Federal legislation not likely to have big impact on Arkansas’ economy in 2017

by Jeff Collins ([email protected]) 313 views 

Predicting how the Arkansas economy will perform in 2017 is not a very risky business. Historically our state economy has done slightly worse than the national economy during periods of growth, and slightly better during economic downturns.

There have been exceptions. Arkansas could not avoid the worst effects of the Great Recession: failing banks, bankruptcies, home foreclosures, and steep declines in property values. Since the end of the recession the state economy has increasingly behaved more like the national economy. This may be due to the employment profile of Arkansas increasingly mimicking the national profile. Whatever the reason, if we want to predict how the state economy is likely to perform we need to look at the national forecast and the national forecast is 2017 will look a lot like 2016.

For this not to be true you have to ask yourself, “What could happen to change the status quo?” The obvious answer is the surprising election results and subsequent policy changes that might come out of the new administration. But very few if any changes proposed, debated, and passed into law during the coming year will immediately impact 2017.

There are a few possible exceptions. Changing the corporate tax code to induce U.S. companies to move profits held off-shore back into the country or changing capital gains tax rates which would likely induce profit taking and impact the equity markets are the most probable. The biggest question would be how corporations and individuals would use the freed up cash. To the extent that the funds flowed into new investment, investment that resulted in net new job creation, we could see faster employment growth rates than forecast for 2017. Other possibilities exist too. For example, those funds could be invested abroad or in new technologies that replace workers. In either scenario domestic employment growth rates would not benefit.

There are other potential disruptions to national and therefore state economic performance. Terror attacks could impact our economy in a number of ways including supply chain and output disruptions or higher commodity prices. These types of events are difficult to build into a forecast at the national level and impossible at the state level.

What is easier to predict is the impact of price changes. Recently prices for goods and services have begun to increase as output growth has been consistent if not spectacular. Higher prices will be felt by Arkansans. Prices as measured by the Consumer Price Index have risen at roughly 1% annually over the past few years. This rate is expected to double in 2017. Still modest by historical standards but a clear sign that the national economy has fully recovered. Commodity prices like oil have been negatively impacted by falling international demand. Many of these regions have stabilized and so too has commodity demand. We should expect oil prices to rise in 2017 due to international and domestic demand.

Another set of prices worth mentioning and which directly impact Arkansans are interest rates. The Federal Reserve has begun the process of increasing short term rates to more policy neutral levels. This is expected to continue and will impact the cost of credit. Long-term rates have also begun to increase. The most obvious impact will be in terms of mortgage rates which had been at or near historic lows enabling the housing recovery. As rates increase there will be some impact on demand but how much is difficult to say. Despite low rates, the sector has not performed as well as expected. The fundamentals of the housing market may have changed with the recession as younger buyers no longer view home ownership as an imperative.

Looking at the metro economies within the state there are a couple of key observations. The Jonesboro and Northwest Arkansas regional economies are performing well. Despite concerns that these economies may be overheated, any slowdown to current growth rates is likely to be minimal. Look for employment growth throughout 2017, but perhaps at slightly lower rates.

The Fort Smith regional economy has stabilized but growth has not returned, and the regional economy will continue to transition away from dependence on manufacturing. Employment growth in the service sectors will drive whatever growth occurs in 2017. Of all the regional economies in the state, the Fort Smith regional economy is the most likely to be impacted by the protectionist policies discussed by the Trump administration. As mentioned, if enacted the impact would not be felt until 2018 at the earliest.

Finally, the Central Arkansas metro area has typically reflected the national economy more so than any other region of the state and this is likely to continue. Look for slow steady employment growth at rates similar to 2016.

One final thought. Over the last 10 years three of the four largest state metro areas have grown as measured by the labor force. Northwest Arkansas has added roughly 30,000 while the Little Rock metro has added roughly 6,500 and Jonesboro an additional 3,300. Only the Fort Smith region has seen a decline in the labor force of roughly 17,300. This is startling and clear evidence of the impact of the changing structure of the national economy. Whether anything can be done to reverse the tide remains to be seen.

Editor’s note: Jeff Collins is an economist for Talk Business & Politics’ The Compass Report, and is the former director of the Center for Business & Economic Research at the University of Arkansas.