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Real Personal Income – 2014

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

Arkansas Personal Income – 2012:Q4

The Bureau of Economic Analysis released new data on state personal income this morning.  In Arkansas, personal income rose by 2.2% for the quarter, compared to a 1.9% growth rate nationwide.  Arkansas’ growth rate for the quarter was the 12th highest in the nation.  Data for the third quarter were revised downward, but growth for the entire year remained relatively strong at 4.9% (Q4/Q4).

As shown in the figure below, personal incomes in Arkansas have risen to a level that is 9.3% higher than the previous cyclical peak (in 2008:Q2).  By comparison, U.S. personal income is 8.3% higher over the same period.  These figures do not include the effects of inflation, however.  After accounting for price increases of approximately 6.7% over the period (as measured by the price index for personal consumption expenditures), real personal income is up 2.4% in Arkansas and 1.9% for the U.S.

Source: Bureau of Economic Analysis

The press release noted particularly strong growth in the fourth quarter, citing special and accelerated dividend payments that were associated with end-of-year expectations for higher income tax rates in 2013.  The report also cited accelerated bonus payments and other irregular pay in anticipation of tax rate changes.  These effects had their largest impacts on states where the finance industry is particularly prominent.

The BEA report also noted the impact of severe heat and drought on agricultural production and income in the summer and fall of 2012.  Although the impact of these weather-related effects were fairly large and negative for states in the upper Midwest and great plains states, the impact on farm incomes in Arkansas was positive.  Record crop yields and high prices combined to boost Arkansas farm incomes by 44% over their levels in the fourth quarter of 2011.

The table below compares annual growth rates in total personal earnings for Arkansas and the U.S.  For the year in total, earnings growth was 2.6% in Arkansas, compared to 3.3% for the U.S.  Sectors generating large income gains included Farming, Utilities, and Management of companies.  Industries in which Arkansas earnings growth lagged the nation included Mining, Nondurable goods manufacturing, and Finance and Insurance.

Source: Bureau of Economic Analysis

With data now available for the year as a whole, today’s report also highlighted new measures of per-capita income in 2012.  Per capita personal income in Arkansas was estimated at $34,723 — about 81% of the national average ($42,693).  This ranked Arkansas #45 among the 50 states.  As noted in a previous post, the real purchasing power of incomes are affected by regional differences in the cost of living.  Updated estimates of regional price parities will come out later this summer (scheduled for June 12).  For now, using the 2006-2010 estimates of regional price differences, price-adjusted per capita income in Arkansas amounted to 91% of the national average in 2012, moving the state up to #41 in the rankings (not including D.C.)

Income and Price Parities – Implications for Arkansas

“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.


Gasoline Prices

Rising gasoline prices are in the news again.  According to AAA Fuel Gauge Report, the national average price for a gallon of regular grade gasoline has risen to $2.76 per gallon–up six cents in the past week and ten cents from a month ago.   Here in Arkansas we’ve seen similar price increases, with the current average price reported to be $2.66 per gallon.

Price changes play an important role in any market.  Gasoline prices tend receive more attention than other prices–perhaps because gasoline is a commodity that we use on a daily basis, or perhaps just because gasoline prices are prominently posted on every street corner.  But like any other price, understanding movements in the price of gasoline ultimately comes down to considering supply and demand.

About half the cost of gasoline can be traced back to crude oil prices.  In the past month, world oil prices have risen from around $70 to over $80 per barrel.  Specific market factors have been mentioned as playing a part in this increase:  On the supply side, an insurgency in Nigeria (an OPEC member nation) has been causing some production disruptions, and there has been some uncertainty about the prospects for Iranian oil production as well.   Meanwhile, it is anticipated that China will be adding to its strategic petroleum reserves this year, raising demand.  More fundamentally, the world economy is seen as recovering from the deep recession of the past two years, bringing stronger demand for energy overall.

Other factors affect the price of gasoline specifically.  With the warmer weather, refiners are switching to their summer formulations, contributing to a seasonal increase to production costs.  Demand for gasoline also tends to rise in the spring as consumers come out of hibernation to drive more.  This year, strengthening demand is expected to be particularly important.   With the economy emerging from recession and consumer spending showing signs of picking up, it is anticipated that demand for gasoline will be especially strong during the spring and summer months of 2010.

For both crude oil and refined gasoline, rising demand associated with economic recovery is seen as the fundamental factor driving prices upward.  Some industry analysts are predicting gasoline prices as high as $3.00 per gallon by this summer, but the alternative–lower gas prices in the face of weaker-than-expected consumer demand–is not an attractive prospect either.

In current market conditions, higher prices are serving as a signal to producers and distributors to unleash their inventories of oil and gasoline.  The time is now to bring the product to market.  In fact, the Financial Times reports  that the relationship between crude oil prices on the spot and futures markets is in the process of moving from “contango” toward “backwardation.”    The market has been in contango for some time, as weak demand during the recession has kept spot prices low relative to foward prices.  The market appears to be moving to a reversal, known as backwardation, in which forward prices fall below spot prices.  This serves as a signal for prompt delivery of product to market.  A similar process appears to be occuring in the markets for gasoline as well.

So in some sense, higher gasoline prices are serving as an indicator that the economy is strengthening, and should be considered a positive development.    For Arkansans, the other good news is that gasoline prices in our state remain about ten cents below the national average.  In fact, a “top ten list” of the lowest gas prices in the nation (see below) includes Arkansas, along with several of its neighboring states.  If you’re willing to pay one or two cents more for gasoline, Mississippi and Louisiana join the list as well.  So no matter which direction you head on a road trip from Arkansas this spring and summer, you’re likely to find relatively low gas prices.

Source:  AAA Fuel Gauge Report, March 9, 2010
Source: AAA Fuel Gauge Report, March 9, 2010