this time. These differences in expectations accounted for the divergent ICC index scores observed in national and regional data, and significantly impacted the overall index (ICS) for the period. 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 less optimism reported, with scores

Table 2. June 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

59.8

59.5

1.7

FSICC*

63.2

55.1

60.6

63.2

4.3

FSICE

57.5

62.3

57.9

0.2

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

2.4% lower than last quarter (84 to 82). National results were down 1.8% 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 35% who expected them to be worse. 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 about short-term prospects of the U.S. economy. Area consumer scores registered a 1.4% decline relative to last quarter when respondents were asked about prospects for the economy over the next 12 months (69 to 68). National scores were unchanged from the March survey. When looking at the five-year range, area respondents reported slightly less optimism than last quarter with scores declining 1.3% (79 to 78). National scores were down 9% from last quarter.

To summarize the results to this point, regional consumers reported more optimism regarding their own personal financial situations this quarter, but held more cautious views about the prospects for the national economy going forward. With the exception of the item on personal finances, item scores were little changed from last quarter. RESULTS SPECIFIC TO THE FORT SMITH ECONOMY For each quarterly survey, we modify two items in the UM 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 sub-index are impacted by the change. As these items focus on future expectations as opposed to current conditions, the FS ICC scale is

Figure 1. Fort Smith Sentiment on National and Regional Scales

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Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

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As can be seen from Table 2, Fort Smith respondents’ overall sentiment (FS ICS) and future prospects (FS ICE) of the regional economy improved over last quarter and ratings for the region were essentially the same as were ratings for the U.S. economy on the same dimensions (UM ICS). Recall that fourth-quarter 2011 scores reflected the first time that Fort Smith consumers characterized the regional economy’s prospects as less positive than the national economy as a whole. Scores from the unmodified scale are restated from Table 1 and are presented in the column labeled UM ICS. Results for the second quarter reflected a 1.7% improvement in the overall index score (FS ICS) and recorded essentially no change in the Index for Consumer Expectations (FS ICE) relative to last quarter. This modest improvement in optimism was not consistent in direction with the ratings Fort Smith consumers gave the national economy. The FS ICS score of 60 is essentially the same as the national score of 59.8. BEYOND THE CORE MEASURES Consumers were asked seven additional questions 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 attitudes toward Social Security and their own retirement. The specific questions, comparative scores and percentage breakdown of positive-negative responses for each are contained in Table 3. GENERAL ECONOMY AND CONSUMPTION INDICATORS Perceptions of the current business conditions in the U.S. economy (Q8) declined from March ratings, with 8% of the respondents indicating they thought the economy was better now than it was a year ago. This was down from 14% who felt this way in the first

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

SURVEY QUESTIONS

2012

Qtr. 2 Percentages

% pos

% neg

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

612

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

233

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

109

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 NOT currently eligible to receive social security benefits, do you plan to apply as early as possible (62 yrs), at your ‘normal’ retirement age (either 65, 66, or 67 yrs), or later than normal but by age 70?

Q16) If you are currently receiving social security benefits, did you apply as early as possible (age 62), at your ‘normal’ retirement age (either 65, 66, or 67 yrs), or after normal age?

Q17) With regard to social security, do you expect your benefits to increase, remain about the same, or decline in your lifetime?

CONSUMER SENTIMENT

not affected (thus, is the same as ICC results in Table 1 for Fort Smith).

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.

As response options for items Q15 and Q16 were informational only, the index score and related percentages were not meaningful under the positive-negative index structure of Table 3.

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS quarter. Sixty-one percent (versus 34% in March) indicated it was worse. More consumers continue to think that higher inflation will be the rule over the next twelve months (Q9), with 81% indicating this view. This was down from the 93% who felt that way in the previous quarter, and less than the 88% that felt that way a year ago. The dominant expectation among area consumers continues to be biased toward inflation. When asked about overall consumption expectations over the next three months (Q10), the percentage of respondents in this survey who indicated they intended to spend more in the third quarter declined, while the number indicating they would spend less also declined. This resulted in no change in the index score of 107 from last quarter. Twentynine percent of the respondents indicated that they would spend more overall in the third quarter 2012 versus 22% who intended to spend less. When it came to specific purchasing activity over the next quarter (Q11), nine percent expected to increase spending on such activities as dining out, the same percentage as last quarter. Thirty-nine percent indicated they would spend less during the 2012 first quarter, a decline from the 43% recorded last quarter. Spending intentions on dining out are still biased toward constraining consumption in this area. Ratings regarding intentions toward buying large-ticket items (Q12) in the third quarter remained largely unchanged this quarter, with 5% of respondents (versus 6% last quarter) indicating they expected to make such purchases in the third quarter and 80% (versus 83% last quarter) who did not. This suggests that we might continue to expect some weakening in the sale of large-ticket items as we move through the July-September quarter of 2012. Overall, these data suggest that consumers will remain generally cautious this summer in consumption, including largeticket durables.

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EMPLOYMENT Fort Smith respondents continue to report less optimism about the regional job market, but scores were improved from the previous survey. Index scores of current availability of jobs and prospects for job improvement over the next year ticked slightly higher than last quarterâ&#x20AC;&#x2122;s scores, but the shift is hardly noticeable. Ratings of current perceptions of job availability in the Fort Smith area (Q13) indicated that 53% of the respondents felt that jobs were hard to get now (versus 54% last quarter) and only 3% stating that jobs were plentiful (up from 2% last quarter). When asked about availability of jobs a year from now, regional consumers were pessimistic here as well, with 61% of respondents indicating they expected fewer jobs to be available a year from now. This was largely the same as the 63% who felt that way in March. Nine percent felt there would be more jobs in the region versus 10% who felt that way last survey. When asked about job prospects a year from now (Q14), respondent scores were essentially the same as last quarter, registering a 49 (versus 47). The percentage of respondents who felt job prospects would improve over the next year was 9%, down from 10% last quarter, while the number of people reporting that job prospects would be worse over the next year declined from 63% to 61%. With index scores hovering around 50, survey participants continue to hold rather pessimistic views of the regional employment situation, particularly in attitudes toward future job prospects (Q14). Recall that the index score for respondents on this item in the secondquarter 2011 survey was 71. Views now are gloomy in comparison. SOCIAL SECURITY AND RETIREMENT INTENTIONS Three questions asked respondents their views on social security and their views of the program benefits going forward. Items Q15-Q17 in Table 3 relate to these themes. Items Q15 and Q16 were informational items and thus were not

Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Consumers who were not eligible to receive social security benefits at the time of this survey were asked (Q15) when they expected to apply for social security benefits. Of the 351 survey responses, 248 completed this item. Forty-one percent indicated they would draw social security as soon as they were eligible, presumably at 62 years of age. Thirty-eight percent indicated they intended to apply at their normal retirement age (typically 65, 66, or 67 years), and 21% indicated they would apply for benefits sometime after their normal retirement age but before 70. Item Q16 asked respondents who were already receiving benefits whether they had applied at the earliest stage (presumably 62 years of age), waited until their normal age for full benefits, or delayed until later than their normal retirement eligibility. Of the 351 surveys responses, 177 surveys contained responses to this item. Of those who responded, 59% indicated that they drew benefits as soon as they were eligible, while 32% indicated they waited until their normal retirement age. Ten percent indicated they delayed applying until after their normal retirement age. The total responses to Q15 and Q16 exceed the total number of surveys received. The questions were structured so as to separate those receiving social security and those who were not. Unfortunately, some respondents answered both of these items, confusing results. Therefore, clear interpretation of these items is not possible. Finally, consumers were asked (Q17) their views regarding social security benefits in the future. Thirteen percent thought their benefits would increase over their lifetime, while 38% thought benefits would remain about the same. Fifty percent felt benefits would decline during their lifetime. As this was a sentiment question, a score and percentages were calculated and can be found in Table 3.

As stated earlier, it is difficult to interpret the results regarding those items geared toward learning consumer decisions regarding social security benefits, specifically related to items Q15 and Q16. A couple of observations will be made here nonetheless. Nearly 60% of respondents already drawing social security benefits (Q16) indicated they drew benefits as soon as they were eligible. This stands in contrast to the 41% who expect to do so when they are eligible to retire (Q15). Twice as many in the “still-working” group expect to work past their “normal” retirement age (21%) as was the case in what was reported by those already drawing benefits (10%). Finally, few expect social security benefits to grow during their lifetimes. Overall, second quarter results indicated that area consumer attitudes were more mixed relative to the previous quarter, though with one exception, all individual index scores drifted lower. While the overall score improved some relative to last quarter, sentiment was generally weak across items in the survey. Ratings of prospects for jobs and the economy overall are anything but positive. Sentiment might be expected to slide further if the economic news, nationally and globally, continues its current negative tone through the summer. The regional jobs picture continues to record low scores, but did improve slightly over the previous quarter. There remains generally less positive news on the jobs front in the Fort Smith MSA and increasingly this is the case nationally as well. On the consumption side, evidence from this survey suggests little change in consumer buying behavior going into the third quarter. General consumption is expected to be flat to slightly weaker, based on these results. Unlike the national economic news during the first quarter, the context has become less positive and has the

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makings of more uncertainty and volatility in markets as we move toward the latter part of the year. Regional consumers are rightfully cautious and anything but optimistic at this point. ABOUT THE SURVEY Of the 3,200 surveys mailed to the five-county MSA, 296 were returned undeliverable, and 351 usable surveys were returned, providing a return rate of 12.1%. As a result, the confidence level exceeds 95% 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.

CONSUMER SENTIMENT

sentiment-related. As a result, no index scores or percentages are provided in Table 3 for these items.

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 http://uafs.edu/cob/cbred.

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A Sector Analysis of the Fort Smith MSA Special Report for the Center for Business Research and Economic Development by Dr. Latisha A. Settlage

The Fort Smith economy has recently endured the departure of Whirlpool. In response to concerns surrounding the ongoing and steady decline of manufacturing jobs in the Fort Smith Metropolitan Statistical Area (MSA), the Center for Business Research and Economic Development conducted an analysis to examine the changing structure of our local economy. This analysis seeks to answer the following questions: (1) What is the relative importance of manufacturing as compared to other sectors in the MSA and how have the shares held by the major sectors in our local economy changed between 2007 and 2010 with respect to total jobs provided, employee compensation paid, and output produced? (2) What is the overall economic impact of manufacturing, service, and trade to the MSA?

(3) How have other sectors, such as services and trade, performed overall in the MSA and in each of its five counties relative to manufacturing when comparing their economic positions in 2007 versus 2010? MANUFACTURING’S CHANGING IMPORTANCE TO THE FORT SMITH MSA As of 2010 (the most current year of full data), just over 14% of total full-time equivalent positions can be attributed to the 117 individual industries that comprise the Fort Smith MSA’s manufacturing sector (Table 1). In 2007, manufacturing jobs accounted for almost 16% of total jobs in the MSA, illustrating the decline in manufacturing in recent years. Similar to the U.S. economy, the largest share of jobs in the Fort Smith MSA in both 2007 and 2010 was provided by the service sector, with almost 41% in 2007 and just over 42% in 2010. Somewhat surprisingly,

the government sector ranked third in most jobs provided in 2010 with a share of 13.4%. In 2007, the trade sector was third most important in jobs provided, but due to slow growth in retail jobs, the sector’s overall share remained constant between 2007 and 2010 at 13.2%, thus allowing government to ascend into the top three. However, even though retail jobs slowed between 2007 and 2010 due to the recession, we can note that this sub-sector still comprises the majority of trade sector jobs (as opposed to wholesale). When examining the services subsectors, we see that health and social services represented the highest proportion of total jobs in the MSA in 2010 (11.7%) followed by administrative and waste services (6.4%) and then accommodation and food services (5.8%).

Table 1. Shares of Employment, Employee Compensation, and Output Contributed by Sectors – Fort Smith MSA, 2007 and 20101 Employment

Employee Compensation

Output

Sector

2007

2010

2007

2010

2007

2010

Ag, Forestry, Fish & Hunting

3.3%

3.1%

0.4%

0.7%

2.7%

2.5%

Construction

6.2%

5.5%

5.0%

4.3%

5.5%

4.5%

Government

12.3%

13.4%

18.9%

19.8%

5.6%

6.9%

Manufacturing

15.9%

14.1%

23.1%

20.3%

38.6%

37.4%

Mining

2.5%

3.1%

4.1%

3.6%

7.1%

4.5%

Services

40.8%

42.3%

30.7%

33.2%

26.8%

30.2%

All Trade

13.2%

10.4%

10.9%

6.9%

7.3%

Wholesale

2.6%

2.8%

3.9%

4.2%

2.6%

2.9%

10.6%

10.3%

6.5%

6.7%

4.3%

4.4%

Transportation & Warehousing

5.2%

4.7%

6.3%

6.1%

4.9%

4.3%

Utilities

0.5%

1.1%

1.2%

2.0%

2.4%

Retail

IMPLAN software was used for this analysis. BLS Covered Employment and Wages (CEW) data, BEA Regional Economic Accounts (REA) data, and County Business Patterns (CBP) data are used in conjunction to create IMPLAN data because no one dataset provides enough information to create a complete IMPLAN database. 1

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Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

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Further evidence of the shift in structure of our local economy can be found in the sector shares comprising total employee compensation. In contrast to number of jobs or economic output, employment compensation relates the amount of income that the employees in that sector earned. In 2007, manufacturing paid 23% of labor income in the MSA, with this

figure shrinking to 20% in 2010. The government sector now pays the same amount of employee compensation in the MSA as manufacturing. The services sector leads the way at 33%. Again looking at the service sub-sectors, we see that health and social services represented a significantly higher proportion of employee compensation relative to its counterparts in both 2007 and 2010. This is not surprising, since this sub-sector represents industries such as hospitals, offices of doctors and dentists, and nursing and residential care facilities. SECTOR ANALYSIS OF THE FORT SMITH MSA Table 2 presents an analysis by sector of the Fort Smith MSA. Number of full-time equivalent positions, employee compensation, and economic output is examined by sector for both 2007 and 2010. Note that while employment and output totals fell for the MSA as a whole between 2007 and 2010, total employee compensation increased by 4.7%. The agriculture, trade (wholesale and retail), service, and government sectors all experienced increases in employee compensation, with the largest increase being in the agricultural sector, with a 88.7% increase. Almost all industries within the agricultural sector (crop farming as well as livestock operations) experienced increases in employee

compensation according to the data with the exception of timber extraction and commercial logging. The percentage increase in employee compensation in the crop farming industries were significantly higher than the percentage increase in employee compensation for the livestock industries. The number of full-time positions decreased between 2007 and 2010 for all sectors except mining and government. Manufacturing experienced the highest rate of decline (-16.2%) followed by construction (-15.9%) and transportation & warehousing (-13.9%). Output also decreased for most sectors during the period. Only the services and government sectors experienced increasing output levels. For the services sector, the increase in output between 2007 and 2010 was led by the finance and insurance sub-sector where the increase in output equaled 69%. The most notable decline in output for the Fort Smith MSA was in the mining sector where a 40.6% decrease is measured. Construction, transportation, and agriculture also experienced double-digit declines in output between 2007 and 2010. Construction output fell 23.8% in the MSA, transportation output decreased by almost 18% and agricultural output fell by 13%.

FORT SMITH MSA SECTOR ANALYSIS

Despite accounting for only 14% of the jobs in the MSA in 2010, manufacturing contributed 37% of the economic output of the region. Between 2007 and 2010, the sector remained the largest contributor of economic output, outpacing the service sector by 7%. However, the percentage of economic output attributable to manufacturing has decreased relative to 2007 when the sector produced 39% of total output. While being the largest sector in terms of number of employees, the services sector comprised the second largest share of output (30% in 2010). The trade sector held firm to its third position in MSA production in 2010 contributing just over 7% of total output. Again when looking at the subsector detail for the services sector in 2010, we see health and social services accounting for the largest share of production (6.8%) followed 6.6% in real estate and rental (driven largely by the imputed service value of home ownership) as well as finance and insurance (5%).

Table 2. Sector Analysis, 2007 and 2010, Fort Smith MSA Employment*

Employee Compensation**

Output**

Sector

2007

2010

% Change

2007

2010

% Change

2007

2010

% Change

Ag, Forestry, Fish & Hunting

5,298

4,835

-8.7%

$20.6

$38.9

88.7%

$590.4

$513.6

-13.0%

Construction

10,061

8,465

-15.9%

$250.5

$225.4

-10.0%

$1,188.1

$905.9

-23.8%

Government

19,906

20,671

3.8%

$948.2

$1,045.2

10.2%

$1,207.7

$1,407.5

16.5%

Manufacturing

25,816

21,626

-16.2%

$1,163.8

$1,067.6

-8.3%

$8,391.2

$7,594.1

-9.5%

4,062

4,840

19.1%

$204.8

$187.4

-8.5%

$1,536.3

$912.9

-40.6%

Services

65,999

64,987

-1.5%

$1,544.2

$1,749.0

13.3%

$5,815.5

$6,134.7

5.5%

All trade

21,427

20,226

-5.6%

$523.6

$572.5

9.3%

$1,488.8

$1,472.5

-1.1%

4,241

4,371

3.0%

$196.6

$219.6

11.7%

$563.8

$583.0

3.4%

17,186

15,856

-7.7%

$327.0

$352.9

7.9%

$925.0

$889.4

-3.8%

8,471

7,290

-13.9%

$317.0

$319.3

0.7%

$1,054.0

$868.8

-17.6%

832

829

-0.4%

$57.1

$63.1

10.5%

$439.2

$483.2

10.0%

161,874

153,769

-5.0%

$5,029.7

$5,268.3

4.7%

$21,711.1

$20,293.2

-6.5%

Mining

Wholesale Retail Transportation & Warehousing Utilities Total

* Measured by number of full-time equivalent positions

** MIllions of dollars

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Table 3. Top Manufacturing Subsectors in the Fort Smith MSA, 2010 Employment*

Employee Compensation**

Output**

Poultry processing

6,003

$204.6

$1,399.3

Household refrigerator/home freezer manufacturing

1,995

$114.0

$808.5

Motor and generator manufacturing

1,936

$132.7

$623.0

Air conditioning, refrigeration, and warm air heating

1,598

$88.7

$514.1

Paperboard container manufacturing

1,222

$68.0

$432.0

Fruit and vegetable canning, pickling, and drying

813

$48.1

$426.1

Cookie, cracker, and pasta manufacturing

647

$26.5

$281.0

Other plastics (not packaging, bottles, pipes, or fittings)

533

$22.4

$113.9

Printing

523

$23.2

$77.2

Iron and steel mills and ferroalloy manufacturing

452

$45.8

$319.2

Industry

* Measured by number of full-time equivalent positions

Manufacturing is a diverse sector represented by over one-hundred subsectors (industries) in the Fort Smith MSA. Table 3 lists the top subsectors ranked in order of providing jobs. These are the industries that employ the most full-time equivalent positions to our region. Poultry processing ranks as not only the most important source of manufacturing jobs to the Fort Smith MSA but also as the top output (GDP) producer. While this subsector also ranks at the top for employee compensation, this is due largely to its large number of employees. Other manufacturing industries playing significant roles in Fort Smith MSA’s labor market include household refrigerator/freezer, motor/generator, air conditioner/refrigeration/warm air heating, and paperboard container.

** MIllions of dollars

Petroleum refineries are also important in providing manufacturing output. Table 4 supplies a listing of the top subsectors providing jobs in the services sector for the Fort Smith MSA. Since there are fewer specific subsectors in the service sector and this sector comprises the largest proportion of employment for our MSA (as compared to manufacturing), each subsector represented in the services list has a much larger number of employees than its counterpart ranking in the top subsectors list for manufacturing. However, the corresponding totals for employee compensation and output are not as great, which reflects the significant difference in wages between the two sectors as well as value of production. As Table 4 shows, the most important service subsectors

to the Fort Smith MSA are food/ beverage service, employment service, hospitals, physician/dentists’ practices, nursing/residential care facilities, and real estate. The management and banking subsectors are also important contributors to services output and employee compensation. OVERALL ECONOMIC IMPACT OF MANUFACTURING, SERVICE, AND TRADE TO FORT SMITH MSA Clearly, the sectors of manufacturing, services, and trade are the most significant to the Fort Smith MSA. As shown in previous analyses, these sectors represent the three largest shares of total regional output. Altogether, in 2010, they account for three-quarters of total MSA output. Services and manufacturing also rank as the top two sectors providing jobs for the

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CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Employment*

Employee Compensation**

Output**

Food services and drinking places

8,330

$120.1

$392.1

Employment services

6,805

$99.7

$160.1

Private hospitals

4,285

$197.0

$459.2

Offices of physicians, dentists, and other health practitioners

3,964

$235.8

$464.1

Nursing and residential care facilities

3,735

$102.6

$185.9

Real estate establishments

3,666

$18.2

$323.5

Home health care services

2,390

$50.1

$104.1

Nondepository credit intermediation and related activities

2,301

$93.9

$227.7

Civic, social, professional, and similar organizations

2,217

$65.6

$162.0

Management of companies and enterprises

2,037

$171.9

$336.9

Industry

* Measured by number of full-time equivalent positions

MSA, with trade tying government for the third spot. As a group, the three provided almost 70% of jobs to the MSA in 2010 and about 65% of employee compensation. The sector analysis previously reported addresses the direct economic impacts of each sector to the Fort Smith regional economy. That is, how many jobs, how much employee compensation, and how much total output (GDP) is attributable to each sector, as each sector operates independently in the economy. However, within the regional economy, there are linkages between the sectors as local companies purchase inputs from one another and as employees spend paychecks. To define the

** MIllions of dollars

true importance of a sector and its significance to the regional economy, all linkages that sector has with others in the economy must be examined. These connections are known as multiplier effects and must be added to the direct economic activity to gain an estimate of the true importance of a sector to the MSA. Using IMPLAN2 – economic impact modeling software – the full economic impact of manufacturing on the Fort Smith MSA is listed in Table 5. The manufacturing sector supported more than 41,000 jobs and $9.7 billion in output in our regional economy in 2010. In addition to the jobs directly affected by the sector (those that are in the manufacturing industry itself),

there are jobs that are supported in this industry’s supply chain (the firms in the region from which the manufacturing firms source inputs), and there are jobs that are supported by the spending of income by the people who work both for the manufacturing firms and the supply chain firms. The supply chain effect is known as the indirect effect in economic impact terms, and the spending effect is known as the induced effect.

FORT SMITH MSA SECTOR ANALYSIS

Table 4. Top Services Subsectors in the Fort Smith MSA, 2010

Because the number of jobs in manufacturing declined between 2007 and 2010, the overall economic impact for the MSA declined as well. However, part of the decline was offset by a slight increase in economic impact stemming from a positive induced economic impact in the economy. This is likely

According to their website, “ IMPLAN is the most widely employed and accepted regional economic analysis software for predicting economic impacts.” Using its proprietary software and dataset, impacts are estimates for the Fort Smith MSA. 2

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Table 5. Economic Impact of Manufacturing Sector on Fort Smith MSA, 2007 and 2010 Employment* Type of Impact

Employee Compensation**

Output**

2007

2010

% Change

2007

2010

% Change

2007

2010

Direct Effect

25,816

21,626

-16.2%

$1,183.2

$1,079.3

-8.8%

$8,391.2

$7,594.1

-9.5%

Indirect Effect

13,569

10,117

-25.4%

$534.4

$453.9

-15.1%

$1,625.0

$1,238.3

-23.8%

Induced Effect Total Effect

% Change

8,972

9,395

4.7%

$252.6

$292.3

15.7%

$785.8

$893.8

13.8%

48,356

41,138

-14.9%

$1,970.2

$1,825.6

-7.3%

$10,802.0

$9,726.2

-10.0%

* Measured by number of full-time equivalent positions

** MIllions of dollars

Table 6. Economic Impact of Service Sector on Fort Smith MSA, 2007 and 2010 Employment* Type of Impact

Employee Compensation**

2007

2010

% Change

2007

2010

Output**

% Change

2007

2010

% Change

65,999

64,987

-1.5%

$1,983.2

$2,175.0

9.7%

$5,815.5

$6,134.7

5.5%

Indirect Effect

1,610

1,528

-5.0%

$73.2

$69.3

-5.4%

$224.9

$207.2

-7.9%

Induced Effect

3,093

3,430

10.9%

$86.8

$106.2

22.3%

$249.1

$307.8

23.6%

70,702

69,945

-1.1%

$2,143.2

$2,350.5

9.7%

$6,289.5

$6,649.7

5.7%

Direct Effect

Total Effect

* Measured by number of full-time equivalent positions

** MIllions of dollars

Table 7. Economic Impact of Retail Trade Sector to Fort Smith MSA, 2007 and 2010 Employment* Type of Impact

2010

% Change

2007

2010

Output**

% Change

2007

2010

% Change -3.8%

17,186

15,856

-7.7%

$399.8

$400.1

0.1%

$925.0

$889.4

Indirect Effect

1,920

1,868

-2.7%

$59.6

$65.6

10.0%

$177.2

$187.3

5.7%

Induced Effect

1,739

2,135

22.8%

$52.5

$70.6

34.5%

$180.1

$237.4

31.8%

20,846

19,859

-4.7%

$511.9

$536.3

4.8%

$1,282.3

$1,314.0

2.5%

Direct Effect

Total Effect

* Measured by number of full-time equivalent positions

** MIllions of dollars

due to the 4.7% increase in employee compensation experienced throughout all sectors of the region between 2007 and 2010.

sector across employment, employee compensation as well as output, with the highest percentage increase being observed in employee compensation.

Which sectors in the MSA were most impacted by the presence of manufacturing as measured by indirect and induced effects? Sectors most negatively impacted by the decline in manufacturing jobs in recent years include professional services, information, real estate, administration, and wholesale trade.

In 2010, the services sector supported almost 70,000 jobs in the MSA with 5,000 of those stemming from the indirect and induced economic impacts. However, as the proportion of service jobs in the MSA has increased, this has not carried a positive change for indirect economic impact for employee compensation and output. Recall, indirect impacts stem from business-tobusiness transactions.

Table 6 shows the change in economic impact of the services sector to the Fort Smith MSA for between 2007 and 2010. Recall, service jobs comprised a slightly larger proportion of employment, employee compensation, and output in 2010 as compared to 2007. The result of service jobs becoming a larger part of our economy can be seen as increases in direct economic impacts for the

Employee Compensation**

2007

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The services sector is different from manufacturing, in which there are typically a fair number of supplier relationships that develop between companies that represent the various industries within the sector. As manufacturing jobs comprise a smaller proportion of jobs in the MSA and

service jobs comprise a larger share, it is not surprising to see a trend of diminishing indirect effect emerge. A positive trend to note for the economic impact of services on the Fort Smith MSA is the significant increase in induced effect between 2007 and 2010. The induced effect traces spending throughout the economy that is performed by workers in the services sector as well as any workers in subsectors that supply services sector companies. From this increase in spending, the model estimates the corresponding number of jobs necessary to support this economic activity. The services sectorâ&#x20AC;&#x2122;s indirect and induced effects have had the most economic impact on job numbers in the agriculture, construction, and mining sectors. However, output in the mining, construction, and government sectors has seen the largest impact. These changes

Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

While trade accounts for 13% of total jobs in the Fort Smith MSA, it is the retail portion that accounts for almost 80% of that sector’s jobs. Table 7 presents the economic impact of retail trade for both 2007 and 2010. Note that for the direct effect, the percentage decline in output is smaller than the percentage decline in jobs in this sector. This helps to explain the increase in total economic impact that the retail sector had on the MSA between 2007 and 2010. Another explanation for the increase in economic impact (even in the presence of decreasing jobs and economic output in this sector) is the slight increase in employee compensation. Even a slight increase in employee compensation has a significant impact on the induced effect in this multiplier model. SUMMARY AND CONCLUSIONS The economy of the Fort Smith MSA is changing. Like the composition of the national labor market, the proportion of jobs in the manufacturing sector is shrinking, while the services sector continues to serve as the dominant sector for jobs. In 2010, the manufacturing sector in the Fort Smith MSA provided over 20,000 jobs, produced $7.6 billion in output, and paid over $1.1 billion in employee compensation. Relative to other sectors in the MSA, it contributed the largest share of output as well as the second largest shares of employment and employee compensation. Since 2007, the number of employees in this sector has declined by more than 15%, while employee compensation and output has dropped by about 8% and 9.5%, respectively. By contrast, the services sector in the Fort Smith MSA provided almost 65,000 jobs in 2010, produced $6.1 billion in output, and paid over $1.7 billion in employee compensation. Between 2007 and 2010, service sector

jobs in the MSA declined by a modest 1.5%, while employee compensation and output both rose by 13.3% and 5.5%, respectively. Clearly, with job numbers dropping only modestly, and compensation and output both increasing, the services sector outperformed manufacturing in the Fort Smith MSA during the early stage of the recovery from the Great Recession.

FORT SMITH MSA SECTOR ANALYSIS

demonstrate the interrelationships present in our local economy. The services sector depends heavily on production of food and fiber as well as production of natural resources to operate. In addition, spending by those employed in this sector supports jobs in construction and government (primarily public education).

Since jobs in manufacturing declined between 2007 and 2010, the total economic impact of the sector declined as well, while the opposite was true for the services sector and retail trade. The majority of the increase in economic impact for the services and trade sectors was due to the increase in employee compensation in these sectors, and the additional consumer spending (multiplier effects) that resulted. As mentioned in the introduction to this report, the Fort Smith MSA experienced a significant shock mid-year 2012 with the departure of Whirlpool, a company that had once employed more than 4,000 in the region. The Center for Business Research and Economic Development has estimated that the economic impact of Whirlpool’s loss to the region is severe. In addition to the final jobs that were suspended along with the factory’s closure (approximately 900), the model estimates a long-run job loss of 900 additional jobs in related industries. These include companies with input or supplier relationships with Whirlpool, such as those within the industries of wholesale trade, plastics, truck transportation, motor manufacturing, and employment services. Additional job loss is also likely to arise when the compression of employee compensation begins to affect the economy. Firms in the food/ beverage, health care, real estate and retail industries are most likely to experience the most hardship due to the deterioration in spending from former Whirlpool employees. Dr. Latisha Settlage is the Hill Williams Endowed Chair/Associate Professor of Economics in the UAFS College of Business, as well as a research associate in CBRED.

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FURTHER COMMENTARY First some observations before we close this issue with some housekeeping notes. 1) While Fort Smith-MSA manufacturing has certainly taken a hit during the 2007-2010 period, it was during 2010 when the contraction began in earnest in the sector. This makes the contrast of the pre-recession boom of 2007 and the rapid decline seen in 2010 so sharp, and startling. This partially reflects the sector’s leading indicator status – predicting improving and declining performances for the economy before many other sectors such as services. The services sector trailed manufacturing during this period in terms of rate of decline, as did the government sector (always slower to react than the private sector to economic setbacks). We might expect the reverse to be true in manufacturing were we to see 2011 data, and even 2012 data, except for the “Whirlpool effect.” 2) This “Whirlpool effect” will rumble through the economy for some time to come, but its more immediate impact is relatively clear from these data. In Table 3, we see that the

second largest subsector within the manufacturing sector is household refrigerators and home freezers, contributing around $800 million in GDP in 2010, and nearly 2,000 jobs. While one cannot say from these data that Whirlpool comprises all these outputs, it certainly makes up the large proportion of it. These evaporate by the end of 2012. 3) Not all manufacturing jobs are created equal, even if we replace jobs. We see that poultry processing is the largest segment of the MSA manufacturing sector in terms of jobs, compensation, and GDP output. It is by far the largest segment of the sector. Yet, on a per-job basis, the sector is one of the weakest in the top ten listed here in terms of compensation and GDP per employee. In contrast, number ten in the sector, iron and steel, rates the highest on both of these factors. 4) Health services showed considerable resilience to the downward pressure in the economy during this period. In fact, four of the top ten services subsectors (Table 4) were from health care-related services.

These observations and their implications will be examined more fully in the next issue and in the final report. Notes: Please note that due to space limitations in this publication, not all the narrative and supporting tables from Dr. Settlage’s report were included here. Further, the sector analyses reported here addressed only the broader sector-contribution questions that were outlined at the beginning of the report. The countylevel analyses, along with the full report and commentary, are expected to be completed and released before the end of the year. The second thing to note regarding the analysis in this report relates to the IMPLAN software used for this analysis. The well-recognized economic analysis software is proprietary and uses a dataset created and managed by the vendor, which is then used for these analyses. The resultant output is an estimate and will not always compare easily with datasets from the Bureau of Labor Statistics or the Bureau of Economic Analysis, though these government sources are incorporated into the IMPLAN dataset.

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Fort Smith Regional Economic Outlook, 2nd Quarter, 2012

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