Slow Growth Ahead, Economists Predict

In 2003, Arkansas’ economy should continue to see a slow recovery.

“It won’t be all that spectacular, although it should pick up in the second half and accelerate into 2004,” said John Shelnutt, senior research economist and head of research at University of Arkansas at Little Rock’s Institute for Economic Advancement.

Leading the way for the state’s economy will be services, trucking and parts of the manufacturing industries, Shelnutt said. The industries that could be hit the hardest, he said, are the forest and construction-related manufacturing industries.

Other bad news for the upcoming year is Arkansas’ per capita income, compared with the national average, will fall in 2003 from 73.1 percent in 2002 to 72.1 percent next year, according to the annual report from the IEA.

On the other hand, total employment will rise for the first time since 2000.

“It’ll be slow,” Shelnutt said. “The labor markets tend to lag the other leading measures of the economy in recovery.”

In 2003, the labor market is expected to have a 0.7 percent net growth, compared with minor losses in the previous two years. In 2004, the net growth is expected to hit 2 percent, the highest level since 1998.

The state’s unemployment rate should remain at 5.1 percent in 2003, while the national unemployment rate will be 5.9 percent, the UALR report said.

One area that’s been helping the economy is the low interest rates.

Refinancing of mortgages and other debt at lower interest rates has improved liquidity and given consumers more money to spend, said Jeff Collins, director of the Center for Business and Economic Research at the University of Arkansas.

Interest rates should rise along with recovery in the national economy — which means relatively low interest rates could continue through 2003, Shelnutt said.

In Arkansas, consumer prices will rise by 2.9 percent in 2003 and 2004, after a mere 1.7 percent rise in 2002, the report said.

The report, written by Shelnutt, said real earnings growth will worsen in 2003 as inflation shifts from unusually low levels in 2002 to average acceleration in 2003. Real income growth is expected to recover in 2004 as the labor markets improve.

Retailers could be at risk if consumer confidence doesn’t rebound, Collins said.

“So much is driven by consumer confidence, and consumer confidence tends to be a pretty fragile thing,” he said.

Until there’s some resolution with the situation with Iraq, people are going to “wait and see,” Collins said.

Government

The Legislature will have its hands full next year dealing with the Lake View school case and Gov. Mike Huckabee’s proposal to raise taxes, both which could have strong implications for the state’s economic future.

In the Lake View case, the state Supreme Court recently ruled that the state’s system of public education is unconstitutionally inadequate and inequitable. The ruling means that the General Assembly will be forced to fund what may amount to hundreds of millions of dollars in additional educational expenses each year.

But the overhaul in education may be good for the state, Collins said.

“Education is important to long-term economic growth. Unless we continue to improve the quality of the work force of the state of Arkansas, we will be unfortunately relegated to competing against other countries that have much lower costs of labor than we do,” Collins said.

Collins said the state has to produce more productive, higher-quality labor, “and that comes through putting more stuff in people’s head, putting more abilities and skills, and that’s the future for us. … The investments that we make in education today are the economic boons of the next decade.”

Until that happens, Collins said not to expect Arkansas to make any big strides relative to the national economy.

The Legislature also will have to deal with Huckabee’s proposal of a 5/8-cent sales tax increase.

If the state sales tax is raised, soon the sales tax in some cities with local-option sales taxes could approach 8-10 percent, which could defeat the purpose of raising rates.

“As that (sales tax) rate continues to climb … you’re really encouraging people to spend other places,” Collins said, such as on the sales tax-exempt Internet or catalogs.

And without sales, it becomes harder to raise revenue, he said. “I think it’s a tough time to be in government right now,” Collins said.

Weak revenue growth by cities and the state will limit the growth of government spending in 2003, Shelnutt said.

“In local government, the good news is we’re not as bad off as a lot of other states,” Shelnutt said.

“So I think things are going to be tight in the state and local government for at least a year. But in relative terms, it’s OK.”