Forecast: Tariffs, housing costs present downside risks to national, state economies

On the same day significant and disruptive tariffs on Canada, China and Mexico were announced by President Donald Trump, economists spoke at a business luncheon in Rogers about the health and challenges of the U.S. economy.

The 31st Annual Arkansas Business Forecast Luncheon held Friday (Jan. 31) in Rogers was hosted by the University of Arkansas.

Dana Peterson, chief economist at The Conference Board, spoke virtually at the event and predicts the global economy will grow about 3.1% in 2025. While that’s a solid rate, it is below levels reached in recent years. She expects U.S growth at 2.8% this year and global growth over the next decade to remain lower than pre-pandemic years as China and many other countries continue to struggle with labor shortages resulting from lower birth rates and higher rates of retiring workers.

Peterson says inflation will remain elevated primary because of geopolitical risks and the workforce deficits that push wages higher. She said trade wars, especially with the announced tariffs, will have a slowing effect on the U.S. and global economy.

She predicts a 10% U.S. tariff on all imports would lower overall U.S. gross domestic product (GDP) by 0.7% in the first year. It would fuel the Personal Consumption Expenditures index – a key measure of U.S. inflation – up 0.5% in a year. Peterson estimates 307,000 U.S. jobs would be lost in the first year of the announced tariffs and the U.S. dollar would strengthen. She said the global economy would decline 0.3%, with China’s economy down just 0.2%. Mexico and Canada would feel the brunt more severely with declines of 0.7% and 0.5%, respectively, with job losses and higher unemployment rates.

ARKANSAS TARIFF IMPACTS
Mervin Jebaraj, director of the Center for Business and Economic Research at the UA, said Arkansas’ manufacturing sector has seen solid growth since the pandemic, fueled by steel production, weapons systems and airplane parts manufacturing. He said some of the tariffs on steel that have been in place for several years helped the state’s steel industry but it hurt those who buy steel and use it in their manufacturing and construction.

Jebaraj said the 25% tariffs on Canada and Mexico will reverberate through the state’s economy. Canada is the state’s largest trading partner, benefiting from $2.7 billion in goods exported annually. The state also exports $217 million in services to Canada each year that could be constrained by tariffs. Jebaraj said 21% of the tariffs are grains valued at $94 million. Iron and steel garners $175 million, plastic companies sell $98 million, with aircraft parts garnering another $77 million. Perfumes, essential oils, firearms and ammunition, heating and cooling equipment and electric motors are also sold to Canada benefiting the state’s economy.

Jebaraj said Canada is in the middle of elections and he expects retaliation once U.S. tariffs go into effect. He said Arkansas businesses import $2.6 billion in goods from Canada each year such as softwood lumber, electricity, and optical and medical precision instruments.

Mexico is the second largest trading partner with Arkansas exporting $1.1 billion annually. Meat, poultry, paper, pulp and steel are among the largest exports. Arkansas businesses also import $913 million in goods from Mexico including motor vehicles, electrical components and motor vehicle parts, beverages and agricultural and construction machinery.

He said if the tariffs continue, he expects unemployment to increase as businesses may no longer be able to expand production.

HOUSING COSTS
Sam Khater, chief economist at Freddie Mac, spoke on the rising housing costs that continue to keep inflation elevated with the growing shortage of lower prices homes. He said builders have largely stopped building starter homes that consumers within 80% of the median income can afford to buy. This is happening at the same time families living in smaller homes might move up but the average 3% mortgage is keeping them in place. He said while a 7% mortgage is normal historically, families can buy less house for what they sell for and the cost of ownership is increased because of relatively higher interest rates. He estimates the average family would lose $47,000 in home equity if they tried to move from their 3% mortgage.

Khater expects the housing market to remain unfordable for many in 2025 and 2026. He does not believe mortgage rates will dip much lower than 7% range in the foreseeable future.

“We have gotten so use to the low, low rates and they are not coming back barring some major shock to the economy. The Fed is trying to avoid the mistakes it made previously by lowering rates fast and keeping them low too long,” Khater said.

He expects the migration of Americans to continue out of gateway cities into smaller, suburban areas over the next few years. He said Northwest Arkansas is a beneficiary of this migration, but areas like Austin, Texas, that was once a benchmark to follow has seen its housing prices escalate beyond affordable and consumers are leaving that area where their dollars go further. He said the same thing is happening in Nashville.

Jebaraj said about 400 homeowners move into Northwest Arkansas annually and 1,000 migrate to the state.

“The lack of affordable housing is one of the biggest challenges we face in the region.” he said.

Khater said Freddie Mac is working with smaller lenders on financing opportunities for starter homes in areas much like Arkansas and surrounding states. Freddie Mac reports home prices rose 4.7% in Northwest Arkansas in 2024. He said prices were up 5.4% in the Fort Smith metro and 2.8% in the Little Rock metro. Hot Springs saw prices rise 6.3% while Jonesboro’s metro area home price increased 4.9%. Pine Bluff and Texarkana each saw home prices rise around 2% last year.

Khater expects the Fed will lower rates just one time this year, keeping mortgage and credit card rates elevated for longer.