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2023 Economic Forecast Event

This morning’s Economic Forecast Event was a great success. Thank you to all the participants and attendees, and special thanks to the Little Rock Branch of the Federal Reserve Bank of St. Louis for hosting the event.

Copies of the presentations are available by following the links below:

 

 

Forecast Update: Impact of Covid-19 on the Arkansas Economic Outlook (June)

As the economic impact of the COVID-19 pandemic continues to unfold, one constant is the rapid pace at which the situation is developing. Just one month ago, our May forecast came out in the wake of the April employment report, which showed U.S. payroll employment plummeting by over 20 million and the unemployment rate rising to 14.7%. The ongoing accelerated pace of initial claims for unemployment insurance suggested that labor markets would continue to decline, both nationally and here in Arkansas.

Over the past month, however, there have been emerging bits of information that suggest that Arkansas has not been as hard-hit as many other parts of the country. While initial claims for unemployment insurance remain high, continuing claims (insured unemployment) seemed to have clearly plateaued at around 120 thousand, implying an insured unemployment rate of about 10%. The U.S. insured unemployment rate has shown some signs of coming down from a peak in early May, but remained above 14% near the end of the month.

Figure 1:

Source: Department of Labor

The release of the state-level employment report for April provided further evidence of Arkansas’ relative resilience to the economic downturn. If every sector in the Arkansas economy had suffered the same proportionate losses as shown in the U.S. employment report, we would have expected a decline of 160 thousand jobs in April. Instead, the decline was “only” 100 thousand.  It was telling that the sectors in which Arkansas outperformed the national economy included some of those most-impacted by COVID-related economic shutdowns; for example, both Retail Trade and Leisure & Hospitality contracted far less than the national average. Construction and Manufacturing also experienced smaller declines in Arkansas than in the national data.

Another piece of information came from the state revenue report for May, which showed Sales and Use Tax collections down only 2.8% from a year earlier. That was 8.5% above the forecast of the Arkansas Department of Finance and Administration and similarly above our expectations.

But the most paradigm-disrupting development over the past month was the unexpected rebound of U.S. labor markets that was announced last Friday (June 5). The May employment report showed a one-month increase in payroll employment of approximately 2.5 million and a decline in the official unemployment rate to 13.3%.  The increase in payroll employment was the largest one-month gain ever recorded for the series and was the largest monthly percentage increase since WWII. In the context of the 22 million decline in employment over the previous two months, the May rebound might be characterized as a “dead-cat bounce.”[1] Nevertheless, it showed that the limited re-opening of the economy around the country was generating a more rapid and robust resurgence of economic activity than most economists had expected.

Figure 2:

Source: Bureau of Labor Statistics

In this updated forecast report, we present new projections for the Arkansas economy in light of recent developments. The forecast is based on the latest update to the national outlook from IHS Markit, originally dated June 4, but updated on June 8 to account for the surprising U.S. employment report. The June IHS forecast projects second-quarter GDP growth falling at an annual rate of 42% — down from the 36.5% rate of decline forecast a month earlier.  National unemployment is now projected to peak earlier at only 13.4%, with the peak now coming sooner (in the second quarter rather than the fourth).

As with our previous forecasts for the Arkansas economy, we have applied the recent IHS national forecast changes to the model for Arkansas, adjusting the components of each aggregate separately in order to capture some of the unique characteristics of the Arkansas economy. Our forecast is also informed by a recent update to the IHS Arkansas model that reflected the assumptions in the previous (May) national model. In addition, this forecast update is adjusted along several margins to reflect the relatively-strong performance of the Arkansas economy. We take explicit account of the effects of higher earnings and spending that are likely to accompany the improved employment outlook, adjusting the model-generated forecasts to match emerging data for the state.

The following sections present our latest post-COVID-19 forecasts for Arkansas, comparing the latest projections to previous forecasts.

Employment
The most significant revision to the forecast is, once again, the outlook for employment.  A month ago, we expected payroll employment to decline through May or June, with recovery slowly taking hold in a partially-reopened economy. The rebound of U.S. employment in May changes that outlook dramatically. Because the Arkansas economy has been proportionately less affected by employment declines in March and April, a significant May rebound is considered unlikely. Nevertheless, the flow of job-losses is expected to have abated.

The latest forecast indicates total job losses of 110,000 in the second quarter, a drop of 8.6% from the first quarter. The May forecast had projected job declines nearly twice that size.  A likelihood remains that we might see further declines in the third-quarter as firms adjust to the limited reopening of the economy. Gradual recovery and steady positive job-growth is now expected before the end of the year.

Figure 3:

Sources: IHS Markit, Arkansas Economic Development Institute

Unemployment
Even in the best of times, the unemployment rate can be a tricky measure to interpret.  Based on a nationwide survey, the rate presents the number of unemployed as a percent of the labor force, where movement into and out of the labor force complicate matters.  In the present setting, interpreting the underlying survey results has also been problematic. In March, April and May, the Bureau of Labor Statistics noted that many workers affected by COVID-19 shutdowns were incorrectly classified as “employed but absent from work” instead of “unemployed on temporary layoff.” The BLS reports the survey results as the official statistics, but has provided estimates of how this misclassification might have affected the reported unemployment rate. As shown in Table 1, correcting for the misclassification might add as much as 3 to 5 percentage points to the reported rate. The BLS has reported that the error is not specific to any state or region, so it is unclear how it has affected the measurement of Arkansas’ unemployment rate.

Table 1:

Source: Bureau of Labor Statistics

Measurement problems notwithstanding, Figure 4 shows the latest outlook for unemployment based on the typical relationship between household employment and payroll employment. Just a month ago, the forecast indicated unemployment in the range of 16 to 17% through the end of 2020. The latest forecast shows unemployment remaining at around 10.3% through the summer before starting to decline in the fourth quarter.

Figure 4:

Sources: IHS Markit, Arkansas Economic Development Institute

Personal Income
The latest forecast for personal income continues to reflect a combination of lower earnings, offset by a deluge of government transfer payments (which include special tax rebates and expanded unemployment insurance benefits). As shown in Figure 5, the effects of transfer payments imply a surge personal income in the second and third quarters, dropping off sharply after that.

Figure 5:

Sources: IHS Markit, Arkansas Economic Development Institute

Figures 5a and 5b show how transfer income and non-transfer income are affecting overall personal income. Reflecting higher expected employment (and wages), the June forecast for personal income less transfer payments is expected to decline by only 7.8%. In May the forecast decline was 10.3%. Meanwhile, the timely distribution of tax rebate payments has increased total transfer payments expected in the second quarter, in part by moving them up from the third quarter.  In the absence of further policy actions, the transfer payments authorized under the CARES Act are expected to diminish in the fourth quarter.

Figure 5a:

Sources: IHS Markit, Arkansas Economic Development Institute

Figure 5b:

Sources: IHS Markit, Arkansas Economic Development Institute

Consumer Spending
Despite the boost to incomes from expected transfer payments, we are still anticipating a sharp decline in Personal Consumption Expenditures (PCE), particularly in the second quarter. The combination of business closures and reduced non-transfer income is expected to suppress consumer spending temporarily. Ongoing economic weakness is expected to keep spending from accelerating to pre-COVID levels for some time. Although the surge in transfer income could buffer consumer spending from even larger declines, economic theory and evidence suggests that one-time payments result in relatively small boosts to current spending, with significant portions of the payments being saved or (equivalently) used to pay down household debt.

As shown in Figure 6, the latest forecast suggests a somewhat smaller decline in PCE than projected a month ago. The outlook now includes a slightly more rapid pace of recovery, reflecting improved expectations regarding employment and income. Spending in the second quarter is now projected to decline by 13.4%, slightly less than the 14.8% decline predicted in the May forecast.

Figure 6:

Sources: IHS Markit, Arkansas Economic Development Institute

Table 2 compares the May and June forecasts for PCE, focusing on the two-quarter impact (2019:Q4-2020:Q2) of the COVID-19-related shutdowns. Projections for many of the components have changed little since last month, while others reflect specific sectoral information collected by IHS forecasters. Each of the series was adjusted to account for the higher income profile embedded in the June forecast.

The largest revision are in Durable Goods, particularly the Motor Vehicles & Parts component, for which data on both the national and state level indicate stronger-than-expected demand. The decline in nondurable goods is now expected to be somewhat larger, as some of the strength in Food & Beverages Purchased for Off-Premises Consumption (a.k.a. groceries) is expected to dissipate as the economy opens further. Spending on services is still expected to show sharp declines, although the magnitude of the drop in Food Services and Accommodations is now somewhat smaller.

Table 2:

Sources: IHS Markit, Arkansas Economic Development Institute

Figure 7 shows index values (relative to 2019:Q4=100), illustrating the relative paths for total PCE, Durable Goods, Nondurable Goods (less Gasoline & Other Energy) and Services. When gasoline expenditures are excluded, nondurable goods purchases are expected to remain relatively stable throughout the forecast horizon. But subtracting Food and Beverages Purchased for Off-Premises Consumption, the remaining components are expected to decline by about 10%. Driven by reduced spending on Recreation and Food Services & Accommodation, spending on services is expected to decline by 15%.  The largest declines are in durable goods, which falls by 19%.

Figure 7:

Sources: IHS Markit, Arkansas Economic Development Institute

 

Implications for Local Sales Tax Collections

One of the practical applications of the consumer spending forecast is evaluation of how sales tax receipts by city and county governments might be affected.   To assess the sales tax implications, we have been tracking a composite measure that is intended to mimic the taxable sales base.  This taxable sales proxy—shown in Figure 8—includes all Durable and Nondurable goods less Gasoline, plus Recreation Services and Food Services & Accommodation.

The outlook for taxable sales has improved in this month’s forecast, for the second consecutive month. The April forecast had shown a decline of 18.3% from 2019:Q4 through 2020:Q2.  In May, the projected decline was 16.7%. The latest forecast shaves that loss down to 16.1%.  Reflecting the more rapid and robust recovery of employment and income that is now projected, the taxable sales base is now expected to rebound more sharply than in either the April or May forecast.

Figure 8:

Sources: IHS Markit, Arkansas Economic Development Institute

# # #

A PDF file of this report can be downloaded HERE.

[1] A dead-cat bounce is a term used in finance to refer to a small recovery in the price of an asset after a period of sharp decline. The name comes from the idea that even a dead cat will bounce if it falls far enough or fast enough. As a cat owner, the Arkansas Economist intends no disparagement of cats.

Forecast Update: Impact of Covid-19 on the Arkansas Economic Outlook (May)

The economic impact of the COVID-19 pandemic continues to be more rapid and more severe than initially expected.  In our previous forecast dated April 8, we projected a payroll employment decline of 108,000 by the end of the year.  It now appears that job losses during the month of April alone will exceed this magnitude.  The unemployment rate – previously projected to reach 9.3% in the fourth quarter – will likely be well over 10% for April.

In this updated report we present new projections for the Arkansas economy.  The forecast is based on the latest update to the national outlook from IHS Markit, dated May 11, 2020.  The new IHS forecast projects GDP growth falling at nearly a 37% annual rate in the second quarter – down from the 26.5% rate of decline forecast a month ago.  National unemployment is now projected to peak at nearly 20%, with the peak now coming sooner (in the third quarter rather than the fourth).  The latest IHS forecast takes into account new data and new assessments of employment, income and spending patterns – including the national employment data for April that came out last Friday, May 8.  (April employment data for Arkansas will not be released until May 22.)

Assessing the prospects for the timing of a national economic recovery, Joel Prakken, Chief US Economist emphasized the uncertainties that remain: “A phased re-opening of the economy has begun already. On the one hand, this is likely to make April or May the low point in consumer spending and GDP. On the other hand, studies suggest it likely will slow the decline in new cases and deaths, discouraging many consumers from resuming their pre-COVID-19 spending patterns and thereby slowing the recovery in spending.”

As with our previous forecasts for the Arkansas economy, we have applied the recent IHS national forecast adjustments to the model for Arkansas, adjusting the components of each aggregate separately in order to capture some of the unique characteristics of the Arkansas economy. Our forecast is also informed by a recent update to the IHS Arkansas model that reflected the assumptions in the previous (April 8) national model.

The following sections present our latest post-COVID-19 forecasts for Arkansas, comparing the latest projections to previous forecasts.

Employment
The most significant revision to the forecast is a more rapid and sudden decline in payroll employment.  Employment declines in March were unexpected in their abruptness, and the data available for April indicate a truly precipitous decline.  The national data showed an employment loss of over 20 million for the month.  If the major sectors of the Arkansas economy show job-losses with magnitudes similar to the U.S., we should expect to see that Arkansas nonfarm payroll employment declined by about 160,000 April.

The latest forecast indicates total job losses of 240,000 by the third quarter of 2020, a drop of 19% drop from the first quarter.  A gradual recovery begins in the fourth quarter but by the end of 2021, employment remains more than 80,000 below pre-COVID-19 levels.

Figure 1: Sources: IHS Markit, Arkansas Economic Development Institute

As shown in Table 1, forecasts for job losses continue to be somewhat concentrated in service-providing sectors that are considered especially impacted by social-distancing norms.  However, the new forecast shows sharply larger employment declines across the entire economy.

Table 1: Sources: IHS Markit, Arkansas Economic Development Institute

Unemployment
The Arkansas unemployment rate was previously forecast to peak at 9.2% in the fourth quarter.  It now appears to be well over 10% already.  Using the methodology described in a recent post, data on unemployment insurance claims and projections of nonfarm payroll employment suggest that the reported unemployment for April rate will be in the neighborhood of 12.5%.

Our latest forecast suggests an unemployment rate peaking at 17% in the third quarter. As dire as that sounds, the forecast for Arkansas is lower than the national rate of 19.6%.  Recent data suggests that the labor force participation rate might fall by as much as 5%. This unprecedented drop would have the effect of reducing the reported unemployment rate, but would nonetheless represent a labor-force contraction.

Figure 2: Sources: IHS Markit, Arkansas Economic Development Institute

Personal Income The latest forecast for personal income includes even larger increases in transfer payments than in our April forecast, reflecting expansions of federal spending associated with the CARES Act and higher estimates of unemployment insurance payments.  Nevertheless, income losses that are directly related to higher unemployment result in a downward revision to total personal income, at least during the current quarter.

Figure 3: Sources: IHS Markit, Arkansas Economic Development Institute

Figures 3a and 3b help to disentangle the personal income forecasts.  Driven by declining employment, the outlook for personal income less transfer payments has grown more pessimistic with each iteration of the forecast.  Economic stimulus payment, on the other hand, have the effect of increasing personal income, particularly in the second and third quarters of the year. The net result is the forecast shown above in Figure 3: total income below trend except for the third quarter of the year, when transfer payments are expected to peak.  Assuming no additional government stimulus programs, the net outcome is that total personal income declines to a reach a trough in the first quarter of 2021.

Figure 3a: Sources: IHS Markit, Arkansas Economic Development Institute

Figure 3b: Sources: IHS Markit, Arkansas Economic Development Institute

Consumer Spending Despite the boost to incomes from expected transfer payments, the balance of forces is again expected to result in sharper declines in Personal Consumption Expenditures (PCE) than in the previous forecast.  Spending in the second quarter is now projected to decline by 13.4%, compared to a decline of 9% in the April forecast.

Figure 4: Sources: IHS Markit, Arkansas Economic Development Institute

Table 2 shows the initial declines expected for components of consumer spending, comparing the current outlook to previous forecasts for the period 2019:Q4-2020:Q2.  As is typical during business cycle downturns, durable goods purchases are expected to fall by the largest percentages.  Total durable goods purchases are expected to decline by 28%, with motor vehicles down 41%.  Nondurable goods purchases are less-affected during economic declines, particularly in the present situation with meals-at-home substituting for dining-out, overall Nondurable Goods purchases are expected to decline by only 4%.  Nondurables also includes gasoline, where price reductions account for much of a 46% drop in spending, as well as Food and Beverages Purchased for Off-premises Consumption, which are expected to increase by 22%.  Spending on services also tends to be more resilient to economic downturns, but some sectors in particular are expected to show sharp declines.  Overall spending on services is projected to decline by 16%, but spending on Recreation is expected to drop by 44% and Accommodations and Food Services by 48%.  The forecast for spending on Food Services has been marked up from the previous forecast as drive-through and take-out sales have shown the resilience of that sector.

Table 2: Sources: IHS Markit, Arkansas Economic Development Institute

Figure 5 shows index values (relative to 2019:Q4=100), illustrating the relative paths for total PCE, Durable Goods, Nondurable Goods (less Gasoline & Other Energy) and Services.

When gasoline expenditures are excluded, nondurable goods purchases are expected increase throughout the forecast horizon.  But subtracting Food and Beverages Purchased for Off-Premises Consumption, the remaining components are expected to decline by about 8%. Driven by reduced spending on Recreation and Food Services & Accommodation, spending on services is expected to decline by over 16%.  The largest declines are in the durable goods components.

Figure 5: Sources: IHS Markit, Arkansas Economic Development Institute

Implications for Local Sales Tax Collections
For assessing the impact on county and municipal sales tax collections, the question is how the tax base is reflected in the various components of spending.  Durable goods are taxable and represent a significant share of the sales tax base.  Nondurable goods, excluding gasoline, are also taxable.  Services are generally not taxable, with the exception of some categories that are expected to be hard-hit by the downturn; in particular, Recreation and Food Services & Accommodation.  On the other hand, the surge in grocery sales represent a component of county and municipal sales tax bases that should help offset declines in other categories.

As a proxy for local sales tax bases in Arkansas, we take a simple sum of Durable Goods plus Nondurable Goods (less Gasoline and other energy) plus two services components, Recreation and Food Services & Accommodation.  This isn’t a perfect measure.  For example, it excludes the utilities component of Housing and Utilities, as well as some taxable components of Other Services.  Moreover, as a measure of consumer spending, it does not include some taxable business-to-business sales.  Nevertheless, this aggregate measures some of the key components of the tax base.

Figure 6 shows the trajectory of this measure compared to total Personal Consumption Expenditures, along with a comparison of the current outlook and the April forecast.  In the new forecast, the decline in total PCE has been revised from roughly -10% to -15%.  The proxy for taxable sales, however, has been revised to show a somewhat smaller decline (-16.7%) than previously forecast (-18.1%).  The key factor driving this revision is the more optimistic assessment of food services consumption, along with upward revisions to some components of nondurable goods purchases.

Although the impact of the initial decline in taxable sales is slightly smaller than in our previous forecast, the path toward recovery is more gradual, reflecting the persistence that higher unemployment and lower income builds into the forecast.

Figure 6: Sources: IHS Markit, Arkansas Economic Development Institute

# # #

A PDF copy of this report is available HERE.

Arkansas Economic Forecast Presentation

Little Rock Regional Economic Briefing

Thank you to all who attended this morning’s Regional Economic Briefing, where I presented my annual forecast for the Arkansas economy.  Special thanks to the Little Rock Branch of the Federal Reserve Bank of St. Louis for co-sponsoring the event.

Below are links to the presentations:

Kevin Kliesen:  National Economic Conditions

Charles Gascon:   Startups, STEM Jobs and the Tech Sector

Michael Pakko:  The Arkansas Economic Outlook

This Year’s “Forecasting a Revision of History”

One of the more upbeat prognostications from the 2012 Arkansas Economic Forecast Conference was the prediction that revisions to the employment data will ultimately show much stronger job growth in Arkansas than reported in the currently-published data.  Due to the nature of the expected revisions, this prediction is also somewhat tricky to interpret.  Hence this more detailed explanatory note is in order.

The monthly statistics on payroll employment–the Current Employment Statistics (CES) — are among the most timely and revealing economic indicators available at the state level.  However, they are based on a sample survey of employers, so they are subject to sampling error.  Moreover, important pieces of missing information involves the rate of new business formation and the closure of failed firms.  The Bureau of Labor Statistics estimates the effect of these changes with a “birth/death model.”  Particularly in times of economic turmoil, even the best modeling can end up being far off the mark.  The CES is also subject to a number of other non-sampling errors.

Once per year, the BLS revises the CES data with the more accurate statistics from the Quarterly Census of Employment and Wages (QCEW).  Based on records from state unemployment insurance offices, the QCEW is very comprehensive, covering 98% of all U.S. jobs.  Because it is so comprehensive, however, it is only available after a fairly long lag.  Data for the first quarter of 2012 only came out at the end of September.  These first quarter data will be used to revise the CES data in the annual “Benchmark Revision” process.

The benchmark revisions will not be completed until after the release of monthly CES data at the end of the year, but there is enough information available at this time to make a fairly accurate estimate of what the revision process will reveal.  In recent years, the revisions have been substantial  (see here and here, for example).  The next benchmark revision is expected to reveal a large upward revision to the total employment count in Arkansas.

The chart below illustrates the magnitude of the expected revision.  The revised data projections diverge from currently-published figures in July 2011, with a net increase of 9,700 jobs.  The largest monthly revision is for October 2011 — amounting to nearly 19,000 jobs.  Because the QCEW data extend only through March 2012, job growth for April through September is unrevised, so monthly changes are simply appended to the revised data.

Sources: Bureau of Labor Statistics, Institute for Economic Advancement

Because of the timing of the revisions, the next benchmark revision will show substantial upward adjustment of job growth in 2011.  As a result, the net increase in employment in 2012 will actually be revised downward.  Nevertheless, this downward revision in growth represents a large upward shift in the number of jobs at any particular point in time.   The revisions are expected to raise 2011 job growth from -3,100 to +9,400, an upward revision of 12,500 jobs.  With employment expected to be so much higher at the end of 2011, job growth data for 2012 will actually be lower than current data are showing.  For example, year-over-year growth through September 2012 is currently reported at +10,800, but is likely to be revised to +10,300.

As of September 2012, the benchmark revisions are expected to raise the level of employment by 13,500 jobs.  Estimating the expected benchmark revisions sector by sector, the new data will show a mix of changes — as detailed in the table below (using quarterly-average data).  Some of the larger upward revisions include Professional & Business Services, Retail Trade, and Construction.  Not all sectors will be revised upward, however.  For example, the revised data are expected to show lower government employment, particularly at the state and local level.

Sources: Bureau of Labor Statistics, Institute for Economic Advancement

The actual benchmark revision process involves far more detail than the rough estimates presented here.  Nevertheless, the simple log-linear regression techniques we have used to estimate the benchmarking have turned out to be quite accurate in the past.  The official revisions will not be available until March 2013.  So in the meantime, data from the CES will need to be interpreted in light of this yet-to-be-incorporated new information.  Although it adds complexity to the interpretation of the data, we’ll be providing that analysis here on the pages of the Arkansas Economist in coming months.  As an illustration of how the expected revisions change the monthly tracking of job growth, the following two tables compare the September jobs report using currently-published data and expected-revised data.

Currently-Published Data

Source: Bureau of Labor Statistics

With Expected Revisions:

Source: Bureau of Labor Statistics; revisions estimated by the Institute for Economic Advancement

The most recent month-to-month changes are unaffected by the revision.  The year-over-year figures for total employment growth are revised downward, as described earlier.  Perhaps the most striking difference between the two tables is the column showing cumulative growth since the employment trough-date of February 2010.  The unrevised data show total growth of 15,700 jobs — about one-quarter of the total number of jobs lost during the recession.  After revision, however, the new cumulative job growth total is 29,200 — an increase that represents over half of the recessionary job losses.  Given the projected employment growth embodied in the forecast for 2013 and 2014, this revision makes it likely that we will reach the point of total employment equal to the pre-recession peak by sometime in early 2014, rather than at the end of 2014 as projected using the unrevised data.

Updated Forecasts for 2012 and 2013

At the Arkansas State University Economic Outlook Conference today, we presented revised and updated forecasts for some key economic indicators for the Arkansas economy.  At the time that the original forecasts were complied in late October 2011, data for some series were available only through the first half of the year (e.g., personal income).  Some of the statistics that were available through the third quarter have subsequently been revised (particularly employment data).  Hence, the original projections for 2012 and 2013 incorporated forecast estimates of how 2011 would turn out.  Now that we have at least preliminary data for all of 2011, it seems a propitious time to revisit the forecasts.

In general, the data have confirmed our expectations that 2011 would show a slowdown in the pace of  the economic recovery overall, but with clear signs of improvement in the final months of the year.  In some cases, our expectations for improvement in the waning months of 2011 were exceeded — in other cases our outlook was overly optimistic.  Accordingly, the forecast revisions are mixed. And the outlook — in broad strokes — continues to be one of steady but unremarkable growth as we slowly emerge from the aftermath of the 2008-09 recession.

Personal Income
Yesterday’s data-release from the Bureau of Economic Analysis showed that total Personal Income in Arkansas grew by 3.7 percent in 2011 (Q4/Q4).  This fell closely in line with our forecast of 3.6% growth for the year.  Hence revisions to the outlook are minor.  Due, in part, to lower-than-expected transfer payments in the second half of 2011, the forecast for personal income growth in 2012 has been revised down from 5.1% to 5.0%.  The forecast for 2013 is unchanged at 3.9%.

Personal Income
Sources: Bureau of Economic Analysis, Institute for Economic Advancement

Arkansas Taxable Sales Including Gasoline
Our proxy for state retail sales, Arkansas Taxable Sales Including Gasoline (ATSIG), finished 2011 with a Q4/Q4 growth rate of 5.0% — slightly higher than the 4.4% rate in the forecast.  Some of this strength is expected to continue into 2012, prompting a slight upward growth revision from 3.2% to 3.3%.  (The slowdown from 2011 reflects, in part, the expectation of slightly lower inflation rate.)  Our original forecast included a (somewhat anomalous) slowdown in growth for 2013 (2.0%).  Such a slowdown now appears less likely, and we are now forecasting 2013 growth of 3.9%.

Arkansas Taxable Sales Including Gasoline
Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Home Sales
Arkansas home sales had been steadily improving during 2011 (on a seasonally-adjusted basis), but after having been supported by home-buyer tax credit programs in the previous two years, 2011 was still expected to be have the lowest total annual sales volume in recent memory.  Sales in the last three months of the year were fairly strong, but were somewhat below our expectations.  Compared to the previous year, total sales volume was down slightly more than forecasted: down 2.5% from the previous year’s (revised) sales figures.  Carrying this weakness forward into the projected sales trajectory, the forecasts for 2012 and 2013 have been revised downward.  Expectations of a double-digit growth rate in 2012 have given way to a revised forecast of +7.5%.  Sales are still expected to improve by 4.3% in 2013, but end the year with a lower sales volume than previously forecasted.

Home Sales
Sources: Arkansas Realtors Association, Institute for Economic Advancement

Payroll Employment
At the UALR Arkansas Economic Forecast Conference, we predicted that downward revisions to the payroll employment data would show that the year would end with a lower level of employment than the previous year — in sharp contrast to data that was available at the time.  The actual data revision was slightly larger than anticipated, showing a Q4/Q4 employment loss of 0.4%, rather than the 0.2% that had been forecasted.  Nevertheless, relatively strong job growth did materialize in the fourth quarter of 2011, as anticipated.  Accordingly, the growth path for employment has not been revised (+1.3% in 2012 and +1.5% in 2013), but the path has been benchmarked to a slightly lower starting point.

Payroll Employment
Source: U.S. Bureau of Labor Statistics, Institute for Economic Advancement

Unemployment Rate
Unemployment rate data for 2011 were also recently revised.  The updated statistics showed that unemployment was not quite as high in mid-2011 as previously estimated.  Moreover, the rate dropped over the last three months of the year much more rapidly than expected.  Consequently, our unemployment rate forecasts have been revised downward significantly.  2011 ended with a rate of 7.9%, instead of the expected 8.2% rate.  The downward trajectory of unemployment has been adjusted downward from this lower starting point.  We now expect the unemployment rate to average 7.4% in the fourth quarter of 2012 (instead of 7.9%) and to fall to 7.0% by the fourth quarter of 2013 (instead of 7.6%).  These would be welcome developments, if realized.  The risk to this revised forecast is that new entrants and re-entrants to the labor force might put upward pressure on the unemployment rate as the labor market continues to improve.

Unemployment Rate
Sources: U.S. Bureau of Labor Statistics, Institute for Economic Advancement

# # #

Methodological Note:  The original forecasts of November 2011 were produced using the Moody’s Economy.com Arkansas model, benchmarked to a composite of national economic forecasts.  The revised projections presented here represent adjustments to the original forecasts in light of new and revised data.   Underlying forecast assumptions and model estimates were not generally re-evaluated as a part of this exercise, but updated model forecasts for the unemployment rate and retail sales were factored into the analysis.

Arkansas Economic Forecast Conference – November 2

The 2011 Arkansas Economic Forecast Conference is only one week away.  This year’s conference features the national outlook from Ken Simonson, Chief Economist for the Associated General Contractors of America.  A panel of speakers will address specific areas of the Arkansas Economy, including Roby Brock of Talk Business, Ray Dillon of Deltic Timber, Lane Kidd of the Arkansas Trucking Association, and J. French Hill of Delta Trust.  Jon Harrison, former GM of Caterpillar in North Little Rock will be the luncheon speaker.  And of course, the conference will also include forecasts for the Arkansas Economy presented by Dr. Michael Pakko, State Economic Forecaster.

Registrations are being taken online or by contacting Tonya Hass by phone at (501) 683-7407 or by email at tghass@ualr.edu.

2010 UALR Arkansas Economic Forecast Conference

Nov. 10, 2010

The UALR Arkansas Economic Forecast conference took place today.  Thanks to all who attended, and special thanks to the program participants:  Phillip Baldwin, Michael Dueker, Vic Hiryak, Richard Plotkin, and Randy Zook.

A copy of the Charts and Tables from the Arkansas Outlook presentation are available here.

– Michael Pakko

PS:  A post-conference interview with Roby Brock of Talk Business can be seen on the Arkansas Economist Media Page.

Another Round of State Budget Cuts

Governor Beebe announced another round of state budget cuts this morning.  The cutbacks total $106 million of spending, amounting to about 2.4% of the state’s budget.  Today’s announcment followed last week’s report from the Department of Finance and Administration (DF&A) that showed state revenues continuing to fall short of expectations.

For the first six months of the 2010 fiscal year (July-December 2009),  gross general revenues were down $80 million– about 3 percent–from the previous year.  More important, gross revenues were 1.9 percent below DF&A’s forecast.  As shown in the chart below, gross revenue has shown some signs of a comeback in recent months.  However, the rebound is not as large as was anticipated in the state’s revenue forcast (as revised in October 2009).

Gross General Revenues
Source: Arkansas Deparment of Finance and Administration. Seasonal adjustment by the Institute for Economic Advancement

Gross General Revenues measure the total income for the state.  A more important measure for the budget is known as Net Available Revenues, which is equal to gross revenues minus some specific budgetary obligations (including tax refunds, bond payments, earmarked education funds, etc.).   Net available revenues measure the resources that are available for funding ongoing state government operations.  According to the DF&A report last week, net revenues for the first half of FY2010 were $37.7 million (1.7 percent) lower than in the previous year, and were 2.4 percent lower than the DF&A revised forecast. 

This second round of budget cuts for FY2010 should be sufficient to keep the state’s finances in balance.  As is clear in the chart above, however, a large share of the state’s revenues arrive in the second calendar quarter of the year (the last quarter of the fiscal year).   Consequently, we should have a much clearer picture of the state’s budget situation for FY2010 after income tax returns are filed in April.

Selected news coverage about the budget cuts:

The UALR Arkansas Economic Forecast Conference

The UALR Arkansas Economic Forecast Conference took place today.  I thank all of those who attended, and extend special thanks to the participants:  Richard Bell, Roby Brock, Lane Kidd, Chris Masingill, David Sanders and Julie Stackhouse. 

Proceedings of the conference are available on the

Arkansas Economic Forecast Conference page

News coverage:

    State rebound to take time, says economist

    UALR Economist Foresees Modest Growth Ahead