State of the State 2022: Arkansas’ economy expected to outpace 2021 despite Omicron surge

Arkansas’ economy was on track for robust gains in 2022 until the Omicron variant of COVID-19 put a kink in the line. Economists still believe the state’s economy will grow in 2022, with labor shortages possibly being a factor limiting growth.

John Shelnutt, administrator of economic and tax research at the Arkansas Department of Finance and Administration, said high growth in several sectors – travel, restaurants, personal services, and educational services – expected for early in 2022 may be pushed forward to mid-year because of the Omicron surge. That surge peaked in late January, after active cases rose above 101,000 and hospitalizations approached 1,700. The active cases as of Feb. 5 were down to 41,069, and hospitalizations were down to 1,512.

“Recent gains in the sectors hard hit by COVID-19 will be challenged again in the first half of the year by the more rapid spread of the omicron variant. High growth in the state’s private sector employment base in the second half of 2021 was marked by a blend of high growth from rebound in hard-hit sectors and continued expansion in the early-recovery sectors. A resumption of that pattern is expected by mid-year but not before dampening the annual growth that was initially expected,” Shelnutt told Talk Business & Politics.

Shelnutt estimates the 2022 Arkansas economy will “mirror and slightly exceed the growth rebound year of 2021,” with 2022 growth of 2.3% above 2021 growth of 2.1%. The 2022 growth, if reached, would be well above the five-year average growth in the pre-pandemic period of 1.8%.

SECTOR, GDP ESTIMATES
Following are other estimates from Shelnutt about 2022 economic conditions.
• Continued high growth in Professional & Business Services is expected with 6.3% growth in 2022, after an impressive 5.7% gain in 2021.
• Growth is also expected in the state’s historical sector advantages, with 8.8% employment growth expected in transportation, including trucking. Employment in manufacturing looks anemic in 2022, but could surprise on the high side with expansions in food processing and further expansion in steel fabrication and primary steel.
• Growth in construction employment could also surprise on the high side with gains from a combination of federal infrastructure spending and industrial projects.
• A surge from infrastructure programs and the expected fast start for construction of the newly announced U.S. Steel mill in Northeast Arkansas will offset the dampening of growth from rising interest rates in other market segments.
Attempts to attract skilled workers to meet rising demand in the state with economic development-style incentives could offset rising mortgage rates and highlight the lower cost of living in Arkansas.
• Renewable energy and transportation investments could add a diversification aspect to growth.
• Other state and federal stimulus program deployment will benefit telecommunications construction and health services.

Dr. Michael Pakko, chief economist and state economic forecaster at the Institute for Economic Advancement at the University of Arkansas at Little Rock, sees the state’s GDP rise by 4.2% in the fourth quarter of 2021 compared with the same quarter in 2020, with growth moderating to 3% in all of 2022. In terms of dollars, Dr. Latesha Settlage, dean of the College of Business at the University of Arkansas at Fort Smith, pegs the state’s GDP (final estimate) at $152 billion in 2022, up from $144 billion in 2021.

Settlage also estimates Arkansas economy sectors adding the most jobs in 2022 will be information, leisure & hospitality, professional & business services. She said consumers are in a “low debt-to-income position” and will have money to spend in the state’s tourism sector. Higher wages will pull people into the manufacturing sector.

THE LABOR FACTOR
Finding labor to feed and maintain economic growth will be a state and national challenge.

“The real concern for policymakers is how to turn the tide on labor force participation. Labor is a critical component in supporting expanded investment by business and government. Without a reliable supply of trained talent, goods and service producing firms must forego sales. In short, economic growth is not at its potential,” Settlage said in an early December 2021 note to Talk Business & Politics.

Arkansas’ December jobs report posted Jan. 25 provided an example of Settlage’s concern. The state’s jobless rate fell to a record low 3.1% in December, down from 3.4% in November and below the 4.9% in December 2020. However, there were fewer Arkansans employed in December compared to December 2020. The number of employed in Arkansas during December was an estimated 1,310,494 down 1,643 jobs compared with December 2020.

Also declining was the state’s labor force, which is the number of people eligible to work. The December tally was 1,353,108 in December, 26,205 people fewer than the 1,379,312 in December 2020, and even below the 1,354,206 in November. Arkansas’ labor force participation rate was 56.9% in December, below the 58.3% in December 2020, and below 57% for the first time in 2021.

Shelnutt believes conditions will improve in 2022 for the state’s labor market and for workers.

“Overall, the story of continued labor market recovery and expansion is still on track. Total wage income growth will still be elevated in 2022 from the combined factors of job gains, wage acceleration, inflation, and afterglow of past and current stimulus deployment. Stimulus payments to households will be replaced by greater opportunity in the labor market.”

GLOBAL, U.S. ECONOMIC ESTIMATES
• S&P Global Ratings estimates on U.S. GDP growth: 5.5% in 2021, 3.9% in 2022, and 2.7% in 2023

• Fitch Ratings estimates on U.S. GDP growth: 5.7% in 2021, 3.7% in 2022, and 1.9% in 2023

• Moody’s estimates G20 advanced countries will collectively grow 5.8% in 2021 and 4.4% in 2022, after a 3.2% contraction in 2020. The previous growth estimates in its August report were 6.2% for this year and 4.5% for the next year.

• ”Weaker-than-expected growth momentum and an upside surprise to inflation have dented some of the optimism surrounding the global economic recovery,” according to Moody’s.

• ”Supply chain disruptions, labor shortages and higher prices for some goods and services resulting from pandemic-induced lockdowns and fitful re-openings will stretch into 2022, but their effects will lessen in the second half of the year,” Moody’s Managing Director Elena Duggar

• “With inflation still rising and looking less transitory, the Fed has been moving up its tightening schedule. We now expect faster tapering and a policy rate liftoff in the third quarter of 2022,” according to S&P Global Ratings.

• Fitch Ratings’ recent world growth forecast for 2022 is 4.2%, down from a previous forecast of 4.4%, with most of the decline from “more intense slowdown in China.”

• “We expect goods prices to stabilize in 2022 as spending switches back to services, as strong investment boosts goods supply and as fiscal stimulus is unwound,” noted Fitch.

Editor’s note: Link here to connect to the State of the State section.