A Federal Reserve economist says Arkansas’ economy struggles to gain a stable foothold for solid growth years after the so-called “Great Recession,” with the Little Rock and Northwest Arkansas areas being the largest “pockets” of growth.
As Arkansas emerges from the long shadow of the first economic decline in the 21st century, a lot of questions are still being asked about the overall health of the state’s economy after the Great Recession. What is clear to many Arkansans – from business leaders, economists and politicians to every day workers and ordinary consumers – is that economic conditions are no longer the way they use to be only a few years ago. There appears to be a new normal.
Charles “Chuck” Gascon, regional economist and research support coordinator with the Federal Reserve Bank of St. Louis, recently gave his observations about the state of Arkansas’ economy in a wide-ranging interview with TalkBusiness.net. Gascon was also in Little Rock on Wednesday to give a presentation on the U.S. and Arkansas economy at the annual state economic forecast at the University of Arkansas at Little rock.
In summarizing Arkansas’ economy, Gascon gave an interesting observation about the difficulty in generalizing about the state’s economic fortunes when compared to other states. For example, when looking at the state’s GDP productivity numbers, 30% of the state’s output comes from the Little Rock area and another 20% comes from fast-growing Northwest Arkansas economy.
“So you are talking about two areas with 50 percent of your output,” he said. “When you look at statistics, you have these two real pockets of strength and growth, but everything else is significantly different.”
In his role at the Federal Reserve’s regional office in St. Louis, Gascon and his colleagues provide detailed economic data and commentary for the Eight Federal Reserve District. The most familiar commentary comes from the Regional Economist and the widely-held Beige Book report, which provides an ongoing summary of conditions in the Eight District and the 11 other districts in the Federal Reserve system.
Headquartered in St. Louis, the Eighth District has main branches in Little Rock, Louisville, Ky., and Memphis, Tenn. The district includes all of Arkansas and portions of six other states: Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
TWO MAJOR TRENDS
In assessing the current recovery from what many believe is the most severe downturn since the Great Depression, Gascon says there are two major trends related to the state’s rebound from the continuing effects of the recession that ended nearly six years ago.
“First, there is the long-term trend in manufacturing when we got the shock from the loss of manufacturing jobs,” Gascon said. “But at the same time when you look at the health care sector, you see the long-term increase in this sector and it continues to add jobs after the recession.”
But unlike a lot of government critics, Gascon says the shift toward a healthcare-focused, service sector heavy economy did not just begin in Arkansas and rest of the nation in March 2010 with the passage of the Affordable Care Act, widely known as Obamacare.
He pointed to the U.S. Bureau of Labor Statistics’ current forecast on U.S. employment from 2012-2022, which projected that occupations and industries related to healthcare will add the most new jobs across the nation in the next decade.
“The main reason is the demographic shift in the aging of the population. That is the big driver,” Gascon said. “I think I am pretty sure that those job growth projections happened before the Affordable Care Act was passed.”
Still, the Federal Reserve researcher said Arkansas will have to adjust to the historic changes from a being manufacturing-based economy to one that is largely powered by service sector jobs. He said the worker needed in the healthcare field is unlike the traditional blue collar workers who drove the state’s economy over the past 50 years.
“The skill sets in those two sectors are very different. That is one reason that we have this friction in the labor market because there is a ‘mismatch’ of jobs in demand and the skills that are needed,” he said. “Then you have workers who have left their jobs in construction and manufacturing who are (retiring) early and leaving the work force.”
LABOR MARKET SHIFTS
That is also a major cause for the state’s declining labor pool, Gascon offered. That same question has been raised by several Arkansas economists over the past 12 months, including University of Arkansas economist Kathy Deck. The director of the university’s Center for Business and Economic raised a note of caution in January when state labor numbers showed more rural counties of the state were experiencing employment downturns more severe than those that took place during the recent recession.
According to the state Department of Workforce Services, nearly all of Arkansas’ workforce investment areas saw decreasing populations in 2013. That resulted in the state’s labor force and employment decreasing between 2012 and 2013, at 18,100 and 17,600 respectively.
“I know labor force participation rate in Arkansas is a little lower because of demographics – in the sense that the population is a little older than in older states. That is why there is a steeper decline here relative to the rest of the nation,” he said.
On the positive side, however, the shrinking labor market has not equated to less worker productivity. In his presentation at UALR, the Federal Reserve economist said the state’s road to recovery has been “slow, but steady” with real GDP (Gross Domestic Product) growth of 8% since 2006.
MANUFACTURING, AGRI PRODUCTIVITY
Still, when you look at detailed income statistics on the Arkansas economic output, Gascon said, the spike in productivity is driven by growth in dividends, capital gains and profits versus increases in wages and salaries.
“When we talk to manufacturers, they say they are growing at a slower pace,” said the St. Louis-based economist. “Arkansas’ total production per worker is about $10,000 since 2006. That means they have been able to increase their productivity with fewer workers.”
Gascon continued: “When you look at the broader overall health of Arkansas and the nation, it is a different story than what you see when you look at (productivity).”
In Arkansas agriculture sector, the story there has also been dissimilar to the rest of the state. In August, the U.S. Bureau of Economic Analysis reported that Arkansas’ GDP grew by 3% in the fourth quarter of 2013. However, the state’s agriculture and farming sector lost ground, falling 1.36 points in overall growth.
“I think there are a couple of things that come to mind in the terms of the performance of the agri sector. What are the yields? And how is that going to translate to prices,” Gascon said, explaining why the state’s largest industry is face strong economic headwinds. “And this year, the yields have been great and prices have come way down and that has squeezed income.”
HOUSING MARKET FACTORS
Concerning the housing market, Gascon said housing prices in the state are on the rise, but not as quickly as the rest of the nation.
“There is a steady level of growth, but we didn’t get the ‘big Boston (housing) boom’ in Arkansas on prices,” he said.
More troubling, Gascon said, is the slowdown in sales of housing stock across the state in 2013. He said real estate agents he has talked to across the Eighth District say housing inventories are low.
“That means people are having a harder time finding the (home) they are looking for,” he offered.
Gascon said the other trend he is seeing in the real estate sector in Arkansas and across the region is that first-time home buyers are slow to enter the housing market.
“Is this a permanent shift or are we more in a bubble phase where the preference for when people start their families has just moved back a few years?” he asked.
“What that means is that we are in a pause phase until this group hits that threshold, then we will see that steady movement in the housing market again,” said the Eight District economist. “But it is going to take a little time for that to play out.”
INTEREST RATE FUTURE
At the same time, the momentum in the housing market largely depends on the Federal Reserve’s supervision of the nation’s most influential economic indicator – interest rates. In September, the nation’s central bank renewed its pledge to keep interest rates near zero for a "considerable time."
The last time the Fed raised its federal-funds short-term interest-rate target was in 2006, a year before the financial crisis in 2007 that pushed the U.S. into the Great Recession. Today, many economic experts and investors are taking bets on whether the Fed will raise interest rates at its next policy meeting in June 2015. Gascon didn’t predict what he thought the Fed may do, but offered that the nation’s monetary policy will continue on the “steady path.”
“In this economy that we are in right now, things to be pretty slow moving,” he said. “Any path you look at on expectations from the market of the Federal Reserve’s (policy) …, we are not going to see a big jump in interest rates.”
Yet, the Federal Reserve economist did say there is also an upside for the housing market when there is an expectation that interest rates will rise in the short term.
“On the arithmetic side of the equation, as mortgage rates move upward – the cost of getting a home also rises,” he said. “The other side is that Interest rate (hikes) can cause people to take action. People realize they can no longer stay on the sidelines.”