Expect Higher Unemployment Before 2Q Recovery, Economists Say

In 2002, Arkansas’ economy will see a recovery by the second quarter and incentives for bargain-hunting consumers.

And the state’s unemployment rate, currently at 4.8 percent, will rise above 5 percent early next year as the full brunt of known layoffs and plant closings is registered, according to the annual report from the University of Arkansas at Little Rock’s Institute for Economic Advancement.

The report, written by John Shelnutt, head of research for the institute, said the higher unemployment rate also is a result of cautious employers making job-hunting more difficult.

But the unemployment rate in this recession will be lower than it was in the early 1980s, when it hovered at 10 percent, or in the early 1990s, when it was about 7 percent, he said.

One of the outcomes of the downturn will be the permanent loss of manufacturing jobs, said Jeff Collins, director of the Center for Business and Economic Development at the University of Arkansas in Fayetteville.

Between October 2000 and October 2001, the state lost about 13,000 manufacturing jobs, although construction and service jobs grew to offset the losses, he said.

“What really is happening is the state is moving closer to the national distribution of employment across sectors by percentages,” Collins said.

Collins said it’s better for the state to diversify and move away from manufacturing jobs anyway.

“I think we always equate economic development with increasing manufacturing employment,” Collins said. “The truth is manufacturing is such an internationally competitive sector that those jobs are very difficult to hold onto.”

Recovering from Recession

Shelnutt said characterizing this period as a moderate recession is difficult, though some of its features are in effect, including cautious consumers and employment losses in the more volatile sectors.

And although state revenue and corporate profits are under siege, a significant set of stabilizing factors is also in place.

Consumers and businesses are finding bargains in the marketplace, ranging from rock-bottom interest rates to prices of commodities and finished goods, Shelnutt said.

“Consumers may be tempted by the bargains while the fear of household financial damage from job loss is normalized,” he said.

State revenues will take a hit because corporate income taxes will be lower than expected, Collins said. Corporate profits also look ill.

When demand finally picks up, however, corporations will be able to return to profitability much quicker than they have in previous recessions because of the cost-cutting measures they instituted, he said.

The second quarter of 2002 will show consumers evidence of a modest recovery, and the third quarter will be when most major industries see evidence of recovery, Shelnutt said.

“In the interim, the state will see sluggish retail sales and a shrunken state budget,” he said.

Falling Behind

Shelnutt said Arkansans shouldn’t expect their personal income to rise for at least three quarters.

A reduction in overtime hours, part-time jobs and annual raises and bonuses caused personal income to fall, he said.

In 2001, total personal income will grow by 3.8 percent and 2 percent next year. But an expansion to almost 6 percent will return by 2003, he said.

Real personal income growth after inflation will be negative or zero growth over three quarters, ending by midyear 2002.

Although there is a surge in vehicle sales in response to financing incentives, it could be viewed as spending that would have occurred next year, Shelnutt said. The surge can be attributed to customers responding to the bargains in the market.

“So far the mood is bullish, as evidenced by unexpectedly high rates of sales for new cars and trucks,” Shelnutt said.

But the surge won’t be enough to save sales this year.

In Arkansas, sales of light vehicles will decline 17 percent from 58,838 in 2000 to 48,476 in 2001. Sales will fall nearly 4 percent in 2002, to 46,732, Shelnutt said.

“Unexpectedly high sales rates in the final months of the year in reaction to dealer incentives will only serve to ameliorate sales declines from earlier in the year,” he said.

Compared to the national average, personal income in Arkansas — now at about 75 percent of the national average — will fall further behind to 72 percent by 2004, he said.

One of the state’s problems is the lack of venture capitalists, Collins said.

In 2001, the Milken Institute ranked Arkansas last for the second year in a row among states that are in the best position to take advantage of the opportunities for growth in the new economy through technology development. States that rank highest are those that are able to turn their research capabilities into commercial products and help their economies grow.

“We will continue to fall further and further behind without some sort of investment,” Collins said.

Improved economic development is going to have to come from a strategically planned group effort, not just from a small group of people, he said.

Win Some, Lose Some

In 2002, the real winner in the state will be construction, Collins said.

“I don’t think we’re done building in Northwest Arkansas,” he said, “although I was talking to some folks in the real estate business, and they were concerned that perhaps office space had been overbuilt.”

The loser in 2002 will be some manufacturers.

“I think you’re going to see whatever remaining apparel jobs we have left … pretty much gone,” Collins said.

Collins said he still has hope that someday the overall economic landscape will improve for the state.

State government leaders have been talking more about education than in the past, which shows progress, he said.

Overall, the economic picture in 2002 is going to look similar to 2001, only in reverse, he said.

“The downturn will be in front and pick up in the latter part of the year,” he said.