fort smith regional economic outlook report (q3 2011)

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UAFS.eduVol. 2, Num. 3

Fort SmithREGIONAL

Economic OutlookReport Sponsored by Arvest Bank

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Sponsored by Arvest Bank Fort Smith Regional Economic Outlook, 3rd Quarter, 2011

UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

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

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

Center for Business Research and Economic DevelopmentUAFS College of Business5210 Grand Avenue BI 218P.O. Box 3649Fort Smith, AR 72913-3649

Phone: 479-788-7938Fax: 479-424-6938E-mail: [email protected]

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.

Vol. 2, Num. 3 3rd Quarter, 2011

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

Third Quarter Summary of Regional Economy ............................... 2-3

Consumer Sentiment in the Fort Smith Region .............................. 4-8

Review of Regional Single-FamilyResidential Constructionand Sector Prospects ..............................9-16

Sponsors .................................................. 17

UAFS.edu

UAFS College of Business Sponsored by Arvest Bank 1

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENTAs I write the introduction for this third quarter issue of the Fort Smith Regional Economic Outlook Report, I have the advantage of being able to reflect on the third quarter from the perspective of November. When the quarter ended in September, the general response was a sigh of relief that it was finally over.

Global stock markets had been quite volatile and had moved lower, and the news out of Europe continued to be negative. The U.S. employment picture appeared to be deteriorating, and consumer sentiment dropped further. It appeared that

the U.S. economy was sliding toward a second recession. In sum, it was an emotionally trying period, dominated by bad news and bad moods.

Weeks later, after the dust had settled a bit, the picture turned out to be less gloomy. Final GDP numbers for the quarter were better than expected, corporate results were solid, consumer spending actually showed some strength, and we added more jobs than was first reported. As a result, recessionary fears have receded somewhat, at least for the time being.

As we look forward to the fourth quarter, the data seem to point to an economy that continues grow, but at a slow pace. Barring any major negative events, the prospects for closing out 2011 on a more positive note are at least possible, if not expected. There are plenty of serious challenges that have yet to play out, foremost being the choices Europe makes in the weeks ahead, but

also the actions our own national policy makers take to address the issues facing our economy.

While bold actions seem warranted during this period, they don’t appear likely in an election year. We must hope so in any case.

Regionally, we have our own reality to confront. While the third quarter brought better news relative to 2010, there remained plenty of room for improvement. The fourth quarter has already delivered new challenges to the region, however. The Whirlpool shutdown will further dampen the employment picture as we move into 2012. It will likely keep consumer attitudes in the doldrums as well. Voter rejection of the one percent sales tax to fund the convention center will have its own ripple effect going forward.

In this report, we review the performance of the Fort Smith area economy. Retail and auto sales continued to show progress in the third quarter and residential real estate staged a modest rebound relative to 2010. Employment turned in a more mixed picture for the quarter. Our survey of Fort Smith consumer sentiment for September declined from last quarter to the lowest level since we started collecting data over a year and a half ago.

In the final section we continue our look at the regional housing market over the past decade, focusing on the construction side of the business. This sector has had its struggles in recent years, and we take a look at its prospects going forward.

I want to conclude with a nice piece of good news. Arvest Bank has recently agreed to continue their support of this publication, in addition to the Monthly Economic Indicators Index, our monthly report. Arvest has been underwriting a portion of the costs of this publication since mid-2010 and has now committed to do so through 2013. This is an important partnership.

I want to thank Arvest for this commitment and vote of confidence in what we’re doing. We appreciate our advertisers and subscribers for their support as well. We are partners in the common cause of making the Fort Smith region the best it can possibly be.

To our future.

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

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The Fort Smith regional economy saw general improvement for the third quarter relative to the same period a year ago. Retails sales for June-August were up as were auto and home sales and residential construction for the quarter. Employment data was weaker relative to a year ago. The most recent economic activity index was for August and was estimated at 96.4, up 1.5 % from 2010 levels for the same period.

Taking a closer look at the quarter, retail and auto sales data revealed stronger results relative to last year. Retail sales were up 4% for the three month period ending August 31. Consumers continued to increase spending over the summer, though modestly. The retail picture seems to have gained some strength as sales for August were up 5.8% from 2010. The National Retail Federation expects sales for this holiday season to be 2.8% higher than last, considerably lower than the 5.2% increase experienced in 2010.

Auto sales trended higher for the quarter

relative to a year ago, up a solid 5.2% in the third quarter. As was the case last quarter, however, the 8,300 new and used autos sold for the quarter were slightly lower than 8,345 units for the third quarter of 2010.

While the regional consumer has continued to spend at higher levels than a year ago, sentiment has declined. Regional consumer sentiment for the third quarter reached the lowest levels since we started measuring it in 2010 (see our full discussion of consumer sentiment in the next section). National surveys have been similarly pessimistic.

The residential real estate sector has posted some of the best year-over-year improvement you will find in this report, particularly when compared to the dismal performance of this sector for the third quarter of 2010. Based on MLS data for the third quarter, the number of new and existing homes sold was up nearly 23% from last year, while the value of homes sold was up nearly 21% from 2010 levels.

While the current results are being compared with the period when sales dropped sharply after the end of federal incentives for first-time home buyers, the numbers suggest a stabilizing of sales has been achieved relative to the declines in 2010. There remain significant challenges for the sector over the next few years (see our analysis of residential construction in the last section of this issue).

Residential construction results improved as well, though generally not as strongly as home sales. Permit totals for the quarter were up 9.6% over last year, but were over 60% below the 2005 base year. This is in stark contrast to the permit activity of the first half of 2010, which was likely impacted by the federal support in place during this time last year. Permit values were similarly above last year’s results but well short of 2005 values.

While many ingredients remain in place to support the residential real estate sector, and have likely aided in

Third Quarter Summary of Regional Economy

Table 1. Summary of Third Quarter Performance

3rd Quarter 2011Base Year - Q3 Last Year - Q3 This Year - Q3 % Change

2005 2010 2011* 2010-2011Sales Retail Sales (MSA, June, July, August, 000’s) $827,761 $898,173 $933,820 4.0% Auto Sales (Seb., Craw., Frank. Counties, AR, 000’s) $94,621 $74,166 $77,994 5.2%Residential Construction (MSA) Residential Permits 318 114 125 9.6% Value of Permits (000’s) $32,978 $16,684,000 $18,716,000 12.2%New and Existing Home Sales (MSA) Number Sold 677 433 532 22.9% Value of Homes Sold (000’s) $76,793 $57,707 $69,768 20.9% Average Price of Homes Sold (Q3 Avg.) $113,431 $133,273 $131,143 -1.6%Employment (MSA unless noted, Q3 Monthly Avg.) Wage & Salary Employment (Total Non-farm) 120,067 116,467 116,333 -0.1% Manufacturing 28,900 21,633 20,933 -3.2% Trade, Transportation, and Utilities 23,967 24,167 24,000 -0.7% Government 15,867 17,333 17,033 -1.7% Education and Health Services 14,033 16,233 16,267 0.2% Professional and Business Services 11,767 11,867 12,033 1.4% Leisure and Hospitality 8,833 8,900 9,367 5.2% Natural Resources, Mining, and Construction 7,100 7,333 7,900 7.7% Financial Activities 4,167 4,100 4,167 1.6% Information Services 1,600 1,200 1,167 -2.8% MSA Unemployment Rate (Q3 Monthly Avg., NSA) 4.3% 7.9% 8.1% 0.2% AR Unemployment Rate (Q3 Monthly Avg., NSA) 5.0% 7.7% 8.1% 0.4% U.S. Unemployment Rate (Q3 Monthly Avg., NSA) 5.0% 9.5% 9.1% -0.4%Airport Traffic (Fort Smith) Total Passenger Traffic (Q3 Monthly Avg.) 17,634 15,127 15,110 -0.1%* Data as of September 30, except retail sales which includes June-August. 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.

UAFS College of Business Sponsored by Arvest Bank

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

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the improved activity observed for this quarter, there remain several factors operating in the economy that will hinder recovery in the sector. Near-record-low mortgage rates are offset by stricter loan qualification criteria and hesitant buyers. Nonetheless, the sector posted positive numbers for the quarter.

Turning to the regional jobs picture, employment posted weaker numbers relative to the same period last year, recording a small .1% decline for the quarter. Total MSA employment fell by an estimated 135 jobs from a year ago. Taking a closer look at Bureau of Labor Statistics estimates, we find that most of the jobs lost were in manufacturing (300) and the government sector (300), while the biggest gainers were in leisure and hospitality (467) and mining and construction (567).

The 8.1% average unemployment rate for the MSA for the third quarter was two-tenths higher than a year ago. The September non-seasonally-adjusted rate moved up .2% to 8%. The rise in the unemployment rate in September was due to the combination of a rise in the number of reported unemployed seeking work and a slight decline recorded in the size of the labor force. Recall that the unemployment rate is calculated by dividing the number of unemployed by the total civilian labor force.

The recent Whirlpool announcement that it will shut down operations in Fort Smith will add to the downward pressure in job numbers going forward. Our own estimates suggest that in addition to the 1000 jobs directly affected by the Whirlpool decision, there could be another 1000 jobs lost once the full impact of the shutdown works its way through our economy over the next few years.1

SUMMARY AND ANALYSISFor this report, we find that many of the same issues that have plagued the economy over the past several months remain largely unchanged. This quarter’s relatively positive season of corporate earnings reports, supported by generally respectable estimates of future business, have calmed investor jitters to some degree. Upward revisions of GDP numbers for the third quarter and stronger consumer buying activity have alleviated some fears of an imminent relapse into recession.

However, the forces that keep people on pins and needles remain in play as well. Europe seems unable to make

the significant strides required to tame the sovereign debt issues that seem to dominate headlines every few days. This lack of effective action has allowed the spread of Greek troubles to Italy, an economy no one can fathom bailing out due to its size.

The U.S. Congress seems to find it equally difficult to do what is necessary. By the time this report goes to print, we should know whether the congressional deficit-reduction “super committee” was able to offer a solution that is viewed by the markets as credible enough to warrant support and investor confidence going forward. The minimum $1.2 trillion required will likely not do that.

Business activity reflects a very cautious spending posture. While capital investments have picked up, hiring has been very slow. Consumers continue to hold rather dim views of the economy and of the prospects going forward. They have been buying, but cautious in their use of credit. Latest consumer credit figures by the Federal Reserve released on November 7 reveal a contraction of consumer use of credit card debt in September. Credit for autos and school loans grew in September.

On the monetary side, the Federal Reserve has been waiting and watching. Aside from policies to keep credit flowing and rates low, their latest initiative seeks to drive down long-term rates through bond market action. During his November 4 press conference, Fed Chairman Bernanke described the growth of the economy as “frustratingly slow” and stated that he expected inflation to decline to two percent or less in the coming months.

On the fiscal side, the next big event is the recommendations, if any, from the super committee for deficit reduction, due out by the third week of November. Committee members have generally been pretty tight-lipped about what is specifically being discussed. Hopefully, when they do come forth with a recommendation, it will be substantive and believable.

National manufacturing and non-manufacturing numbers for October, reported by the Institute for Supply Management, were largely unchanged relative to our July readings reported last quarter. The PMI (for manufacturers) recorded a 50.8 for October, while the NMI, which includes such sectors as professional services, information, wholesale and retail trade,

came in at 52.9. Index scores that trend above 50 are interpreted as a growth mode for the sector.

Arkansas employers’ hiring intentions for the fourth quarter of 2011 declined slightly from last quarter, according to the most recent (September) Manpower Inc. survey of Arkansas employers. The survey revealed that 14% of employers intended to increase hiring during the fourth quarter, down from 15% reported for the previous quarter and lower than the 18% reported for the fourth quarter of 2010. Seven percent intended to reduce headcount versus 5% in the previous report. All told, expectations were lower for fourth quarter hiring intentions across state employers. No report specific to the Fort Smith MSA was available.

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Where does that leave us in the Fort Smith regional economy as we close out 2011 and move into the first part of 2012? Looking at it from the broader perspective first, data suggests that the national economy will continue to expand, though at a painfully slow rate.

This means that GDP annual growth rates will be below 2%; stock markets will likely continue to be volatile; business will continue to be reluctant to make commitments; and consumers will remain cautious and quite pessimistic. The best result will be slow growth, slow hiring, and slow spending.

There are a number of significant issues, nationally and internationally, that will continue to influence events over the coming months. They have the power to create a train wreck for our economy or improve things significantly. What policymakers in both Europe and Washington decide to do (or not do) on key issues are some of the biggest wild cards in play right now. They’ve tended to be negative forces up to this point.

The regional economy will be influenced by these broader forces. Our economy remains quite fragile. Consumers are not optimistic, though they have continued to spend. Overall, employment data has revealed a mixed jobs picture and the Whirlpool shutdown will likely push the overall employment numbers toward the weaker side over the next few months. The residential real estate sector will remain weak as well.

In sum, expect more of the same and hope for better days.

1 This analysis was conducted by Dr. Latisha Settlage through CBRED and reported in the Sunday, November 6, 2011, Times Record, p. 7B.



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INTRODUCTIONThe Index of Consumer Sentiment (ICS) for the Fort Smith region declined in the third quarter making this the third quarter in a row, recording the lowest level since we started collecting consumer data in the first quarter of 2010. The index for September, which measures consumer confidence for the Fort Smith MSA, was 54.2, a decline of two percent from the second quarter result of 55.3, and lower than the 62.3 reported for the third quarter of a year ago. The decline was consistent in direction with national results of 59.4 reported by the University of Michigan (UM) for September, which was down 16.9% from the previous quarter.

The two sub-indices for Fort Smith were also lower for the quarter. The Index of Current Conditions (ICC) for the Fort Smith region, a measure of consumer attitudes toward their current economic situations, declined by less than one percent to 54.7, while the national ICC declined 8.7%. The Fort Smith Index for Consumer Expectations (ICE) score, which measures consumer feelings about future economic conditions, recorded a

2.9% decline as well, a modest decline relative to the 23.8% decline observed in national data.

UM national results have run generally higher than Fort Smith MSA scores since we started collecting these data. The gap was closing somewhat during recent quarters, until the second quarter when national scores rose sharply from the previous quarter. However, this reversed again in this most recent quarter. Overall, area consumers continue to be more pessimistic than national respondents for the third quarter, with the exception of expectations regarding the future economic outlook where national scores were four points lower than regional scores.

TAKING A CLOSER LOOKArea consumer sentiment scores revealed less optimism in the third quarter relative to the second quarter of 2011 (see Table 1). While the ICS and both sub-indices recorded declines relative to the March survey, a closer look into local sentiment reveals that the overall negative tone was

not the case across all items of the index.

Two items comprise the ICC: people’s ratings of their current personal finances and whether the time is right to make major purchases (referring to durable goods). Area consumers reported more positive attitudes this quarter regarding their current personal finances, up 3.4% from last quarter. National numbers were down 9.5% from the previous quarter.

The second item in the ICC, which asks whether this was a good time to purchase durable goods, was 4.9% lower than last quarter (82 to 78). National numbers were down 7.9% from last quarter. Area consumers appear to view their current economic reality in slightly more optimistic terms this quarter relative to last quarter, but still appear reluctant to make larger purchases.

The ICE consists of three items and seeks to measure consumer attitudes going forward in areas of personal finances and national economic prospects. As to personal finances over the next twelve months, there was more optimism

Consumer Sentiment in the Fort Smith Region

1 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.

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relative to last quarter, with a 2.6% increase over last quarter reported (77 to 79). National results were down 3.7% 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 39% 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 pessimistic views about short-term and medium-term prospects for the economy. Area consumer scores registered a 10.9% decline relative to last quarter when asked about prospects for the economy over the next 12 months (64 to 57). National scores dropped significantly, declining an astonishing

47.3% from those scores reported last quarter (74 to 39).

When looking at the five-year range, area respondents again recorded less optimism than last quarter with scores declining 1.3% (78 to 77). National scores declined by 32.5% from last quarter, reversing the significant increase recorded last quarter.

To summarize to this point, regional consumers continue to hold more pessimistic views of their own personal financial situations and even weaker views of the national economy, especially over the next year or so. Fort Smith scores for the quarter reflected slightly more optimistic views of their current and future financial picture. This was in contrast to national respondents,

where scores were all lower from last quarter. Scores reflecting the longer term perspective were particularly negative for the general economy.

RESULTS SPECIFIC TO THE FORT SMITH ECONOMYFor each 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 the 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 not affected (thus, is the same as ICC results in Table 1 for Fort Smith).

INDICESQ3/2010 Q2/2011 Q3/2011 % Change Q2-Q3

UM* FS UM* FS UM* FS UM* FS

Index of Consumer Sentiment (ICS) 68.2 62.3 71.5 55.3 59.4 54.2 -16.9 -2.0

Index of Current Conditions (ICC) 79.6 62.1 82 55.1 74.9 54.7 -8.7 -0.7

Index of Consumer Expectations (ICE) 60.9 62.4 64.8 55.5 49.4 53.9 -23.8 -2.9

INDEX COMPONENTS

Personal Finances – Current (ICC) 82 66 84 59 76 61 -9.5 3.4

Personal Finances – Expected (ICE) 108 84 108 77 104 79 -3.7 2.6

Economic Outlook – 12 Months (ICE) 61 71 74 64 39 57 -47.3 -10.9

Economic Outlook – 5 Years (ICE) 73 94 77 78 52 77 -32.5 -1.3

Buying Conditions – Durables (ICC) 123 93 127 82 117 78 -7.9 -4.9

Table 1. September 2011 Index and Component Scores

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



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As can be seen from Table 2, Fort Smith respondents rated the overall situation (FS ICS) and future prospects (FS ICE) of the regional economy somewhat higher than the U.S. economy on the same dimensions (UM ICS). These results continue to affirm earlier reports where there was noticeably more optimism toward the Fort Smith economy one year and five years from now than toward 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 first quarter reflected a 3.9% decline in the overall index (FS ICS) and a decline of 5.8% in the FS ICE relative to last quarter. While the decline in optimism was consistent in direction with the ratings Fort Smith consumers gave the national economy, percentage declines were nearly twice as much as those recorded for the national economy. That is, while Fort Smith views of the future expectations regarding the national and Fort Smith economy declined, the tone toward the Fort Smith economy declined the most, quarter-to-quarter.

BEYOND THE CORE MEASURESSeven additional questions were asked of consumers in order to better understand their views and expectations about inflation, personal spending, jobs, and income. Three more items were included which asked consumers about spending plans. The specific questions, comparative scores, and percentage breakdown of positive-negative responses for each are contained in Table 3.

GENERAL ECONOMY AND CONSUMPTION INDICATORSPerceptions of the current business conditions in the U.S. economy (Q8) were lower than June ratings, with only five percent of the respondents indicating they thought the economy was better now than it was a year ago. Sixty-nine percent indicated it was worse. The decline from 47 of last quarter to 35 on the index score reflected a six percentage point decline in the number of respondents who thought conditions were improved and a five percentage point increase in those who felt conditions were worse.

Consumers continue to think that higher inflation will be the rule over the next twelve months (Q9), with 86% indicating this view. This perspective was less than the 88% who felt that way in the previous quarter. Clearly higher prices remain the dominant expectation among area consumers.

When asked about overall consumption expectations over the next three months (Q10), respondents in this survey indicated they intended to spend less

than respondents from last quarter (98 vs 109). Twenty-three percent (versus 33% last quarter) of the respondents indicated that they would spend more overall in the fourth quarter versus 25% who intended to spend less. This was an eleven point decline over the previous quarter.

When it came to specific purchasing activity (Q11), nine percent expected to increase spending on such activities as dining out, while 42% indicated they would spend less during the fourth quarter. The index score for this item improved from last quarter, improving from 61 to 67. This resulted from a three percentage point decline from last quarter for those expecting to spend more, but a nine percentage point decline in those who expected to spend less.

Ratings regarding intentions in buying large-ticket items (Q12) declined again in the third quarter, with five percent of respondents (versus 7% last quarter) indicating they expected to make such purchases in the fourth quarter and 83% (versus 80% last quarter) who did not. This suggests that a general decline in purchases of large-ticket items can be

Fort Smith Scores

UM ICS Survey (Q3/11)

FS ICS Survey (Q3/10)



% Change Q2-Q3

FSICS 54.2 65.3 59.5 57.2 -3.9

FSICC* 54.7 62.1 55.1 54.7 -0.7

FSICE 53.9 67.3 62.3 58.7 -5.8*Items included in the FSICC are identical to the ICC; thus, no change.

Table 2. September 2011 Index Scores of Fort Smith MSA

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2 Neutral scores are not included in calculating index scores.

3 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.

SURVEY QUESTIONS

Index Scores Qtr. 3Percentages2010 2011

Q3 Q2 Q3 % pos

% neg

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

51 47 35 5 692

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

42 14 173 3 86

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

85 109 98 23 25

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

58 61 67 9 42

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

29 27 22 5 83

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

51 47 45 3 57

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

79 71 50 10 61

Q15) When it comes to summer travel plans, do you expect to spend more money this summer than last summer?

NA NA 38 3 65

Q16) Do you expect to vacation closer to or farther from home this year versus last year? 94 NA 94 24 30

Q17) Do you feel more comfortable or less comfortable about spending money for a vacation this year over last year?

49 NA 57 3 52

Table 3. Additional Consumer Sentiment Scores and Current Quarter Percentages



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expected as we move through the end of 2011.

Consistent with the generally more negative tone revealed in consumer sentiment scores for the third quarter, spending intentions for the fourth quarter were more mixed. Consumer spending looks to continue into the fourth quarter, but spending on larger ticket items will be more muted.

EMPLOYMENTFort Smith respondents continue to report less optimism about the regional job market than in the previous survey. Index scores of current availability of jobs and prospects for job improvement over the next year drifted lower from last quarter scores. While the index was slightly lower, ratings of current perceptions of job availability in the Fort Smith area (Q13) indicated that 57% 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 1% last quarter).

When asked about job prospects a year from now (Q14), respondent scores dropped significantly from last quarter, registering a 50 (versus 71). The percentage of respondents who felt job prospects would improve over the next year declined from 14% to 10%, while the number of people reporting that job prospects would be worse over the next year, climbed to 61% for the quarter from 44% in June.

Overall, survey participants continue to hold less optimistic views of the regional employment situation than those who participated in previous quarters. While perceptions of current job availability in the region were largely steady relative to last quarter, the views going forward are decidedly more pessimistic.

SPENDING INTENTIONSThree questions asked respondents to rate their savings behavior and spending intentions going into the holiday season. Items Q15-Q17 in Table 3 relate to this theme.

Consumers were asked about their intentions to use more or less credit over the next 12 months. Three percent indicated they expected to use more credit over the next 12 months versus 65% who indicated they expected to use less.

When asked about their savings intentions over the next year (Q16), 30% reported that they would save less than they are now, while 24% indicated they planned to save more. These scores are similar to last year’s scores on this item and provide a rather mixed consumption message going forward.

Finally, 52% of the respondents indicated they expected to spend less this Christmas season than last year and 45% plan to spend about the same as last year. Only three percent indicated they intended to spend more. [Note: Due to a calculation error, the October 7 preliminary report incorrectly stated the results on this item.]

From this data, it seems that consumers are generally still quite cautious in the use of credit and this can be expected to constrain spending as we head into the Christmas shopping season. This view is further supported by the mixed message on savings, where some consumers indicated that they intended to save more over the next year while an equally significant number intend to save less.

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Overall, results for this quarter suggest that area consumers remain pessimistic about their personal finances and the economy at large. While the declines were generally modest and reflected a broad decline in optimism for the period, consumers continue to be cautious going forward. Consumer readings on regional jobs prospects and prospects for the overall economy were much more pessimistic this quarter relative to the second quarter.

After a rather mixed consumption pattern over the past two quarters, these results suggest that the consumer will continue to spend but with considerable restraint. Though regional employment data reflects an improving jobs environment, consumers don’t seem to think it will continue. There are plenty of reasons for such views. National and international news continues a negative tone with talks of recession, weak employment numbers, Europe’s troubles, and a jittery stock market dominating economic headlines.

Unfortunately, the issues that seem to keep sentiment in the basement will likely remain in place for the foreseeable future. Decision makers at the national

and international level seem unable or unwilling to make the hard choices that can reset the courses of their respective economies. With an election season upon us, it seems unlikely much of substance will happen to change that.

ABOUT THE SURVEYOf the 3,000 surveys mailed to the five-county MSA, 228 were returned undeliverable, and 358 usable surveys were returned, providing a return rate of 12.9%. The confidence level as a result 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.

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 (ICE) and the Index of Current Economic Conditions or more simply, Index of Current Conditions (ICC). The ICE “focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term” (University of Michigan). The ICC focuses on consumers’ views of their current financial condition and whether they feel secure enough about their financial situations to engage in major consumption activity.

For more information on the Consumer Sentiment Survey, methodology used, and discussion regarding results, a more extensive narrative is provided in the first quarter 2010 report that is available online under our Publications link at uafs.edu/cob/cbred.



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The residential real estate sector is an important component of our local economy as well as an important aspect of our definition of the American dream. Last issue we examined this sector from the perspective of single-family home sales and outlined several issues that will challenge this side of the business going forward.

In this issue, we will look at the construction side of the business by examining building permit trends over the past few years and will conclude our review by revisiting key themes introduced in the previous issue that are believed to affect the sector going forward.

For this report we will use Census Bureau (CB) data to analyze annual residential construction activity from 2000-2010. The CB tracks housing permit data from various jurisdictions that require and issue building permits for single and multi-family units. Using CB data brings its own challenges, with the main issue being that it revises estimates and does so selectively. That is, when a revision is made in monthly reports, the year-to-date (YTD) total is revised but not the individual months which comprise the YTD total. Further, the YTD total may not match the final annual total. For our purposes, we will use the annual data when discussing year-over-year activity and when discussing 2011 activity we’ll use the most recent monthly and year-to-date data.

We will discuss residential construction activity by comparing state, Fort Smith MSA (FS), and Northwest Arkansas (NWA) data, both in terms of percentage of total units permitted and average permit value. We then will look at

building activity across the different types of residential housing (single-family and multi-family). Finally, we briefly look at county-level building activity in terms of type and value of properties permitted. We’ll conclude our review by revisiting key factors introduced in our last issue to discuss the potential impact on the industry going forward.

SINGLE-FAMILY RESIDENTIAL CONSTRUCTIONSingle-family construction comprises the majority of permit activity across all geographic areas included in this report, with rare exceptions. Table 1 reports total annual housing-unit permits for 2000-2010 for Arkansas and the Fort Smith (FS MSA) and Northwest Arkansas (NWA) MSAs. It should be noted that the Northwest Arkansas MSA heavily impacts state data due

to the proportion of total state permits attributed to NWA. Northwest Arkansas unit totals range from 25%-40% of state totals, depending on the year under review. In contrast, the Fort Smith MSA will generally range from 5%-10% of state totals.

In looking at Figure 1, we see that over the 2000-2010 period in the Fort Smith MSA, between 62% and 82% of new residential construction permits takes place in single-family housing. This compares with NWA where single-family construction was 5% to 10% lower than the Fort Smith region as a proportion of total MSA units.

After a noticeable drop in single-family construction as a percentage of total units during the 2007-08 period for both MSAs, 2010 saw a rebound in this category. The shift was strongest for NWA in 2009 and 2010. The NWA

Review of Regional Single-Family Residential Construction and Sector Prospects

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Year Arkansas FS MSA NWA2000 9,203 664 7,5932001 10,407 607 3,9642002 12,436 914 3,9492003 14,839 914 6,2872004 15,767 861 6,3942005 17,932 1,051 7,5932006 13,885 808 6,0932007 11,031 1,105 3,3732008 8,810 757 2,7662009 7,056 894 1,7512010 7,177 690 1,221

Table 1. Total Annual Housing Units (2000-2010)

Source: Census Bureau



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experience appears more dynamic relative to the FS MSA, based on the sharper directional changes observed in Figure 1. We also note that state averages (blue line) track more-or-less between the FS MSA and NWA on this dimension.

When looking at the value of single-family permits across the geographic areas (Figure 2), we note again that state averages on this dimension track between the two MSAs, particularly in recent years.

The average value of permits being

issued has remained largely flat for the FS MSA, while values have steadily moved higher in NWA. Fort Smith MSA average permit values have remained in the $125,000-$135,000 range, whereas NWA’s average permit value has moved consistently above the $150,000 in the past five years. In 2010, it appears that both MSAs saw a sharp increase in the value of single-family permits being issued, suggesting that builders saw better opportunities in higher-priced housing.

At this point of our analysis, it seems

clear that that the two MSAs represent noticeably different market dynamics. The Fort Smith market is less volatile in single-family construction activity (Figure 1) than what is observed in Northwest Arkansas in that the proportional shifts are less dramatic. Further, Figure 2 reveals that the Fort Smith market permit values run noticeably lower in the single-family market relative to Northwest Arkansas.

SINGLE-FAMILY VERSUS MULTI-FAMILY HOUSING BY MSAWhile residential construction units

Figure 1. Single-Family Units as Percent of Total (2000-2010)

Figure 2. Average Permit Value of Single-Family Units (2000-2010)





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declined dramatically from the peak in 2005, the construction profile of the Fort Smith and Northwest Arkansas MSAs differed considerably. Figures 3 and 4 highlight the residential housing profiles of each MSA respectively.

When looking at the Fort Smith profile (Figure 3), the single-family category is the dominate builder activity averaging 72% of all residential construction for the 2000-2010 period. The balance of construction activity is largely equal

among duplexes (12%) and larger complexes of over 5 units each (13%).

In NWA, as seen in Figure 4, we see a different profile emerge. Single-family construction average 64% over the 2000-2010 period, while larger multi-family units of five or more averaged 30%, including the uncharacteristically low three percent in 2010.

We see from this that the residential construction profiles of FS MSA and

NWA have notable differences, driven to a large degree by the broader dynamics of the individual economies. Fort Smith has a more stable, non-transient population relative to NWA. Northwest Arkansas hosts more corporate headquarters of companies with significant national and international scope than does Fort Smith. This factor alone likely results in a larger proportion of the population who will likely rent as opposed to buy their living space. This conclusion is supported by Census Bureau1 data which indicated that

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Figure 3. Fort Smith MSA Units per Housing Type (2000-2010)

1 See earlier issue of this publication, Volume 1, Number 3, Table 4, p.12.




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the native population of the FS MSA was around 55% in 2009 versus NWA with a 44% native population.

FORT SMITH MSA PERMITS AND VALUES BY COUNTYTaking a closer look within the Fort Smith MSA, we see from Figure 5 that the average number of monthly permits each quarter has drifted steadily lower. As a comparison, from 2005-2007 permit numbers averaged 71 units, but dropped

to 53 units in the 2008-2011 period.

Permit activity dropped noticeably in the fourth quarter of 2008, but posted a solid rebound in 2009 only to start dropping again in late 2009. The first home buyer incentive provided a temporary boost to the market in 2010 only to collapse again in the latter half of that year. The year-to-date results for 2011 have continued to be relatively anemic (Figure 5).

In Figure 6, we compare single-family permit values across the five counties of the Fort Smith MSA for the 2005-2010 period.

Single-family permit values generally moved higher during the 2005-2007 period for most counties. Sebastian County peaked in 2008. Generally, permit values declined in 2008 and 2009 and began to show some leveling off or improvement by 2010.

Figure 5. Average Monthly Permits per Quarter for FS MSA (2005-Current)

Figure 4. NWA MSA Units per Housing Type (2000-2010)





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Since 2005, according to Census Bureau data, average permit values in Sebastian County have averaged $132,500 with an uncharacteristically high 2010 permit average of $180,000. Crawford County average permit values have been similar since 2005, coming in at nearly $133,000. For 2010, however, Crawford County values dropped to $112,000 after posting averages of over $140,000 per single-family permit in years 2008 and 2009.

Data for Le Flore County in Oklahoma reveal that permit values have improved to $117,700 in 2010 after lows of around $105,000 for the previous two years. Sequoyah and Franklin Counties continued to experience declining permit values relative to the values reached in the 2005-2008 time period. For 2010, Sequoyah permits averaged $106,000, while Franklin County saw values averaging $69,000.

In general, we see that not only have

the number of permits issued declined since the 2007-2008 peak, but values have trended generally lower across the region. This has continued in the Fort Smith MSA through the third quarter of 2011. Overall, single-family construction activity will continue to be difficult, though some opportunity seems to exist in moderately priced properties.

Rob Coleman of ERC, a company with a long history in the region as a real estate developer, states, “I see the

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Figure 6. Average County Single-Family Permit Values in FS MSA (2000-2010)


Year Sebastian Crawford LeFlore Sequoyah Franklin2000 $123,967 $102,505 $69,867 $87,221 $45,9462001 $13,1,340 $109,633 $84,841 $86,868 $58,3042002 $122,113 $113,894 $87,517 $91,544 $58,8492003 $140,666 $118,106 $77,528 $94,010 $65,6142004 $130,514 $128,331 $102,032 $97,194 $591862005 $123,488 $134,933 $133,938 $104,688 $63,5532006 $120,007 $132,419 $144,826 $125,815 $76,7862007 $114,143 $136,336 $150,399 $135,677 $113,6562008 $147,000 $140,420 $106,201 $107,941 $108,5222009 $110,142 $141,352 $105,241 $106,282 $87,8502010 $180,083 $112,113 $117,658 $106,158 $68,578

Table 2. Average County Single-Family Permit Values in FS MSA (2000-2010)




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current and short term (24 months) single family housing market as stagnant … Land continues to be available in areas such as Fort Chaffee and the pricing is agreeable …”

When asked about what will constrain the market going forward, Coleman said, “The major hurdle in determining supply and future building is that the majority of buyers in the Fort Smith metro have homes to sell and cannot move on new purchases quickly. The job market will continue to weigh heavy on the confidence of the buyers …”

Our analysis suggests that there has been a shift toward more multi-family construction since 2006. The percentage of single-family permits relative to total permits averaged 73% from 2000 to the 2006 high. Since then, that percentage has dropped to 69% of all permits.

This shift may reflect a response to a difficult home sales environment over recent years as well as increased foreclosure activity that puts more former home owners into renting as the only option. The recent announcement of a larger multi-family project at Chaffee Crossing suggests that builders see some opportunity in these types of investments.

Coleman concurs, “Multifamily housing should continue to be solid in the way of occupancy, and rent growth should stay consistent or experience small gains.”

SUMMARY AND DISCUSSIONBuilding permit activity is used by many market watchers as an early indicator of the direction of the general economy in the near term. As a leading indicator for this recovery, it reveals a difficult road still lies ahead. As we discussed in the previous issue, the sector has faced an uphill battle during this recovery, and it is expected to continue to face difficulty.

Three observations are made based on this analysis:

1. Regional residential construction activity has been in decline since 2005. Figure 5 reveals this trend. From the graph, we see that each succeeding high has been lower than the preceding one and each low has struggled to post better numbers than previous lows.

2. Multi-family construction has increased. As the turmoil continues in single-family property, multi-family units have increased as a proportion of permits being issued. The fallout from the ongoing struggles of the economy and the painful impact on residential real estate is expected to shift more households from owners to renters over the next few years. Aside from the financial aspects driving this shift, there are additional factors which suggest that a larger portion of potential home buyers will simply defer or forego home ownership altogether.

3. Future single-family residential construction will remain weak. The reasons for this are several and the issues facing the sector will persist, some for many years. In the previous issue, we highlighted some of these and restate them here for convenience:

a) Lingering recession effects on buyer qualifications. Damaged credit of many during this recession, combined with higher qualifying standards for loans make for a slow recovery.

b) Distressed sales. Foreclosure and short sale activities will continue to increase inventory and to push prices lower.

c) Re-structuring of the financing mechanism for home buyers. The planned phase-out of Fannie Mae and Freddie Mac, institutions that backed around 50% all mortgages over the years, will likely restrain access to favorable mortgage terms going forward.

d) Downsizing of Baby Boomer population. This trend toward less consumption and more savings will constrain home buying going forward.

2 One vocal advocate for the significance of demographics on national economies is H.S. Dent, Jr. For convenience, many of the statistics used here are taken from his book, The Great Crash Ahead, 2011, co-authored with Rodney Johnson, and published by Free Press, NY.



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Following generations have shown less willingness to commit to home ownership and are expected to have less income to spend.

e) Long-term employment trends. First, the ‘new normal’ of employment may well reflect an acceptance of a 6-6.5% unemployment rate as normal. Second, there is ample evidence to suggest that not only will unemployment rates be higher going forward, but real household income will continue to be flat if not declining (relative to inflation) over the coming years.

f) Change in tax code. The popular home interest deduction may well be at risk, reducing the value of home ownership.

While the economic issues can be expected to negatively affect the sector for years, the least talked about factors of this current recovery could arguably be the most important – that being demographics. More specifically, the issue is the shift in consumer demand due to generational or consumer life-cycles. Demographic economists are interested in studying and predicting the economic impact of generations as they move through the different phases of life.

Boomers are most often defined as those born between 1946 and 1964, which is comprised of between 76-82 million, adjusted for immigration. As the largest generation to date, baby boomers have started moving into retirement, bringing with it a shift in consumption behavior.

Boomers have been defining the marketplace for the past 40 years or so. Well over half of this generation has moved past 50 years of age, the proximate point where peak spending is reached and begins to decline. As a result, boomers will continue to be a major force in the economy going forward but in a more negative sense, behaviorally speaking.

Behaviorally, as this generation ages, they become more focused on

retirement and less on consumption. Thus, savings, paying down debts, and consuming less become more important as the boomer moves through his or her 50s. While the generation that has largely defined our consumer society will continue to spend, the rate can be expected to decline. Downsizing or downshifting will be typical, driving overall consumption down.

Why wouldn’t the following generation naturally pick up the slack? The answer,

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quite simply, is that the following generation, Generation X, is smaller. Hence, why it’s also called the ‘baby bust’ generation. The large boomer population wave is followed by a smaller wave (Gen X), which is again followed by a larger wave (Gen Y).

To demographic economists, the implications are straightforward. These demographic realities will dampen economic growth over the next 5-10 years, until the much larger Generation Y begins to exert influence.

If we add to this demographic mix the economic factors that we now face, we find a consumer that is constrained by his or her capacity (or willingness) to consume. Between 2000 and 2008, public debt grew from approximately $5 trillion to $10 trillion (and has since grown to nearly $15 trillion). This has received much of the attention in the media and in political discussion.

However, as bad as that is, it is private debt that may be the biggest constraint on the economy, particularly consumer debt. From 2000 to 2008, private debt (financial sector, corporate, and

consumer) grew from approximately $20 trillion to $42 trillion! While trillions of dollars in assets evaporated during the most recent recession, the debts did not. For the consumer, the growth in debt centered largely on an explosion in mortgage-related debt which remained high while the asset values underlying these mortgages plummeted.

While the financial sector saw trillions of dollars in write downs/offs through converting private debt to public debt and other government assistance schemes, the consumer debt segment has been deleveraging in slow motion, relatively speaking, with no grand initiatives in the works to expedite this write off so as to begin to regrow the economy.

With 70% of the U.S. economy tied to consumers, demographic transitions and consumer capacity (and willingness) to buy are critical factors to any recovery going forward. Persistent unemployment and flat or declining household income levels will further constrain growth.

We can expect the challenges regional home builders now face will continue for some time to come.



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