Manufacturing job rebound fades in Arkansas

Recent jobs data shows that Arkansas has not been able to maintain a rebound in manufacturing jobs like has been seen in the U.S. and most neighboring states.

Beginning in early 2010, the U.S. manufacturing sector began to show signs of life, with economists and other market watchers suggesting that gains in the auto and housing sectors were boosting manufacturing employment.

Arkansas’ manufacturing sector was hard hit when the U.S. housing market crashed in 2007-2008, said Grant Tennille, executive director of the Arkansas Economic Development Commission. The state, according to Tennille, was home to numerous forest products and home appliance manufacturers.

“A lot of that went dark during the worst of the housing crunch,” Tennille said of the forest products industry.

In May 2010 national manufacturing sector employment improved past 11.531 million jobs. The sector continued to grow, reaching 11.988 million in February 2013. However, the sector shed an estimated 13,000 jobs between February and July.

Historically, U.S. manufacturing sector employment has ranged between 19 million and 17 million. It reached a high of 19.553 million jobs in June 1979. Sector employment has been stuck below 12 million since May 2009. Prior to May 2009, the last time sector employment was below 12 million was May 1941.

Arkansas initially saw a similar pattern. In early 2010, the state’s manufacturing sector appeared to find a bottom and entered a 14-month period (April 2010-May 2011) in which employment remained above the 160,000 level. By early 2012, sector employment resumed its decline. May and June of 2013 marked the first time employment in the sector was consecutively below the 155,000 level.

The U.S. Bureau of Labor Statistics estimated there were 154,300 manufacturing jobs in Arkansas during June 2013. Employment in the sector is down 24.6% compared to June 2003, and is down almost 38% compared to the sector high of 247,300 set in February 1995.

Arkansas’ three largest metro areas have seen double-digit percentage declines in manufacturing job levels between June 2003 and June 2013. Jobs in the sector are down 23% in central Arkansas, down 34.16% in the Fort Smith region, and down 20.8% in Northwest Arkansas.

MASSIVE INVESTMENTS
Tennille said several industries are returning to Arkansas and are making “fairly massive” investments to retool plants. The investments, which boost productivity by modernizing facilities, don’t always lead to more jobs.

“They are coming back but not with anywhere near the same number of people. ... We’re not getting the jobs back, which is frustrating,” Tennille said.

Also frustrated is Greg Kaza, executive director of the Arkansas Policy Foundation.

“The recovery, as I’ve said many times, is weak at best, and that shows up in the employment numbers,” Kaza said. “It’s better than being in a recession, but it’s nowhere near where it should be in an expansion.”

REGIONAL MANUFACTURING COMPARISON
Between June 2010 and June 2013, Arkansas lost 7,700 manufacturing jobs, a decline of 4.75%. Among Arkansas’ neighboring states, only Mississippi also saw a decline in manufacturing jobs in the same period, but that was just a 500 job loss, or a decline of 0.36%.

During the same three-year period, the manufacturing workforce grew by 3,600 jobs in Louisiana; grew by 9,500 jobs in Missouri; grew by 12,300 jobs in Oklahoma; and grew by an impressive 55,900 jobs in Texas. Nationally, there was a 3.7% gain in manufacturing employment between June 2010 and June 2013. However, all states have seen a manufacturing workforce decline when compared to the previous decade (June 2003).

Arkansas’ durable-goods manufacturing sector GDP has also lagged most of its neighboring states and the country. The GDP figure partially speaks to the value, or productivity, of the sector. The state’s manufacturing sector saw a 0.37% gain during 2012. The durable goods sector GDP was up 0.22% in Louisiana; up 0.68% in Mississippi; up 0.37% in Missouri; up 0.78% in Oklahoma; up 1.08% in Tennessee; up 0.72% in Texas and up 0.55% across the U.S.

FEWER JOBS AND CHANGING SKILL SETS
The dynamic of large capital investments with few jobs is not unique to Arkansas. A report issued June 19, 2013, by Congressional Research Service, indicates that recovery in the manufacturing sector will deliver more output, rising productivity, and fewer jobs.

“Although a variety of forces seem likely to support further growth in domestic manufacturing output over the next few years, including higher labor costs in the emerging economies of Asia, higher international freight transportation costs, and increased concern about disruptions to transoceanic supply chains, evidence suggests that such a resurgence would lead to relatively small job gains within the manufacturing sector,” noted Marc Levinson, report author and a section research manager for CRS.

Levinson also noted that manufacturing jobs included fewer “physical production” jobs and more managerial and technical skills jobs.

“These changes are reflected in increasing skill requirements for manufacturing workers and severely diminished opportunities for workers without education beyond high school,” according to Levinson.

Tennille said company officials considering expansion or relocation are asking more questions about skills and workforce quality. Financial incentives remain important, but if a company can’t find the people, the value of financial incentives diminish.

“A lot of it comes down to, ‘Can you get me the people?’” Tennille said of discussions in trying to recruit a company to Arkansas. “And, ‘What does your training environment look like?’”

‘VIGOROUS DISCUSSION’ NEEDED
Kaza said national economic factors have hit Arkansas hard, but notes that they hit all the states hard. He believes Arkansas’ overall business climate and economic development policies are also to blame for the state’s poor manufacturing numbers compared to nearby states.

He recommends a hard look at the state’s tax code, and specifically noted that Arkansas should more aggressively phase out the capital gains tax. The tax has fallen from 7% to 3.5% since 1995.

“Then you could say to business, ‘We’re one of only 10 states to not have a capital gains tax,’” Kaza said.

Kaza, who is a critic of the Quick Action Closing Fund program utilized by Gov. Mike Beebe to land large jobs projects, wants to see a “vigorous discussion about whether some of these programs are working” with respect to retaining and recruiting manufacturing jobs.

“What they’ve had in place for more than a decade isn’t working. ... Historically it should be producing more, and the sad reality is that we will likely continue to tread water and shed jobs,” Kaza said.

Arkansas legislators have in recent years moved to lower tax rates on manufacturing. Some of the changes include a lowering of the sales tax on utilities paid by manufacturers and exempting repair parts and labor for pollution control machinery and equipment from the state sales tax. The parts and labor exemption is scheduled to begin Oct. 1.

‘CHANGES NEED TO BE RADICAL’
Kaza believes some of the moves are not enough, and believes “radical” ideas should be tried. One of those ideas is what Kaza calls the “Razorback Production Zone.” The zone waives all or most taxes for qualifying manufacturing operations, with state revenues offsetting the loss of property tax revenue for school districts. It’s a concept the Arkansas Policy Foundation has encouraged the AEDC to consider.

“That would have been a powerful incentive to keep Whirlpool in Fort Smith. ... That was an idea we floated, but it didn’t go anywhere,” Kaza explained. “I would argue that we put them (new ideas) out there and see what happens. ... The changes need to be radical. There can’t be any tweaking around the edges.”

Benton Harbor, Mich.-based Whirlpool announced in October 2011 it would close its refrigeration production plant in Fort Smith. The move resulted in about 1,000 lost jobs when the plant closed in June 2012. However, Whirlpool, which employed more than 4,500 at the Fort Smith plant in 2006, moved production out of the plant for several years prior to the closing.

Tennille argues that Arkansas has been aggressive in its efforts. He points to the Big River Steel project as an example. Big River Steel, announced in late January 2012, will eventually be a $1.1 billion investment and provide a minimum of 525 jobs averaging $75,000 a year. It will be built in Mississippi County near Osceola.

Gov. Mike Beebe and AEDC officials pushed for incentives through Amendment 80, which Arkansas voters approved to provide bond financing for large economic development projects. The package was approved by the Arkansas General Assembly in the recent legislative session and provides a revenue stream for the $125 million bond package of incentives and loans for the superproject.

MANUFACTURING IMPORTANCE
Kaza also suggested that some in state government or other circles of influence may believe manufacturing should no longer be a primary focus for economic development efforts. In a state with 1.184 million nonfarm jobs (June 2013), the manufacturing sector is now just a little more than 13% of the job total. At its peak, Arkansas’ manufacturing sector represented almost 25% of all jobs.

“They may just say it’s only 155,000 jobs ... and that maybe the state should instead focus on knowledge-based industries,” Kaza said, adding that he believes it would be a mistake to reduce efforts to support the manufacturing sector.

Maintaining a focus on manufacturing is a point on which Kaza and Tennille agree.

Tennille admitted that he does talk to people “very much into the high-tech space who think they hold the keys to the kingdom.” But he believes manufacturing is an important part of a “diversified approach” to economic development. Tennille also believes a healthy middle class needs a healthy manufacturing sector.

“People making things is what built this country,” Tennille said. “The mechanism by which the middle class was built and sustained, was ripped out of this country” when manufacturing jobs were outsourced.

Levinson, in his Congressional Research Service report, provides an argument to those who might say manufacturing recruitment is not the best approach to increasing jobs.

“As manufacturing processes have changed, factories with large numbers of workers have become much less common than they once were. This suggests that promotion of manufacturing as a tool to stimulate local economies is likely to meet with limited success; even if newly established factories prosper, few are likely to require large amounts of labor,” Levinson wrote.

Kaza believes manufacturing can again be a larger part of the national and state economy. He thinks that will happen only if policy makers look beyond traditional economic development tools.

“I’d like to be positive. I think we can compete. ... We can do it. When people come in with this defeatist attitude that we can’t compete in the U.S., I respectfully disagree. We just have to be willing to try something different. ... The first step to addressing a problem is to admit that you have a problem.”