Economists weigh in on national, state and regional economic health in 2018

Three economists who closely watch Arkansas’ economy believe job growth and positive GDP reports will continue into 2018. Unfortunately, uneven economic growth in the state and a low labor force participation rate are also likely to be realities in 2018.

Mervin Jebaraj, recently named director of the Center for Business and Economic Research (CBER) at the Sam M. Walton College of Business at the University of Arkansas, said it will take unforeseen “shocks to the system” to slow or reverse economic trends for the state and nation.

“The nation as whole is in the 102nd consecutive month of economic growth and assuming the economy continues to grow in the first five months of 2018, we will have the second-longest economic expansion in our nation’s recorded economic history,” he said. “Small business optimism is up and consumer sentiment is doing pretty well.”

Jebaraj also said Arkansas set a record unemployment rate of 3.4% in 2017 — first posted in May — and the state’s GDP growth was ranked 14th in the nation. The low rate held for June and July before rising to 3.6% in October, the last month of data from the U.S. Bureau of Labor Statistics (BLS) available by presstime.

Jeff Collins, an economist for Talk Business & Politics-Northwest Arkansas Business Journal and former CBER director, said low inflation and interest rates will continue to fuel growth, but he added a caveat.

“The outlook for the next four to eight quarters is accelerating growth, relatively low inflation and interest rates. …  Any restructuring of the federal budget which significantly changes the ratio of tax revenues to spending will impact the price of money,” Collins said.

Arkansas Economic Development Institute economist Dr. Michael Pakko believes the cycle of state economic growth that began in 2014 will continue in 2018, but “not at a spectacular pace.” He predicts the jobless rate might rise to 4% during the year.

“Job growth will continue to absorb workers and draw new residents to the state,” Pakko noted. “Employment gains will continue to be dominated by service-providing sectors, but also with positive growth in manufacturing and construction employment.”

He also believes a recent trend in Arkansas of rising wages — boosted by low unemployment mixed with a continued need for more workers — will increase in 2018. The Arkansas Department of Finance and Administration recently reported payroll income gains of 4.5% between July and November, with a 4.8% gain in November.

“This should help boost the growth rate of consumer spending, which has been lagging behind other indicators of economic activity for Arkansas,” Pakko said.

Sales and use tax collections, a primary measure of consumer spending, are essentially flat. For the first five months of the state’s fiscal year (July-November), sales and use tax revenue was $979.9 million, up just 0.7% compared to the same period in 2016.

UNEVEN JOB GROWTH, WAGE ISSUES
Jebaraj and Pakko pointed to uneven job growth and stagnant wages as problems for the state economy. While wages are rising, as Pakko noted, Jebaraj said when adjusted for inflation, “the wage growth for workers has essentially been non-existent.” Jebaraj also said the nature of rural Arkansas — lack of nearby resources — and the opioid epidemic have curtailed economic growth.

“In Arkansas, the labor force participation rate has stubbornly remained below 60%. It means that we still have some slack in employment stemming from the lack of employment for the long-term unemployed, opioid prescriptions and addiction preventing work, or lack of affordable daycare,” Jebaraj said.

Pakko agreed, noting, “Although the unemployment rate is low, Arkansas still has too many potential workers who have withdrawn from the labor market.”

And Pakko’s point of an uneven economy in the state comes to life when looking at job numbers in central and Northwest Arkansas.

Arkansas ended October with 1.329 million jobs, up 3.3%, or 42,501 jobs compared with the same period in 2016 — the latest BLS data available. Of the job growth, 12,904, or 30.3%, came from Northwest Arkansas, and 8,894, or 21%, came from central Arkansas. Northwest Arkansas had 272,998 jobs in October, up almost 5% compared to the same period in 2016. Central Arkansas had 348,141 jobs in October, up 2.6% compared with the same period in 2016.

More than 51% of job growth came from less than 10 — arguably less than five — of the state’s 75 counties.

NEW FEDERAL TAX RULES
Collins’ reference to changing tax and money policy was also noted by Jebaraj, with both concerned the new rules could change economic performance beyond 2018.

Among the key points of the new law signed by President Donald Trump is that the top corporate tax rate declines from 35% to 20% but would be implemented at separate times and made permanent. The Treasury Department’s Office of Tax Policy predicts nearly half of the expected 0.7% in new growth will come from changes to corporate taxation.

“This is certainly an interesting economic experiment that will bear watching. If successful, Keynesian economists everywhere will rejoice with, ‘I told you so!’” Collins noted, referring to those who believe cutting corporate taxes will result in more jobs and higher wages. “That is, we should no longer concern ourselves with the potential negative impacts of fiscal stimulus policies that have near-term benefits and long-term costs. As Keynes remarked, ‘In the long run we are all dead.’”

Jebaraj suggested economic growth may struggle to provide promised tax revenues under the new language.

“Even though the national economy has recorded above 3% growth in the past two quarters, business economists are still projecting an annual economic growth rate of 2.2% in 2017 and 2.5% in 2018, which accounts for the tax reform bill as it is currently structured,” he said. “The growth rate isn’t nearly as strong as previous economic expansions and raises important questions about how we can pay for the tax changes and other government programs.”

Collins also said aspects of the new law could lead to business investments in labor-saving technologies that would reduce rather than increase job numbers. He also said removing the penalty for offshoring profits could result in more capital investment outside the U.S.

NORTHWEST ARKANSAS
Jebaraj said continued growth of major corporate players in Northwest Arkansas, along with health care and other service sector jobs, is expected in 2018. The region in July set record employment of 274,971 jobs and a record labor force of 283,189.

“There is strong employment growth in the professional and business services sector and in health care indicating that the population growth and general economic performance is strong,” he said. “As long as the national economy continues to grow, we expect a similar story in 2018.”

With big employers like Wal-Mart Stores, J.B. Hunt Transport Services and Tyson Foods helping boost the regional economy, Jebaraj said it’s important for regional leadership to continue job diversification efforts. He said a “strong entrepreneurial eco-system” is needed to build on the base of corporate jobs.

Jebaraj cited housing affordability and mass transit when asked about regional weaknesses.

“While we are affordable when compared to other large metros, housing costs are steadily rising and the region risks losing its competitiveness on this front,” he said. “The region needs an action plan to develop affordable housing that is close enough to the regional investments in amenities and that makes sense for the development of alternative transit modes in NWA.”