Editor’s note: The State of the State series provides reports twice a year on Arkansas’ key economic sectors. The series publishes stories to begin a year and stories in July/August to provide a broad mid-year update on the state’s economy. Link here for the State of the State page and previous stories.
The nationwide recession expected in 2023 never materialized, thanks primarily to a stronger-than-expected labor market and consumer spending. The new consensus is that economic growth will continue in 2024 but weaken compared to 2023.
“It looks like we dodged the bullet on the recession that was forecasted by many economists for 2023. In fact, the Arkansas economy had a strong first half — particularly in employment. There have been signs of slower growth in the latter part of the year, and I expect that to continue,” noted Michael Pakko, chief economist and state economic forecaster at the University of Arkansas at Little Rock’s Institute for Economic Advancement. “GDP growth is likely to be slow but positive. For the U.S., a consensus estimate is GDP growth of about 1.5%. It is likely to be less than 1% in Arkansas, given the relative size of our state’s manufacturing sector.”
Pakko said the U.S. jobless rate will likely rise above 4% by the end of 2024 and predicted Arkansas’ jobless rate will not rise above 3.7% in 2024. As of this writing, the U.S. jobless rate in December was 3.7%, and the Arkansas rate in December was 3.4%, unchanged from December 2022.
In Arkansas, Pakko predicts employment contraction in manufacturing, retail and wholesale trade and sectors reliant on consumer spending. He believes job gains will continue in the state’s health services, tourism and other service-providing sectors. He also sees a continued decline in inflation resulting in lower interest rates and a path for better economic growth into 2025.
“From an optimistic viewpoint, 2024 is expected to be a year of consolidation. Federal Reserve officials expect inflation to subside to near their 2% target, paving the way for possible interest rate cuts later in the year. This ‘soft-landing’ scenario sets the stage for a resumption of higher growth in 2025 and beyond,” Pakko said.
Greg Kaza, an economist and executive director of the Arkansas Policy Foundation, also sees growth continuing into 2024. He said the U.S. and Arkansas economies are in an expansion that began in the spring of 2020, with monthly employment, industrial production and trade sales among several key growth indicators.
“The main reason to believe growth will continue in 2024 is that expansion is the natural state of a market-based economy. By contrast, a recession could be caused by an endogenous or exogenous shock, though the Fed is better positioned to respond with rates above 5% than when they were zero. An example of an endogenous shock was the financial sector in 2008. The 1973 oil crisis was an exogenous event,” Kaza noted.
According to Kaza, the relatively rapid rise in interest rates during 2023 could result in a slower-growing economy in 2024 because of the likely negative impact on business and household spending.
“The central bank kept short rates at or near the zero bound for too many years. Some businesses and households have suffered consequences from the reversal of this policy due to leverage and debt levels,” Kaza said.
Kaza prefaced his responses by noting that one “can prepare for the future but cannot predict it given the large number of variables in a complex, modern economy.”
‘WALK THE LINE’
Assessments by Kaza and Pakko mirror that of the closely watched The Conference Board and recent analysis from J.P. Morgan.
“We anticipate a tepid start to 2024. While the prospects for a soft landing have risen, we continue to believe that volatility awaits the U.S. economy this year,” noted a January report from The Conference Board. “However, late 2024 and 2025 should usher in lower volatility and greater predictability. Inflation and interest rates should normalize, and GDP growth should converge to potential at just under 2%.”
Following are other estimates from The Conference Board.
• Overall consumer spending growth will slow in the first quarter of 2024 and contract in the second and third quarters. Inflation and interest rates will decline, and consumption should expand again in late 2024.
• Year-over-year inflation readings will hit the Fed’s 2% target in the third quarter, and the Federal Reserve will cut rates until the rate falls below 3% in the third quarter of 2025.
• Home sales and residential investment growth will not meaningfully improve until interest rates begin to fall.
J.P. Morgan analysts believe the national GDP will “walk the line between a slight expansion and contraction for much of next year, also known as a soft landing.” They also predict core prices (inflation) will be 2.4% in 2024, down from 3.4% in 2023. The housing market could see a modest improvement in 2024.
“With housing affordability metrics at a 40-year low and 75% of mortgages locked in at 4% or below, the U.S. housing market is effectively frozen. Given the already large drop in recent years, we think the housing market is one area of the economy that could perform better in 2024 than in 2023, even if trends remain soft in the near term,” according to J.P. Morgan.
The U.S. Bureau of Economic Analysis reported Dec. 21 a surprise 4.9% GDP gain in the third quarter of 2023. The Federal Reserve Bank of Atlanta on Jan. 19 put the fourth quarter GDP estimate at 2.4%.
A Jan. 2 report from the Federal Reserve Bank of St. Louis about the district’s economic conditions, including Arkansas, points to the softening labor market predicted by Pakko and others. A survey of businesses in the district found that 61% of firms plan to keep employment levels unchanged, 21% plan to increase job numbers and 18% plan to reduce jobs.
The recent survey also shows that 46% of businesses reported a reduction in employees in the previous three months, well above the 20% in the same period of 2022.
“While some saw lower headcounts due to struggles in replacing departing workers, most of these firms said that they were purposefully reducing headcount, either by not backfilling positions, reducing the number of open positions or laying off workers,” according to the St. Louis Fed.