Page 65 – Arkansas Economist

Arkansas Taxable Sales (Including Gasoline) – 2011:Q1

by Michael Pakko
Arkansas Taxable Sales, General Information, State Revenue
June 21, 2011

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.

Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, Institute for Economic Advancement

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.

Sources: U.S. Census Bureau and U.S. Department of Energy

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.

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

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.

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

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.

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A spreadsheet with data for ATS and ATSIG is available here.

Arkansas Employment and Unemployment – May 2011

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.

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*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

Consumer Confidence in Arkansas – Second Quarter

by Michael Pakko
Consumer Confidence, General Information
June 15, 2011

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.

Source: Talk Business, Arkansas Consumer Confidence Report - Q2 2011

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.

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*Statements of statistical significance are based on two-proportion z-tests.

Arkansas Real GDP Growth – Revisions to the 2009 Data

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.

Source: Bureau of Labor Statistics (Calculations by the Institute for Economic Advancement)

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.

Arkansas Real GDP – 2010

by Michael Pakko
State GDP
June 7, 2011

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.

Arkansas House Prices – 2011:Q1

The latest house price data from the Federal Housing Finance Agency (FHFA) shows that average house prices in Arkansas continued to decline in the first quarter of 2011. The FHFA “All Transactions Indexes,” which incorporate house price information from both home sales and refinancings, showed an average decline for Arkansas of 1.6% in the first quarter of the year. Over the last four quarters, the average value has fallen about 1.9%. These decreases are smaller than the national average: In the first quarter, average prices for the U.S. as a whole fell 2.7%, and are down 3.1% over the past four quarters.

The statewide average conceals some stark differences among regions of the state. As shown in the figure below, house prices in the Fayetteville-Springdale-Rogers metro area have followed a pattern very close to the U.S. average. Over the past four quarters, prices in Fayetteville are down 4%, and have fallen by 14% over the past five years. In contrast, house prices in central Arkansas are down only 1.1% compared to a year earlier, and are about 4% higher than five years ago.

The state’s smaller metro areas have generally fared better than the statewide average as well. In the first quarter, prices increased in Texarkana and Jonesboro. Both of these metro areas have generally seen modest but steady price increases throughout the “boom and bust” cycle experienced in most parts of the country. House prices in Hot Springs and Pine Bluff had been rising steadily during the early stages of the housing downturn, but have turned sharply negative in recent quarters. Prices in Fort Smith have also fallen over the past two years, but not as dramatically as in Hot Springs and Pine Bluff.

A longer-term perspective reveals the stark differences among Arkansas metro areas. House prices in five of the state’s metro areas are higher than they were at the beginning of 2006. Recent declines in Pine Bluff have lowered prices to about the same level as in 2006, while prices in northwest Arkansas are down by 14%–more than the national average decline of 11.8%.

It should be noted that even the relatively large price declines in the Fayetteville-Springdale-Rogers metro area pale in comparison to some of the more severly impacted regions of the country. Over the five year period from 2006:Q1 to 2011:Q1, house prices in California are down by nearly 35%, price declines in Florida and Arizona are close to 40%, and house prices in Nevada have fallen by nearly half: -48.9%.

Arkansas Employment and Unemployment – April 2011

The latest reports on conditions in Arkansas labor markets confirm the trend of slow but steady improvement. According to data from the Bureau of Labor Statistics and the Arkansas Department of Workforce Services, the unemployment rate in March was revised downward by 0.1% to 7.7%, and remained at that level in April. The underlying data from the household survey showed a decline in the labor force and the number of employed persons in April, representing breaks in what had been generally upward trends in those series. More important, however, the data also showed a decline in the number of unemployed — down 341 from the previous month. So far in 2011, the number of unemployed in Arkansas has fallen by over 1,400.

The survey of employers showed an accelerating pace of employment growth. The total for March was revised upward by 2,000 jobs and payrolls expanded by an additional 4,800 in April (seasonally adjusted). Over the first four months of the year, employers have added over 12,000 jobs to their payrolls. And since the trough of February 2010, employment has increased by 31,400. This 16-month expansion represents a milestone of sorts: Over half of the total jobs lost between the start of the recession and February 2010 have now been recovered. By comparison, employment nationwide has risen by 1.8 million, only about 20% of the total number of jobs lost from the start of the recession.

Employment in construction continues to languish, declining by another 900 jobs in April (seasonally adjusted). Over the past 12 months, construction employment is down by 2,600. Manufacturing employment increased by 1,200 in April, but is still below the level of a year ago. Service-providing jobs rose in every major sector in April, with the exception of “Other Services.” Gains were particularly strong in Leisure and Hospitality; Professional and Business Services; and Trade, Transportation and Utilities.

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Arkansas Home Sales — 2011:Q1

by Michael Pakko
General Information, Real Estate/Housing, Seasonal adjustment
May 12, 2011

The latest monthly home sales figures from the Arkansas Realtors® Association (ARA) have appeared to be rather volatile. Compared to the previous year, sales were up 13% in January, down 6% in February, then down 15% in March. These swings prompted Amy Glover Bryant, Director of Communications for the ARA, to characterize the market as “something of a roller coaster ride.” Interpreting the data are complicated by seasonal patterns and the delayed effects of the home-buyer tax credits in 2009 and 2010.

Home sales follow a recurring seaonal pattern, with sales strong during the summer months and slow during the winter. Consequently, month-to-month comparisons of raw sales data are dominated by seasonal effects, with little information about business cycle fluctuations or longer term trends. The appropriate measure for tracking such data is the year-over-year comparison that has recently yeilded such variable readings. To properly interpret year-over-year data, however, it is necessary to keep track of special factors that were influencing the market 12 months ago. For several months now, the Federal government’s home-buyer tax credit programs have been relevant for that evaluation.

As shown in the figure below, year-to-year changes for January, February and March of 2011 are guaged against sales figure for 2010 that lie between the tax-credit expiration dates of November 2009 and April 2010. January is typically the slowest sales month of the year, and last year it was also effected by the slowdown that immediately followed the November 2009 tax credit expiration. Sales began to pick up in February and March as the second tax-credit program ramped up toward a peak in April. These developments have effected year-over-year comparisons just as much (if not more than) the sales figures for 2011.

Another way to disentangle the seasonal fluctuations from underlying cycles and trends is to use statistical methods to “seasonally adjust” the data. The transformed, seasonally-adjusted data provide an estimate of the sales pace for each month under the counterfactual assumption that home sales are distributed evenly throughout the year. After the purely seasonal components are removed, it is legitimate to make month-to-month comparisons, or to compare different points throughout the year. The figure below shows the Arkansas home sales data, after seasonal adjustment.

Source: Arkansas Realtors® Association. (Seasonally adjusted by the Institute for Economic Advancement.)

After seasonal adjustment, the two sales peaks associated with the end-dates of the home-buyers’ tax credits are clear. Each peak is followed by a sharp drop in sales. Since the expiration of the second program last year, sales languished — but have begun to recover, slowly.

In addition to the monthly data from the ARA, the National Association of Realtors® (NAR) publishes quarterly, seasonally-adjusted sales figures for each state. The methodologies for collecting and processing the data differ between these two sources, so it is interesting to compare their implications. The figure below presents such a comparison, with each series normalized to equal 100 at the start of 2009. Both series show the sales peaks associated with the home buyers’ tax credits, and both indicate a slow, uneven recovery since the drop-off in 2010:Q3. The NAR data show a slight increase in 2011:Q1 compared to the previous quarter, while the ARA data show a slight decrease.

Sources: National Association of Realtors®, Arkansas Realtors® Association, Institute for Economic Advancement.

The trends are not clear enough to make any unambiguous projections. But when it comes to the monthly data releases from the ARA, April 2011 is almost certain to represent a sharp decline from the previous year. Similarly, July 2011 (typically the highest sales month of the year) is almost certain to be higher than July 2010. When those figures are released, however, it will say more about what happened in 2010 than what is happening today.

Arkansas Taxable Sales Up 0.7% in 2011:Q1

Preliminary figures indicate that Arkansas Taxable Sales rose slightly in the first quarter of 2011, up 0.7% from the previous quarter. Following sluggish growth in the third quarter of 2010 and a decline in the fourth quarter, the most recent data show that sales have been essentially flat since the middle of last year.

Sources: Department of Finance and Administration; Institute for Economic Advancement.

Raw monthly data from the Department of Finance and Administration (DFA) show that recent sales tax collections have been above the levels of the previous year, and totals for the fiscal year-to-date have been running close to official forecasts. But recent monthly figures have been less than robust, coming in below forecast.

As shown in the figure below, Arkansas Taxable Sales had risen sharply during the first half of 2010, but slowed in the latter part of the year. The sharp decline in December prompted speculation in a previous post as to whether unusual holiday spending patterns might be to blame. Sales during the first three months of 2011 have rebounded somewhat, but remain below the peak levels of mid-2010.

The sluggish figures for the first three months of 2011 suggest that the weakness in December sales was not an anomaly. However, there is one important factor to consider in interpreting recent data: Gasoline is not subject to sales and use taxes in Arkansas, so it is not included in the Arkansas Taxable Sales figures. Data from AAA shows that gasoline prices in Arkansas rose by more than 40% between September 1, 2010 and April 1, 2011. Even with slowing demand due to conservation responses, that rate of price increase suggests that people have been devoting a larger share of their total spending to fuel consumption, and a smaller share to other categories that are included in Arkansas Taxable Sales. This factor is likely to continue to restrain Arkansas Taxable Sales growth in coming months.

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The Arkansas Taxable Sales series is calculated by the Institute for Economic Advancement to serve as a timely measure of Arkansas retail sales. The series is derived from sales and use tax data from DFA, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.

A spreadsheet of the data is available here: Arkansas Taxable Sales data (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for April 2011, and will be updated when information becomes available.

Metro Area Unemployment – 2011:Q1

by Michael Pakko
Employment/Unemployment, General Information, Metro Areas (MSAs), Seasonal adjustment
April 28, 2011

The latest unemployment rate figures for Arkansas metro areas provide another example of the importance of considering seasonal patterns when analyzing month-to-month data. The raw, not-seasonally adjusted data released yesterday by the Bureau of Labor Statistics show unemployment rates declining between February and March for each of Arkansas’ metropolitan statistical areas (MSAs). However, it is typical for March that unemployment rates decline: Economic activity generally begins a seasonal resurgence in the spring, so unemployment rates tend to decline. If we seek to look beyond routine seasonal changes in the data to discern longer term trends and changes associated with the business cycle, it is helpful to consider seasonally adjusted figures.

As shown in the table below, the not-seasonally adjusted unemployment rate for Arkansas fell from 8.7% in January to 8.4% in Feburary, then to 8.0% in March. Yet, the seasonally adjusted figures show that the unemployment rate was steady at 7.8% for those three months. The decline from January to March was entirely seasonal in character, indicating nothing to suggest that the economic recovery was resulting in lower unemployment. Similarly, the not-seasonally adjusted data for Arkansas’ MSAs show declining unemployment rates across the board. But to what extent were those changes purely seasonal?

Sources: Bureau of Labor Statistics, Institute for Economic Advancement

The seasonally adjusted data show that a portion of the lower unemployment in February represented a true decline. The data show that unemployment rates declined in five MSAs, remaining unchanged or rising in the other two. In March, however, seasonal factors were more important. The not seasonally adjusted data show lower unemployment rates for all seven MSAs while the seasonally adjusted figures show higher unemployment in all seven. So, why did unadjusted unemployment rates decline in March? Because it was March.

Beyond the month-to-month uncertainty associated with seasonal factors, metro area data are also more variable than the state-level or national data. Hence, it is even more important to view MSA data from a longer term perspective. With this consideration in mind, the figure below shows quarterly average unemployment rates for Arkansas MSAs. Rates declined slightly in the spring of 2010, but then rose during the second half of the year (partly as a result of temporary Census workers being idled). In nearly all of Arkansas’ MSAs, unemployment appears to have peaked in the fourth quarter of 2010 and declined in the first quarter of this year. By way of comparison, the seasonally-adjusted unemployment rate for the state as a whole was 7.9% in 2010:Q4 and 7.8% in 2011:Q1.