Arkansas economists discuss economic silver linings

Editor’s note: The following is an excerpt of an article appearing in the most recent issue of TBQ, a magazine covering business and political news in Arkansas. Link here for more details.

Finding an economist willing to point out yet another miserable fact about recessionary economic conditions in the nation and state is easier than breaking a New Year’s resolution. The difficult chore is finding economists willing to talk about what’s right with the Arkansas economy.

There are a few economists willing to talk about the silver lining of the dark recessionary clouds.

• Kathy Deck, director of the College of Business and Economic Research with the Sam M. Walton College of Business at the University of Arkansas.

Deck, a long-time watcher of the Arkansas economy from her perch in Fayetteville, took a broad approach in finding the silver lining. She said a recession almost always causes business and industry to force assets into their most productive use, thereby eliminating the “slack” caused by positive economic cycles.
 
“That is, the seeds of the next boom are always planted during the busts,” Deck noted.
 
Not avoiding detail, Deck pointed to four positives — but noted that the positives “are few and far between, and almost always come with a caveat.”
 
1. Motor gasoline prices are low.
Low prices have helped the consumer continue to spend or reduce debt, Deck explained.

“But, then again, the development of the Fayetteville Shale depends on a threshold price for natural gas, so sustained low energy prices aren’t necessarily a full benefit for the Arkansas economy,” said Deck, pointing out her first caveat.

2. The state just barely had positive job growth.
Considering other parts of the county, any level of net job growth has to be counted as a positive, Deck asserts.

3. Housing prices are not dropping as fast as in other parts of the country.
Deck said housing price declines can be a good thing if they allow people who had previously been priced out of the market to buy.

“But it is not clear that is happening in any real way because of the significant uncertainty about that market right now,” said Deck, pointing to yet another caveat.

4. Arkansas has seen its sustainable business cluster grow.
Deck believes Arkansas government, academic and business officials have a placed real emphasis on the growth of green businesses, which will serve the state well by creating new jobs and lowering costs.

As far as the biggest Arkansas business events of 2008, Deck cited the emerging sustainability focus at the University of Arkansas and with the city of Fayetteville; home sales declines, foreclosures and other impacts of the real estate market correction; activity in the Fayetteville Shale play and the associated severance tax compromise; the health of banks in Northwest Arkansas; and the national credit meltdown.

• Greg Kaza, executive director of the Arkansas Policy Foundation

Kaza cuts to the chase, noting that employment growth at Bentonville-based Wal-Mart Stores Inc., El Dorado-based Murphy Oil Corp., and other Arkansas-based enterprises has kept Arkansas from feeling the full effect of the U.S. recession.

“Everyday job creation” is how Kaza describes the process that allows companies to grow during economic downturns — for example, Wal-Mart sales increasing because consumers seek lower prices.

“Government policymakers should be aware of this countercylical trend, and reduce any barriers that interfere with it,” Kaza said.

The old maxim that “This too shall pass,” is another silver lining, according to Kaza.

“The current recession will eventually end,” he wrote in a note to TBQ

Kaza explained, citing data from the National Bureau of Economic Research, that the average postwar recession is 10 months, and the two longest (1973-75, 1981-82) were 16 months in duration. NBER has said the current recession began December 2007. The Great Depression lasted 43 months (August 1929 to March 1933).
 
Another silver lining is the “modest fiscal discipline and tax relief” of Gov. Mike Beebe and other Arkansas officials. Kaza praised Beebe’s goal of cutting the sales tax on groceries.

“Tax relief is preferable to the alternatives: tax and spending increases, or inaction,” Kaza said.

• Robert Pittman, executive director, Strategic Growth Institute at the University of Central Arkansas.

Retail and energy are the bright spots for the Arkansas economy, according to Pittman.
Like Deck and Kaza, Pittman said the ability of Wal-Mart to capitalize on consumers’ interest in saving money during the recession keeps unemployment numbers low, especially in Northwest Arkansas.

And although natural gas prices have declined and reduced some of the momentum for exploration and drilling, Pittman said Arkansas’ Fayetteville Shale Play continues to create “an economic boom in the north central part of the state.” The play, a large and proven natural gas reserve, has been projected to create 10,000 new jobs in the next few years.

Pittman, citing relative strength in Arkansas sales tax collections, said state consumers are “holding up” despite tough economic conditions. However, Pittman said this is no time to be joyous of the state’s ability to — so far — avoid the full effects of the recession.

“While Arkansas is more fortunate than many parts of the country, the state cannot afford to rest on its laurels, and it must continue to diversify its economy,” Pittman warned.

• Jim Wollscheid, assistant professor of economics, University of Arkansas at Fort Smith.

Wollscheid also points to Wal-Mart as a positive for the Arkansas economy during this recessionary period. He predicts continued growth — and more jobs created in the state — for Wal-Mart as the national recession continues.

However, Wollscheid also points to academia as another source of economic growth in these tough times.

“During recessions, people typically return to school at higher rates to make themselves more employable,” he explained.

• Jeff Collins, an economist with Springdale-based Street Smart Data Services

Collins also points to a return to education as a silver lining.

“This is the time for Arkansas workers to invest in their human capital. To the extent that people take advantage of educational opportunities, they and the state economy will benefit as we return to growth,” Collins said.

The recession — which Collins predicts will last 19 to 24 months — could also provide “political cover” for state officials who have long wanted to revamp economic development policy.

“State and local governments will be forced to innovate to foster new economic activity,” Collins explained. “My hope is short-term strategies will be replaced by long-term strategies that encourage diversification of the state’s economy and the growth of the knowledge-based sector.”

The recession is also forcing Arkansas businesses to become better managed, better capitalized and more willing to innovate.

“The business community that emerges from the recession will be better able to compete in the global economy,” he said. 

As far as the top state business stories in 2008, Collins list included the failure of Rogers-based ANB Financial; the sale of Little Rock-based Alltel Corp. to Verizon Wireless; the decline of manufacturing in the state, particularly in Fort Smith; the statewide real estate market correction; job growth in the wind and biofuels energy sectors; and sustainability initiatives launched by Wal-Mart.

“This could have huge implications for the development of a new sector within the state,” Collins said of the sustainability program.