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Burgundy Book A report on economic conditions in the Little Rock zone Second Quarter 2014 The Little Rock zone of the Federal Reserve comprises the majority of Arkansas, except northeast Arkansas. The total population is approximately 2.5 million people, including the 710,000 who live in the Little Rock MSA. Economic Conditions Improve in the Little Rock Zone Data Snapshot County unemployment rates (SA, Q1-14) By Kevin L. Kliesen, Business Economist and Research Officer 6.8% The near-term outlook for the Little Rock zone improved modestly according to a May survey of business contacts. Roughly two-thirds expect economic conditions in 2014 to be better or somewhat better than they were in 2013. The Little Rock zone’s unemployment rate averaged 6.8 percent in the first quarter of 2014, down modestly from the previous quarter (7.2 percent). Two of the four MSAs in the Little Rock zone (Fayetteville and Little Rock) had unemployment rates below the U.S. average (6.7 percent). The zone’s payroll employment growth was modestly positive in the first quarter. less than 5% 7% to 8% 5% to 6% over 8% 6% to 7% Nonfarm payroll employment by industry Percent change from one year ago (Q1-14) In contrast to the nation, manufacturing employment in the Little Rock zone declined in the first quarter. However, activity in the transportation sector appears to be ramping up, as reflected in a sizable increase in job openings over the past several months. Compared with a year earlier, house prices and single-family building permits declined in the first quarter—although Fayetteville and Texarkana were notable exceptions. Vacancy rates in Little Rock were unchanged to slightly lower in the first quarter compared with the previous quarter. Households in the Little Rock zone continue to pare their mortgage debt and credit card balances. However, auto loan debt—a proxy for auto sales—increased at a healthy pace in the first quarter and by a larger percentage than seen nationally. -6 -4 -2 0 Total NonFarm (100%) Government (21%) Trade, Trans., and Utilities (19%) Education and Health (15%) Prof. and Business Services (13%) Leisure and Hospitality (9%) Manufacturing (6%) Financial Activities (6%) Compared with the previous three months, Arkansas banks’ return on assets and net interest margins increased slightly in the first quarter; however, their nonperforming loan ratio was largely unchanged. Nat. Res., Mining, and Construction (5%) Other Services (5%) Arkansas farmers reduced their corn acreage in 2014, but boosted their rice acreage sharply. Information (2%) Little Rock This report is published by the Federal Reserve Bank of St. Louis US 2 4 6 Second Quarter 2014 How to read this report Table of Contents Unless otherwise noted, city names refer to the metropolitan statistical areas (MSAs), which are geographic areas that include cities and their surrounding suburbs, as defined by the Census Bureau. Labor Markets ........................................................................... 3 Statistics for the Little Rock zone are based on data availability and are calculated as weighted averages of either the 62 counties in the zone or the six MSAs. As of 2012, approximately 74 percent of the zone’s labor force was located in an MSA. Specifically: 29 percent in Little Rock, 20 percent in Fayetteville, 11 percent in Fort Smith, 6 percent in Texarkana, 4 percent in Pine Bluff, and 4 percent in Hot Springs; 26 percent of the zone’s labor force was located in non-metropolitan areas. Banking and Finance ................................................................. 7 Arrows in the tables are used to identify significant trends in the data. The direction of the arrow indicates the sign (up/down) and the color indicates the economic significance (green = good, red = poor). Arrows appear only when the change from the previous quarter is greater than 1 standard deviation. For example, the standard deviation of the change in the US unemployment rate is 0.4 percent. If the US unemployment rate declined from 8.4 percent to 8.2 percent, no arrow would appear; but if it declined from 8.4 percent to 7.9 percent, a green down arrow would appear in the table. Selected variable definitions are located in the appendix. Manufacturing and Transportation ........................................... 4 Real Estate and Construction .................................................... 5 Household Sector ...................................................................... 6 Agriculture and Natural Resources ........................................... 8 Appendix ................................................................................... 9 Join Our Panel of Business Contacts The anecdotal information in this report was provided by our panel of business contacts, who were surveyed between May 1 and May 15. If you’re interested in becoming a member of our panel, follow this link to complete a trial survey: http://research.stlouisfed.org/outlooksurvey/ Selected quotes from business contacts are generally verbatim, but some are lightly edited to improve readability. or email us at beigebook@stls.frb.org. For more information contact the St. Louis office: Charles Gascon charles.s.gascon@stls.frb.org Media inquiries: mediainquiries@stls.frb.org Views expressed do not necessarily reflect official positions of the Federal Reserve System. Federal Reserve Bank of St. Louis—Little Rock Zone 2 Labor Markets Second Quarter 2014 Labor Markets Continue To Grow Modestly in Little Rock Zone By E. K. Vermann, Senior Research Associate The unemployment rate fell in all of the MSAs in the Little Rock zone. In fact, Little Rock, Fort Smith, and Texarkana all experienced significant decreases in the unemployment rate. Despite these changes, only Little Rock and Fayetteville have unemployment rates lower than the national average. With the exception of Fayetteville, employment growth in the nation continues to outpace that in the Little Rock zone: Employment in Little Rock and Fort Smith grew 0.1 and 0.5 percent, respectively. Employment in Texarkana, though continuing to fall, declined at a slower rate than the previous quarter due to smaller declines in the goods-producing and government sectors and a small gain in the service-providing sector. According to a survey of business contacts, employment, hours, and wages in the Little Rock zone are expected to remain the same in both the second and third quarters. “Managed IT services and… consulting projects are significantly higher in the short-term and [the pipeline of committed development projects is] indicating higher [hiring] for the long-term.” Arkansas’ professional and business services sector continues to grow. Though it accounts for only 13 percent of the state’s total nonfarm employment, it has grown 10 percent since 2010 (see figure). Anecdotal evidence suggests this growth may be due to a increase in demand for IT services, especially within the healthcare sector. —Little Rock area IT consultant “We continue to have trouble finding mechanics because very few training programs produce qualified candidates.” —Northwest Arkansas transportation executive Professional and business services employment growth outpaces nation since 2008 Professional and business services employment, SA (Index 2008=100) 115 110 105 100 95 90 AR US 85 80 2008 2009 Source: BLS. 2010 2011 2012 2013 2014 Little Rock Fort Smith 6.7 0.5 -1.3 ▲ 1.7 0.2 -0.3 -3.8 0.3 2.1 0.7 1.2 0.0 2.9 0.7 -7.0 5.3 7.0 Nonfarm employment (Q1-14) 0.1 1.9 -1.0 Private service-providing sector Government sector Goods-producing sector US ▼ 6.4 ▼ Texarkana 7.0 Unemployment rate (Q1-14) (%) ▼ Fayetteville 1.5 ▲ 2.1 -0.1 Note: Unl es s otherwi s e noted, va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gni fi ca nt (± 1 s ta nda rd devi a ti on) cha nge from the previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis—Little Rock Zone 3 Manufacturing and Transportation Second Quarter 2014 Contacts Remain Optimistic Despite Recent Slowdown By Yang Liu, Senior Research Associate Online job openings as percent of employment, 3-month moving average 4.5 Manufacturing 4.0 Transportation 3.5 3.0 2.5 Transportation employment declined in Little Rock and Fayetteville. Arkansas saw transportation employment move up slightly, but much slower than the nation’s pace (see table). The job vacancy rate in Little Rock’s manufacturing industry increased 0.2 percentage points in the first four months in 2014. The job vacancy rate in transportation surged from 3.1 percent to 4.3 percent (see figure). Job vacancy rates in both industries are significantly higher than the corresponding national averages. Multiple contacts suggest that qualified truck drivers and mechanics have been very hard to find in Arkansas. Limited labor supply has led to a capacity shortage in the truck loading sector and an increase in service prices. The durable goods manufacturing sector in Arkansas grew modestly, but the nondurable goods sector continued to contract, resulting in a 0.3 percent decline in overall manufacturing employment (see table). Demand for transportation jobs surges in Little Rock Manufacturing employment in Little Rock, Fayetteville, and Arkansas has declined slightly in the first quarter, while national manufacturing employment increased (see table). “Manufacturing activity has picked up in recent months; however there are indications that the expansion is slowing to moderate in the summer and fall.” — Northwest Arkansas transportation executive “[We expect] the business to grow substantially in the next five to six years. We plan to invest significantly on new equipment to add capacity for the new demand.” – Northern Arkansas manufacturer In contrast to the nation’s 1.1 percent growth, Arkansas’s manufacturing exports dropped 17.1 percent compared with one year ago (see table). Declines in exports of transportation equipment and primary metal were the main drivers. 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Conference Board a nd BLS. Little Rock Fayetteville Arkansas US Transportation employment (Q1-14) -2.1 -1.3 0.2 2.1 Manufacturing employment (Q1-14) -0.7 -1.0 -0.3 0.6 Durable goods -- -- 0.8 0.9 Nondurable goods -- -- -1.5 0.2 -- -- -17.1 1.1 Manufacturing exports (Q1-14) Note: Values are percent change from one year ago. Arrows indicate a significant (± 1 standard deviation) change from the previous quarter; see appendix for notes and sources. Federal Reserve Bank of St. Louis—Little Rock Zone 4 Real Estate and Construction Second Quarter 2014 Residential Real Estate and Construction Off to a Rocky Start By Diana Cooke, Research Associate Residential construction worsened in the first quarter of 2014. Single-family building permits continued to display negative yearly growth rates in the majority of MSAs. This decline was significant in Little Rock, Hot Springs, and Pine Bluff. The sales of new and existing homes in Little Rock reached its lowest point in the first quarter of 2014 compared with all quarters in the past year. Contacts noted that weather was a likely factor. Home prices in Little Rock fell by 1.6 percent from one year ago. The multi-family housing market remains stable. The vacancy rate fell by 40 basis points from the previous quarter (see top table). Contacts report that developers continue to look for new sites for apartment complexes. Office market vacancy rates in Little Rock continue to fall. Vacancy rates in the central business district (CBD), midtown, and the suburbs show signs of convergence (see figure). The spread between office vacancy rates in the CBD and the suburbs has decreased by 4 percentage points in the past two years. “Wood product sales prices and volumes are low due to slow new home construction.” There continue to be a few construction projects planned in the industrial market around Little Rock, including a steel mill that will break ground in late June. — Southern Arkansas timber company executive “There is a lack of available lots for residential construction.” — Little Rock area banker Office vacancy rates across the Little Rock MSA converge Percent 18 16 14 12 10 8 CBD Midtown Suburbs 6 Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Source: Reis.com. Non-residential market (Little Rock, Q1-14) Apartment Office Retail Industrial 7.0 11.7 11.9 8.4 1.6 0.6 1.1 -0.6 Vacancy rate (%) Asking rent Percent change from one year ago Note: Apa rtment, offi ce, a nd reta i l va l ues a re from Rei s .com. Indus tri a l va l ues a re es ti ma tes from Ca s s i dy Turl ey. Residential market (Q1-14) CoreLogic Home Price Index Little Rock Fayetteville Fort Smith Hot Springs Pine Bluff Texarkana -1.6 5.7 ▲ -2.8 ▲ Single-family building permits -26.4 ▼ 14.1 -23.1 5.9 ▼ -- -- New and existing home sales -10.2 -27.3 ▼ -- -4.0 2.2 -75.0 ▼ 285.7 ▲ -- -- US 11.4 0.0 ▼ -6.4 ▼ Note: Va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gnfi ca nt (±1 s ta nda rd devi a ti on) cha nge from previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis—Little Rock Zone 5 Household Sector Second Quarter 2014 Northwest Arkansas Luxury Retailers Report Strong Sales By Elise A. Marifian, Research Associate Per capita personal income growth in Arkansas slowed to a modest 0.3 percent in the fourth quarter. This growth rate was below the national rate of 0.6 percent (see table). Households reduced their non-auto debt balances. Per capita credit card and mortgage debt declined across the zone, although the Little Rock MSA saw little decline in mortgage balances. “Vehicles that are between $10,000 - $25,000 with the lowest mileage possible is the sweet spot for the market.” – Central Arkansas auto dealer “Recently introduced new, full-size trucks and sport utilities are drawing more attention than their predecessors did in the last year of their life cycle.” – Northwest Arkansas auto dealer Consumers continue to borrow to purchase vehicles Percent change in debt balances from one year ago 20 15 Mortgage Auto Credit 10 5 Luxury retailers in northwest Arkansas reported positive sales growth. Other retailers reported a slight increase in sales. 0 Fourth-quarter mortgage and credit card delinquency rates declined relative the previous quarter, while auto loan delinquency rates ticked up slightly. -5 -10 -15 2008 2009 2010 2011 2012 Source: FRBNY Consumer Credit Pa nel and Equifax. Auto loan balances in the zone increased at a year -over-year rate of 6.9 percent in the first quarter, which was 1.8 percent higher than the previous quarter’s growth rate. This is reflected by reports of strong increases in auto sales in February and March relative to last year. Anecdotal evidence indicates that few consumers have been declined for a car loan, and demand for used vehicles is strong as individuals have been using tax refunds to purchase used vehicles. 2013 2014 Little Rock Zone Arkansas Little Rock MSA -- 0.6 ▼ -2.5 -0.6 -2.1 ▲ -3.7 -3.6 -4.2 -4.9 6.9 6.7 6.8 4.8 Mortgage 2.1 2.1 2.1 3.3 Credit card 7.8 7.8 6.7 Auto loan 2.4 2.4 2.7 Per capita personal income (Q4-13) -- 0.3 Mortgage -2.5 Credit card Auto loan ▼ US Per capita debt balances (Q1-14) 90+ day delinquency rates (%) (Q1-14) ▼ 8.3 ▼ 3.2 Note: Unl es s otherwi s e noted, va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gni fi ca nt (±1 s tanda rd devi a tion) cha nge from the previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis—Little Rock Zone 6 Banking and Finance Second Quarter 2014 Banking Conditions Steady in Arkansas By Michelle Neely, Economist “Business practices and evaluation of credit worthiness are more deliberate and disciplined than a few years ago, hence less volume for both new and refinance markets.” —Little Rock area banker Arkansas banks still outperforming national peers Return on average assets at commercial banks, percent 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Return on average assets (ROA) dropped slightly again at Arkansas banks in the first quarter to 1.20 percent. Nevertheless, the state’s average ROA still significantly exceeded those of their District and national peers. One year ago, ROA averaged 1.25 percent at Arkansas banks. The small drop in ROA can be traced to a 7-basispoint decline in the state’s average net interest margin (NIM) that more than offset a slight drop in loan loss provisions. At 4.17 percent, however, the average NIM for Arkansas banks is well above national and District averages. “We have a robust pipeline of loans. Our optimism is due to a good solid business environment in northwest Arkansas.” —Northwest Arkansas banker Nonperforming loans remain on the decline across the state, District, and nation. The average nonperforming loan ratio at Arkansas banks (2.01 percent) continues to exceed the District (1.66 percent) and national (1.75 percent) averages because of mergers and acquisitions by Arkansas institutions of failing banks. Arkansas US 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: FRED. Arkansas 8th District Return on average assets 1.20 1.02 0.97 Net interest margin 4.17 3.75 3.79 Nonperforming loans / total loans 2.01 1.66 1.75 87.56 79.89 Banking performance (Q1-14 ) Loan loss reserve coverage ratio US Peer Banks ▼ 92.00 Note: Al l va l ues a re percenta ge poi nts . Arrows i ndi ca te a s i gni fi ca nt ( ± 1 s ta nda rd devi a ti on) cha nge from the previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis—Little Rock Zone 7 Agriculture and Natural Resources Second Quarter 2014 Growth in Agricultural Land Values Slows By Lowell R. Ricketts, Senior Research Associate Agricultural bakers surveyed in the zone expect slightly higher capital spending by farmers and greater availability of loanable funds in the second quarter of 2014 compared with the same period in 2013 (see right table). At the same time, bankers expect slightly lower loan demand over the same period. Farmers are pulling back from corn in response to low commodity prices and the need to rotate crops (see left table). Arkansas farmers will plant 280,000 fewer acres of corn in 2014 than they did in 2013. In lieu of corn, plantings of all other major crops listed are expected to grow. Rice improved the most with 445,000 more acres expected than last year. Coal production in Arkansas jumped by almost 500 percent relative to production levels at the same time last year (see left table). This should be taken with a grain of salt as Arkansas’s production scale is very small and subject to volatile swings. “Corn has become more popular in eastern Arkansas. Although people are pulling back, the trend is unlikely to be long-term.” Agricultural land values in Arkansas grew at a slower rate over the past five years than the rate seen in the early 2000s (see figure). National land values grew at a faster rate during the same period and will soon surpass Arkansas if the trend persists. — Central Arkansas farmer “Low corn prices don’t really matter, I was going to rotate to beans this year anyway.” — Northwest Arkansas farmer “Land prices are still going up but the rate is slowing.” —Central Arkansas farmer Rapid growth in Arkansas land values slows down Average dollars per acre 3,000 2,500 2,000 1,500 Arkansas 1,000 US 500 1997 2002 2007 Source: USDA Census of Agriculture, s ee notes. Arkansas Natural resources (Q1-14) Mining and logging employment Coal production Prospective plantings (2014) Corn Cotton Rice Sorghum Soybeans -1.4 499.7 -31.8 ▼ 9.7 ▲ 41.4 ▲ 7.7 2.8 2012 US 4.1 -1.1 -3.9 6.7 15.6 ▲ -17.1 ▼ 6.5 Note: Va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gni fi ca nt (± 1 s ta nda rd devi a tion) cha nge from the previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis—Little Rock Zone Little Rock zone Ag. bankers' expectations Q2-14 vs. Q2-13 Loan demand Available funds Loan repayments Farm income Capital spending Lower Higher 17 0 0 17 0 0 20 20 20 40 Net -17 17 0 0 20 Note: Percenta ge of res pons es . See a ppendi x for notes a nd s ources . 8 Appendix Cover Page Sources Bureau of Labor Statistics Unemployment rate, nonfarm payroll employment. Labor Markets Table Sources Bureau of Labor Statistics Unemployment rate. Nonfarm employment and contributions by sector. Notes Goods-producing sector comprises the manufacturing and natural resources, mining, and construction sectors. Private service-providing sector includes the following sectors: Trade, Transportation, and Utilities; Information; Financial Activities; Professional and Business Services; Education and Health Services; Leisure and Hospitality; and Other Services. Unemployment rate data are seasonally adjusted. Manufacturing and Transportation Table Sources Bureau of Labor Statistics Transportation employment: includes transportation and warehousing industries. Manufacturing employment: total, durable, and nondurable goods. World Institute for Strategic Economic Research Manufacturing exports: dollar value. Notes Job vacancy rate is defined as the online job openings as percent of total employment in an industry. Transportation employment in Little Rock and Fayetteville covers transportation, warehousing, and utility industries. About 90 percent of the reported jobs are contributed by transportation and warehousing industries. Manufacturing exports are defined as total dollar amount of exports by the manufacturing industries. Durable goods manufacturing sector is defined by the Bureau of Labor Statistics as industries with a NAICS classification code of 321 (Wood Product Manufacturing); 327 (Nonmetallic Mineral Product Manufacturing); 331 (Primary Metal Manufacturing); 332 (Fabricated Metal Product Manufacturing); 333 (Machinery Manufacturing); 334 (Computer and Electronic Product Manufacturing); 335 (Electrical Equipment, Appliance, and Component Manufacturing); 336 (Transportation Equipment Manufacturing); 337 (Furniture and Related Product Manufacturing); and 339 (Misc. Manufacturing). Federal Reserve Bank of St. Louis—Little Rock Zone Second Quarter 2014 Nondurable goods manufacturing sector is defined by the Bureau of Labor Statistics as industries with a NAICS classification code of 311 (Food Manufacturing); 312 (Beverage and Tobacco Product Manufacturing); 313 (Textile Mills); 314 (Textile Product Mills); 315 (Apparel Manufacturing); 316 (Leather and Allied Product Manufacturing); 322 (Paper Manufacturing); 323 (Printing and Related Support Activities); 324 (Petroleum and Coal Products Manufacturing); 325 (Chemical Manufacturing); and 326 (Plastics and Rubber Products Manufacturing). Real Estate and Construction Table Sources CoreLogic Home price index, including distressed sales. Census Bureau Year-to-date single-family building permits. Janet Jones Company Realtors Year-to-date new and existing home sales. Notes Asking rent is the publicized asking rent price. Data are in current dollars. Vacancy rate is the percentage of total inventory physically vacant as of the survey date, including direct vacant and sublease space. New and existing home sales consist of single-family home sales. Household Sector Table Sources Equifax based on authors’ calculations All figures are based on a 5 percent sample of individual credit reports. Balances are geographical averages of various debt categories. The mortgage category includes first mortgages and home equity installment loans, but home equity lines of credit are omitted. Auto loans include those financed by finance company or bank loans. Credit cards are revolving accounts at banks, bankcard companies, national credit card companies, credit unions, and savings and loan associations. Haver Analytics Per capita income. Notes Delinquency rates are calculated as the percentage of payments past due by more than 90 days, weighted by the dollar value of the loan. 9 Appendix Second Quarter 2014 Banking and Finance Table Sources Federal Financial Institutions Examination Council Return on average assets: USL15ROA. Net interest margin: USL15NIM. Nonperforming loans: USL15NPTL. Loan loss reserve/ Total loans: USL15LLRTL. Net loan losses/Average total loans: USL15LSTL. Note: The data available in the table can be found in FRED. Notes Loan loss provisions are expenses banks set aside as an allowance for bad loans. Nonperforming loans are those loans managers classify as 90 days or more past due or nonaccrual, which means they are more likely to default. Loan loss coverage ratio is loan loss reserves divided by nonperforming loans. US peer banks are those commercial banks with assets of less than $15 billion. Due to the seasonal nature of bank return on average assets and net interest margin, the arrows in the table denote significant changes from one year ago. Agriculture and Natural Resources Table Sources Federal Reserve Bank of St. Louis Survey of Agricultural Credit Conditions Agriculture bankers’ expectations of loan demand, available funds, loan repayment rates, farm income, and capital spending are relative to one year ago. Respondents can answer “increase,” “decrease,” or “no change.” Energy Information Administration (EIA) Coal production. Bureau of Labor Statistics (BLS) Mining and logging employment. United States Department of Agriculture (USDA) Prospective plantings. Agricultural land values taken from the Census of Agriculture. The Census is conducted every five years; the last survey was in 2012. Consequently, land values shown in the figure are only available at 5-year intervals and a linear trend was used for interpolation of missing values. Land values include the value of buildings located on the land. Federal Reserve Bank of St. Louis—Little Rock Zone 10
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