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Building Arkansas.

Building Arkansas

Residential and nonresidential construction are important sectors in our state's economy, and there are a number of related reasons why construction is significant to the Arkansas business community.

First, construction activity is sensitive to expectations about the future economic outlook. Swings in construction activity provide a clue to the collective judgment of many buyers and sellers about future business prospects.

Few of us, whether we're business owners or home owners, will start a large project or assume a new mortgage when we have doubts about our future jobs and income. That's why the swings in construction activity provide a composite measure of expected future business conditions.

The second reason to consider the importance of the construction sector is that it produces large ripple effects. An increase in new home construction means an increase in the sales of refrigerators, carpets, furniture, landscape plants and other items necessary to set up a new residence.

A reduction in housing starts has the opposite effect. For example, lower housing starts may reduce production at plants like the Whirlpool refrigerator factory in Fort Smith. The negative ripple also reduces the payment - including wages - for all products used to manufacture refrigerators in Fort Smith.

The ripple effect extends to other states, too. For example, a reduction in housing starts in Oklahoma City reduces the sales of refrigerators manufactured in Forth Smith along with a reduction in sales of affiliated items produced at other locations. The second-round effects of the swings in construction activity pulse throughout the United States in response to the waves in the building cycle.

Sales of construction materials are one way to measure the importance of this sector. These sales equal 5 percent of all sales made in Arkansas. This 5 percent measures only the direct effect of construction activity.

More Ripple Effects

The full impact is significantly larger after including the second-round ripple effects. If one dollar of construction expenditures prompts an additional 80 cents of related purchases, then construction's total effect on the economy is larger than first expected.

The impact of construction on the Arkansas economy is the same as the impact of total construction activity on the national economy. The value of all construction sales made in the United States equals about 5 percent of the value of all goods and services sold in the United States.

The third reason construction expenditures are important is because many jobs and family incomes are directly dependent on them. In June 1990, 4.2 percent of the total wages and salaries paid in Arkansas originated from employment in the construction sector. In 1988, 5.5 percent of total Arkansas industry earnings originated from construction activities. This sector employs about 32,000 persons, which equals 3 percent of the state's employment.

Noting the importance of construction expenditures, current figures (see related chart) show the number of residential dwelling units measured on the left axis and nonresidential projects measured on the right axis by quarters beginning in 1986.

Residential construction slumped in 1986. Since then, residential activity has continued to decline, although at a diminishing rate. Forecasts beginning in the second quarter 1990 and continuing through the end of 1991 suggest little improvement is likely for Arkansas' residential construction.

Using past residential building activity as an indicator of the future business conditions, the consensus view is that no upturn is in sight.

Responding To Change

Residential construction activity does not exist in a vacuum. It responds to changes in the mortgage interest rate, personal income and total employment. Washington's budget gridlock prevents any decline in the prevailing interest rates. Should a miraculous decline in interest rates occur, then residential construction activity will increase in response to cheaper credit.

Nonresidential construction includes all construction - commercial buildings, manufacturing plants and government projects - except residential buildings. The pattern of nonresidential construction projects follows the general pattern of residential building activity. A precipitous decline occurred in 1986, followed by a small increase extending through 1989, then a modest decline since then.

The six quarter forecasts ending in 1991 show little prospect for improvement in the number of nonresidential building projects. Arkansas' strong general contracting companies - including Nabholz Construction in Conway, KA Industries in Rogers, Kinco in Little Rock, and Griffin Construction in Fort Smith - face a declining number of new projects.

However, if the nation's business prospects should brighten, then the number of new nonresidential projects would increase.

Examining the outlook for construction activity provides a clue to the general business conditions in the state. With a poor outlook for a decline in interest rates and little improvement likely in the national business scene, an upturn in construction activity is not likely to provide the needed boost to the Arkansas economy in 1991.


John C. Pickett, Ph.D., is a professor of economics at the University of Arkansas at Little Rock. He is actively engaged in the analysis of the current economic issues facing the public and private sectors.
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Author:Pickett, John
Publication:Arkansas Business
Date:Nov 5, 1990
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