Hang in There for 2002?s 2Q

Few would argue that Arkansas and the United States aren’t in a recession, even though there’s been no “official” pronouncement. The only questions are how bad will it be, and how long will it last?

And that’s what those attending the University of Arkansas at Little Rock’s Economic Forecast Conference were hoping to learn.

The short answer is that there will be more bad economic news in the near term, but the downturn won’t be as bad as the 1991 recession.

Dr. John Shelnutt, senior research economist for UALR’s Institute for Economic Advancement, said Arkansas’ economy has entered an “average” or “moderate” recession as consumers have joined other weak sectors and unemployment has risen.

Economics is not called the dismal science without reason. Yet Shelnutt, who presented the Arkansas forecast, and Andrew Hodge, who gave the national forecast, were more optimistic than expected.

Shelnutt said signs of modest recovery in the state will be evident by the second quarter of 2002 for consumers and by the third quarter for most major industries. That would make it a fairly short-lived recession. Let’s hope it works that way.

The recovery will not be robust as measured by employment and consumer confidence, however. Among the positives factoring into recovery are low interest rates on vehicles and mortgages and low energy prices.

Shelnutt and Hodge, group managing director of U.S. and Canada macroeconomics for the global DRI-WEFA research firm, have ample reason to make such a forecast.

They see government spending as the driving force behind the rather quick rebound. In past recessions, it has been consumers who led the turnaround.

Hodge said that, unlike other recessions, “we have proactive government” that has initiated tax cuts and spending to speed the economic recovery after the Sept. 11 terrorist attacks.

Americans, a much more resilient bunch of folks than many around the world give us credit for being, have adapted quickly to wild fluctuations on Wall Street brought about by terrorism or airline crashes or just plain old bad economic news.

After a flat fourth quarter, Hodge foresees a 1.7 percent decline in the GDP in the first quarter next year. Starting in the second quarter though, there should be a boom. By the third quarter, the country should see GDP growth at an annual rate approaching 5 percent. And By 2003, Hodge sees GDP growth at a 4.4 percent annual rate.

Interest rates are probably at their bottom, Hodge said. The latest Federal Reserve cut put the discount rate at 1.5 percent. While it’s conceivable that the Fed could lower the rate one more time in December, Hodge said, he thinks rates will begin to rise again in April or May to keep inflation in check as the economy rebounds.

The United States had a 5.4 percent unemployment rate in October, but that could go up to 6.3 percent in the next few months, Hodge said.

In Arkansas, Shelnutt said manufacturing job losses “will include some of the continuing closures of apparel plants and older plants in a variety of sectors mixed with national layoffs.”

He sees the state jobless rate rising to the 5.5 percent level next year, far less than the state experienced in previous recessions. Losses in manufacturing jobs will be offset in part by continued job growth in the services sector.

Personal income growth will suffer for at least three quarters, Shelnutt said. In annual terms, total personal income will grow by 3.8 percent this year and only 2 percent in 2002.

Retail sales in Arkansas have been disappointing, Shelnutt said, and as a result, stores may try to jump-start the holiday shopping season with early bargain pricing.

Manufacturing sales will fall 4.4 percent this year and 7.2 percent next year before climbing 1.5 percent in 2003. Shelnutt predicts wholesale and retail trade sales to inch up 1 percent this year before falling 1.1 percent next year and 1.3 percent in 2003.

Only the services and government sectors are expected to grow each year through 2003. The main hits are coming in tourism, luxury goods and consumer durables, Shelnutt said.

The state’s budget will suffer from a growing list of problem areas in revenue, including corporate earnings, sales taxes and capital gains, he said.