U.S., Arkansas economy to peak, face strong headwinds in 2019, economists say

The decade-long economic upswing following the Great Recession is nearing its peak and will gradually erode in 2019 and beyond as a number key economic factors come into play.

That dour forecast was just a few of the highlights at Friday’s (Nov. 9) annual forecasting and economic outlook event hosted by the Little Rock branch of the Federal Reserve Bank of St. Louis and the Institute for Economic Advancement at the University of Arkansas at Little Rock.

During the two-hour breakfast event attended by more than 100 business leaders at the Clinton Presidential Library, economists Chris Varvares and Michael Pakko offered state and national economic forecasts, respectively, and provided their assessments of possible bumps in the road ahead that may slow down the pace of growth.

In prefacing his  hourlong presentation to the business-friendly crowd, Varvares jokingly said his economic outlook could be subtitled “as good as it gets,” citing ongoing global trade tension, rising interest rates, higher energy prices and the waning “stimulus effect” of the 2017 corporate income tax cuts.

“Economic forecasting is the dismal science, and I am not going to disappoint today,” said Varvares, who is co-head of U.S. economics at IHS Markit, a publicly-traded global information and analytics firm.

With recent strong reports of nation’s real Gross Domestic Product growth at 4.2% and 3.5% in the second and third quarters, respectively, Varvares called the current rate of growth “unsustainable.” He said the tight U.S. job market at 3.7% is too low and beyond full employment, and nation’s economy is now growing “above trend.”

“Above trend means we are still absorbing resources in labor markets faster than they can be produced, meaning that these markets are tightening and the law of supply and demand has not been repealed …,” he said. “Current conditions in that sense are unsustainable.”

Noting that his economic forecast is keeping with the Federal Reserve Open Market Committee modernizing its “accommodative” monetary policy, the IHS Markit economist said he expects the nation’s central bank to raise interest rates four times in 2018, three times in 2019 and once in 2020 to act as a brake on the overheated economy.

“We believe the Fed is reading the economy correctly, and they have also correctly surmised what level of rates would be consistent with the economy slowing back to its trend. But the financial markets don’t agree with the Fed or us,” he added jokingly.

That Fed policy, along with the nation’s tight labor market and other markets, will cause the U.S. GDP growth to peak at 3.1% in 2018, fall to 2.5% in 2019, and slide below 2% in 2020 and beyond. Varvares said those factors will allow the U.S. economy to grow more modestly without going into a downturn.

“The clock is ticking. So, we expect that once we begin to grow below trend in 2020, not a recession, but actually we have a technical name now that we call a ‘growth recession,’ said the Wall Street economist. “No negative … GDP growth, but slow enough growth that we are creating enough jobs as fast as new entrants coming into the labor force … It would be great if we could do it.”

Among other headwinds facing the U.S. economy, Varvares said rising energy prices, the impact of ongoing trade wars, tightening mortgage lending, global uncertainty surrounding Brexit and a possible downturn in China could all impact future U.S. economic growth and stability.

Arkansas growth concentrated in Northwest, Northeast and Central Arkansas
Following that presentation, Pakko told the audience that his forecast would closely mirror the IHS Markit national outlook, albeit with a few differences. In particular, the UALR economist said economic growth in Arkansas is almost always below the national average and several months behind.

“Other than the ‘growth recession’ that Chris was talking about, there is really no difference” in our forecasts, said Pakko, director of the UALR’s Economic Development Institute. In his presentation a year ago, Arkansas economist noted that the Natural State suffered a “double dip” recession during a period of negative growth in 2012, nearly three years after the nation’s Great Recession ended in July 2009.

In his new forecast, Pakko said that Arkansas is now a tale of two economies with strong population and GDP growth in the urban-focused metropolitan areas of Northwest, Northeast and Central Arkansas, while the rural counties and communities elsewhere are declining in numbers and jobs.

For example, communities in Benton and Washington counties in Northwest Arkansas have seen post-recession economic growth of 40% , which averages to about annual GDP growth of 3.1%. In Northeast Arkansas, the Jonesboro MSA has seen annual GDP growth of 1.6% over the same period, while Central Arkansas has seen a modest decade-long expansion at a rate of 0.3% annually, Pakko said.

“There is a less optimistic story about the rest of the state,” said Pakko, noting that 23 of the 75 Arkansas counties have seen population declines. “There is a lot disparity around the state. In fact, this is one of the major themes on what is happening to our state economy over the past decade.”

Pakko continued: “That means over two-thirds of our counties are losing population and this is not a short-term thing, it’s over the span of (several) years. So that is a big aspect of what’s happening in our state when comparing the different regions.”

Another theme Pakko focused on was the state’s record low unemployment rate, which touched an all-time low of 3.5% in September and October. However, the Little Rock economist said there are some “disturbing signs” in Arkansas state’s brimming job pool that bears watching.

In particular, Pakko said the so-called labor force participation rate, which is a measure of workers are either employed or actively looking for work, have seen a stark decline from 63% to 58% in 2017 and now stands below 57%. In recent months, he said, there has been a significant spike in the number of workers in the 45-to-64 year old range who have simply dropped out of the labor force without explanation.

“They have dropped out of the labor force and they don’t intend to come back. That just means that we have lost a certain amount of productive capacity for our economy and these are workers at the peak earning years of their careers who have decided for one reason or another to drop out of the workforce perhaps to take early retirement or disability,” he said. “So, I would suggest that the unemployment rate is not giving us a true signal or condition of the labor market.”

Concerning the state’s growth prospects over the next few years, Pakko said Arkansas will close out 2018 with GDP growth of 1.6% and then peak in 2019 at 2.4%. Afterward, Arkansas’ economy will begin to decline in 2020 with tepid growth of only 1.8%, he said.

In the first quarter, Arkansas economy ranked 49 out of the 50 states with 0% GDP growth. Statewide, the tepid annual GDP growth of 0.91% and 1.1% over the past two calendar years has left Arkansas in the bottom tier among the 50 states and D.C. That largely mirrors weak GDP growth of 1.3% and 0.4%, respectively, in 2014 and 2015. The U.S. Bureau of Economic Analysis will release its next GDP for Arkansas and other states on Wednesday, Nov. 14.

Pakko’s annual outlook also predicted Arkansas will continue to transition from a goods-producing to a service-sector based economy. He said the professional and business services will continue to see the strong growth in 2019, followed by the leisure and hospitality industry that is expected to get a boost from the passage of the Nov. 6 ballot issue to legalize casino gambling in four Arkansas counties.