Cbred economic outlook q2 2013 final

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UAFS.eduVol. 4, No. 2

Fort SmithREGIONAL

Economic OutlookReport Sponsored by Arvest Bank

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

Sponsored by Arvest Bank Fort Smith Regional Economic Outlook, 2nd Quarter, 2013

UNIVERSITY OF ARKANSAS - FORT SMITH COLLEGE OF BUSINESS

The Fort Smith Regional Economic Outlook Report is published quarterly by the College of Business and the Center for Business Research and Economic Development (CBRED). Subscriptions are available for $25 per year.

For more information, please visit us on the web at uafs.edu/cob/cbred, or contact us at:

Center for Business Research and Economic DevelopmentUAFS College of Business5210 Grand Avenue, BI 218P.O. Box 3649Fort Smith, AR 72913-3649

Phone: 479-788-7938Fax: 479-424-6938E-mail: [email protected]

The Center for Business Research and Economic Development seeks to be the primary source of Fort Smith regional economic information; a catalyst for bold, innovative ideas and strategies for economic development in the area; and an active partner in the execution of sound, integrative solutions for regional prosperity and health.

Cover image: Flaring of gas well in Logan County, Arkansas.

Courtesy of Hanna Oil and Gas.

Vol. 4, No. 2 2nd Quarter, 2013

From the Director ........................................ 1

Second Quarter Summary of the Regional Economy .......................... 2-4

Consumer Sentiment in the Fort Smith Region .............................. 5-9

Energy and Mining:Challenges and Prospects ......................10-16

Sponsors .................................................. 17

uafs.edu/cob/cbred

Upcoming EventsFort Smith Regional Economic Outlook Forumsponsored by Arvest Bank

Tuesday, December 17, 201311:30 a.m. — 1:00 p.m.Smith-Pendergraft Campus Center Reynolds Room

UAFS College of Business Sponsored by Arvest Bank 1

FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

I am pleasantly surprised at how green everything still is for mid-August. Bright green trees and grass all suggest that it is April or May rather than late summer. Rains have come in opportune times and temperatures have ebbed and flowed just right to make this an unusual year.

The weather seems to have rubbed off on stock markets. In our last report, I reported that stock indices had reached record levels. Three months later we find they’ve hung in there pretty well, unlike the previous couple of years. While markets have had some difficulty in recent days, it seems as if for much of the summer investors have gotten a timely “shower”

of good economic news here and there to maintain these higher levels. Will this rough spot prove to be the late-summer collapse or will this prove to be only a brief hiccup along the way to higher levels?

It is unclear at this point, and that is the point – even a frustrating point. To have this level of uncertainty four years after the recession ended reveals just how strange this recovery has been (like our summer to some degree). We still have an economy that is fragile and you get the sense that it could all come undone in a moment.

Here’s one example of this confusion. Homebuilder confidence is at a post-recession high. Yet, their stock values have dropped more than 25 percent since May. Something doesn’t make sense here.

In recent issues of this publication, we’ve looked at the regional economy from the perspective of industry and cluster performance relative to national performances. Our primary focus has been on jobs created or lost. We identified a number of sectors in which our regional economy appeared to perform better than expected relative to the national economy. Recall that these earlier analyses used 2007 and 2010 data to examine key sectors and clusters of our economy.

In this issue, we take an in-depth look at the energy and mining cluster, specifically the natural

gas and coal sub-groups, which comprise the bulk of activity in this group. This cluster was identified as a relatively strong performer in our area economy, based on that earlier research. In recent years, the group has received national and regional attention because of the success in shale oil and gas production. Successful application of “fracking” and horizontal drilling technologies has resulted in an unexpected boost to domestic gas and oil output. This has not come without some controversy. We take a look at the prospects for the group in our regional economy.

Also in this issue, we make our regular review of the performance of the Fort Smith area economy for the period. Overall, I think we can say things improved this quarter over a year ago at this time. Housing permits and home sales showed improvement. Retail sales were lower but auto sales were higher. The employment head counts improved this quarter, but the unemployment rate rose as well. Our survey of Fort Smith consumer sentiment for June showed higher numbers than a year ago. And in the final section, as we discussed earlier, we examine the energy and mining cluster that make up our economy.

One other note before I conclude this introduction: The July economic forum was well-attended, with more than 150 participating, as Kevin Kliesen of the St. Louis Federal Reserve and I discussed the national and regional economy. The Arvest forum is a joint project between Arvest Bank and UAFS. The luncheon is held twice a year and is open to the public. If you have not attended, your next opportunity will be Dec. 17 on the UAFS campus.

I want to acknowledge Arvest’s continued support of our efforts here in CBRED, not just in the economic forum. They also sponsor our monthly and quarterly reports. Their commitment to what we do, along with our advertisers, makes our work possible. We’re partners in a common cause of making the Fort Smith region the best it can possibly be.

To our future,

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Kermit W. Kuehn, Ph.D.Director, Center for Business Research and Economic Development

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Data on the performance of Fort Smith regional economy continued to provide a confusing picture in the second quarter. On the positive side, auto and home sales, residential permits, and overall job numbers were higher this quarter than a year ago. Retail sales (March-May 2013), the unemployment rate, and airport traffic numbers were all lower for the quarter.

The most recent economic activity index was for May and was estimated at 95.3, lower than the 2012 reading of 96.0. The index seems to confirm the mixed nature of the economy’s performance.

Area auto sales continued to show solid month-over-month growth in 2013, resulting in sales up 7.4 percent for the quarter. Total unit sales were

lower again this quarter, however, with 8,590 new and used autos sold in the quarter. Recall that data is only available for Sebastian, Crawford and Franklin counties of Arkansas.

New car units sold in the quarter rose again this quarter, up 6.5 percent over 2012, accounting for the rise in overall sales for the quarter. New car sales totaled 1,672 units for the quarter, according to Department of Finance and Administration data.

Retail sales posted a year-over-year decline, again, for the three months ending May 2013, down 1.6 percent in this report. This follows a similar decline last quarter. According to the April 12 release by the Census Bureau, U.S. retail

sales activity weakened in June, climbing an anemic 0.4 percent. July estimates project stronger U.S. consumer retail activity for July, providing some reason to think that the Fort Smith region might return to growth in the third quarter.

Regional sales have been weak for much of 2013, however, and there does not seem to be a strong catalyst thus far that will change this trend.

Overall, the regional consumer has continued to show restraint in spending in the March - May period in terms of general consumption. Yet, consumer sentiment was the strongest it’s been since 2010 according to the June reading of the area consumer. This offers some promise for stronger

Second Quarter Summary of the Regional Economy

Table 1. Summary of Second Quarter Performance

2nd Quarter 2013 Base Year - Q2 Last Year - Q2 This Year - Q2 % Change2005 2012 2013* 2012-2013

Sales (Qtr. Total) Retail Sales (MSA, March, April, May, 000’s) $809,257 $930,752 $915,982 -1.6% Auto Sales (Seb., Craw., Frank. Counties, AR, 000’s) $82,445 $81,643 $87,679 7.4%Residential Construction (MSA, Qtr. Total) Residential Permits 167 150 212 41.3% Value of Permits (000’s) $19,710 $21,094 $22,429 6.3%New and Existing Home Sales (MSA, Qtr. Total) Number Sold 749 529 540 2.1% Value of Homes Sold (000’s) $86,520 $68,008 $66,526 -2.2% Average Price of Homes Sold (Qtr. Monthly Avg.) $115,514 $128,559 $123,196 -4.2%Employment (MSA unless noted, Qtr. Monthly Avg.) Wage and Salary Employment (Total Non-farm) 120,567 117,200 119,167 1.7% Manufacturing 29,033 19,267 18,567 -3.6% Trade, Transportation, and Utilities 23,600 23,967 25,433 6.1% Government 17,367 19,433 19,500 0.3% Education and Health Services 13,900 17,033 17,767 4.3% Professional and Business Services 11,267 11,167 11,433 2.4% Leisure and Hospitality 8,767 9,167 9,367 2.2% Natural Resources, Mining, and Construction 7,100 7,033 6,800 -3.3% Financial Activities 4,133 4,200 4,333 3.2% Information Services 1,600 1,400 1,400 0.0%

MSA Unemployment Rate (Qtr. Monthly Avg., NSA) 4.5% 7.3% 7.5% 0.2% AR Unemployment Rate (Qtr. Monthly Avg., NSA) 5.1% 7.2% 7.3% 0.1% U.S. Unemployment Rate (Qtr. Monthly Avg., NSA) 5.0% 8.0% 7.4% -0.6%Airport Traffic (Fort Smith) Total Passenger Traffic (Qtr. Monthly Avg.) 18,436 15,267 15,093 -1.1%

*Data as of June, except retail sales which includes Mar.-May Dollars are not inflation adjusted. Data not seasonally adjusted (NSA). Auto sales Arkansas only. Prepared by the Center for Business Research and Economic Development, UAFS College of Business

UAFS College of Business Sponsored by Arvest Bank

CENTER FOR BUSINESS RESEARCH AND ECONOMIC DEVELOPMENT

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retail sales in the coming months. See our full discussion of consumer sentiment in the next section.

Auto sales continued to hold up well, however, suggesting pent-up demand remains solid. Overall, the expectation remains good for new car sales this year.

The regional jobs picture offered some hope as well, based on recent Bureau of Labor Statistics data. Total nonfarm employment rose 1.7 percent for the quarter. Based on the monthly average of total employment in the metropolitan statistical area for the second quarter, there were an estimated 1,967 more jobs in the region than there were a year ago. This is a solid improvement and suggests that the region is making some progress toward restoring jobs in the region.

Taking a closer look at specific sectors, we find that transportation and utilities (+1,466), education (private) and health services (+734), and business and professional services (+266) sectors added the most jobs for the quarter, while manufacturing (-700) and mining and construction (-233) were the biggest losers.

The other measure of job market strength is the unemployment rate, which rose again this quarter relative to a year ago. The unemployment rate averaged 7.5 percent for the

MSA for the second quarter, two-tenths higher than a year ago.

According to BLS data, there were around 550 more people in the Fort Smith MSA labor force in June 2013 than there were in 2012. There were more than 250 people working in the MSA during the period. The net result

was that the number of unemployed in the region was estimated at 10,070 people, an increase of nearly 300 people from a year ago. Recall that the unemployment rate is calculated by dividing the number of unemployed by the total civilian labor force.

As is always the case, data are preliminary estimates and are likely to change month by month.

The residential real estate sector was on the same page this quarter, with both construction permits and home sales coming in positive relative to the second quarter a year ago. Residential

construction reported very good numbers for the quarter with new permit totals up 41 percent from last year. The 212 permits issued exceeded the 167 units issued in 2005 for the same period. This was largely a result of a large batch of multifamily permits issued in April.

Home sales, on the other hand, were less exciting, but still positive for the quarter. Based on Multiple Listing Service data, 540 units were sold, up 2.1 percent from a year ago. Unit sales are still significantly below the 749 units sold during the 2005 base year for the second quarter.

There have been some changes in the underlying dynamics of the sector, as interest rates have begun to move higher in recent weeks. This may put some pressure on “lookers” to actually make offers. We might see unit sales spike higher, at least temporarily, if potential home buyers perceive that rates will continue higher.

Overall, conditions are still quite good for residential real estate. Interest rates remain low relative to historical levels and inventory levels appear to be adequate across most price ranges. There are recent conversations taking place in Washington to loosen lending requirements, but nothing concrete has emerged as of this writing.

“Auto sales continued to hold up well, however,

suggesting pent-up demand remains solid. Overall, the expectation

remains good for new car sales this year.”



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Finally, average monthly airport traffic counts for the quarter continue their downward trek relative to last year, though at a slower pace. The slide appears to be reaching a bottom as recent monthly declines have been smaller year over year. June traffic counts even managed to eke out a 0.2 percent gain over 2012.

Summary and analySiS

At the writing of this report (second week of August), stock markets have continued to operate near record highs. There’s clearly a softening evident on the major indices, however, as supporters of the market have had a harder time maintaining upward momentum.

Overall, the tone is much the same as in recent reports – have I said that before? Investors fear staying in the market but are more afraid of losing out on more upside action. It has been an impressive run thus far, so it’s hard to blame them.

A generous monetary policy has continued to support markets, even though corporate estimates of future business were less than glowing for the third quarter. According to CoreLogic, home prices nationally continued to rise, with June numbers up nearly 12 percent from a year ago. But the housing sector may be in for a breather, as homebuilder stocks are off 25 percent from their highs of just a few weeks ago. There is a warning flag in there somewhere regarding future activity in the sector and the economy in general.

Weak job creation – specifically the poor quality of jobs created in terms of compensation – and rising interest rates look to make their mark on housing and elsewhere sooner or later – it appears it may be sooner.

Looking in on some other indicators, national manufacturing and non-manufacturing numbers for July, the most recent data reported by the Institute

for Supply Management, were both higher than the April readings reported last quarter. The PMI, or purchasing managers’ index (for manufacturers) recorded a 55.4 for July, well above the 50.7 for April we reported in our last issue. This indicates the manufacturing sector continued to expand and at a faster rate since the last report.

The non-manufacturing index for July, which includes such sectors as professional services, information, wholesale and retail trade, came in at 56. This compares with the April reading of 53.1, which we reported last time. Index scores that trend above 50 are interpreted as a growth mode for the sector.

The June results from the Manpower Group’s Employment Outlook Survey found that Arkansas employers’ hiring intentions for the third quarter of 2013 were slightly lower than second quarter readings. Fourteen percent of employers indicated they intended to hire more people in the third quarter, down from 16 percent in the previous survey. Five percent indicated they planned to decrease payrolls in the third quarter, down from 6 percent from the previous report. This results in a net positive of 9 percent for the quarter and reflects a moderately positive prospect toward third-quarter hiring and very similar to the previous report. No report specific to the Fort Smith MSA was available.

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For the Fort Smith regional economy, results were noticeably better than the previous report. Residential real estate, auto sales, and jobs data seem most encouraging. If job growth reported is real, and sustainable, this will bode well for future economic activity in the region. As it currently stands, area paychecks appear unable to sustain year-over-year growth in consumption, as evidenced by continued weak retail sales.



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introductionThe Index of Consumer Sentiment for the Fort Smith region continued higher in the second quarter after the solid uptick recorded in the March report. The index for June, which measures consumer confidence for the Fort Smith MSA, was 64.5, up 10.4 percent from the first quarter result of 58.4, and higher than the 59.8 reported for the second quarter a year ago. The rise in sentiment was consistent with national results of 84.1 reported by the University of Michigan for June, which rose 7 percent from the previous quarter.

The two sub-indices for Fort Smith were higher as well for the quarter. The Index of Current Conditions for the Fort Smith region, a measure of consumer attitudes toward their current economic situations, rose 16.2 percent to 71.6, while the national ICC rose by 3.4 percent. At the close of the second quarter, regional consumers expressed more positive views of their current financial situations than

was the case last quarter and well above the 63.2 recorded a year ago at this time.

The Index for Consumer Expectations (ICE), which measures consumer feelings about future economic conditions, was up 6.2 percent from last quarter, recording a 59.9 for the Fort Smith regional consumer. The result was similar in magnitude and direction to national scores, which were up nearly 10 percent from last quarter.

National and Fort Smith consumers’ sentiment improved relative to last quarter, both in terms of current conditions and expectations going forward1. Overall, the more positive tone reported by area consumers appeared to reflect the more positive economic news reflected in record high stock market indices and recovering home prices.

taking a cloSer lookAs can be seen from Table 1, area consumer-sentiment scores revealed notable improvement in optimism in the

second quarter relative to last quarter. The observed improvement in overall sentiment was broadly supported across all sub-indices and index items, both for national and regional respondents.

Two items comprise the ICC sub-index: people’s ratings of their current personal finances and whether the time is right to make major purchases (referring to durable goods). Area consumers did report noticeably more-positive attitudes this quarter regarding their current personal finances, up 19.4 percent from last quarter. National numbers were 6.4 percent higher than the previous quarter on this item.

The second item in the ICC, which asks whether this was a good time to purchase durable goods, was up 15.6 percent from last quarter with an index score of 104. National numbers were up a more modest 2.1 percent from last quarter on this item.

The ICE sub-index consists of three items and seeks to measure consumer

Consumer Sentiment in the Fort Smith Region

*UM= University of Michigan Survey; FS = Fort Smith Survey

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Table 1. June 2013 Index and Components

INDICESQ2/2012 Q1/2013 Q2/2013 % Change Q1-Q2

UM* FS UM* FS UM* FS UM* FS

Index of Consumer Sentiment (ICS) 73.2 59.8 78.6 58.4 84.1 64.5 7.0 10.4

Index of Current Conditions (ICC) 81.5 63.2 90.7 61.6 93.8 71.6 3.4 16.2

Index of Consumer Expectations (ICE) 67.8 57.5 70.8 56.4 77.8 59.9 9.9 6.2

INDEx COMPONENTS

Personal Finances – Current (ICC) 85 75 94 67 100 80 6.4 19.4

Personal Finances – Expected (ICE) 110 82 109 81 115 83 5.5 2.5

Economic Outlook – 12 Months (ICE) 79 68 85 69 104 77 22.4 11.6

Economic Outlook – 5 Years (ICE) 81 78 89 74 93 79 4.5 6.8

Buying Conditions – Durables (ICC) 125 87 140 90 143 104 2.1 15.6



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expectations going forward in areas of personal finances and national economic prospects. As to personal finances over the next 12 months, there was slightly more optimism reported, with scores a modest 2.5 percent higher than last quarter (81 to 83). National results were up 5.5 percent for this item. In percentage terms, 19 percent of respondents in the Fort Smith area felt their personal finances would be better off a year from now versus 38 percent who expected them to be worse.

When asked about prospects for the general economy over the next 12 months and over the next five years, Fort Smith area respondents reported more optimism for both short- and medium-term prospects of the U.S. economy. Area consumer scores registered an 11.6 percent improvement relative to last quarter when respondents were asked about prospects for the economy over the next 12 months (69 to 77). National scores were up nearly 22.4 percent from the March survey.

When looking at the five-year range, area respondents again reported more optimism than last quarter with scores up 6.8 percent (74 to 77) relative to last quarter. National scores were up nearly 4.5 percent from last quarter on this item.

To summarize the results to this point, regional consumer sentiment continued to improve in the second quarter, bolstered by positive economic

news and by the lack of substantive negative news during the quarter.

reSultS Specific to the fort Smith economyFor each quarterly survey, we modify two items in the UM scale to focus participants on the Fort Smith regional economy versus the national economy. These two items ask respondents to rate their expectations about business conditions in the Fort Smith economy over the next year and also five years from now. The overall FS ICS index and FS ICE sub-index are impacted by the change. As these items focus on future expectations as opposed to current conditions, the FS ICC scale is not affected (thus, is the same as ICC results in Table 1 for Fort Smith).

As can be seen from Table 2, Fort Smith respondents’ overall sentiment (FS ICS) and ratings of future prospects (FS ICE) for the regional economy rose from last quarter with ratings of the region continuing to run higher

than ratings of the U.S. economy on the same dimensions (UM ICS).

Results for the second quarter reflected a 10.1 percent increase in the overall index score (FS ICS) and a 4.8 percent increase in the FS ICE relative to last quarter. This rise in optimism was consistent in direction with the ratings Fort Smith consumers gave the national economy. The FS ICS score of 65.5 is marginally better than the national score of 64.3.

As can be seen in Figure 1, Fort Smith consumer sentiment moved higher in the second quarter, approaching levels not seen since 2010.

Beyond the core meaSureSConsumers were asked seven additional questions in order to better understand their views and expectations about inflation, personal spending, jobs and income. Three additional items were included which were related to consumers’ health care. Where applicable, the

Figure 1. Fort Smith Sentiment on National and Regional Scales

Table 2. June 2013 Index Scores of Fort Smith Region

Fort Smith Scores

UM ICS Survey (Q2/13)

FS ICS Survey (Q2/12)



% Change Q1-Q2

FSICS 64.3 60 59.5 65.5 10.1

FSICC* 71.2 63.2 61.6 71.6 16.2

FSICE 59.8 58 58.8 61.6 4.8

*Items included in the FSICC are identical to the ICC; thus, no change.

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specific questions, comparative scores, and percentage breakdown of positive and negative responses for each are contained in Table 3.

general economy and conSumption indicatorSPerceptions of the current business conditions in the U.S. economy (Table 3, Q8) continued to improve from March ratings, with 17 percent of the respondents indicating they thought the economy was better now than it was a year ago. This was up from 15 percent who felt this way in the first quarter. Forty-one percent (versus 53 percent in March) indicated it was worse.

More consumers continue to think higher inflation will be the rule over the next 12 months (Q9), with 91 percent indicating this view. This was up from the 89 percent who felt that way in the previous quarter, and higher than the 81 percent who felt that way a year ago. The dominant expectation among area consumers continues to be biased toward inflation, and this view has increased steadily in recent surveys.

When asked about overall consumption expectations over the next three months (Q10), the percentage of respondents in this survey who indicated they intended to spend more in the third quarter 2013 rose, while the number indicating they would spend less declined. This resulted in an increase in the index score from 107 to 115 for the quarter. Twenty-nine percent of the respondents indicated that they would spend more overall in the third quarter of 2013 versus 14 percent who intended to spend less.

When it came to specific purchasing activity over the next quarter (Q11), 15 percent expected to increase spending on such activities as dining out, up from the 10 percent who responded last quarter to this item. Thirty-five percent indicated they would spend less during the 2013 third quarter, a slight decline from the 37 percent recorded last quarter. There has been a positive change in consumer consumption intentions to dine out relative to last quarter.

Ratings regarding intentions toward buying large-ticket items (Q12) in

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2 Neutral scores are not included in calculating index scores.

3 Positive responses to item Q9 are reflective of negative sentiment regarding pricing; thus, scores are reversed to reflect sentiment-score consistency. That is, a pessimistic tone regarding inflation should score lower relative to a more optimistic tone, consistent with the other items in the table.

SURVEY QUESTIONS

Index Scores Qtr. 2Percentages2012 2013

Q2 Q1 Q2 % pos

% neg

Q8) Are current business conditions in the country better, about the same, or worse than they were a year ago?

47 63 76 17 412

Q9) During the next 12 months, do you think that prices overall will go up, go down, or stay the same?

23 14 10 2 91

Q10) Compared to the last three months, how much do you expect to spend overall as a household in the next three months?

107 107 115 29 14

Q11) Do you expect to spend more, about the same, or less per week in the next three months on dining out?

70 74 80 15 35

Q12) In the next three months, do you expect to purchase a major household item, such as furniture, appliances, or a TV?

25 33 36 9 73

Q13) Thinking about the Fort Smith area, how would you describe the availability of jobs today? 50 53 61 5 44

Q14) A year from now, will there be more or fewer jobs available in the Fort Smith area than there are today?

49 60 78 20 42

Q15) By 2014, the Affordable Care Act (also known as Obamacare) will require everyone to have medical insurance or pay a penalty. How will this program affect the cost of your healthcare?

NA NA NA NA NA

Q16) For you personally, the Affordable Care Act will result in better quality healthcare, no change in quality, or lower quality healthcare?

NA NA NA NA NA

Q17) Currently, is your primary health insurance coverage through a government program, an employer program, or a private policy?

NA NA NA NA NA

Table 3. Additional Consumer Sentiment Scores and Current Quarter Percentages



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the third quarter remained largely unchanged, with 9 percent of respondents indicating they definitely expected to make such purchases in the third quarter (the same as last quarter). Seventy-three percent (versus 77 percent last quarter) indicated they would not make such purchases. Overall, the index score of 36 exceeds the 25 recorded in June 2012 on this item, suggesting considerable improvement in consumer intentions toward larger purchases.

Overall, these data suggest that consumers reported generally more positive views toward consumption relative to last quarter, and this was largely true across the board – general spending, dining and durables.

employmentFort Smith respondents were less pessimistic about the regional job market, recording improvement over readings from last quarter and a year ago. Ratings of current perceptions of job availability in the Fort Smith area (Q13) indicated 44 percent of the respondents felt jobs were hard to get now, an improvement over the 51 percent who felt that way last quarter, and only 5 percent stating that jobs were plentiful (up from 3 percent last quarter).

When asked about availability of jobs a year from now (Q14), regional consumers were more optimistic here as well, with 42 percent of respondents indicating they expected fewer jobs to be available a year from now. This was a notable improvement over the 54 percent

who felt that way in March and better than the 61 percent who felt that way a year ago. Jobs sentiment has improved markedly over the past two quarters.

Survey participants have shown steadily improving views of the regional employment environment in 2013 surveys. In the 2010 survey for the second quarter, respondent ratings as to expectations regarding the availability of jobs in the region a year from now (Q14) was 110, well above the 78 reported from this most recent survey. The 2010 number seems almost unbelievable as we look at it three years later.

perSonal financeSThree questions asked respondents about their personal health insurance and the impact of the soon-to-be-implemented Affordable Care Act. Items Q15-Q17 in Table 3 relate to these themes.

Respondents were asked to rate the impact of the ACA, also called “Obamacare,” on their personal health-insurance costs (Q15). Seventy-three percent of area consumers who responded to this survey felt their healthcare costs would increase under the program, while 3 percent felt their costs would decline.

Clearly, respondents in this survey believe that their healthcare costs will be negatively affected by this legislation.

When asked about the impact of the ACA on the quality of their personal health-care experience (Q16), 59



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percent felt it would be worse under the program. Only 6 percent indicated they expected an improvement the quality of their health-care experience under the program.

Finally, consumers were asked (Q17) about the source of their health-care coverage. Forty-five percent of respondents indicated their primary source of insurance was through an employer-based program, while another 38 percent reported a government program as the primary source of coverage. The remaining 17 percent indicated that a private policy was the source of coverage. No respondent reported not having any insurance coverage.

Summarizing results from these last three items, it is clear that respondents felt that the Affordable Care Act was bad for their personal health-care experience – both in terms of cost and quality of care. However, it must be noted that all respondents in this survey reported having health insurance coverage. It is unlikely this result is representative of the regional population as a whole. Thus, caution must be exercised when interpreting these results.

Overall, second-quarter results reflect continued improvement in sentiment, building on the strong rebound observed in the first quarter. Ratings are now at levels not seen since 2010.

The tone in this report is decidedly less negative. It is not yet positive as ratings improved largely due to fewer negative ratings relative to positive ratings. Nonetheless, this is a significant turnaround and particularly so if it persists into the coming quarters.

Economic headlines have generally been positive in the second quarter. It seems evident in this report that consumers are feeling better about their personal economic situations, as

well as the broader prospects for the regional and national economies.

aBout the SurveyOf the 3,250 surveys mailed to the five-county metropolitan statistical area, 288 were returned undeliverable, and 325 usable surveys were returned, providing a return rate of 11 percent. As a result, the confidence level exceeds 90 percent for this survey.

The University of Michigan’s Index of Consumer Sentiment survey is used to measure consumer attitudes on several economic themes. Collectively, these represent consumer optimism or confidence levels for any given period

and can be used to compare any one period with other periods.

The overall ICS score includes five core questions and constitutes a general measure of consumer sentiment for the period. These

questions cover three general areas of consumer sentiment: personal finances, business conditions, and buying conditions. Two sub-indices within the ICS make up the Index of Consumer Expectations, and the Index of Current Economic Conditions or Index of Current Conditions. The ICE focuses on three areas, according to the UM: “how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term.” The ICC focuses on consumers’ views of their current financial condition and whether they feel secure enough about their financial situations to engage in major consumption activity.

For more information on the Consumer Sentiment Survey, methodology used and discussion regarding results, a more extensive narrative is provided in the first quarter 2010 report that is available online under our Publications link at http://uafs.edu/cob/cbred.

“...it is clear that respondents felt that the Affordable Care Act was bad for their personal

health-care experience – both in terms of cost and

quality of care.”



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Energy is a central ingredient to supporting the modern lifestyle. Specifically, our dependence on hydrocarbons for our way of life is deep and wide, encompassing every aspect of our lives. We see it explicitly at the gas pump each time we fill up our cars and to a lesser extent we know energy lurks behind our monthly utility bills.

However, beyond these more consumer-focused examples, it is the global industrial complex, which produces the wide array of goods and services we consume each day, that uses the bulk of energy produced. Energy is central to our economic system and hydrocarbons comprise the largest source of energy in the U.S. – by far.

The regional economy has had a long and significant history in energy. This has largely been focused on natural gas and coal. The region has little or no oil deposits of note. Further, there have been no minable deposits of uranium found in the five-county Fort Smith metropolitan statistical area, nor are there any significant uranium processing plants in the MSA. (It appears that the closest processing plant is located in Gore, Okla., which is between Sallisaw and Muskogee.)

As a result, our discussions of energy will largely focus on natural gas and coal. While rock quarries are present in the region, and are part of the energy and mining cluster we’re referring to here, it has a modest portion of jobs within the sector, and prospects for significant change in this regard are viewed as limited (see note at the end of article).

Our discussion will proceed as follows. First, we’ll review what we’ve learned thus far about the energy and mining group from earlier sector and cluster analyses of the Fort Smith regional economy. Then, we’ll examine the broad macro-trends affecting the group. Third, we’ll summarize available data to assess prospects for the group, particularly as it pertains to regional jobs and compensation. Finally, we pull all this analysis together to discuss the prospects for the regional energy and mining sector going forward.

review of earlier reSearchEarlier research conducted by CBRED on the strongest sectors in the Fort Smith regional economy identified the mining sector as a potential candidate for growth based on a “value index” created to measure relative industry strengths within the Fort Smith MSA. Table 1 summarizes the performance of the mining sector in 2007 and 2010.1

From Table 1 we see that the oil and natural gas component of the sector is the most significant in terms of jobs, total compensation and output during the period. As the data is drawn from the pre- and post-recession period, we observe significant declines for all components on most measures. The lone exception is oil and gas employment, which did not decline between 2007 and 2010.

Additional analysis was conducted on these same data using a cluster-analytic technique commonly used by economic development practitioners and academics. This was reported in last quarter’s issue of this publication. Using jobs as the metric of interest in that study, the cluster analysis grouped sectors and subsectors based on their economic relationships. As such, clusters attempt to identify groupings that involve organizations in economic relationship that may not necessarily be a member of the same sector or subsector.

Focusing on jobs, this research used location quotients, or LQs, to determine those clusters in the regional economy that demonstrated strength compared to national and industry performance during the 2007 and 2010 periods.

Taking from last quarter’s report, “[a] location quotient is calculated as an

Energy and Mining:Challenges and Prospects

1 Please refer to the second and third quarter 2012 issues of this reports for these discussions, or the full special report, A Sector Analysis of the Fort Smith MSA Economy: 2007 & 2010, which can be found on the CBRED website under publications.

Table 1. Breakdown of Mining Sector

Employment* Employee Compensation** Output**2007 2010 % Change 2007 2010 % Change 2007 2010 % Change

Oil and Natural Gas 3,525 4,470 26.8% $178.7 $168.1 -5.9% $1,429.4 $821.2 -42.5%

Quarrying 335 192 -42.9% $11.7 $9.1 -22.1% $47.4 $40.6 -14.3%

Coal and Other 202 178 -11.8% $14.4 $10.2 -29.1% $59.6 $51.1 -14.3%

All Mining 4,062 4,840 19.1% $204.8 $187.4 -8.5% $1,536.3 $912.9 -40.6%

*Measured by number of full-time equivalent positions **Millions of dollars



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industry’s proportion of total MSA employment relative to an industry’s proportion of total U.S. employment. For example, an industry comprising 5 percent of total MSA employment and 5 percent U.S. employment would have a location quotient equal to 1.00. Thus, quotients greater than 1.00 indicate a greater employment concentration than that observed in the U.S. economy, and quotients less than 1.00 indicate less employment concentration. So, if an industry has a location quotient of 2.00 there are twice as many employees in that industry on a proportionate basis in the MSA relative to the U.S.”

Based on the cluster analysis, energy and mining was identified as one of eight clusters with significant impact on the regional economy (with an LQ of 4.62 in 2010). Due to its solid LQ and the relatively high rate of growth of the LQ during the 2007 and 2010 period, the group would appear to have potential for growth going forward.

what’S driving the energy Sector?For decades, politicians and consumers alike have lamented the increased dependence of the U.S. economy on imported oil to meet its growing energy requirements. Increasing dependence on unstable parts of the world for our energy supply has resulted in repeated calls for major shifts away from hydrocarbons as a primary source of energy. The problem is exacerbated by global politics, which result in unstable sources of energy – think Libya, Iraq or Venezuela.

Two themes seem to highlight the pressure on the sector: the balance of supply and demand, and the increased emphasis on environment-friendly alternatives.

Supply and Demand. While it might be said that virtually all industries face the supply-demand pressures, energy encompasses aspects of this balance that makes for high uncertainty (thus, volatility) of supply and grave consequences if the supply-demand balance gets too far out of whack. This is exacerbated by the fact that the resource

is often located in unstable regions of the world and every national economy in the world is dependent on the resource for its citizenry, its industry and its defense.

Additionally, the demand for energy continues to grow while the global supply of the underlying natural resource (oil, coal, uranium, etc.) is being depleted. For the oil segment of energy, the Peak Oil Theory has been the underlying operating assumption driving most government and oil company boardrooms since at least the 1960s. This theory argues that most of the world’s oil reserves have already been found and that the supply is limited and declining. In sum, it’s an unsustainable energy resource going forward.

Finally, these natural resources are commodities, and as such, they’re subject to the “boom and bust” cycles of all commodities. This means that price fluctuations ebb and flow, often violently, with the flows of supply relative to demand.

Environment. A second area at work in the energy sector is the growing discontent with hydrocarbons as a source of energy. This has been largely due to the environmental costs attributed to these various forms of energy – it’s a comparatively “dirty” energy. Dirty includes the fact that

when hydrocarbons are used, they pollute, and even when they’re not used, they can wreak havoc when the extraction and distribution processes get out of control (as with oil spills).

The result of these forces is that clean energy experiments, such as solar and wind energy, have received preferential treatment in terms of government and private grants and tax benefits

current State of the u.S. energy SectorAccording to U.S. Energy Information Administration, the U.S. currently consumes around 19 million barrels of oil a day, importing nearly 8 million barrels per day to meet this demand. This includes crude oil, natural gas, and the byproducts of these. As bad as that might seem, it has been worse.

Imports are expected to decline to 6 million bpd by 2014. Figures 1 and 2 illustrate the dramatic rise in U.S. oil and natural gas production in recent years. What has caused such a dramatic turnaround?

crude oilFive years ago, few people outside the industry even heard of “fracking,” much less could explain what it actually was. Formally, it is called hydraulic fracturing, and it is an extraction

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Source: U.S. Energy Information Administration

Figure 1. U.S. Oil Production (1980-2012)

Thousand Barrels Per Day



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technique for drawing oil and gas out of shale rock formations economically.

According to Bill Hanna, president of Hanna Oil and Gas in Fort Smith, the technology has been around for decades. Add horizontal drilling techniques to the mix while refining the application of the technology and you have a resurgence of the oil and natural gas boom of a century ago.

The growth of U.S. production of crude oil in recent years is expected to accelerate, causing some analysts to believe that energy independence is within reach by 2020 or soon after. Others are more skeptical of such a prognosis. There’s no question that

crude oil production will soon surpass levels not seen since the 1980s and keep climbing, assuming oil prices remain around $100 a barrel.

natural gasNatural gas has led the way in the successful use of these new technologies. Some might argue that it’s too successful. Natural gas production has already exceeded previous production levels, as can be seen in Figure 2. As a result, producers have seen a dramatic drop in natural gas prices in the U.S. in recent years due to successful fracking, which has flooded the U.S. market with supply.

In fact, U.S. natural gas prices are the lowest in the world – by a long

shot. Unlike the problem for crude oil, natural gas supply has no way of getting off shore, because of the need to compress the gas into liquid form in order to ship by tanker. Only three export terminals have gained U.S. government approval to be built, and they are years away from actually exporting gas.

With a glut of supply and below-production prices for “dry” gas, it might be expected that production will slow if not drop in the near term. Reuters reported in a July 29, 2013 news item that in North Dakota’s Bakken shale field alone, an estimated $100 million a month in natural gas is burned off (called flaring) as producers chase the much more lucrative crude oil shale deposits. In sum, it’s literally going up in smoke.

There is a good market for “wet” gas or Natural Gas Liquids. We know NGLs as the propane for our grill, but they come in other forms as well. Shale formations that contain wet and dry gas are viable, as the wet gas is very profitable and may allow the producer to pay the bills even with below-cost dry-gas fields.

To summarize our discussions up to this point, U.S. crude oil production will continue to grow at a fast clip, while the problems facing natural gas remain to be worked out. For prices to return to attractive levels for the producer, natural gas supplies must find more uses. Export terminals provide access to world markets at world market prices, but policy makers are


Figure 2. U.S. Natural Gas Production (1980-2012)

Billion Cubic Feet Per Day

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reluctant to give up such an abundant, local and cheap energy resource.

Domestic use will take years to develop. The obvious target is the conversion of transportation to natural gas and away from the more-expensive gasoline and diesel fuels – truck fleets, autos and trains. However, getting natural gas into a car requires large investments in distribution, assuming there are cars, trucks and trains that can actually burn natural gas. Most manufacturers are committed to offering natural gas vehicles in the near future, but the transition will take some time, if it occurs at all.

coalCoal’s story is a more complicated one. Bob Cooper, vice president of Farrell-Cooper Mining in Fort Smith, has said coal is the “bad boy” of energy, even among other hydrocarbons. For all the bad publicity and generally negative views by policymakers, coal remains the third most common energy source in the U.S., behind oil and gas. Figure 3 summarizes the trajectory of coal production over the past three decades.

Like crude oil and natural gas, coal is a commodity, and as such each mine must demonstrate global standards for classifying or grading mine deposits. The old lignite-bituminous-anthracite classifications we learned in high school will not do. Coal also has a long history of being exported

abroad to customers who have more positive views of the energy source.

Broadly speaking, coal uses may be loosely categorized as ranging from thermal to metallurgical. Thermal uses largely involve the production of steam to produce electricity. Metallurgical uses are primary to production of products such as steel.

Due to the sharp drop in prices in natural gas – a ready substitute for coal – coal producers have struggled to remain profitable, particularly in the U.S. Coal is used in the production of electricity and in various applications in industry from firing kilns to steel

mills. The U.S. provides nearly 7 percent of world supply through exports, according to the Energy Information Administration. Exports continue to grow. China and India are significant importers of energy, particularly coal.

U.S. coal will likely continue to face a hostile environment within the U.S. because of its pollution characteristics. However, it is an abundant, relatively inexpensive resource that will be a reliable energy source for decades to come.

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Figure 3. U.S. Coal Production (1980-2012)

Million Short Tons



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fort Smith mSa energy Sector occupationSTable 2 contains key groupings of mining-related occupations as of 2012 for the Fort Smith MSA. These data are from the Bureau of Labor Statistics. The table is organized based on the location quotient, from the lowest LQ to the highest. The location quotient is a metric that reflects the relative presence of the occupation in the region as compared to national averages for the occupation.

Recall that location quotients above 1.00 indicate that an occupation’s presence, proportionally in the region, is above the national average.

What we immediately notice about the group is that the LQs are all above 1.00, reflecting a higher-than-average presence of occupations in energy and mining than is present in national data. This is not unexpected since, as we’ve discussed, we have a significant presence of gas and coal resources in the region. (See note on quarries at the end of this report.)

Returning to Table 2, we also note that some of the category descriptions are less unique to the mining sector and as a result, make it more difficult to focus on the sector specifically. For example, the largest occupation group, construction and extraction, likely contains a proportionally large head count in general construction, and these jobs may not even be in mining.

Further, from these data we see that wage rates are modest in the group. As can be seen from Table 2, the lack of data on the group further complicates analysis of jobs in this sector.

regional demand for energy and miningFigure 4 contains the most recent estimates of future growth of jobs in the cluster. From the chart we see that job growth within the group is expected to be modest during the 2008-2018 projection period. In fact, modest growth is expected in only four of the 13 occupations within the sector.

However, trends in the group have been changing quite dramatically since the projections were published. This suggests that the sector may have more going for it today than when it was viewed five years ago.

As we’ve discussed, fracking has significantly altered the U.S. oil and natural gas picture and will continue to do so for some time to come. On the flip side, coal has been under considerable pressure due to competition from the environmentally cleaner and cheaper fuel, natural gas. Whether any of these trends will alter the regional job demand in the cluster will be discussed in the following section.

Summary and diScuSSionThe demand for energy is global. The region has significant coal and natural gas deposits. Crude oil deposits are not significant within the region.

With all the excitement about shale extraction and the potential for U.S.

Occupations LQ JobsAverage Compensation

Hourly AnnualConstruction and extraction occupations 1.21 5,230 $17.16 $35,690

Separating, filtering, etc., machine operators 1.29 50 13.77 28,650

Surveying and mapping technicians 1.30 50 15.84 32,950

Crane and tower operators 1.39 50 19.08 39,690

Supervisors of Construction Trades and Extraction Workers 1.43 570 26.02 54,130

Inspectors, testers, sorters, samplers, and weighers 1.62 640 15.81 32,880

Excavating and loading machine and dragline operators 2.07 80 14.65 30,480

Crushing, grinding, and polishing machine operators 2.61 70 10.14 21,090

Service unit operators, oil, gas, and mining 3.44 170 17.96 37,350

Continuous Mining Machine Operators 3.48 40 14.38 29,900

Helpers--extraction workers 7.84 180 16.90 35,150

Wellhead pumpers 10.74 130 23.61 49,110

Rock splitters, quarry 27.89 110 10.18 21,170

Rotary drill operators, oil and gas NA NA 25.90 53,870

Roustabouts, oil and gas NA NA 16.63 34,590

Mine cutting and channeling machine operators NA NA NA NA

Petroleum engineers NA NA NA NA

Pipelayers NA NA 19.88 41,350

Derrick operators, oil and gas 0 0 22.79 47,410

Source: BLS; NA means data not available

Table 2. Fort Smith MSA Energy and Mining Occupations – 2012



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energy independence, what does this say about the regional prospects in energy? Kathy Deck and her team at University of Arkansas Center for Business and Economic Research have conducted a number of studies on gas shale in Arkansas, particularly focused on the Fayetteville Shale formation.2 In sum, there’s been a lot of interest in the sector, nationally and in the state.

Yet, as we saw in the data for the Fort Smith region, not much is expected to happen in terms of job growth from this cluster. How can this be reconciled with the recent success nationally in increased production and jobs?

Several issues will affect regional energy development over the next few years. Let’s look at natural gas first.

natural gasProfitability. As discussed earlier in this report, natural gas prices dropped sharply over the past two years due to the successful application of fracking technologies. Prices dropped from more than $6 per million British Thermal Units

in 2007 to less than $2 in 2012. While prices have recovered in recent months to more than $3 per mBTU, fracking is unprofitable for most shale projects at these prices. This is particularly true of projects involving only “dry” gas reserves, such as the Fayetteville Shale.

Bill Hanna of Hanna Oil and Gas indicated that fracking is a costly technology relative to conventional drilling techniques. He also notes that “fracked” wells experience faster declines in output, making the need to keep drilling new wells essential to increase production levels and build asset reserves. All this adds to the cost of this technology.

Geology. For all the advances in technology, finding viable gas projects remains both an art and a science. What a well will deliver in volume of output is not known until it’s operating.

Hanna reports that the underlying geology determines the technique most suited for success. While the company uses fracking techniques

occasionally, it has found that most of the regional formations are not suitable for widespread use of the technology, and that’s why most big players have moved out of the region in search of more viable and larger opportunities. This is exacerbated by the fact that natural gas is currently landlocked due to the inability to process the resource for export markets. This depresses prices and makes smaller deposits less attractive.

In sum, growth in natural gas demand (and thus jobs) in the region will be muted as long as the basic dynamics remain as they are. Prices are too low, reservoirs tend to be too small and the geology too difficult to be inviting to big players like Chevron or Exxon.

coalAt first glance, and if one listens to popular media, coal would appear to be a dying sector. Yet it is far from dead as it still makes up nearly one-fifth of U.S. energy production – we still need and use the stuff.

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-‐60 -‐50 -‐40 -‐30 -‐20 -‐10 0 10 20 30

Construc2on and Extrac2on Crane and Tower Operators

Excava2ng, Loading and Dragline Extrac2on Workers

Geological and Petroleum Techs Geoscien2sts, Excl Hydrol. and Geographers

Helpers-‐-‐Extrac2on Workers Mining and Geological Engineers

Pipelayers Pump Operators, Except Wellhead

Service Unit Ops, Oil, Gas, and Mining Supervisors: Construc2on and Extrac2on Workers

Surveying and Mapping Techs Wellhead Pumpers Growth Rate %

Percentage Change Source: BLS

Figure 4. Expected Annual Growth (%) in Specific Occupations through 2018

2 Several UA CBER reports on the Fayetteville Shale can be found at http://cber.uark.edu/369.asp



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Reliable and Abundant Resource. The reality is that there is a lot of coal in the U.S. and that is certainly the case in the Fort Smith region. Bob Cooper at Farrell-Cooper Mining believes there are various types of coal in the state that lie untapped due to unfavorable government policy and basic “laziness” on the part of some users. These issues keep Arkansas coal in the ground – along with the economic benefits coal creates. He notes that it is easier for some users to keep importing coal from outside the state than to develop a coal project immediately adjacent to them.

International Markets. Unlike natural gas, coal is not landlocked and has had ready access to overseas markets for many decades. Cooper notes that increasing amounts of regional coal is shipped outside the region, even out of the country. The recent announcement that Farrell-Cooper came to an agreement with Ouro, an Australian-backed company, to develop the metallurgical coal project in Heavener, Okla., reflects this global interest in Arkansas-Oklahoma coal deposits. The project is expected to employ around 400 people over the next few years.

Competition. Within most markets, particularly when it comes to thermal-type coal, the competition is constant and fierce. Most large power users can switch from coal to natural gas and back again at little cost, depending on which source is least expensive. Thus, coal producers

must be constantly trimming costs and pursuing new markets to remain viable.

Science and Politics. Coal is nearly always in competition for the title of least-favored energy source, usually running neck and neck with uranium, particularly in developed economies, which have stronger opposition to the resource. While the commodity is abundant and relatively cheap, it is also a relatively “dirty” energy resource. Further, the politics of coal bring a high cost to any project. Government permits are a challenge to get, and regulations regarding safety, environmental and reporting make the business a difficult one.

In sum, coal is a resilient sector facing an uncertain future – one that the players in the sector have come to accept. Regionally there are jobs in the sector, and with just a little positive support in terms of policies and incentives, there appear to be opportunities for more jobs.

concluSionFrom this analysis, prospects for growth in the energy and mining sector in terms of demand for the regional resources and the jobs they create appear modest. Like commodities in general, activity within the sector will ebb and flow based largely on the prices commanded at any given time for the commodity. Jobs will move in line with these forces.

The advances seen in other areas of the country in terms of oil and gas shale

seem unlikely to directly benefit the regional economy anytime soon. It does appear that coal will experience a noticeable uptick in jobs if the Ouro project ramps up as intended and if the global economy rebounds from the current doldrums as hoped.

All in all, the dynamics of the energy and mining sector remain stable and prospects for growth are likely modest in the midterm.

____________________ Note: While we chose not to focus on quarrying in this report, there are significant operations in the region as well, but they appear to operate under the radar because extraction activity does not have to be reported to the state of Arkansas.

Bob Cooper of Farrell-Cooper Mining indicated that Oklahoma’s policy environment was much more stringent in the reporting aspect of mining activity, requiring all miners, quarries included, to report tonnage of extraction (and pay a tax on production), whereas Arkansas apparently does not require this of quarries in the state.

He did observe that the geology is very good for quarries of various types to prosper in Arkansas, beyond simply meeting basic construction demand. Sandstone and granite deposits, for example, are abundant, as well as other rock formations. This view finds some support from Table 2 as the LQ for quarry rock splitters is over 27.

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