The Bureau of Labor Statistics announced this morning that unemployment rates were “lower in May than a year earlier in 274 of the 372 metropolitan areas, higher in 85, and unchanged in 13.” Among Arkansas Metropolitan Statistical Areas (MSAs), unemployment rates were lower for only 2, with rates higher in the remainder (relative to a year earlier). Comparing May to the previous month, seasonally adjusted data show that the unemployment rate increased in 3 MSAs, declined in 3, and was unchanged in Hot Springs.
Total personal income in Arkansas rose by 1.9% in the first quarter, and is up 4.8% since the first quarter of 2010. The latest report on state personal income shows that income growth in Arkansas was slightly above the national average rate of 1.8%, ranking 16th among the 50 states. However, revisions to the data show that income growth was slower than initially reported in 2010, particularly in the fourth quarter.
The figure below tracks personal income for the U.S. and Arkansas, normalizing each series to equal 100 in 2008:Q2 (the previous cyclical peak). The decline in personal income in Arkansas during the recession was less than the national average, and income growth during the recovery has generally outpaced that of the nation. The latest observation shows that personal income in Arkansas is 4.8% higher than at the previous cyclical peak. For the U.S., personal income has shown a net increase of 3.8% over the same period.
A careful comparison of the figure above with a previous version of the same chart reveals that income growth in Arkansas is not outpacing the U.S. as much as previous data had suggested. The slow income growth in the fourth quarter, in particular, represents a sharp downward revision to previously-published data. As shown in the table below, Arkansas income growth was revised downward in each of the four quarters of 2010.
The report from the Bureau of Economic Analysis points out that a large share of the income growth in the first quarter is attributable to a two percentage-point decline in the Social Security payroll tax rate. This tax cut, applicable to calendar-year 2011, was part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (i.e., the December political compromise that extended the Bush-era tax cuts, among other things). For Arkansas, the Social Security tax cut accounted for approximately 0.8 percentage points of the 1.9% personal income growth rate. Wage and Salary earnings accounted for 0.6 percentage points, with the remaining growth attributable to Dividends, interest and rent (0.44 percentage points); and Personal current transfer receipts (0.15 percentage points).
A breakdown of earnings by industry (which does not include that effects of the Social Security payroll tax cut) is shown in the table below.
Sectors showing the strongest growth in the first quarter included Mining and Durable goods manufacturing (which were among the strongest sectors nationwide). Earnings showed negative growth in a handful of sectors, including Farm income, Construction, Information services and Real Estate. The BEA reports that Farm income in agricultural states varied widely, depending on the mix of agricultural products in each state. “Farm income in some states, such as North Dakota, benefited from surging global wheat demand (which raised prices in the U.S. 18 percent in the first quarter) while farm income in other states, such as Iowa, plummeted because of rising livestock expenses and falling production.” Farm income in North Dakota was up 66.6%, while farm income in Iowa was down 15.1%. Arkansas farm income fell between these extremes.
High Gasoline Prices Divert Spending
Preliminary data indicated that Arkansas Taxable Sales (ATS) increased only modestly in the first quarter of 2011 (+0.7%), and had shown little net growth over the past three quarters (+0.6%). Based on information released last week from the Arkansas Department of Finance and Administration (DF&A), revised statistics show an even smaller increase in the first quarter, +0.6%. As shown in Figure 1, the sluggish growth in ATS since mid-2010 contrasts with national retail sales statistics, which have shown steady recovery from the recession.
In the Arkansas Economist report on the preliminary figures we speculated that the difference might be related to the recent spike in gasoline prices. (This factor was also mentioned in the most recent General Revenue Report from DF&A.) National retail sales statistics from the Census Bureau include expenditures on gasoline. But because gas is not subject to sales tax in Arkansas, it is not included in ATS.
As shown in Figure 2, the share of total U.S. retail sales reported at gasoline stations varies directly with the price of gasoline. In the short run, the demand for gasoline tends to be price inelastic — that is, the quantity of gasoline purchased remains fairly stable when prices change. Consequently, an increase in gasoline prices raises the share of total spending devoted to gasoline.
Arkansas Taxable Sales includes the non-gasoline items that are sold at gas stations, but it doesn’t include the gasoline iteslf. When gas prices increase dramatically, this means that ATS is missing a component that is of growing importance. Although gasoline is not subject to sales tax in Arkansas, it is subject to a motor fuel tax that is assessed per gallon sold. Therefore, the Department of Finance and Administration has monthly records of the quantity of gasoline sold in the state. Multiplying the quantity sold by the average price for gasoline in Arkansas (obtained from the Oil Price Information Service), we can construct aggregate gasoline sales to be included in an expanded measure of ATS — Arkansas Taxable Sales Including Gasoline (ATSIG). Figure 3 compares ATS with and without this newly-constructed measure of gasoline expenditures.
The data that include gasoline sales show considerably greater strength in recent quarters than the original version of ATS: In the past three quarters, ATSIG has grown by 2.8%, compared to the meager 0.6% growth without including gasoline expenditures. The difference is particularly marked in the first quarter of this year, with ATSIG expanding by 1.9%. In the most recent two quarters, ATSIG shows that total sales growth in Arkansas expanded more than 1% per quarter faster than ATS (without gasoline) suggests.
With gasoline included, the recent growth of taxable sales in Arkansas more closely mirrors the statistics on national retail sales, as shown in Figure 5.
So how should we interpret the surge in recent spending on gasoline? From a strictly utilitarian standpoint, it is appropriate to include gasoline in total sales so that it more closely matches the U.S. Retail Sales statistics. But the economic significance of an increasing gasoline share in total spending is trickier to evaluate. To the extent that a gasoline price increase is considered permanent, it should have a negative wealth effect that reduces overall spending. On the other hand, a temporary price spike should have negligible wealth effects, but might induce households to borrow more and/or save less in order to maintain planned spending on non-gasoline items. This is likely to be a factor in explaining the sharp surge in ATSIG in response to the surge in gasoline prices in early 2008. But, if households are effectively credit constrained, the increased spending on gasoline is likely to crowd out other spending — leaving total spending at about the same rate as it would be without the gasoline price spike. The reaction of non-gasoline spending to the 2011 price spike suggests this scenario might be relevant for interpreting recent data. The difference between 2008 and 2011 is illustrated in Figure 6, which shows the gasoline expenditure share in ATSIG alongside Arkansas average gasoline prices. In 2011, the rise in gasoline prices was slightly smaller than the 2008 spike, but the share of spending on gasoline has exceeded the 2008 peak. This indicates that the 2011 price surge has resulted in a larger cut-back in non-gasoline expenditures.
Gasoline prices have fallen considerably in recent weeks. According to the AAA Fuel Guage Report, gasoline prices in Arkansas have declined by nearly 23 cents over the past month. This is likely to reverse the substitutions we’ve seen in the early-2011 data, with non-gasoline items again constituting a larger share of total spending. For state general revenues, which depend heavily on sales taxes, this should result in more rapid growth for the remainder of 2011.
# # #
A spreadsheet with data for ATS and ATSIG is available here.
The unemployment rate in Arkansas ticked upward in May, rising from 7.7% to 7.8%. According to data from the Bureau of Labor Statistics and the Arkansas Department of Workforce Services (DWS), the household survey showed that the number of unemployed rose by over 1,100 while the number of employed dropped 4,800. This was the second consecutive monthly decline in the number of employed following a string of increases since July 2010. DWS Communications director Kimberly Friedman pointed out that the uptick in the unemployment rate and the decline in the labor force “mirrors the trend seen at the national level.” It is also likely to reflect disruptions due to severe weather conditions in Arkansas during late April and May.
The figures for nonfarm payroll employment from the establishment survey also showed a contraction in the total number of jobs in May, down 5,400 (seasonally adjusted). As shown in the chart below, the May reading fits the recent pattern of month-to-month volatility. From a longer-run perspective, however, the latest monthly observation provides little indication of any change in the trend of positive job growth that has prevailed since February of 2010.
Job losses in May were concentrated in two sectors: Trade, Transportation, and Utilitites (TT&U); and Professional and Business Services (P&B). In the broad TT&U sector, the raw data showed only a slight decline in jobs (-200). However, employment in this sector typically expands during May so the seasonally adjusted figures show a decline of 3,100 — with much of the loss concentrated in Retail Trade (-1,800). In the P&B services sector the number of jobs was down by 2,400 (seasonally adjusted) with the losses concentrated in Administrative & Support Services (-1,700). The Administrative and Support subsector includes temporary positions arranged through employment agencies–so while it has shown some of the largest gains over the past year (+2,900) it is one of the first areas to show job losses in a temporary employment contraction (-1,400 in May).
The tornadoes and flooding that hit many parts of the state during April and May are likely to have suppressed employment growth temporarily, but should have little lasting effect. In fact, recovery efforts are likely to provide some support for job growth in coming months — particularly in the construction sector. Underlying growth trends are also likely to result in a rapid recovery in the Administrative & Support Services sector. The key sector to monitor in June will be TT&U, which accounts for a large share of total employment in Arkansas. If the factors underlying the weak employment report for May are indeed temporary, we should see robust recovery in this sector. Continued stagnation in this sector would be a sign of more fundamental economic weakness.
# # #*Seasonally adjusted data for nonfarm payroll employment, reported in a format compatible with the monthly press release from the Arkansas Department of Workforce Services, are available here: Table – Seasonally Adjusted NFPE
A pessimistic outlook gets even worse (with one exception)
Earlier this week, Talk Business published a second quarterly Arkansas Consumer Confidence Report. As in the previous survey taken in the first quarter of the year, this report showed considerable pessimism about the current and prospective state of the economy. In fact, consumer confidence seems to have deteriorated markedly over the past three months.
The most significant shift was evident in the response to a question about household spending plans.* Only 17% of survey respondents reported plans to spend more on goods and services over the next six months, compared to 41% in the first quarter. Over half of the respondents (50.5%) planned to spend less — up sharply from 29% in the first quarter. Follow-up questions in this survey showed that those who plan to spend less are concerned with conserving money (57%), while those who plan to spend more anticipate higher prices (60.5%). Neither outlook is particularly positive.
Another significant change in outlook concerned local job market conditions. The second quarter survey showed that 76% characterize jobs as “hard to find,” up from 69.5% in the first quarter. Expectations about future labor market conditions deteriorated as well: The new report indicates that 45.5% expect job conditions to get worse over the next six months. In the first quarter survey, only 37.5% expected conditions to worsen.
A shift in current personal financial conditions was also evident. In the second quarter survey, 42% reported being financially worse off than six months ago. Only 34.5% gave that answer in the first quarter. The shift reflected fewer respondents reporting “about the same” (48% vs. 54.5%), with no significant change in the proportion indicating that they were financially better off (only 10% in the second quarter and 11% in the first quarter).
Two questions on the survey pertaining to national and state business conditions showed an interesting dichotomy:
- Perceptions national business conditions worsened, with 80% characterizing the current situation as “bad,” up from 74.% perecent in the first quarter. The percentage of those calling national business conditions “good” fell from 5% to 3%.
- In contrast, a question about business conditions in the Arkansas economy represented the only survey question to elicit no statistically significant changes in responses since the first quarter.* As shown in the figure below, the contrast between perceptions of the state and national economies remains striking.
In spite of greater pessimism about the national economy, local job market conditions, and personal financial outlooks, survey respondents have so far been consistent in characterising economic conditions in Arkansas as being better than those in the U.S. as a whole.
The Arkansas Consumer Confidence Report is sponsored by Delta Trust and Bank and the Electric Cooperatives of Arkansas, and is compiled by Talk Business. The report is based on a telephone survey that asks several questions about household economic and financial conditions, as well as perceptions about the economic environment. The details of the questions and responses in the latest report can be found here.
# # #
*Statements of statistical significance are based on two-proportion z-tests.
A parenthetical statement in yesterday’s report on real GDP growth in Arkansas mentioned that the 2009 data had been revised downward. Advance figures reported last November showed slightly positive growth for Arkansas in 2009, but revised figures reveal that the state’s economy contracted by 1.6% — better than most other states during the year that marked the low point of the recession, but far worse than the initial statistics had indicated.
The table below shows contributions to growth for the sectoral components of Arkansas GDP growth in 2009, comparing the initial data released in November 2010 with the new data that came out yesterday. The sharp downward revision was not attributable to any one component, but goods-producing sectors generally contributed the most to the downward revision.
The total downward revision, from +0.6% to -1.5%, amounted to -2.1%. More than half of that total is attributed to durable goods manufacturing, which appears to have fallen far more sharply at the end of the recession than initial figures suggested. Significant contributions to the downward revision were also registered for Agriculture, Construction, and Utilities. Transportation and warehousing, an important component of the Arkansas economy, also contributed to the decline. Several other service-providing sectors expanded more robustly than the previous data had indicated — particularly Wholesale trade and Finance and insurance.
When the advance report on 2009 GDP came out last November, we reported that “the numbers for Arkansas were something of a surprise.” Employment statistics had suggested a more severe downturn in overall economic activity, and the only reasonable explanation for the positive GDP growth was that growth had been concentrated in relatively low-employment sectors of Arkansas economy. This still appears to be true. The downward revisions for sectors that comprise large shares of the labor force — Manufacturing, Transportation and warehousing, and Government — show that the recession hit output as hard as it did employment. In the smaller, but growing service-providing sectors, the revised statistics for output growth in 2009 show even more strength than the earlier data suggested. To some extent, the newly-revised figures bring some consistency to our view of the recession’s impact on Arkansas’ economy.
This morning, the U.S. Bureau of Economic Analysis released advance statistics on GDP by State for 2010. The data show widespread economic recovery, with real GDP increasing in 48 states and the District of Columbia. Arkansas real GDP expanded by 2.3%, slightly lower than the national average rate of 2.6%. (Revised figures for the previous year show that Arkansas real GDP contracted at a 1.5% rate in 2009, in contrast to previously-published figures that indicated a small increase for the year – see Arkansas Gross Domestic Product – 2009.)
The press release from BEA noted that durable-goods manufacturing was a leading contributor to growth in 29 states. As shown in the table below, manufacturing of both durable and nondurables goods expanded sharply in Arkansas, rising at rates of 10% and 7.7%, respectively. Service-providing sectors expanded in all sectors except the volatile category of information services (primarily telecommunications). Construction continued to decline, as did Agriculture, forestry, fishing and hunting. Following two years of rapid development in the Fayetteville shale play, mining activity contracted slightly in 2010.
Growth rates for individual sectors can vary considerably over time, and from each other. For relatively small sectors, these swings can convey an exaggerated sense of importance. For example, Administrative and waste services expanded at a rate of over 9% in 2010. However, this sector accounts for only 2.4% of total economic activity in Arkansas. As a result, growth in Administrative and waste services contributed only a small portion to total Arkansas GDP growth–about 0.2 percentage points. The table below shows growth contributions by sector, where the relative size of the sector is taken into account.
Manufacturing accounted for about one-half of total GDP growth in Arkansas during 2010. Wholesale trade and retail trade were also large contributors. The sharp decline in information services subtracted nearly 0.6% from total growth, with other service sectors contributing modestly to the overall expansion.