Arkansas Economic Development Institute

Category: Prices

Regional Price Parities and Real Personal Income – 2015

By , June 23, 2017 10:07 AM

Arkansas is a relatively low income state, but it is also a state with a very low cost of living.  A dollar of income supports more real spending in Arkansas than it would in other, more expensive parts of the country.  New data from the Bureau of Economic Analysis documents the low cost of living in Arkansas using measures known as Regional Price Parities (RPPs).

RPPs measure the average price of goods and services in a geographic region compared to other regions in the U.S.  The figure below displays these measures for the 50 states and the District of Columbia, as of 2015.  The most expensive state in the nation is Hawaii, with prices that are 18.8% above the national average.  At the other extreme, the cost of living is only 86.2% of the national average in Mississippi, almost 14% below average.  Arkansas comes in at #3 on the list of states with the lowest cost of living, with a RPP of 87.4.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

While the cost of living is lower in all areas of the state, there are differences among the RPPs for regions within Arkansas.  As shown in the following table, the cost of living is highest in the Northwest and Central Arkansas metropolitan areas.  Nonmetropolitan areas of the state have a RPP of 83.9, implying a cost of living that is 16% below the U.S. average.  Among metro areas, Jonesboro is the least-expensive place to live.  In fact, Jonesboro’s RPP ranks it with the 7th lowest cost of living among all 382 of the nation’s metropolitan statistical areas.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The table also shows that differences in rents–or housing costs more generally–drive the overall differences in cost of living.  Goods prices tend to vary relatively little in different parts of the country.  The cost of services, which have a significant locally-produced content, vary more substantially.  Rents, on the other hand, are entirely local prices and therefore display the largest region-specific component.

Real Income and Local Inflation
By adjusting incomes in states and regions for differences in cost of living, RPPs can be used to calculate measures of purchasing power that provide real (price-adjusted) measures of income.  Typically the term “real income” is used to describe measures that are adjusted for inflation, or price differences over time.  In the context of RPPs, the adjustment covers differences over both time and space.

In the latest data, for instance, the RPP for Arkansas rose from 87.1 in 2014 to 87.4 in 2015.  Because the RPP for the entire U.S. is 100, by definition, this means that prices in Arkansas rose by 0.3 percentage points more than for the nation as a whole.  U.S. inflation was 0.3% in 2015 (as measured by the implicit price deflator for personal consumption expenditures) so Arkansas’ inflation rate was about double the national average for that year.  Actually after rounding to the nearest one-tenth of a percentage point, the inflation rate implied by Arkansas regional price deflator was 0.7%.  Other states’ regional price adjustments indicated inflation rates ranging from 1.2% in North Dakota to -0.7% in Delaware.

The figure below illustrates the varying path of price-level changes in Arkansas compared to the national average.  The U.S. the data are annual percent changes in the implicit price deflator for personal consumption expenditures.  For Arkansas, the data represent implicit price deflators based on the annual RPP statistics.  The two measures of “inflation” track fairly closely over time.  Over the five-year period, cumulative compounded price changes totaled 9.5% for the U.S. and 10.6% for Arkansas, implying that the cost of living in Arkansas was rising slightly toward the national average, on net.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The following table shows the growth rates of total personal income and real personal income in Arkansas, adjusted for differences in inflation and regional prices.  The table decomposes total income growth from 2014-15 into real and inflation components (the percent growth columns).  For Arkansas statewide, nominal (dollar) income rose 2.2%, with 1.4% attributable to real income growth and 0.7% to overall price increases (with the remainder due to rounding error).  The highest real income growth rate in the state was in the Fayetteville metro area, with 3.7% nominal income growth and 0% inflation.  Nominal income in Pine bluff increased only 0.1% in 2015 but prices declined by 0.5%, resulting in an increase in real income of 0.6%.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Real Per Capita Income
One commonly used measure of local economic well-being is per-capita personal income.  In dollar terms, per capita income in Arkansas was $38,257 in 2015, which amounted to just under 80% of the national average.  When we take into account the higher purchasing power of incomes in Arkansas, real per capita income is over 91% of the national average.  The table below shows how the adjustment for purchasing power changes the relative standards of living implied by per capita incomes in Arkansas’ metro areas.  The accompanying figure illustrates the differences among areas.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The highest per capita income in the state is in the Northwest Arkansas metro area.  In dollar terms, per capita income is 9% above the national average. After taking account of the fact that the cost of living is over 10% below the national average, per capita income in the Fayetteville metro area is 22% above the national average–in terms of purchasing power and standards of living.  The very low cost of living in Jonesboro has a particularly large impact on this real income comparison.  In dollar terms, per capita income in Jonesboro is only 70% of the U.S. average, but after adjusting for prices it amounts to 86%.

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Real Personal Income – 2014

By , July 8, 2016 4:22 PM

The Bureau of Economic Analysis released new figures on real personal income for states and metropolitan areas yesterday.  The data contain a wealth of information on incomes, prices and standards-of-living.  They are based on a relatively new dataset calculating “regional price parities,” (RPPs) which measure differences in the prices levels of goods and services across states and metropolitan areas.  Essentially, RPPs serve as a measure of relative price levels among states and metro areas.

The newest data, which apply to 2014, show that the cost of living in Arkansas is the second-lowest in the nation.   The RPP for Arkansas was 87.5, down from 87.7 in 2013.  This number can be interpreted as saying that the cost of living was 12.5% below the national average in 2014.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Because prices in Arkansas are among the lowest in the nation, the purchasing power of incomes in Arkansas is far closer to the national average than nominal (dollar-denominated) incomes would suggest.  In 2014, per capita personal income in Arkansas was only 82% of the national average–ranking the state #43 among the 50 states plus D.C.  After adjusting for differences in the cost of living, however, real per capita income in Arkansas was 93.9% of the national average–implying a ranking of #34.

The slight down-tick in the RPP for Arkansas (from 87.7 in 2013 to 87.5 in 2014) can be interpreted as indicating a lower rate of inflation in Arkansas than the national average.  The U.S. inflation rate in 2014 (as measured by the Personal Consumption Expenditures Price Index) was 1.4%.  The implied regional price deflator for Arkansas increased by only 1.2%.  Hence, the state’s 3.7% growth rate of nominal personal income translates to a real (inflation-adjusted) growth rate of 2.5%.  For the U.S., the nominal growth rate of 4.4% implied a real growth rate of 2.9%.

The composition of Arkansas’ low RPP is typical of other low cost-of-living states:  Prices for goods are near the national average, but the prices of services — especially rents — are far below the norm.  This is not surprising, of course.  Goods can be transported and sold with little marginal expense.  Services are not so transportable.  In fact, in the jargon of international trade, services are often classified as “non-tradables.”  Statewide, the RPP for goods in Arkansas was 95.1%, implying that prices of goods were only 4.9% below the national average.  The RPP for non-rent services was 93.5, while the RPP for rents (which also proxy for home prices) was only 62.5.

As shown in the table below, there is considerable variation among RPPs in Arkansas metropolitan areas.  Overall RPPs range from 91.9 in Memphis to a low of 82.0 in Jonesboro.  The cost of living in Jonesboro–18% below the national average–is the fifth-lowest in the nation.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

While there is variation in RPP price-levels around the state, all RPPs in Arkansas are below 100, implying below-average costs.  This also translates to higher purchasing power.  As shown in the table below, the Fayetteville-Springdale-Rogers metro area is the only part of the state where dollar-incomes are above the national average, with incomes in Pine Bluff at less than two-thirds of the norm.  After RPP adjustment, incomes in all parts of the state (other than Northwest Arkansas) are closer to the national average.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Changes in RPPs for different metro and nonmetro areas around the state also differ, implying variation in inflation rates.  In economic terms, it is the real inflation-adjusted growth rates of income that matters.  The table below shows both nominal and real income growth for the metro and nonmetro areas of Arkansas.  Note that the differences between total income growth and per capita income growth reflects changes in population.  Much of the total income growth in Northwest Arkansas represents population growth that has accompanied general economic expansion.  On the other hand, total real income growth in Pine Bluff was negative, but the losses in income reflected declining population.  In per capita terms, real income in Pine Bluff remained approximately unchanged from the previous year (+0.1%).

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

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Arkansas Taxable Sales – 2014:Q4

By , March 30, 2015 2:07 PM

With consumer purchasing power boosted by low gasoline prices, Arkansas Taxable Sales (ATS) surged in the fourth quarter of 2014, increasing by 2.7% from the previous quarter and up 4.5% from a year earlier.  With gasoline prices falling by nearly 18% from the third quarter to the fourth quarter, Arkansans were paying quite a bit less to fill their tanks.  The dollar-value of gasoline sales fell by 9.1 (seasonally adjusted).  Consequently, Arkansas Taxable Sales Including Gasoline (ATSIG) increased more slowly than the ATS, increasing by 1.8% for the quarter and 3.4% from a year earlier.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Since the official end of the recession (2009:Q2), ATS has increased by 19.4% (a 3.3% annual rate) and ATSIG has increased by 20.4% (3.4% annual rate).  However, inflation–as measured by the price index for Personal Consumption Expenditures–has been associated with an increase in prices of about 9.4% over the same period.  Consequently, real taxable sales  have only been increasing at an annual rate of 1.6% (not including gasoline) and by 1.8% (including gasoline).  After this adjustment for the effects of inflation, real taxable sales are only now recovering to levels comparable to the pre-recession cyclical peak of 2008:Q2.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement, U.S. Bureau of Economic Analysis

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement, U.S. Bureau of Economic Analysis

 # # #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales. The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service. A spreadsheet of the monthly and quarterly data is available here: Arkansas Taxable Sales 2014:Q4 (Excel file). Note:  With this release, seasonal factors for the monthly data have been revised.

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Regional Price Parities and Income – New Data for 2012

By , April 24, 2014 4:53 PM

When the 2013 data on state personal income were recently released, we noted that per capita income in Arkansas was approximately 81% of the national average — essentially unchanged from the previous year.  But when it comes to purchasing power, incomes in Arkansas imply a higher standard of living than suggested by the 81% figure.

This morning, the Bureau of Economic Analysis released their first official set of statistics on Real Personal Income for States and Metropolitan Areas. (Experimental data had previously been released for years prior to 2012, see here and here).  The data confirmed that the cost of living is significantly lower in Arkansas than elsewhere in the U.S.  The overall price parity figure for Arkansas was 87.6, implying that prices were approximately 12½% lower than the nationwide average in 2012.   Adjusting incomes for this difference in the cost of living, Arkansas real incomes have a purchasing power that is 92.6% of the U.S. average.

As shown in the figure below, the 2012 statistics showed Arkansas to be the second-lowest cost state in the nation.

Source:  Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Regional price parities are generally lower in non-metropolitan areas than in metropolitan areas, and tend to be higher in the larger metro areas.  Differences in goods prices tend not to vary geographically as much as prices for services, and much of the regional variation in prices is driven by differences in rent costs.  The table below illustrates these patterns for Arkansas, breaking down prices of goods and services for metro- and non-metro areas of the state.   In the non-metro portions of the state, prices are generally 15% lower than the national average, led by rental costs that are just over half the U.S. mean.  The most expensive areas of the state are Memphis, Little Rock, and Fayetteville, each with an overall price parity exceeding 90.0.  Among metro areas, Jonesboro has the lowest cost of living.  In fact, today’s announcement from the Bureau of Economic Analysis showed Jonesboro to be fourth on the list of the most inexpensive metro areas in the nation.

Source:   Bureau of Economic Analysis

Source: Bureau of Economic Analysis

 

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Arkansas House Prices: 2013:Q3

By , December 3, 2013 3:14 PM

The latest data from the Federal Housing Finance Agency (FHFA) shows a continuing upward trend in Arkansas house prices, albeit at a slower rate than the U.S. average.  The FHFA’s “Expanded Data Indexes” showed that Arkansas house prices rose 0.5% in the third quarter compared to an increase of 2.2% nationwide (seasonally adjusted).  Over the past year, house prices were up 2.6% in Arkansas and up 8.8% for the entire U.S.

Source: Federal Housing Finance Agency; seasonal adjustment by the Institute for Economic Advancement

According to the “All-Transactions Index,” which includes home purchases and refinancings through FannyMae or FreddieMac, Arkansas house prices were down slightly for the quarter (-0.3%), but still up 2.2% over the past year.  Among the state’s metropolitan areas, prices were down everywhere except Jonesboro and Little Rock.  But even after a 1.1% decline in third quarter, prices in the Fayetteville-Springdale-Rogers metro area were 3.2% higher than a year earlier.

Source: Federal Housing Finance Agency

As illustrated in the figure below, the longer-term trends in house prices differ considerably among metropolitan areas.  The two-year growth rate of 3.6% in Northwest Arkansas represents a sharp reversal of the declining trend in 2007-2011.  On the other hand, the two-year growth rates of 5.6% in Jonesboro and 2.4% in Texarkana represent continued rising prices.  In fact, the nationwide collapse of housing prices preceding and coinciding with the recession was evident only in Fayetteville and Memphis (with a delayed downturn in Hot Springs). Compared to the first quarter of 2007, house prices are higher in Texarkana, Jonesboro, Fort Smith, Little Rock, and Pine Bluff.

Source: Federal Housing Finance Agency

 # # #

The Expanded Data Indexes include home purchases financed through FannieMae and FreddieMac, plus additional data from county recorders’ offices and from DataQuick.  The All-Transactions Indexes include both home purchases and refinancings through Fanny and Freddie, but without the additional data that are included in the Expanded Data Indexes.

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Real Personal Income and Purchasing Power, 2007-2011

By , June 13, 2013 9:10 AM

The Bureau of Economic Analysis (BEA) released a brand new set of data yesterday:  Real Personal Income for States and Metropolitan Areas, 2007-2011 (Prototype Estimates).  The data are not as timely as those we usually cover here on the Arkansas Economist, but they are rich in detail.

When economist refer to “real” magnitudes, it means that the data have been adjusted to reflect price differences.  Typically this involves adjusting “nominal” growth rates to account for changes in the price level over time — i.e., inflation.  What is truly novel about the prototype estimates that came out yesterday is that they are also adjusted to reflect differences in relative price levels from one region to another.

As described in a previous post, the BEA’s new set of Regional Price Parities (RPPs) are intended to measure differences in the cost of living across states and metro areas.  Hence, the “real” personal income statistics released yesterday convert dollar-denominated figures into units of current local purchasing power.

As shown in Figure 1 below, the cost of living varies considerably among the states.  In 2011, the RPP for Arkansas was 89.2, meaning that prices in Arkansas are more than 10% below the national average (which is equal to 100, by definition).  The highest prices in the nation are in Hawaii (116.0) and the lowest are in South Dakota (87.0).  In the 2011 data, Arkansas ranked as having the 5th lowest prices in the nation.

Figure 1:

Source: Bureau of Economic Analysis

As shown in Figure 2, RPPs do not vary much over time, but they do differ even among areas within the state.  As of 2011, the average RPP for metropolitan areas in Arkansas was 90.9, while the non-metro RPP was only 85.5.

Figure 2:

Source: Bureau of Economic Analysis

To the extent that RPPs do vary over time, increases or decreases can be interpreted (roughly) as indicating a higher or lower rate of inflation than the national average.  Typically, nominal growth rates are converted to real values by simply adjusting for the nationwide inflation rate.  By using the RPP adjustments, the real income calculations reflect a more accurate and nuanced measure of income that better reflects purchasing power at the local level.  Figure 3 shows changes in personal income in Arkansas — and for its metro and non-metro areas — from 2008 through 2011.  The recession of 2008-09 is reflected in the negative growth rates in 2009.  Statewide, real income declined by 2.5%, but the downturn was sharper (-3.3%) in the non-metro areas of the state than in the metro areas (-2.1%).  During the recovery in 2010 and 2011, total metro-area income has grown faster than non-metro income.

Figure 3:

Source: Bureau of Economic Analysis

However, there is one additional adjustment that is necessary to evaluate how incomes support real purchasing power:  population growth.  If real income in an area is rising simply because there are more people earning the same amount per person, then living standards have not really improved.  Consequently, the best measure of overall economic welfare is “real per capita personal income,” displayed in Figure 4.

Figure 4:

Source: Bureau of Economic Analysis

In general, the metro areas of the state have been growing in population, while the non-metro regions have experienced slower growth — or even outright population declines (see Arkansas Population Estimates for 2012).  Figure 4 shows that these changes in population are important.  In real per capita terms, the recession hit metro and non-metro areas about equally, and the recovery has been slower in metro areas.  In fact, metro area per capita real income declined in 2011, pulling the statewide average negative.  Non-metro areas displayed a small but positive growth rate.

The most significant implication of using RPPs to adjust nominal incomes is how it affects comparisons of the relative purchasing-power of incomes.  It is often noted that Arkansas is far below the national average of per capita income.  However, when regional differences in prices are taken into account, the standard of living in Arkansas is much closer to the national norm.  In nominal terms, Arkansas per capita income was only 81% of the U.S. average in 2011.  But after adjusting for price differences, real per capita income (RPP-adjusted) was 91.2% of the national average.  The adjustment for relative prices moves Arkansas up in the rankings among the 50 states plus D.C. from #46 to #41.

Figure 5:

Source: Bureau of Economic Analysis, with calculations by IEA.

Although the adjustment of per capita income using RPPs brings the statewide standard of living closer to the U.S. average, there remain significant differences between the metro and non-metro areas of the state.  As of 2011, real per capita personal income in Arkansas’ metro areas was 95.7% of the U.S. average, while the corresponding figure for the state’s non-metro areas was only 84.5%.

Metropolitan Areas
The RPP data in yesterday’s report are also broken down by individual Metropolitan Statistical Areas (MSAs).  Even among the various MSAs, Relative Price Parities differ considerably (Figure 6).  Prices are higher in the larger MSAs of Memphis, Little Rock, and Fayetteville.  The smaller metro areas have prices that are comparable to the non-metro areas of the state.

Figure 6:

Source: Bureau of Economic Analysis

Real per capita income growth rates in Figure 7, below, reveal an uneven pace of recovery among the state’s metro areas during 2010 and 2011.  In 2010, the negative growth in total metro area income (shown in Figure 4) was concentrated entirely in three MSAs:  Fort Smith, Little Rock, and Jonesboro. Growth was positive in Arkansas’ other metro areas.   In 2011, however, growth rates were positive for all areas of the state.

Figure 7:

Source: Bureau of Economic Analysis

Finally, how do the state’s MSAs stack up in terms of real per capita personal income, adjusted for purchasing power?  Figure 8 shows that even though prices tend to be higher in larger metropolitan areas, higher incomes tend to compensate for the differences.  In dollar terms, incomes in Arkansas MSAs range from 74.3% of the national average in Pine Bluff to 96% in Little Rock.  After adjusting for relative prices, the real per capita income figures show that Little Rock has a standard-of-living slightly above the national average.  Pine Bluff remains the MSA with the lowest relative income level, but the standard of living is nearly 11 percentage points higher than the nominal, dollar-denominated figures suggest.

Figure 8:

Source: Bureau of Economic Analysis, with calculations by IEA

The new RPP data have now moved from the experimental phase to prototype.  There are likely to be further refinement in the methodology and coverage of the data, but it is extremely useful to now have an official set of measurements for geographic relative price differences.  As detailed here and in yesterday’s report from the BEA, the new data bring a novel perspective to the examination of income differences across the nation and within the state of Arkansas.

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Income and Price Parities – Implications for Arkansas

By , January 29, 2013 4:02 PM

“After adjusting for a relatively low cost of living, incomes in Arkansas allow for a higher standard of living than in some of the higher-cost regions of the country.”

It is widely recognized that changes in income and spending over time should be adjusted for changes in prices; i.e., inflation.  Comparisons of income across countries are also routinely adjusted for differences in prices using exchange rates or other relative price measures.  Less common is the adjustment of state and local data to account for differences in relative prices across regions within the United States.  This type of inter-regional relative price adjustment is familiar to regular readers of the Arkansas Economist — in the context of interpreting poverty rates published by the Census Bureau (see, here and here, for example).  In recent years, researchers at the U.S. Bureau of Economic Analysis (BEA) have been developing statistics on regional price differences that can be applied more generally to income and consumption data for the states and metropolitan areas of the U.S.  This year, the BEA is scheduled to publish the first set of annual updates for personal income adjusted by regional price parties (RPPs).

The baseline estimates for these regional price parties were published in the Survey of Current Business in August 2012 — Regional Price Parities for States and Metropolitan Areas, 2006–2010.   Using data on rents from the American Community Survey (Census Bureau), price data from the Consumer Price Index (Bureau of Labor Statistics), and expenditure shares from the Personal Consumption Expenditure survey (BEA), the newly-developed RPP statistics allow for the comparison of the cost of living among states and metro areas in the U.S.

Normalizing the U.S. average to have an index value of 100, the estimate of Arkansas’ relative price level is calculated to be 89.3.  That is, the overall level of prices in Arkansas is more than 10% lower than the national average.  For the calculation period 2006-2010, the highest and lowers price parities in the nation were calculated for Hawaii (116.1) and South Dakota (87.2), respectively.  The Arkansas level of 89.3 ranked our state as having the 6th lowest prices in the nation.

This as in interesting finding in its own right, but is even more important in what it tells us about relative incomes and purchasing power.  For example it is widely known that Arkansas has one of the lowest levels of average income in the nation.  But to the extent that prices are also lower than in other regions, the differences in price-adjusted standards of living are less extreme than the unadjusted dollar-values suggest.  The map below, reproduced from the article in the Survey of Current Business, shows how per capita personal income changes after adjusting for regional price parities.  Arkansas is one of the states where the purchasing power of income is increased the most by the adjustment — specifically, price-adjusted per capita income for 2010 is 12.2% higher than unadjusted per capita income.

Source: Bureau of Economic Analysis

The average per capita income in all 50 states plus the District of Columbia was $39,900 in 2010.  By construction, this is also the price-parity-adjusted level of income for the U.S.  Without price adjustment, Arkansas’ per capita income was $32,800 — approximately 82.2% of the national average.  After adjusting for the relatively low cost of living in Arkansas, however, the RPP-adjusted income in Arkansas was the equivalent of $36,800 — about 92.2% of the U.S. average.  The table below summarizes this comparison and presents data on RPP-adjusted incomes for the eight metropolitan areas that include parts of Arkansas.

Source: Bureau of Economic Analysis

The RPP figures for Arkansas are all below the national average of 100, ranging from 82.8 in Jonesboro to 94.7 in the Memphis metro area.  In unadjusted dollar terms, per capita income in Arkansas metro areas range from 75.7% of the national average in Pine Bluff to 96.5% in Little Rock.  After adjusting for regional price parities, however, incomes in Pine Bluff rise to 86.2% of the national average and incomes in Little Rock are 3.5% higher than the national average.  In fact, after re-calculating incomes to account for their greater purchasing power, the RPP-adjusted measures of personal income are above the national average in three of the state’s metro areas.

The research on RPPs is still considered to be experimental, with economists at the BEA and elsewhere working to improve the quality of regional price data and the methodology for compiling them into regional index values.  The data will undoubtedly be refined and revised as research continues.  But the overall implications of the findings are clear:  after adjusting for a relatively low cost of living, incomes in Arkansas allow for a higher standard of living than in some of the higher-cost regions of the country.

 

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New FHFA House Price Data – A Mixed Bag

By , August 23, 2012 3:08 PM

This morning, the Federal Housing Finance Agency (FHFA) released house price data for the second quarter of 2012.  For Arkansas, the report was a mixed bag of results.  The seasonally-adjusted “Purchase-Only Index” (which uses only sales price data) showed Arkansas house prices up 1.9% for the quarter and up 7.2% from a year earlier.  In comparison, data for the U.S. showed prices up 1.8% for the quarter and up 3.0% from the previous year.  On the other hand, the FHFA’s “All-Transactions Index” (which includes appraisal data from refinancings) showed prices declining.  House prices were down 1.5% in Arkansas, and down 0.7% nationwide.

Source: Federal Housing Finance Agency

Source: Federal Housing Finance Agency

The purchase-only index has the advantage of measuring only market transactions — where true value is revealed.  The all-transactions index has broader coverage and incorporates more individual data observations.  But neither is a perfect measure.  One conclusion on which both methodologies agree:  The house-price crash that has plagued the market since 2006 has not been nearly as severe in Arkansas as in the rest of the nation.

One drawback of both measures is the limited nature of the underlying data, which are restricted to mortgages financed by Fannie Mae and Freddie Mac.  Missing in this sample are transactions for homes financed with nonconforming mortgages, including “jumbo” loans.  In an attempt to broaden coverage, the FHFA introduced a third measure last year, the “Expanded-Data” indexes, which incorporate additional data from the FHA and from county recorder offices.  The Expanded-Data indexes help to bring the FHFA measures into closer correponsdence with the famous Case-Shiller house price index.

As shown in the chart below, the expanded data indexes show larger peak-to-trough declines than either the all-transactions or purchase-only measures, but tend to validate the view that we are past the trough with prices beginning to recover.  For the second quarter, the expanded-data series show Arkansas prices up 2.4% and U.S. prices up 2.0%.  On a year-over-year basis, the Expanded-Data series show prices up 7.8% in Arkansas and up 2.4% for the U.S.

Source: Federal Housing Finance Agency

Metro Area House Price Data:
Metro area data are available only for the All-Transactions measure.  Consistent with the statewide reading for the second quarter, house prices as measured by this methodology were down across the state.  Price declines ranged from -0.4% in Little Rock and Fort Smith to -5.4% in Hot Springs.  Relative to the second quarter of 2011, however, house prices were measured as being higher in three metro areas — Fayetteville, Jonesboro and Little Rock.  The longer-run record of house prices shows considerable diversity among the states metro areas.  Compared to the second quarter of 2007, price changes range from +6.2% in Texarkana to -18.6% in Fayetteville.

Source: Federal Housing Finance Agency

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Average Weekly Wages

By , July 13, 2011 4:05 PM

Last week we reported on the comprehensive employment statistics from the Quarterly Census of Employment and Wages (QCEW).  This week the BLS released a detailed report on Arkansas, and the business media have tended to focus on the wages component of that report.  The Arkansas Democrat-Gazette, for example, ran the story under the headline “$738 weekly salary ranks state at 47th.”  The low ranking for wages in Arkansas should come as no surprise.  Arkansas has long been near the lower end of the nation’s income distribution, and relative rankings change very slowly. 

As shown on the map below, there are fairly wide discrepancies in average weekly wages among Arkansas counties.  The fourth quarter data show average weekly wages ranging from a high of $885 in Calhoun County to a low of $436 in Newton County.  None of the counties in Arkansas meet the national average of $971.

Source:  Bureau of Labor Statistics, Quarterly Census of Employment and Wages

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages

But income comparisons convey only part of the story.  Differences in the standard of living in different states and regions also depend on costs of living.  In general, states with lower wages also tend to have lower living costs, so that differences in purchasing power are not as pronounced as they might appear when considering wage data alone. 

According to data from Council for Community and Economic Research (C2ER), Arkansas ranks as having the fourth-lowest cost of living in the nation.  Based on a sample that includes groceries, housing, utilities, transportation, health care, and miscellaneous goods and services, the C2ER composite index for Arkansas for 2010:Q4 is 90.61 — that is, the cost of living in Arkansas is almost 10% lower than the national average. 

As shown in the table below differences in cost of living tend to narrow the differences in living standards from state to state.  Using the raw wage data alone, Arkansas average weekly wages of $738 amount to only 76% of the national average.  After adjusting for the relatively low cost of living, the purchasing power of those wages are nearly 84% of the national average, and Arkansas moves up the rankings to #40.

Sources:  Bureau of Labor Statistics, Council for Community and Economic Research

Sources: Bureau of Labor Statistics, Council for Community and Economic Research

The tendency for average wages and the cost-of-living to covary positively is not coincidental.  In international economics, the relationship is known as the Balassa-Saumaulson effect, a productivity-based explanation of  why price levels tend to be lower in low-income countries, after adjusting for exchange rates.  Even in an economy as regionally integrated as the United States (and with no variable exchange-rates to consider),  goods that are traded nationwide can have a local service component.  Lower local wages tend to drive down the local (nontradeable) component of costs, keeping the average price level lower than in high-wage areas.  Over time, we would expect (and hope) that wages in Arkansas tend to converge toward the national average.  The key to this process is capital accumulation — of both physical and human capital.  But a side effect of this process is that we should also expect the cost of living to rise as well.  Convergence in standards of living can therefore be an even slower process than wage convergence.

- Updated July 13, 2011 6:55 PM
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Arkansas Housing Markets – A Status Report

By , August 27, 2010 3:20 PM

“the expiration of the home-buyer tax credits is the elephant in the room”

Information on residential real estate markets has dominated the news over the past few days.  When it comes to evaluating the housing markets in Arkansas, recent reports from various sources show a consistent picture of recent trends, but the outlook is very uncertain.

Home Sales

The Arkansas Realtors Association (ARA) released statistics this week showing that June home sales were up slightly over the previous year, but down from the previous month.  As shown in Chart 1 below, housing sales follow a recurring seasonal pattern, with the summer months tending to have higher sales than winter months.  July is often the peak sales months of the year, but so far this year, sales peaked in April and have declined since then.

Chart 1:
Source:  Arkansas Realtors Association

Source: Arkansas Realtors Association

Disentangling the cyclical and seasonal effects is crucial to understanding recent trends.  Chart 2, below, shows seasonally adjusted data that are averaged over calendar quarters to smooth out some of the month-to-month variability (the data are seasonally adjusted using the technique described in a previous article).

Chart 2:
Sources:  Arkansas Realtors Association, National Association of Realtors

Sources: Arkansas Realtors Association, National Association of Realtors

With these refinements, the cyclical pattern of home sales is more evident:  After declining throughout 2007 and 2008, sales steadily increased over the course of 2009.  The first quarter of 2010 saw a sharp decline, followed by a rebound in the second quarter.  Recent data for Arkansas home sales from the National Association of Realtors  (NAR), also displayed in Chart 2, confirm the recent quarterly pattern in the adjusted ARA data.

The sharp decline in the first quarter of 2010 can be partly attributed to weather.  Sales are usually low in the winter months, and this past winter in Arkansas was particularly ill-suited to house shopping.  Sales recovered in the second quarter to about the same pace as in the fourth quarter of 2009.

But when it comes to assessing the outlook for home sales, the expiration of the home-buyer tax credits is the elephant in the room.  Sales in the fourth quarter of 2009 were boosted by last-minute purchases under the original tax credit program for first-time buyers that expired at the end of October.  Weather might have kept activity low in the first quarter, but the impending deadline for taking advantage of the extended and expanded home-buyer tax credit on April 30 was undoubtedly a factor in the second quarter resurgence.

The recent tax-credit deadline required that a contract be in place by the end of April, but the closing date could be later.  As a result, recorded sales in May and June included some transactions that are associated with last-minute contracts to qualify for the credits.  The crucial question is whether the second quarter increase reflects sales that would have taken place later in the year in the absence of the tax-credit deadeline — implying that we should expect a sharp decline over the next few months — or whether it reflects a sustainable improvement in market conditions.

Preliminary information suggests that we will see a drop-off in the third quarter.  New data on existing home sales and new home sales nationwide showed sharp declines in July.  Information on home sales in central Arkansas for July show that Arkansas housing market experienced this downturn as well.  For example, sales in Pulaski county were reported to be down 30.2 percent from the previous month and down 31.5 percent from July 2009.  When the statewide sales figures for July are released by the ARA next month, they are likely to show a sharp downturn.  

Arkansas home sales over the remaining summer months will probably be relatively weak, as the market returns to an equilibrium undistorted by government subsidies.  On the other hand, mortgage rates remain low and house prices have fallen (see below), so the market continues to be favorable for buyers.  This factor should help sustain sales later in the year.

House Prices

In addition to reports from the ARA and NRA, new data on housing prices were released this week by the Federal Housing Finance Authority (FHFA).  Since the housing downturn began in early 2007, the FHFA purchase-only price index has shown a distinctly lower rate of appreciation than the all-transactions index, which includes appraisal data from refinancings.  Ultimately, it is the market sales price that matters, so the purchase-only index provides more accurate information on current market conditions.  However, refinancings are more likely to be prevalent in areas where houses are retaining their value, so the all-transactions index might give a better indication of long-run home values.  [See also, Comment:  Differences Among Home-Price Indices]

As shown in Chart 3, below, the two measures of house prices have diverged considerably since the market downturn began, with   the purchase-only index showing considerably more variability.  Over the past four quarters, the purchase-only index has experienced quarterly ups and downs, but has changed little on net.  The all-transactions index has fallen by 2.4 percent.

Chart 3:
Source:  Federal Housing Finance Authority
Source: Federal Housing Finance Authority

Under either method, house prices in Arkansas have not experienced declines as large as the nationwide average.  Over the past four quarters, for example, the FHFA all-transactions index for the U.S. showed a 5 percent decline compared to the 2.4 percent decline in Arkansas. 

Chart 4, below, compares the two FHFA house price indexes for Arkansas with the average sales-price data from ARA.  The series are normalized to take on a value of 1.0 in the first quarter of 2007, so the data presented in the chart show cumulative price changes since that time.

Sources:  Federal Housing Finance Authority, Arkansas Realtors Association,  and authors' calculations

Sources: Federal Housing Finance Authority, Arkansas Realtors Association, and authors' calculations

 Not surprisingly, the average price data from ARA shows some similarity to the FHFA purchase-only index.  Both measures are based on prices of actual sales.  Both series show a sharp decline in the first quarter of 2010.  This drop is associated with the decline in home sales discussed earlier.  With fewer homes selling in general, the segment of the market including foreclosures and other distressed sales constituted a larger share of total sales, depressing average prices.  With the pickup in market activity in the second quarter, the price spike was also reversed.

Cumulatively, from 2007 through the second quarter of 2010, house prices in Arkansas have decline modestly.  All three measures of home prices show prices down over the period, but by magnitudes of only about 1 to 3 percent.

The FHFA also releases all-transactions indexes for metropolitan areas.  As shown in the table below, these data show that house price changes vary considerably across Arkansas’ metro areas.

Source:  Federal Housing Finance Authority

Source: Federal Housing Finance Authority

Northwest Arkansas has experienced the largest and most persistent declines in house prices.  Earlier in the decade, the Fayetteville metro area showed the greatest appreciation in the state, so declines more recently serve to offset some of those earlier gains.  Hot Springs has recently shown fairly large declines as well, but compared to five years ago, prices are up about 14.6 percent.  Data for Jonesboro, Texarkana and Little Rock show that house prices increased in the second quarter, with prices also higher than a year ago.  In fact, Jonesboro serves as a counterexample to the experience of Northwest Arkansas:  Rather than rising sharply in the early part of the decade and subsequently declining, house prices in Jonesboro have experienced a relatively slow but steady upward trend.

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