If you have been watching the Texarkana Industrial Index over the last few months, you have probably noticed that it has dipped down near 105 again. There is a relationship between the value of the stocks in the index and the index value, but before describing that relationship, let's look at the underlying structure of the TII.
The TII is calculated using information from six publicly traded industrial companies in the Texarkana area. The companies are American Electric Power (SWEPCO), Centerpoint Energy, Cooper Tire and Rubber, Domtar, Flowers Foods, and International Paper. The index uses the market capitalization of these companies weighted by the relative size of their workforce to formulate the TII each week.
The number of employees in the Texarkana area is the most important measure of economic activity because it is an indicator of the spending power the company brings to the Texarkana market. The second variable in the TII is the company's market capitalization. The market capitalization is a company dollar valuation calculated by multiplying the current stock price by the number of outstanding shares. It represents the capability and potential to pour resources into Texarkana by the companies included in the TII.
As a company's share price rises, good things can happen to the Texarkana market. For example, the firm is better able to spend resources to expand existing facilities, buy new equipment and hire additional employees. It is also important to note that these companies pay local taxes that help provide city services and expand educational opportunities.
Just as the TII was created in 2008, the stock market began a significant decline. With an initial value of 100 on January 1st, the index along with the overall stock market began moving down. Since one of the key components of the index is the market capitalization of each firm, a decline in stock value means a similar decline in the index. The values are not directly correlated because some firms are affected more or less by the stock market decline and each firm in the index has a different influence in the TII based on the number of employees in the local facility.
The TII hit the mid-70s by July of 2009 but began rising to the upper 80s by the end of 2009. The index broke through the 100 level in summer of 2012 for the first time since it began and continued to move in a generally positive direction until fall of 2015. In November 2015 the TII peaked around 110 and then started to fall back to around 105.
An analysis of the stock market is beyond the scope of this author's expertise, but the factors that are currently causing a general decline in the market are having an influence on the stocks in the TII. These factors include concern over the instability in the stock markets in China; the decline in fuel prices, which affects the energy sector; the slow start in the technology sector for the year; and overall investor sentiment.
When these and other environmental factors negatively influence the stock market, industrial companies are usually affected. The reason for this is that when stock prices fall, it means that market capitalization drops. Since the TII is based on market capitalization, the TII tends to drop as the stock market drops. The TII does not exactly follow the stock market because some of the companies in the mix may experience more or less of the impact of the market change, thus dampening the immediate effect of a market shift.
The value of the TII for the Texarkana area is that it is a measure of the market capitalization of these companies that is weighted by the number of employees for each TII company. This gives us a more precise measure of the economic effect of the industrial sector on our local economy than simply watching the stock market as a whole.
As you see the TII graph in the Texarkana Gazette each week, you can see the relative potential impact on our local economy that these industrial companies bring. Their resources and the jobs they provide are an important part of this region's economy.
Note: The description of the TII above was adapted from Dr. Ed Bashaw's column in the Texarkana Gazette published April 6, 2008.