Economists: No second federal stimulus plan will slow consumer spending, lead to an ‘eviction crisis’

by Michael Tilley ([email protected]) 1,452 views 

Arkansas’ tax revenue is beating forecasts and the jobs picture is improving despite an economy weighed down by COVID-19. But the consensus among economists is the pace of recovery could slow – or shift into reverse – without a second federal stimulus.

As Gov. Asa Hutchinson is often quick to note, Arkansas’ economy is in better shape than most states and did not hit the forecast lows. Tax collections during the first quarter (July-September) of the fiscal year provided $158.8 million more in available revenue than expected. The gross general revenue was $1.993 billion, up 17.7% compared to the same period in 2019, and up 11.6% above the budget forecast, according to an Oct. 2 report from the Arkansas Department of Finance and Administration (DFA). Sales and use tax revenue – an indicator of consumer spending – during the first quarter was $703.9 million, up 10.3% compared with the same period in 2019 and up 11.4% above budget forecast.

The number of employed in Arkansas during August was an estimated 1,244,400, down 69,085 jobs, or 5.3% lower, compared with August 2019, according to numbers posted Sept. 18 by the U.S. Bureau of Labor Statistics. The August number was up 31,763 jobs compared with July. However, Arkansans without jobs in August totaled 99,432, up 104.7% from the 48,570 in August 2019, and up 6.9% from the 92,976 unemployed in July.

Unemployment claims also point to an improving job market according to figures from the Arkansas Department of Commerce. The state reported 79,564 regular weekly unemployment claims for the week ending Aug. 1, with the number falling to an estimated 31,056 for the week ended Oct. 3. Initial jobless claims were 12,750 for the week ended Aug. 1, and fell to an estimated 5,039 for the week ended Oct. 3. The state reached a peak of around 122,000 weekly jobless claims soon after the economy essentially shut down in late March and early April.

The estimated $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was approved by Congress earlier this year to provide aid to individuals, businesses and state and local governments in response to the pandemic. Part of the Act provided $1.25 billion to the Arkansas government. According to the Internal Revenue Service, 1.428 million stimulus checks were provided to Arkansans totaling a combined $2.496 billion. Thousands of Arkansans also benefitted from an extra $600 a week in unemployment pay, but that ended July 26. A $300 a week benefit was added later but was only a stopgap measure using money from the Federal Emergency Management Agency.

Federal Reserve Chair Jerome Powell, who has urged Congress to act on a second stimulus plan, said in an Oct. 6 speech that the pace of U.S. economic growth is slowing and there is “still a long way to go” to shore up the national economy.

“The pace of economic improvement has moderated since the outsize gains of May and June, as is evident in employment, income, and spending data. The increase in permanent job loss, as well as recent layoffs, are also notable,” Powell said.

Michael Pakko, chief economist and state economic forecaster at the Arkansas Economic Development Institute at the University of Arkansas at Little Rock, said some of the sales tax growth is the July 2019 state law that allowed for collections of online sales tax.

“That has certainly boosted the year-over-year numbers to date, but that effect will be disappearing in coming months. Internet sales have definitely increased during the pandemic, and if the online sales tax measure had NOT been implemented, many of the sales we’re seeing now would not be reflected in state revenue,” Pakko noted in a statement.

Pakko said sales tax revenue has been “remarkable” and suggests the “shutdown-related economic contraction was far less severe in Arkansas than in other parts of the country, particularly when it comes to consumer spending.” The UALR economist said the CARES Act had much to do with the state’s economic resilience.

“There is no doubt that government stimulus and income-support programs have helped to facilitate this surge in consumer spending. The BEA has reported that Arkansas Personal Income, less government transfer payments, was down by 6.5% in the second quarter.  Including transfer payments, however, total Personal Income was up 7.0% (that’s more than a 30% annualized growth rate). Without the income support that is provided by unemployment insurance and special Covid-19 relief payments, consumers would be far more constrained,” he said in a note to Talk Business & Politics.

Pakko projects reduced consumer spending if another stimulus package is not approved, and “might very well lead to further weakness in the economy, particularly for employment in service-providing sectors.”

Mervin Jebaraj, director of the Center for Business & Economic Research at the University of Arkansas, said the state may also want to prepare for a higher number of evictions without a second stimulus.

“I think the lack of a stimulus will be very harmful for both the nation and Arkansas. In large part, our sales tax revenues stabilized because of the stimulus, particularly the UI (unemployment insurance) benefits. While those have expired, people dipped into the savings they built up and availed themselves of the FEMA UI boost. Without all these programs, we can expect to see a downturn. We have avoided an eviction crisis so far, but we won’t be able to without the stimulus,”Jebaraj said.

He also said the state’s tourism industry “will need additional grants to survive without having to put their employees and customers at risk.”

Arkansas officials have tentatively approved a $50 million grant program for businesses in the state’s travel and tourism sector, but the funding and grant process has not yet been approved by the Arkansas Legislature. Montine McNulty, executive director of the Arkansas Hospitality Association, said it may be near the end of the year before money from the program begins to reach those in the industry. She said that may be too late for some business owners, especially those who are using their retirement savings to keep a business open.

“The industry really needs help now and we are going to lose many businesses without immediate help. I am also very worried about the future of the industry and what will happen next year because things have significantly changed and businesses cannot expect business just to switch back as usual next year. Patterns of living do change,” McNulty said.

Greg Kaza, an economist and director of the Arkansas Policy Foundation, has a different view, saying the economy is recovering and federal officials should balance the need for a stimulus with the need to improve the nation’s fiscal position.

“This is a different state of economic affairs than in February when the recession began. The U.S. government’s fiscal position and the long-term reserve status of the dollar should be considered in any discussion about a potential stimulus. Policymakers have been largely silent on these issues, a troubling development,” Kaza said.