UAFS Fort Smith Regional Economic Outlook Report Q1, 2013

College of Business

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FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

UAFS.edu Vol. 4, No. 1

1st Quarter, 2013

Fort Smith REGIONAL Economic Outlook Report

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

uafs.edu/cob/cbred Vol. 4, No. 1

1st Quarter, 2013

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

Upcoming Events Fort Smith Regional Economic Outlook Forum sponsored by Arvest Bank

Presenters include Dr. Kermit Kuehn, director, CBRED, and Kevin L. Kliesen, business economist and research officer, Federal Reserve Bank of St. Louis

Wednesday, July 10, 2013 11:30 a.m. â&#x20AC;&#x201D; 1:00 p.m. Smith-Pendergraft Campus Center Reynolds Room

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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: Construction of I-49 near Rye Hill.

Fort Smith Regional Economic Outlook, 1st Quarter, 2013

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From the Director

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

That’s no less true for communities. It has been more than five years since things started falling apart economically as the forces of the global financial crisis of 2008 worked their way through our economy. While hardly a vigorous recovery, our economy stabilized and has shown definite improvement since then.

In the last issue of this report we took a closer look at the health care industry, an important subsector of the broad and diverse services sector. This was our first in-depth look at a key regional sector, one that was identified from earlier research we’d done to identify key sectors in our economy. Recall that this earlier work used 2007 and 2010 data to examine key sectors of our economy in terms of jobs, compensation, and output. In this issue we return to a broader discussion of the regional economy’s performance drawing on the same dataset used in the earlier sector analysis. In another first for us at CBRED, we are pleased to present research conducted by one of our students in the College of Business, Shayna Gatzke. I think you’ll find that this is a sophisticated and high-quality analysis of our economy involving techniques used by advanced economic development practitioners to evaluate economic performance of markets of various sizes and complexity. Under the guidance and instruction of my colleague and research associate in CBRED, Dr. Latisha Settlage, Shayna conducted a cluster analysis of the Fort Smith regional economy. The study first identified clusters in our economy using location quotients. The primary variable of interest here was the jobs concentrated in these clusters. From

these she went on to examine how well regional clusters performed relative to national averages. Clusters identified as performing above national averages reflect areas of our economy that have relative competitive advantage. The implication is that these clusters have the potential for sustainable growth going forward—if we first validate and then exploit these advantages. This type of research will allow us to drill deeper into key sectors to identify potential sources of future growth for our economy. Changing gears a bit, let me make a brief comment on what has been happening in the economy since our last report. Nationally, it has been a much more positive quarter. Stock market indices have reached all-time highs, residential real estate has shown definite signs of improvement, and the general tone has been more upbeat. The regional tone has more or less been similarly upbeat. Just one tidbit as evidence of some of our good news was the announcement by Health Management Associates to locate 500 new administrative jobs to the area. There were other smaller announcements recently as well.

From the Director

With this issue of the Fort Smith Regional Economic Outlook Report, we mark the beginning of our fourth year as a center. As is the case in so many aspects of my life at this stage, I find it hard to believe that so much time has passed already. Time truly waits for no one.

In this report, we make our regular review of the performance of the Fort Smith area economy for the period. The mediocre performance pattern continues. Housing permits were up again, but home sales were lower for the first quarter. Retail sales were lower while auto sales were higher. The jobs picture improved somewhat. Our survey of Fort Smith consumer sentiment for March was unchanged from a year ago, but up from last quarter. And, as discussed earlier, the final section examines the economic clusters that make up our economy. I hope you enjoy reading this issue. I again want to acknowledge Arvest’s continued support of our efforts here in CBRED. Their commitment to what we do, along with our advertisers, make our work possible. I truly believe we are partners in a 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 the Regional Economy The performance of the Fort Smith regional economy provided evidence to support both pessimistic and optimistic views of the economy in the first quarter. On the positive side, auto sales, residential permits, and overall job numbers were higher this quarter than a year ago. Retail sales (December 2012–February 2013), homes sold, unemployment rate, and airport traffic numbers were all lower for the quarter. The most recent economic activity index was for January and was estimated at 95.5, unchanged from the 2012 reading. The index seems to confirm the mixed nature of the economy’s performance. Area auto sales continued to show solid month-over-month growth

in 2013, resulting in sales up 15.1 percent for the quarter. Unit sales were down 1.3 percent, however, with 9,216 new and used autos sold in the quarter. Recall that data is only available for Sebastian, Crawford and Franklin counties of Arkansas.

the first positive month year-over-year since October 2012. According to the April 12 release by the Census Bureau, U.S. retail sales activity appeared to weaken toward the close of the first quarter, suggesting continued weakness in the Fort Smith region is possible.

New car units sold in the quarter were up nearly 11 percent over 2012, accounting for the rise in overall sales for the quarter. New car sales totaled 1,493 units for the quarter.

Overall, the regional consumer appears to have slowed down spending in the December–February period in terms of general consumption, though it improved some in the February reading. Sentiment rebounded in March from a disastrous December report. See our full discussion of consumer sentiment in the next section.

Retail sales posted a year-over-year decline for the three months ending February 2013, down 1.6 percent in this report. The numbers would have looked much worse if not for the solid performance in February. February was

Auto sales continue to hold up well, however, suggesting pent-up demand

Table 1. Summary of First Quarter Performance 1st Quarter 2013 Sales (Qtr. Total) Retail Sales (MSA, Dec., Jan., Feb., 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 and Salary Employment (Total Non-farm) Manufacturing Trade, Transportation, and Utilities Government Education and Health Services Professional and Business Services Leisure and Hospitality Natural Resources, Mining, and Construction Financial Activities Information Services MSA Unemployment Rate (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 - Q1 2005

Last Year - Q1 2012

This Year - Q1 2013*

$978,527 $86,835

$934,192 $65,722

$919,204 $75,613

-1.6% 15.1%

237 $22,121

85 $12,234

104 $14,314

22.4% 17.0%

522 $55,507 $106,335

427 $48,650 $113,934

406 $49,451 $121,799

-4.9% 1.6% 6.9%

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

116,000 19,433 24,000 19,400 16,933 10,600 8,700 6,933 4,200 1,267

116,367 18,633 24,667 19,633 17,467 10,900 8,667 6,367 4,267 1,400

0.3% -4.1% 2.8% 1.2% 3.1% 2.8% -0.4% -8.2% 1.6% 10.5%

5.2% 5.9% 5.6%

8.0% 8.0% 8.6%

8.3% 7.8% 8.1%

0.3% -0.2% -0.6%

15,065

13,716

12,604

-8.1%

*Data as of March, except retail sales which includes Dec-Feb. 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, 2013

% Change 2012-2013

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Overall, it is expected that 2013 will be another good year for new car sales. The regional jobs picture offered some hope as well, based on recent Bureau of Labor Statistics data. Total non-farm employment rose 0.3 percent for the quarter. Based on the monthly average of total MSA employment for the first quarter, there were an estimated 367 more jobs in the region than there were a year ago. This is a modest improvement and suggests that the region continues to struggle to generate consistent net-positive job growth. Taking a closer look at specific sectors, we find jobs were added in transportation and utilities (+667), business and professional services (+300), and education (private) and health services (+534) while the three losers by

headcount were in manufacturing (-800), mining and construction (-566), and leisure and hospitality (-33).

As is always the case, data are preliminary estimates and are likely to change month by month.

The unemployment rate rose relative to a year ago. The 8.3 percent average unemployment rate for the MSA for the first quarter was threetenths higher than a year ago.

The residential real estate sector continued to give mixed signals relative to the first quarter of a year ago. Residential construction reported very good numbers for the quarter with new permit totals up 22.4 percent from last year. The 104 permits issued were still well below the 237 units issued in 2005 for the same period, but a marked improvement over last year at this time.

Experian reported that 43.2 percent of new car loans in the fourth quarter were written for those with subprime credit scores, “the highest percentage ... since late 2007.” According to BLS data, there were around 1,400 fewer people in the Fort Smith MSA labor force in March 2013 than there were in 2012. There were more than 1,600 fewer people working in the MSA during the period. The net result was that the number of unemployed in the region was estimated to include 10,316 people, an increase of 250 people from a year ago. Recall that the unemployment rate is calculated by dividing the number of unemployed by the total civilian labor force.

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Home sales, on the other hand, were down again for the quarter, off nearly 5 percent from 2012. Based on MLS data, 406 units were sold. While results were hardly overwhelming, they’ve certainly been worse. For example, there were 364 units sold in the first quarter of 2011. On the other hand, sales are significantly below the 522 units sold during the 2005 base year. Feedback from some real estate agents suggests that we could see improved numbers as we head into summer as buyer interest and pending contracts have improved markedly.

Summary of Regional economy

remains solid. Sustainability of demand continues to be a question, as the restoration of the 2 percent payroll tax works its way into family budgets. While new car sales continue to be a shining light in the regional economy, there is evidence that buyers with weaker credit are increasing as a proportion of unit sales. According to a March 5, 2013, CNBC news feature, Experian reported that 43.2 percent of new car loans in the fourth quarter were written for those with subprime credit scores, “the highest percentage ... since late 2007.”

We’d like to think this surge of interest is for real this time as the underlying dynamics of the sector have been favorable to buyers for years now, yet activity has been rather ho-hum most

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS months. Interest rates have recently begun to test new lows. Inventory levels appear to be sufficient in most price ranges, and home prices remain largely in the buyer’s favor. Qualifying for mortgages remains a daunting task, however, with documentation requirements by underwriters bordering on the absurd. The amount of paperwork required to complete a mortgage loan application continues to grow. Finally, average monthly airport traffic counts for the quarter were down 8.1 percent from last year. This trend has been going on for months now, making it one of the more troublesome activity indicators. While it is hard to determine if it is reflective of declines in business or personal travel activity, it may reflect a lack of confidence in the broader economy or that more air travelers are going somewhere else to catch flights–or a combination of both.

Summary and Analysis At the writing of this report (second week of May), stock markets have moved to record highs. It’s amazing what punishing conservative investors with effectively negative interest rates can do to encourage riskier behavior to get only modest returns. All that in the face of mediocre corporate earnings results for the quarter and an economy still struggling to heal itself. It’s all quite impressive, actually. Overall, the tone is much the same as in recent reports–fear of staying in the game but more afraid of losing out. Stock markets have continued to climb on the wings of a generous monetary policy and the lack of persuasive bad news. Home prices have put in successive gains in the past few months and homebuilders are reporting favorable activity in new home demand. In fact, now we hear of a housing shortage in some markets. Go figure! Looking in on some other indicators, national manufacturing and nonmanufacturing numbers for April–the most recent data reported by the Institute

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for Supply Management–were both lower than the January readings reported last quarter. The Purchasing Managers Index for manufacturers recorded a 50.7 for April, below the 53.1 for January we reported in our last issue. This indicates the manufacturing sector continues to expand, but the pace has slowed since the last report. The NonManufacturing Index for April, which includes such sectors as professional services, information, wholesale and retail trade, came in at 53.1. This compares with the January reading of 55.2, which we reported last time. 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 2013 were up from fourth quarter readings. Sixteen percent of employers indicated they intended to hire more people in the second quarter, up from 10 percent in the previous survey. Six percent indicated they planned to decrease payrolls in the second quarter, up from 5 percent from the previous report. This results in a net positive of 10 percent for the quarter and reflects a moderately positive prospect toward second-quarter hiring. No report specific to the Fort Smith MSA was available. For the Fort Smith regional economy, results were so-so. There’s nothing particularly new in that, however. Piecing together improvements across all the components of our economy will be the key to sustainable yearover-year improvement. It has been difficult to get the regional economy firing on all cylinders. We can look for the April home sales number to come in positive after months in the doldrums. March retail sales need to be positive, after a decent February, or the year-over-year downward trend will remain intact. And then there is the need for continued job growth. The recent Health Management Associates announcement of 500 jobs is the kind of news we need more of. Is all that possible? Of course it is! The optimism that comes with spring is still with us.

Fort Smith Regional Economic Outlook, 1st Quarter, 2013

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in the Fort Smith Region

Introduction The Index of Consumer Sentiment for the Fort Smith region recovered somewhat in the first quarter after the sharp drop recorded in December. The index for March, which measures consumer confidence for the Fort Smith Metropolitan Statistical Area, was 58.4, up nearly 12 percent from the fourth quarter result of 52.2, but still below the 59.3 reported for the first quarter a year ago. The rise in sentiment was consistent with national results of 78.6 reported by the University of Michigan for March, which rose 7.8 percent from the previous quarter. The two sub-indices for Fort Smith were higher as well for the quarter. The Index of Current Conditions for the Fort Smith region, a measure of consumer attitudes toward their current economic situations, rose 6 percent to 61.6, while the national ICC rose by 4.3 percent. At the close of the first quarter, regional consumers expressed more positive views of their current financial situations than was the 1

case last quarter and more positive than the 60.6 recorded a year ago at this time. The Index for Consumer Expectations, which measures consumer feelings about future economic conditions, was up 16.3 percent from last quarter, recording a 56.4 for the Fort Smith regional consumer. The result was similar in magnitude and direction to national scores, which were up 11 percent from last quarter. National and Fort Smith consumers’ sentiment improved relative to last quarter, in terms of both current conditions and expectations going forward.1 Overall, the more positive tone reported by area consumers appeared to reflect a post-fiscal cliff environment where much of the economic news has been less negative.

Taking a Closer Look As can be seen from Table 1, area consumer sentiment scores revealed notable improvement in optimism in

the first quarter relative to last quarter. The observed improvement in overall sentiment was broadly supported across all sub-indices and index items, both for national and regional respondents. Two items comprise the ICC subindex: people’s ratings of their current personal finances and whether the time is right to make major purchases (referring to durable goods). Area consumers did report slightly more positive attitudes this quarter regarding their current personal finances, up 1.5 percent from last quarter. National numbers were 3.3 percent higher than the previous quarter on this item.

CONSUMER SENTIMENT

Consumer Sentiment

The second item in the ICC, which asks whether this is a good time to purchase durable goods, was up 8.4 percent from last quarter with an index score of 90. National numbers were up a more modest 4.5 percent from last quarter on this item. The ICE sub-index consists of three items and seeks to measure consumer

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

Table 1. March 2013 Index and Components Indices

Q1/2012

Q4/2012

Q1/2013

% Change Q4-Q1

UM*

76.2

59.3

72.9

52.2

78.6

58.4

7.8

11.9

60.6

58.1

90.7

61.6

4.3

6.0

69.8

58.4

63.8

48.5

70.8

56.4

11.0

16.3

3.3

1.5

112

102

109

6.9

22.7

Economic Outlook – 12 Months (ICE)

14.9

19.0

Economic Outlook – 5 Years (ICE)

15.6

10.4

125

134

140

4.5

8.4

Index of Consumer Sentiment (ICS) Index of Current Conditions (ICC) Index of Consumer Expectations (ICE)

Index Components Personal Finances – Current (ICC) Personal Finances – Expected (ICE)

Buying Conditions – Durables (ICC)

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

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS expectations going forward in areas of personal finances and national economic prospects. As to personal finances over the next 12 months, there was significantly more optimism reported, with scores 22.7 percent higher than last quarter (81 compared to 66). National results were up 6.9 percent for this item. In percentage terms, 19 percent of respondents in the Fort Smith area felt their personal finances would be better off a year from now versus 38 percent 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 more optimism for both short- and mediumterm prospects of the U.S. economy. Area consumer scores registered a 19 percent improvement relative to last quarter when respondents were asked about prospects for the economy over the next 12 months (69 compared to 58). National scores were up nearly 15 percent from the December survey. When looking at the five-year range, area respondents again reported more optimism than last quarter with scores up 10.4 percent (67 to 74) relative to last quarter. National scores were up nearly 15.6 percent from last quarter on this item. To summarize the results to this point, regional consumer sentiment for the first quarter recovered much of the ground lostFigure in the1.fourth quarter and reflected

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

UM ICS Survey (Q1/13)

FS ICS Survey (Q1/12)

FS ICS Survey (Q4/12)

FS ICS Survey (Q1/13)

% Change Q4-Q1

FSICS

58.4

55.5

59.5

7.2

FSICC*

61.6

60.6

58.1

61.6

6.0

FSICE

56.4

57.9

53.8

58.8

9.3

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

views largely in line with sentiment reported in the first quarter of 2012. 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 five years from now. The overall FS ICS index and FS ICE sub-index are affected by the change. As these items focus on future expectations as opposed to current conditions, the FS ICC scale is not affected (thus, it is the same as ICC results in Table 1 for Fort Smith). As can be seen in Table 2, Fort Smith respondents’ overall sentiment (FS ICS) and ratings of future prospects (FS ICE) for the regional economy rose from last quarter, with ratings of the region higher than ratings of the U.S. economy on the same dimensions (UM ICS).

Results for the first quarter reflected a 7.2 percent increase in the overall index score (FS ICS) and a 9.3 percent increase in the FS ICE relative to last quarter. This rise in optimism was consistent in direction with the ratings Fort Smith consumers gave the national economy. The FS ICS score of 59.5 is marginally better than the national score of 58.4. As can be seen in Figure 1, Fort Smith consumer sentiment moved higher in the first quarter, though still below results reported prior to the fourth quarter drop. Even with improvements in sentiment reported this quarter, scores remain well below those observed in 2010 when the regional survey was initiated.

Beyond the Core Measures Consumers were asked seven additional questions relating to their views and expectations about inflation, personal spending, jobs, and income. Three additional items were included which were related to consumers’ personal finances. Where applicable, the specific questions, comparative

Figure 1. Fort Smith Sentiment on National and Regional Scales 75

Index Score

70 65 ICS Total

FSICS Total

55 50 45

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 2010 2011 2012

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2013

Fort Smith Regional Economic Outlook, 1st Quarter, 2013

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General Economy and Consumption Indicators Perceptions of the current business conditions in the U.S. economy (Q8 in Table 3) improved from December ratings, with 15 percent of the respondents indicating they thought the economy was better now than it was a year ago. This was up from 10 percent who felt this way in the fourth quarter. Fiftythree percent (versus 59 percent in December) indicated it was worse. More consumers continue to think that higher inflation will be the rule over the next 12 months (Q9), with 89 percent indicating this view. This was up from the 85 percent who felt that way in the previous quarter, but lower than the 93 percent that felt that way a year ago. The dominant expectation among area consumers continues to be biased toward inflation, though it seems to have moderated somewhat. 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 second quarter 2013 rose, while the number indicating they would spend less declined. This resulted in an increase in the index score from 93 to 107 for the quarter. Twenty-eight percent of the respondents indicated that they would spend more overall in the second quarter of 2013 versus 21 percent who intended to spend less. When it came to specific purchasing activity over the next quarter (Q11), 10 percent expected to increase spending on such activities as dining out, up from the 9 percent who responded last quarter to this item. Thirty-seven percent indicated they would spend less during the 2013 second quarter, a decline from the 42 percent recorded last quarter. Little has changed in consumer consumption intentions relative to last quarter, though fewer expressed the view that they would spend less in the second quarter.

Ratings regarding intentions toward buying large-ticket items (Q12) in the second quarter remained largely unchanged, with 9 percent of respondents indicating they definitely expected to make such purchases in the second quarter (up slightly from 8 percent last quarter). Seventy-seven percent (versus 78 percent last quarter) indicated they would not make such purchases. Overall, the index score of 33 exceeds the 23 recorded in March 2012 on this item, suggesting some improvement in consumer intentions toward larger purchases. Overall, these data suggest that consumers reported generally more positive views toward consumption relative to last quarter, but scores reflect general weakness as to consumption expectations going forward.

CONSUMER SENTIMENT

scores, and percentage breakdown of positive-negative responses for each are contained in Table 3 (p. 8).

Employment Fort Smith respondents continue to report a pessimistic view of the regional job market, though it improved in March relative to last quarter. Ratings of current perceptions of job availability in the Fort Smith area (Q13) indicated that 51 percent of the respondents felt that jobs were hard to get now, an improvement over the 55 percent who felt that way last quarter, and only 3 percent stating that jobs were plentiful (the same as last quarter). When asked about availability of jobs a year from now (Q14), regional consumers were pessimistic here as well, with 54 percent of respondents indicating they expected fewer jobs to be available a year from now. This was largely the same as the 52 percent who felt that way in December. However, this is markedly better than the 63 percent who felt that there would be fewer jobs a year ago at this time. Survey participants continue to hold rather pessimistic views of the regional employment environment, but ratings held relatively steady again this quarter. In the 2010 survey for the first quarter, the respondent rating as to expectations regarding the availability of jobs in the region a year from now (Q14) was 95, well above the 60 reported from this most recent survey. Itâ&#x20AC;&#x2122;s good to remind ourselves from time to time

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Table 3. Additional Consumer Sentiment Scores and Current Quarter Percentages

Personal Finances Three questions asked respondents for their views on their current financial situations, ability to spend, and financial priorities. Items Q15-Q17 in Table 3 relate to these themes. Respondents were asked to rate their current financial security relative to a year ago (Q15). When asked whether they felt more secure, about the same, or less secure today than they did a year ago, only 9 percent of respondents felt more secure. Fifty-two percent of area consumers who responded to this survey felt less secure than they did a year ago, and the remaining 39 percent felt about the same. Clearly, a large number of consumers perceive their financial situations as quite fragile and are anything but confident in this aspect of their personal lives. The above observation is further reinforced by the view that consumers perceived their income was buying less and less (Q16). When respondents were asked if they felt they had more, about the same, or less to spend now than they had a year ago, only 11 percent reported that they had more to spend now than a year ago. Forty-nine percent felt they had less, and 40 percent felt they had about the same as a year ago. Finally, consumers were asked about their financial priorities for the coming year (Q17). When asked whether they would focus more on increasing income, saving more, or reducing debt, 45 percent reported that reducing debt was the priority. Thirty-one percent indicated they would increase savings, with the remaining 24 percent reporting they intended to increase income. Summarizing results from these last three items, it appears that large numbers of consumers feel insecure about their financial futures, perceive their buying power to be declining, and plan to reduce consumption. To the degree the intentions expressed in this survey are what

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Index Scores Survey Questions

2012

Qtr. 1 Percentages 2013

% pos

% neg

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

532

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

143

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

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 a 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) With regard to your current financial situation, do you feel more secure, the same, or less secure now than a year ago?

Q16) With regard to your current income, do you feel you have more to spend, about the same, or less to spend now than you did a year ago?

Q17) Will your financial goals this year focus more on increasing income, reducing debt, or saving more? (Select only one)

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.

Fort Smith Regional Economic Outlook, 1st Quarter, 2013

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Overall, first-quarter results reflected a rebound in sentiment from the sharp drop observed in December. While ratings did not return to third-quarter levels, first quarter regional sentiment readings were similar to scores observed in the March 2012 survey. This result is hardly anything to boast about, but does reflect sentiment levels consistent with surveys over the most recent year. While consumers indicated more spending was anticipated for the second quarter, there was clear evidence that they were looking to save more and reduce debt over the next year—priorities that reflect less consumption in the intermediate term. Economic headlines have generally been positive in 2013, but like our weather this spring, things can change on short notice. We can hope that the changes will continue to be for the better.

About the Survey Of the 3,000 surveys mailed to the five-county MSA, 232 were returned undeliverable, and 323 usable surveys were returned, providing a return rate of 11.7 percent. As a result, the confidence level exceeds 90 percent for this survey. The University of Michigan’s Index of Consumer Sentiment 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

regional consumers actually do, it can be expected that regional consumption will continue to be constrained.

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 sub-indices within the ICS make up the Index of Consumer Expectations and the Index of Current Economic Conditions or more simply, Index of Current Conditions. According to UM, 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. 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, an 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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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

Regional Competitive Advantage:

A Cluster Analysis of the Fort Smith MSA By: Shayna Gatzke and Dr. Latisha Settlage* In previous studies, IMPLAN software was used to conduct a sector analysis of the regional economy in order to determine the key industry sectors which contributed most to jobs, output, and economic impact. A number of observations were made from these analyses: (1) manufacturing continues to be a major contributor to the economy in terms of output, but the proportion of jobs supplied by this sector is diminishing; (2) service sector jobs are increasing as a proportion of the total number of jobs in the economy; and (3) differences exist in the economic impacts of key sectors (manufacturing vs. service as well as health vs. retail). In order to better understand the reasons behind the changing composition of the Fort Smith economy, a cluster analysis was conducted for the Fort Smith Metropolitan Statistical Area. Clusters, as defined by Michael Porter1 in 1990, are “groups of interconnected firms, suppliers, related industries, and 1

specialized institutions in particular fields that are present in particular locations.” According to Porter, clusters may not only explain the competitive advantage of a region, but they can also be used to guide business leaders and strategic initiatives that ultimately result in successful economic development. This report is part of a larger study conducted to examine the Fort Smith MSA in terms of industry clusters using data from 2007 and 2010. This discussion will proceed as follows. First, using employee headcounts as the metric of interest, regional economic clusters are identified using location quotients, or LQs, and the growth rates observed in these clusters between 2007 and 2010. Then, these clusters are sorted into categories reflecting economic potential and compared in terms of these LQs and growth rates of cluster employee headcounts into what is called a growth-share matrix. Next, a shift-share

analysis was conducted to determine the competitive advantage each of the respective sectors might have relative to national and industry performance. Again, this was conducted using employment as the output of interest. Finally, an analysis was conducted to assess cluster performance in terms of output or gross domestic product.

Identifying Regional Clusters One method that may be used to identify potential clusters in the region is through a location quotient analysis. LQs measure industry specialization by comparing employment concentrations in the Fort Smith MSA to U.S. averages. A location quotient is calculated as an industry’s proportion of total MSA employment relative to an industry’s proportion of total U.S. employment. For example, an industry comprising 5 percent of total MSA employment and 5 percent U.S. employment would have

Porter is a Harvard Business School professor and recognized expert in and proponent of cluster analysis as a tool to understand the makeup of economies and to guide economic development activities within them.

Table 1. Industry Sector Location Quotients Industry Sectors Agriculture, Forestry, Fishing, Hunting, and Mining

2007 LQ

2010 LQ

CAGR of LQ

2.17

2.19

0.7%

Construction

1.01

0.73

-27.6%

Manufacturing

1.95

1.69

-13.3%

Wholesale trade

0.98

0.88

-10.1%

Retail trade

0.92

1.08

17.1%

Transportation, Warehousing, and Utilities

1.26

1.27

0.2%

Information

0.51

0.39

-24.3%

Finance, Insurance, Real Estate, and Rental Leasing

0.63

0.60

-5.1%

Professional, Scientific, and Management; Administrative and Waste Management Services

0.49

0.43

-12.8%

Educational Services and Health Care/Social Assistance

0.98

1.03

5.5%

Arts, Entertainment, and Recreation; Accommodation and Food Services

0.79

1.01

27.7%

Source: U.S. Census Bureau: Fort Smith MSA and U.S. County Business Patterns

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A heavy concentration of employees in particular industries is indicative of labor specialization, and labor specialization indicates competitive advantage. High quotients signal drivers of the regional economy and identify industries in which the region effectively competes on a national scale. Using data from the U.S. Census Bureauâ&#x20AC;&#x2122;s 2007 and 2010 American Community Survey, LQs were calculated at the two-digit North American Industry Classification System level. Those sectors with location quotients greater than 1.00 form the basis for further cluster analysis. It is important to note that the economy experienced a deep economic recession between 2007 and 2010, so total employment numbers were expected to decrease across sectors for both the region and the United States as a whole. However, if national employment in an industry declined more than regional employment in the same industry, the regional industry will have increased in specialization and experienced an increase in its location quotient. In order to measure the rate

of industry specialization, compound annual growth rates, or CAGRs, were also calculated for each sector. Six of the 11 two-digit NAICS sectors in Table 1 show 2010 location quotients above 1.00. They include Agriculture, Forestry, Fishing, Hunting, and Mining; Manufacturing; Transportation, Warehousing, and Utilities; Retail Trade; Educational Services and Healthcare/Social Assistance; and Arts, Entertainment, Recreation, Accommodation, and Food Services. From Table 1, we see that all sectors show positive growth except Manufacturing. However, Manufacturing was selected for further study despite its negative growth rate because it has the second highest location quotient and one that is well above 1.00, even with the decline between 2007 and 2010. Based on the location quotient analysis at the two-digit NAICS level, a new set of specific location quotients were calculated using six-digit NAICS data (which define subsectors or industries). Only location quotients for the industries (subsectors) comprising the sectors identified in Table 1 (with LQs greater than 1.00) were calculated. Within a sector, industries with high location quotients were grouped together based on the same or consecutive NAICS codes to form the basis for a cluster. The six-digit industry location quotients are then averaged to produce a location quotient for the cluster. A

corresponding CAGR is then calculated from the average location quotient for the newly formed cluster. Table 2 lists the clusters identified from this analysis for the Fort Smith MSA. The resulting eight clusters show average location quotients greater than 1.00 in 2010. These are the industries in which the region most effectively competes on a national level. The magnitudes of the quotients indicate regional labor specialization, with the manufacturing clusters representing the strongest economic drivers as evidenced by their relatively high LQs. Of the manufacturing clusters, Food as well as Metal and Metal Products Manufacturing are the most specialized, revealing strong 2010 LQs of 20.2 and 14.2, respectively. This means that food manufacturing specialization in the region is 20 times greater than the nation as a whole, and metal and metal products manufacturing specializations is about 14 times greater. It is also important to note that all compound annual growth rates were positive, with the exception of Metal and Metal Products Manufacturing. This indicates increasing regional labor specialization across industries, even in the midst of a recession.

CLUSTER ANALYSIS OF THE FORT SMITH MSA

an LQ equal to 1.00. Thus, quotients greater than 1.00 indicate a greater employment concentration than that observed in the U.S. economy, and quotients less than 1.00 indicate less employment concentration. So, if a industry has a location quotient of 2.00 there are twice as many employees in that industry on a proportionate basis in the MSA relative to the U.S.

Growth-Share Matrix With clusters identified for the Fort Smith MSA, a matrix was developed to characterize the growth observed in the

Table 2. Cluster Location Quotients and Rates of Change Potential Cluster

2007 LQ

2010 LQ

CAGR of LQ

Energy and Mining

2.55

4.62

21.9%

Food Manufacturing

17.17

20.19

5.5%

Wood Products Manufacturing

3.15

3.33

2.0%

Metal and Metal Products Manufacturing.

17.05

14.16

-6.0%

Transportation and Warehousing

2.29

2.85

7.7%

Health Care

0.80

1.08

10.3%

Recreation/Accommodation/Food Service

0.75

2.04

39.8%

Retail

1.25

1.65

9.9%

Source: U.S. Census Bureau: Fort Smith MSA and U.S. County Business Patterns

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Figure 1. Growth-Share Matrix for Fort Smith MSA, 2010

2010 Average Loca9on Quo9ent

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

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

Metal and Metal Products 7999 Food Manuracturing Manufacturing

5955 15,553 5441 8926

5/15/13

Metal and Metal Products Manuracturing TransportaOon and Warehousing

Mining and Energy RecreaOon/ AccommodaOon/Food Service

5/15/13

Wood Product 10 M anufacturing Retail

-‐60.00%

Transforming

TransportaOon and Warehousing 0

-‐40.00%

-‐20.00%

0.00%

Wood Product Manufacturing

Mining and Energy

20.00%

RecreaOon/ 40.00% AccommodaOon/Food Service

Healthcare

60.00%

Emerging

-‐5 Retail

-‐60.00%

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

cluster analysis, as well as the share of Three clusters were classified Healthcare as jobs associated with each cluster (see emerging (those graphed as touching -‐5 Figure 1). This growth-shareAverage matrixCompound is the x-axis). Emerging were A nnual Growth Rate of the clusters Loca9on Q uo9ent a bubble chart that categorizes clusters Recreation, Accommodation and into quadrants based on the location Food Service; Retail; and Healthcare. quotient and its compound annual growth These groups had the lowest 2010 rate. The size of the bubble directly location quotients, 2007 quotients corresponds to the size of the cluster in near or below 1.00, and annual terms of 2010 employee headcounts. growth rates among the highest. Small bubbles correspond to clusters with fewer employees; larger bubbles Emerging clusters possess a relatively illustrate clusters with proportionately low degree of specialization. However, larger numbers of employees. positive annual growth in their location quotients indicates that such clusters are Because only industries falling into increasing in specialization relative to sectors with 2010 location quotients of the U.S. average. In the case of the three at least 1.00 were considered, all eight regional emerging clusters, specialization clusters of the Fort Smith MSA were appears to be increasing rapidly, categorized into one of three quadrants; with growth rates ranging between Mature, Performing, and Emerging. 10 percent and almost 40 percent.

Transforming

Mature clusters have location quotients greater than 1.00 and negative growth rates. With the only negative growth rate, Metal and Metal Products Manufacturing was charted as Mature. Mature clusters possess a high degree of labor specialization, but the negative growth indicates that the cluster is decreasing in specialization relative to the United States as a whole.

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Performing clusters included Mining and Energy; Food Manufacturing; Transportation and Warehousing; and Wood Product Manufacturing. These four clusters had the highest location quotients in the region, ranging from 2.85 to 20.19. In addition, all four clusters experienced positive growth from 2007 to 2010, ranging from 2 percent to 21.9 percent.

60.00%

Transforming clusters, the fourth Emerging category on the matrix, represented clusters with location quotients of less than 1.00 (no labor specialization) and negative compound annual growth rates. None of the Fort Smith MSA clusters fell into this classification for 2010.

Shift-Share Analysis In order to determine the extent to which Fort Smith MSA clusters possess competitive advantage, a shift-share analysis is performed. Shift-share analysis consists of three components of economic growth: national, industry, and regional. What does a shift-share analysis allow us to do? The national and industry components demonstrate the changes that would occur in regional employment IF the regional conditions exactly matched national conditions and industry trends. Thus, the measures are predictive. When actual regional employment numbers in each cluster do not follow the predictions, there are implications for competitive advantage in that cluster. For example, if a cluster outperforms the prediction, this is because all

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The national component is calculated as 2007 Fort Smith MSA employmentper-cluster multiplied by the national employment growth rate (Table 3a). Note that for the present analysis (2007 to 2010), the national employment growth rate decreased 7.16 percent (given the recessionary state of the economy). Thus, the national component predicts job losses across all clusters. The industry component allows for a comparison of how well Fort Smith clusters perform relative to their national peers. It is calculated as 2007 Fort Smith MSA employment-percluster multiplied by the difference between the national cluster growth rate and the national employment growth rate (Table 3b). The industry component takes into account that some clusters have competitive advantage nationally, so regional employment gains beyond those predicted by this component imply a deeper source of regional competitive advantage. The regional component specifically determines competitive advantage gained from region-specific factors. It is calculated as 2007 Fort Smith MSA employment-per-cluster times the difference in the Fort Smith

MSA cluster growth rate and the national cluster growth rate (Table 3c). Unlike the national and industry components, the regional component is not a predictive calculation. It does not predict or estimate the number of jobs that should have been added or lost. Rather, its importance lies in its sign—whether positive or negative. If the regional component is positive, it indicates that the region possesses a collection of factors that support a cluster’s competitive advantage in the region. A negative regional component indicates that no such regional competitive advantage exists for the cluster. Table 3 presents the shift-share data for the Fort Smith regional clusters, calculated using employment data from the U.S. Census Bureau 2007 and 2010 County Business Pattern tables. The national share component (Table 3a) showed that if the Fort Smith clusters had followed the national employment trend, every cluster should have experienced declining employment. For example, if the regional Healthcare cluster behaved in exactly the same way as the national economy as a whole, it should have experienced the largest decrease in employment, losing 978 jobs throughout the period. However, the regional cluster experienced the largest increase in

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employment, gaining 1,888 jobs, resulting in a 4.4 percent annual growth rate from 2007 to 2010 (actual 2010 MSA employment minus 2007 MSA employment). Mining and Energy; Recreation, Accommodation, and Food Service; and Retail experienced increasing employment in the period as well, with annual growth ranging from 0.2 percent to 2.7 percent. The three manufacturing clusters and Transportation and Warehousing did show decreased employment in the period, but in each cluster, except for Metal and Metal Products Manufacturing, the decline in employment in the region was less than predicted based on the trend in total national employment. Regional declines ranged from –2.4 percent to –3.3 percent in annual growth, well above the national employment growth rate of –7.16 percent. The industry component section (Table 3b) shows the change that would have occurred in regional clusters had they followed the national industry trend. Had the regional clusters behaved exactly as their national counterparts, most clusters would have gained employment. Again, using the Healthcare cluster as an example, the trend in the national healthcare industries predicted a gain of 1,046 jobs in the regional cluster, but the regional Healthcare cluster experienced an even larger gain, adding 1,888 jobs, based on earlier discussion from Table 3a. Other regional clusters

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CLUSTER ANALYSIS OF THE FORT SMITH MSA

resources, including labor, are attracted to their most competitive use. That is, there is implied competitive advantage in the regional sector relative to the benchmark U.S. performance.

UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS Table 3. Shift-Share Analysis of Fort Smith MSA Clusters on Employment a)

National Share Component Predicted 2010 FS MSA Employment

Actual 2010 FS MSA Employment

-181

2,344

2,538

-850

11,025

9,145

Actual 2007 FS MSA Employment

Predicted Change In Jobs*

Energy and Mining

2,525

Food Manufacturing

11,875

Cluster

Wood Products Manufacturing Metal and Metal Products Manufacturing

1,906

-136

1,770

1,734

12,315

-882

11,433

7,999

5,815

-416

5,399

5,955

13,665

-978

12,687

15,553

Recreation/Accommodation/Food Service

5,023

-360

4,663

5,441

Retail

8,526

-610

7,916

8,926

Transportation and Warehousing Health Care

Industry Share Component Actual 2007 FS MSA Employment

Predicted Change In Jobs*

Predicted 2010 FS MSA Employment

Actual MSA Change In Jobs***

Energy and Mining

2,525

2,544

Food Manufacturing

11,875

875

12,750

-2,730

1,906

-8

1,898

-172

12,315

-326

11,989

-4,316

5,815

258

6,073

140

Cluster

Wood Products Manufacturing Metal and Metal Products Manufacturing Transportation and Warehousing Health Care

13,665

1,046

14,711

1,888

Recreation/Accommodation/Food Service

5,023

318

5,341

418

Retail

8,526

279

8,805

400

Regional Share Component Actual 2007 FS MSA Employment

MSA Industry Growth Rate

National Industry Growth Rate

Regional Share Indicator

Energy and Mining

2,525

21.89%

-6.41%

Food Manufacturing

11,875

5.54%

0.21%

1,906

1.96%

-7.57%

12,315

-6.00%

-9.81%

5,815

7.65%

-2.73%

Cluster

Wood Products Manufacturing Metal and Metal Products Manufacturing Transportation and Warehousing Health Care

13,665

10.34%

0.49%

Recreation/Accommodation/Food Service

5,023

39.79%

-0.84%

Retail

8,526

9.90%

-3.89%

Source: U.S. Census Bureau: Fort Smith MSA and U.S. County Business Patterns * Predicted change equals 2007 MSA employment multiplied by negative 7.16% employment growth rate. ** Predicted change equals 2007 MSA employment multiplied by national industry growth rate (Table 3c) less negative 7.16% national employment growth rate. ***Actual 2010 FS MSA Employment (Table 3a) minus Actual 2007 FS MSA Employment.

exhibited similar growth. The retail cluster was predicted to add only 279 jobs had it followed national trends in the retail industry, but the regional cluster added 400 jobs throughout the period. Recreation, Accommodation, and Food Service was predicted to add 318 jobs, but it added 418. The Mining and

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Energy cluster fell slightly short of its 19 predicted jobs, adding only 13 jobs. Two clusters, Wood Products Manufacturing and Metal and Metal Products Manufacturing, were predicted to show declining employment if industry trends had prevailed in the

region, and they did. The MMPM cluster was impacted the most by appliance and heat and air system manufacturers. Food Manufacturing also declined, largely due to job losses in the poultry processing industry. Though all three clusters lost more jobs than predicted by national industry trends, the relative

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Cluster Mining and Energy

Value of Exports (in millions) $

Food manufacturing Wood products manufacturing

% Total Regional Exports

862

8.9

2,358

24.4

419

4.3

2,262

23.5

Transportation and warehousing

392

4.1

Health care

301

3.1

0.5

192

2.0

Metal and metal products manufacturing

Recreation/accommodation/food service Retail Source: IMPLAN Institutional Industry Demand Table

regional employment concentration of those clusters bolstered their overall standing as specialized clusters within the Fort Smith region, as demonstrated by the regional share component. Recall the regional share component is not a predictive calculation. Its importance lies in its sign—positive or negative. The regional component was positive for all clusters of the Fort Smith MSA. Thus, the region enjoyed competitive advantage in all eight clusters relative to the United States as a whole due to regionspecific factors. Therefore, these eight clusters represented the driving forces of the regional economy in 2010.

Export Strength of Clusters In order to verify the competitive advantage and export-oriented nature of the eight clusters identified for the Fort

Smith region, the total dollar value of exports, including foreign and domestic, as well as the percentages of total regional exports, were calculated using the 2010 Institution Industry Demand Table from the IMPLAN software. Table 4 revealed varying export strengths among the clusters; however, there was a pattern. The percentage of total regional exports was higher for the Mature and Performing clusters than for the Emerging clusters, with the highest percentages in the Food Manufacturing and Metal and Metal Product Manufacturing clusters at 24.4 percent and 23.5 percent, respectively. However, of those five clusters, the Wood Product Manufacturing and Transportation and Warehousing clusters experienced smaller-thanexpected percentages of total regional exports, with values only minimally

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higher than the Emerging clusters at 4.3 percent and 4.1 percent, respectively. All three emerging clusters were service-oriented clusters, so their exports represented a special case. Service cluster exports are only possible through the cluster’s ability to generate revenue by attracting people who live outside the five-county Fort Smith MSA to partake of the regional cluster’s services. Thus, a Healthcare cluster’s exports are comprised of revenues from patients that live outside the region but seek healthcare services within the region. Similarly, in Retail and Recreation clusters, exports represent the cluster’s ability to draw shoppers or tourists from outside the region.

CLUSTER ANALYSIS OF THE FORT SMITH MSA

Table 4. Regional Export Strength of Fort Smith MSA Clusters

The smaller export percentages for the Fort Smith region’s Emerging clusters make sense because Emerging clusters

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UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS are less specialized so they would naturally experience less developed export strength relative to other clusters in the region. The fact that the Emerging clusters in the Fort Smith region exported at all was a sign of strong growth within those clusters.

DISCUSSION An analysis of the Fort Smith MSA revealed eight regional clusters, including five Performing clusters and three Emerging clusters. Each of the eight clusters exhibited 2010 location quotients above 1.00 and competitive advantage in the region. Manufacturing and services industries were strongly represented among the region’s clusters. The five Performing regional clusters were Energy and Mining, Food Manufacturing, Wood and Wood Product Manufacturing, Metal and Metal Product Manufacturing, and Transportation and Warehousing. The three Emerging clusters were Healthcare, Retail, and Recreation, Accommodation, and Food Service. In terms of export strength, the manufacturing clusters produced the lion’s share of the region’s exports, totaling 52 percent of total regional exports among the three clusters. Export strength was a common weakness among the Emerging clusters. The three clusters produced just 5.6 percent of all the region’s exports. As noted earlier, the Emerging clusters were in the services sector where exports would be expected to be limited. Services are typically consumed within the area offered.

By identifying clusters of industries present in the Fort Smith MSA that held or actually gained jobs relative to trends exhibited in the overall economy, this study is a first step toward furthering economic development in the region. The implications of the analysis depend on the goals of regional leaders. However, general recommendations are consistent with Porter’s view of the role of governments and firms in cluster development. Though the regional clusters are a diverse group, every cluster can improve productivity and increase specialization and export orientation given the appropriate tools. Those tools include an environment that supports growth and innovation, a sophisticated and demanding consumer base, a means of sharing knowledge and taking advantage of knowledge spillovers, and an adequate supply of common public goods and factors of production. Public goods common to cluster industries include education, labor pools, public transportation, and sophisticated infrastructure. Government’s role is to support the formation and growth of clusters. Thus, policies should target that which increases the availability of public goods, incentivizes innovation, and spurs consumer demand. Further, government entities can encourage the development and growth of clusters by supporting and easing the burden of

new business formation and improving access to region-specific raw materials. The firm’s role is to actively seek cluster development through improving interrelationships among firms and industries, becoming innovation-oriented, and employing sophisticated processes that improve productivity and increase competitive advantage. Firms can speed the growth and development of clusters through active participation in trade associations, which strengthens linkages between firms and industries and magnifies externalities associated with knowledge creation. In addition, firms can accelerate the rate of cluster specialization through innovation and the use of sophisticated technology and processes. The end goal is to increase productivity on the basis of something other than lower factor costs (such as cheap labor or land) to create sustainable competitive advantage. The end result of any such public-private sector partnership is the development and maintenance of sustainable, regional competitive advantage. _________________________________

*Shayna Gatzke is a 2013 graduate of the UAFS College of Business with a major in business administration. As part of her degree requirements, she completed this cluster analysis project as part of an independent research course developed and instructed by Dr. Latisha Settlage, associate professor of economics and CBRED research associate.

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