Worsening supply chains disruptions threaten to slow Arkansas
May 9-15, 2022
By Wesley Brown
Concerns are emerging in several industries that the nation’s ongoing supply chain woes will worsen for the rest of 2022 and well into 2023, stunting current U.S. economic growth at a lowly 1.4% in the first quarter.
Creighton University’s highly watched regional Business Conditions Index (BCI) — the leading economic indicator for the nine-state Midwest region stretching from Minnesota to Arkansas and released at the first of every month — shows that most manufacturing supply managers were not optimistic about the economy despite better than average growth in April.
According to the report, only two of ten supply managers expected improvements in supply chain disruptions in the next six months. Over half, or 56.7%, named soaring material costs as the prime factor pushing input prices higher. Also, approximately four of ten supply managers expect supply chain disruptions to worsen, while only two of ten anticipate an improvement in these disruptions.
Regionally, the Midwest BCI, which uses the identical methodology as the national Institute for Supply Management (ISM) and ranges between 0 and 100 with 50 representing growth neutral, sank to a still healthy 65.9 from March’s strong 71.3.
“Creighton’s monthly survey results indicate the region continues to add manufacturing activity at a healthy pace but with significant inflationary pressures. Supply chain disruptions and labor shortages remain as chief challenges for firms in the region,” said Ernie Goss, chief economist and director of Creighton University’s Economic Forecasting Group.
The Creighton economic think tank has conducted the monthly survey of supply managers in nine states since 1994 to produce leading economic indicators of the Mid-America economy. States included in the survey are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.
Goss said even with solid economic activity, all suppliers were not optimistic about the economy. That pessimism was also reflected in the nation’s top economic report on April 28 from the U.S. Bureau of Economic Analysis, which showed real gross domestic product (GDP) decreased at an annual rate of 1.4% in the first three months of 2022. That compares with strong GDP growth of 6.9% in the fourth quarter of 2021.
For Arkansas, Creighton University’s BCI for the Natural State fell to 61.4 from 74.4 in March. Components from the April survey of supply managers were new orders at 69.3, production or sales at 61.6, delivery lead time at 68.2, inventories at 50.6 and employment at 57.5.
Of note, the monthly survey reported that nonfarm and manufacturing employment in Arkansas have expanded above pre-pandemic levels. Arkansas and South Dakota are the only two states in the nine-state region to experience this positive outcome. Both durable and non-durable goods producers have expanded for 2022, but with weak growth in manufacturing and average hourly wages of 2.7% over the past 12 months, well below the regional median of 6.4%.
Contracting construction sector
Meanwhile, the Associated General Contractors of America (AGCA) said in its monthly industry report that the construction sector is also feeling the strain of supply chain disruptions and the lack of skilled workers. On May 2, AGCA reported that spending on most categories of nonresidential and multifamily construction declined from February to March as contractors struggled to find enough workers and get timely deliveries of materials.
The Washington, D.C.-based construction trade group urged Washington officials to end tariffs on construction materials and widen the opportunities for gaining the skills for rewarding careers in the building trade.
“Contractors continue to report strong demand for most types of structures, with few owners canceling or postponing planned projects,” said Ken Simonson, the association’s chief economist. “But worker shortages and supply-chain problems, from lockdowns in China to the war in Ukraine, are slowing project completions.”
Nationwide, construction spending in March totaled $1.73 trillion at a seasonally adjusted annual rate, 0.1% above the upwardly revised February rate and 11.7% higher than in March 2021. Private residential construction spending accounted for all of the increase in the latest month, rising 1% for the month and 18.4% from March 2021. In contrast, private nonresidential construction spending slumped 1.2% from February, although the March total was 8.5% higher than in March 2021. Public construction spending slipped 0.2% for the month but increased 1.7% from the year-ago level.
Among residential segments, single-family construction added 1.3% over the February total and 19.4% year-over-year. Multifamily construction fell 0.5% in March but rose 3.9% from a year earlier. Spending on improvements to existing owner-occupied houses increased 1.1% for the month and 22.5% year-over-year.
There were also notable monthly declines in the largest private nonresidential categories despite generally robust growth from a year earlier. The largest private nonresidential segment, power construction, slipped 1.2% for the month to a level of 0.3% below the March 2021 rate. The next-largest segment, commercial construction, skidded 1.9% in March but gained 15.5% year-over-year. Manufacturing construction fell 1.6% in March but topped year ago levels by 31.8%.
The largest public segments also slipped in March. Highway and street construction declined 0.4% from February but rose 7.5% compared to March 2021. Educational construction tumbled 0.8% for the month and 6.2% year-over-year. Transportation construction spending slid 0.5% in March and 1.2% year-over year.
Association officials said solving the materials and labor supply problems will require both short- and long-term action by officials in Washington, urging President Biden to end tariffs that are restricting supplies and raising prices for lumber, steel and aluminum products. To improve the labor supply, AGCA called for more funding of career and technical education and recognition of a broader range of apprenticeship programs.
“Now that Congress has funded a substantial increase in infrastructure construction, it is imperative that the supply of materials and workers be increased as well,” said AGCE Chief Executive Stephen Sandherr, the association’s chief executive officer. “Congress and the administration need to act promptly on several fronts.”
Housing market slowdown
As the supply chain woes hit closer to home and impact Arkansas businesses and consumers, Sen. John Boozman of Rogers has spent the last few months visiting with local Arkansas businesses, trade groups and workforce officials to address the lack of skilled labor and enable local workers to fill in-demand jobs.
“Everywhere I go in Arkansas, job creators tell me their workforce needs reinforcements,” Boozman said during an April 19 visit to the Arkansas/Oklahoma Carpenters Training Center in Russellville. “Homebuilders especially require well-trained craftsmen to help construct homes and businesses in the pipeline, and this training resource will undoubtedly help solve that challenge. That’s good news for our state’s economy and the workers who will gain technical skills to help them build stable, successful careers.”
On April 19, Boozman visited the United Brotherhood of Carpenters in Russellville, where the Arkansas labor union is building a new 35,000 square foot, $6.5 million training facility. Construction on the facility is nearly complete. It will immediately serve 141 millwright apprentices and 109 carpenter apprentices already in the program, and work to attract students and military veterans to pursue direct education opportunities, officials said.
Meanwhile, a Canadian timber giant that announced a recent $130 million investment to significantly upgrade and expand its sawmill facility in Union County near El Dorado, recently warned of possible economic and supply headwinds ahead.
Even after posting first quarter profits of $543 million on May 3, Vancouver, B.C.-based Canfor Corp. has still cut production at several Canadian lumber mills and expects new home construction activity to slow for the rest of 2022 due to high inflation, rising interest rates and decreasing housing affordability.
“(T)he global supply chain crisis continues to negatively impact our operations and has resulted in curtailed and reduced lumber and pulp operating schedules,” said Canfor President and CEO Don Kayne, who announced the Arkansas sawmill expansion on April 21. “We will continue to assess the effects of this crisis and will make adjustments to our operating schedules as conditions evolve. We greatly appreciate our employees’ ongoing resilience in managing through the supply chain challenges.”
True to Kayne’s prediction, the National Association of Realtors (NAR) reported on April 27 that pending home sales dropped in March, marking five straight months that contract activity has declined. Month-over-month, only the Northeast saw an increase in contract signings, while the three other major U.S. regions experienced declines in transactions. All four regions reported decreases in year-over-year contract activity.
NAR’s Pending Home Sales Index (PHSI), www.nar.realtor/pending-home-sales, a forward-looking indicator of home sales based on contract signings, fell 1.2% to 103.7 in March. Year-over-year, transactions sank 8.2%. An index of 100 is equal to the level of contract activity in 2001.
“The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions,” said Lawrence Yun, NAR’s chief economist. “As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity.”
Yun expects the 30-year fixed mortgage rate to reach 5.3% by the fourth quarter, mortgage rates to average 4.9% in 2022, and to hit 5.4% by 2023. He also forecasts inflation to average 8.2% in 2022, although it will start to moderate to 5.5% in the second half of this year.
As of March 2022, higher mortgage rates and sustained price appreciation has led to a year-over-year increase of 31% in mortgage payments.
“The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor,” Yun concluded.
NAR, which is one of the nation’s largest and most influential trade groups with 1.5 members, has over 28 independent local boards and affiliates across the state, including the Arkansas Realtors Association and the Little Rock Realtors Association.
1. Sen. John Boozman, R- Arkansas (front left), met with members of the Home Builders Association of Greater Little Rock earlier this year to discuss how lumber costs, inflation, employment woes and supply chain issues are impacting the Central Arkansas housing market.