Arkansas' Diversification Blunts Effects of U.S. Recession

by Mark Hengel  on Monday, Jan. 19, 2009 12:00 am  

(To see a pie chart comparing Arkansas' employment numbers to the nation's, click here.)

Throughout the current recession, Arkansas business and government leaders and economists have repeated what has become a mantra. The state's economy isn't suffering as badly as those of other states because, while Arkansas doesn't fully experience nationwide economic highs, neither does it fully experience the lows.

But why is that?

There are several reasons, but they can probably be boiled down to two.

One, the state learned a hard lesson during the Great Depression, when its almost complete reliance on an agriculture-based economy caused intense economic suffering. That lesson was to diversify.

Second, when most economic indicators consistently put you near the bottom, you don't have as far to fall.

"During the boom times we talk about why we underperform, but during the bad times we turn to the story 2.0: We're not as bad as our neighbors," said Kathy Deck, an economist at the University of Arkansas.

Labor Diversity

Arkansas is still an agricultural powerhouse, although only about 3.5 percent of its jobs are in that sector, according to 2007 U.S. Bureau of Economic Analysis data, the latest available. Arkansas, however, also has a greater concentration of manufacturing jobs compared with the nation, said Ross DeVol, an economist with the Milken Institute in Santa Monica, Calif.

Manufacturing accounted for about 15 percent of Arkansas' non-farm jobs in November 2008, compared with about 10 percent nationally, according to U.S. Bureau of Labor Statistics data.

But the manufacturing done in Arkansas is not concentrated in heavy machinery, automobiles or other "durable goods," he said. Durable goods accounted for about 52 percent of Arkansas' manufacturing jobs in November 2008, compared with about 63 percent nationally, according to the BLS. And that can actually be a good thing in times like these.

Durable goods "are very tied into business investment, so as companies are cutting back in investments, those sectors tend to be very volatile," DeVol said.

Most durable goods require large initial investments, which companies put off as cash grows scarce. Arkansas has labored mightily to attract a major auto manufacturing plant, but states – particularly Michigan – that depend on the auto industry are feeling the current downturn more acutely. The slowdown in durable goods manufacturing has touched Fort Smith, though, where Whirlpool Corp. and Baldor Electric Co. have slashed their employee rosters.

(DeVol will speak at the 15th annual Business Forecast luncheon Friday in Rogers. Deck is also speaking.)

The state's economy is comparatively broad-based, said Gregory Hamilton, an economist at the University of Arkansas at Little Rock. So as one area of the economy goes south, another can pick up the slack, he said.

After World War II, Arkansas avoided developing "specific industry risk," meaning an economy that relies too heavily on one sector for growth. Michigan is the quintessential example of what can happen when such risk develops.

As the automobile industry has weakened, Michigan's economy has struggled, said Hamilton, of UALR's Institute for Economic Advancement's Research Group. In Arkansas, specific regions have suffered as one industry or large company shut down, but the state's economic diversity does not allow one city's or region's woes to affect the entire state.

Arkansas did feel the brunt of the Great Depression, however, because of its reliance on agriculture, Hamilton noted. After the Depression and World War II, the state began diversifying and developing a manufacturing base. The Legislature established the Arkansas Industrial Development Commission in 1955 to modernize Arkansas' economy and bring industry to the state.

Arkansas' governmental employment sector also has remained steady recently, DeVol said. The state also is not facing the financial woes of states like California, where state budget balancing may be done on the backs of government employees, he said.

While Arkansas' economy is steadier than many, it is changing, Hamilton said.

"As the Arkansas economy has evolved, it has gone primarily from an agriculture-based economy to a manufacturing-based economy during the smokestack-chasing phase," he said. "And now it is going to more of a service sector-based economy."

We'll Feel It

Arkansans should not, however, assume that our state's economy is bulletproof.  The state will eventually feel the current recession, though less severely than other states and regions.

"People who believe Arkansas will not feel this recession are mistaken," DeVol said.

The Natural State has many industries that will struggle as the recession deepens. Trucking is a strong sector in Arkansas, DeVol said. As manufacturing, exports and imports decline nationwide, fewer rigs will need to ship goods from place to place, which could affect Arkansas companies like J.B. Hunt Transportation Services Inc. and USA Truck Inc.

Arkansas' manufacturing sector, even the makers of basic goods, might also feel the economy's downturn soon, said John Shelnutt, an economist at the Arkansas Department of Finance & Administration.

"Manufacturing and goods-producing sectors tend to be more volatile than others – or, to say it a different way, more volatile than service sectors," he said.

As consumers spend less money, Arkansas' manufacturers might begin to slow production, affecting workers' hours, he said.

The state might be better placed than others to rebound from a slowdown, though, Shelnutt said. Construction in Arkansas, as a whole, never experienced the growth of other states, meaning Arkansas does not have as much excess housing and commercial real estate. Northwest Arkansas is an exception to that general rule, because it did experience a boomtown surge in construction in the first half of the decade.

DeVol, of the Milken Institute, said the state's construction sector accounted for only about 4.7 percent of the state's total employment during recent years. In Florida, a state straining under the housing bust, construction grew to about 11 percent of total employment, he said.

New economic development announcements have also brought better-paying jobs to the state. The jobs could position Arkansas to take better advantage of an economic recovery, Shelnutt said.

The Current Transition

The state's current emphasis on cultivating a "knowledge-based economy" comes with its own risks, however, Hamilton said. Such an economy will put Arkansas more in line with the national economy, whereas the state has remained relatively self-sufficient since World War II, he said.

"If we become more involved in the national economy, that would lead to more specialization, which would cause more specific industry risk," Hamilton said.

Arkansas is developing previously underrepresented sectors, Deck said. Big-ticket attractions like the William J. Clinton Presidential Library in Little Rock and Crystal Bridges Museum of American Art in Bentonville, scheduled to open next year, are helping grow the state's leisure and hospitality sector at the same time that sector has contracted nationally.

Lagging behind the country has its pluses, too, Deck said. Investment here and there can spur rapid growth in Arkansas compared with similar investments in other, more developed regions of the country. Investing in improving work force education can help bring education levels to the national average, attracting jobs to the state.

"We clearly can reap serious gains by investments in education or infrastructure, because we are not at the head of the pack," she said.

The state could see greater gains coming out of the current recession, Shelnutt said. Arkansas rebounded well after the recession in the early 1990s, based in large part on food processing. The sector employed many Arkansans. However, while many found jobs, the jobs did not bring a noticeable jump in incomes.

Arkansas' recent wave of economic development announcements provides an advantage. Many of the companies, such as Caterpillar Inc., which decided to open a 600-employee factory in North Little Rock, will offer higher wages than food processing, Shelnutt said.

"We have a better chance of showing a greater difference on the income side rather than just the headcount side," he said.

Despite Arkansas' current insulation from national economic trends, residents should not get too excited, Deck said.

"We might not be feeling the recession as acutely, but we are still 48th in per capita income." 



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