The Arkansas economy in 2017: Improving trends to continue

The year 2017 will mark the eighth year of the nationwide economic expansion, although it hasn’t necessarily felt that way here in Arkansas.

The nation’s lackluster recovery translated to a delayed emergence from recession for our state’s economy, with growth rates that could be described as sluggish at best – at least through 2013. But it is the trend that has emerged since 2014 that is more likely to portend the course of the Arkansas economy in 2017.

Over the past three years, employment has expanded by more than 56,000 jobs and the unemployment rate has fallen to a record-low level of 4%. Incomes are rising and consumer spending is starting to pick up. The latest data on the state’s GDP suggests a trend growth rate of over 2%. This pace of expansion is by no means phenomenal, but it is respectable — and more importantly, sustainable.

I expect the state’s economy to continue along this trajectory, with economic growth in the range of 2% to 2.5% in 2017 and with employment expanding by more than 11,000 jobs. With unemployment at or below a sustainable long-run level, future job growth will provide opportunities for new entrants to the state’s labor force and the return of some workers who had previously dropped out of active participation.

The gains from recent economic growth have not always been evenly distributed, but as the expansion proceeds, the benefits should be more evenly dispersed. For example, growth in personal income has been skewed in favor of investors and property owners, with nearly 30% of income gains since 2010 coming in the form of dividends, interest, and rent. Meanwhile, only 40% of the income growth has gone to increases in wages and salaries. By comparison, more than 50% of income growth nationwide has come in the form of wage and salaries. Recent employment gains have supported an increase in aggregate wages and salaries, with investment income growth moderating.

Arkansas’ economic growth has also been geographically uneven. Metropolitan areas have generally fared well, especially in the Northwest and Northeast corners of the state. But many of the more rural areas of the state have continued to lag behind. Over half of the state’s 75 counties experienced net job losses between 2010 and 2015, and more than two-thirds have lost population over the same period.

Much of the uneven distribution of growth stems from a more fundamental transformation in the state’s economy: Goods-producing industries have been steadily contracting while service-providing sectors have expanded. Compared to pre-recession levels (2007), manufacturing employment has declined by nearly 35,000 jobs, with net job losses in construction adding another 6,000 to the total decline. Meanwhile, service-providing sectors have added 65,000 jobs to the Arkansas economy, particularly in the areas of Professional and Business Services, Education and Health Services, and Leisure and Hospitality. These service-sector jobs tend to be located in areas with higher population concentrations, feeding the disparity in rural-urban growth trends.

Looking forward, it is encouraging that after over a decade of decline, employment in manufacturing has stabilized. Significant job gains in that sector are unlikely, but further employment declines are not on the horizon either. Construction employment has been on a rising trend over the past three years and should continue, particularly if we see a renewed initiative on infrastructure spending. Growth in health care services may slow temporarily, but it is on a long-term upward trend, as is employment in other service-providing sectors.

Overall, I expect recent trends to continue in 2017. Policy changes adopted during the state legislative session and coming from the new administration in Washington will undoubtedly shade the outlook going forward, but are unlikely to have a significant impact on economic trends in Arkansas during 2017. These trends include modest growth, low unemployment and an increasing significance of service-providing sectors.

Hints of wage growth in recent data should translate to higher and more even distribution of personal income, with some pickup in consumer spending as well. It may not feel like a booming economy, but Arkansas’ economy is growing and should continue to do so through 2017.

Editor’s note: Dr. Michael Pakko is the chief economist and state economic forecaster and is with the Institute for Economic Advancement at the University of Arkansas at Little Rock.