A forum for information and analysis on the Arkansas economy
Arkansas GDP – 2022:Q4
The latest data from the Bureau of Economic Analysis reports that real GDP growth in Arkansas proceeded at a 3.2% annual rate in the fourth quarter. U.S. GDP growth rate for the quarter was 2.6% for the quarter. Growth over the four quarters of 2022 totaled 1.9% in Arkansas, compared to 0.9% for the U.S.
Source: Bureau of Economic Analysis
Growth in the fourth quarter adds to the gap between GDP growth in Arkansas and the U.S. that has emerged since the onset of the COVID-19 pandemic. Cumulative growth since the fourth quarter of 2019 has been 7.7% in Arkansas and 5.0% for the U.S.
Source: Bureau of Economic Analysis
Breaking down the sources of GDP growth by sector, we see that Agriculture was an important contributor to Arkansas’ growth in the fourth quarter (as we also see in the nominal personal income statistics). Also contributing to Arkansas’ growth were Durable Goods Manufacturing and the collection of sectors referred to as Trade, Transportation and Utilities. Growth in other service sectors was mixed.
Source: Bureau of Economic Analysis
Note: The Bureau of Economic Analysis released data on both Personal Income and Gross Domestic Product by State on Friday, March 31: Gross Domestic Product by State and Personal Income by State, 4th Quarter 2022 and Year 2022. The Personal Income data are discussed in a separate post.
Arkansas Personal Income – 2022:Q4
In the final quarter of 2022, personal income increased at an annualized rate of 7.3%—keeping pace with the national growth rate of 7.4%. Compared to a year earlier, incomes were up 7.7% in Arkansas and 5.7% for the U.S.
Source: Bureau of Economic Analysis
A breakdown by major components shows that Net Earnings provided a larger share of income growth in Arkansas than in the rest of the nation, with Transfer Receipts accounting for a smaller share of growth.
Source: Bureau of Economic Analysis
Netting out Transfer receipts, the major components of earnings all showed increases in the fourth quarter: The largest component, Wages and Salaries, increased at a rate of 6.9% in the fourth quarter and was up 9.0% from a year earlier. Dividends, Interest, & Rent increased at a 6.6% rate for the quarter and was up 4.6% from the fourth quarter of 2021. Proprietors’ Income surged at a 19.9% rate for the quarter and was up 35.0% over the year.
Source: Bureau of Economic Analysis
As shown in the figure below, most of the recent growth in proprietors income has been from the Farm component. In fact, total Farm Income accounted for over one-quarter of Arkansas personal income growth over the four quarters of 2022.
Source: Bureau of Economic Analysis
The importance of farm income is also highlighted in the breakdown of total earnings by industry for the fourth quarter. Growth in farm income contributed contributed 1.43 percentage points to the total earnings growth of 5.2% in Arkansas. In the U.S. data, Farm income comprised a much smaller share of growth. In other respects, the patterns of earnings contributions by industry were similar for Arkansas and the U.S.
Source: Bureau of Economic Analysis
Note: The Bureau of Economic Analysis released data on both Personal Income and Gross Domestic Product by State on Friday, March 31: Gross Domestic Product by State and Personal Income by State, 4th Quarter 2022 and Year 2022. The GDP data are discussed in a separate post.
The 2023 Income Tax Cut Proposal
As this year’s legislative session winds down, a new tax cut proposal is on the agenda of the state legislature this week. The proposal would reduce the top marginal tax rate from 4.9% to 4.7%. This essay considers some of the features of the proposal.
Arkansas has a unique multi-tier system of tax tables, first established in the context of tax cuts in 2015. Accordingly, the newly proposed legislation, Senate Bill 549, adjusts two tax tables separately. The Low Income tax tables are adjusted as shown in Table 1:
Table 1:
Tax cuts for income-earners in this range are affected primarily by adjusting the tax brackets; for example, by increasing the threshold for zero taxes from $5,000 to $5,100. Toward the upper end of the scale, threshold incomes are increased and the top marginal tax rate is reduced from 4.9% to 4.7%.
The effects of these changes on average and marginal tax rates for incomes up to $84,500 are shown in Figure 1:
Figure 1:
The changes in tax-bracket thresholds results in lower taxes for all earners within the income range considered. The tax savings are fairly small: for example, for a taxable income of $32,000, the tax burden is lowered by $32.50—a reduction of 0.10%. At the higher end of the scale, a taxpayer with an income of $84,500 would receive a tax cut of $137.50 (about 0.16%).
The high-income tax tables are adjusted as shown in Table 2. As in Table 1, the thresholds for the tax brackets are revised, along with a reduction in the top marginal tax rate from 4.9% to 4.7%. The breakdown of statutory marginal tax rates into income brackets in this case is completely fictional. The tax obligations in Table 2 could be equivalently stated as “$250 plus 4.9% of all income over $8,500” under existing law, or in the case of the proposed changes, “$260 plus 4.7% of all income over $8,800.”
Table 2:
But here’s where it gets complicated: Under either tax regime, existing or proposed, the two tax scheduled don’t align. Consider the proposed bill: for an income of $87,000 the tax burden from Table 1 is $3,509. If we turn to Table 2 to calculate the tax obligation for an individual with an income of $87,001, it turns out to be $3,939, a tax increase of $430 for an income increase of $1. That’s an enormous effective marginal tax rate! This is an example of what is known as a “tax cliff.”
The legislative “fix” to this problem has been to append an adjustment ladder. In the proposed legislation, for example, an adjustment table reduces the tax burden for individuals with incomes in the range of $87,001 through $87,100 by $460. This assures a smoother transition at the $87,000 income threshold. The adjustment amount is reduced by $10 for every $100 until it reaches zero at an income level of $91,300. In effect, this turns one enormous tax cliff into 46 mini tax cliffs as shown in Figure 2, expressed in terms of average tax rates.
Figure 2:
At each one of these mini-cliffs, the marginal tax rate spikes: a $1 increase in income increases an individual’s tax burden by $10.047 (one dollar for the ladder-adjustment plus 4.7% for the one-dollar increment).
The standardized tax tables are set up in increments of $100, so if we use that as our basic unit, a $100 increase in income results in a $10 increase due to the ladder-adjustment plus $4.70 due to the marginal tax rate–a total marginal tax increase of 14.7%. Figure 3 illustrates how this feature results in an effective marginal tax rate of 14.7% over the adjustment range, along with how the proposed 2023 tax cut affects marginal tax rates.
Figure 3:
*Marginal Tax Rate calculated in $100 increments.
So, although the proposed tax cut plan does reduce the maximum statutory marginal tax rate from 4.9% to 4.7%, the maximum effective marginal tax rate is 14.7% (down from 14.9%) through the adjustment-ladder income range (which itself is shifted by the proposal).
Economic theory and evidence tells us that the effective marginal tax rate is the relevant measure to consider when it comes to to evaluating economic incentives. The tax system introduces economic inefficiencies by discouraging the incentive to seek a higher income when marginal tax rates are high. By this measure, the 14.7% marginal tax rate over the income range of $87,000 to $92,000 is a clear disincentive.
The stated intent of income tax cuts is generally two-fold, to reduce the economic inefficiencies induced by taxation and to reduce the burden on individuals and households. The proposed tax-cut legislation leaves in place the oddity of a very high marginal tax rate over a specific income range, but how much does it satisfy the second objective: lowering taxpayers’ burden?
Figure 4 shows the tax savings under the proposed changes. For a net taxable income of $20,000, the tax cut would yield tax savings of $6.60. The savings jumps to $17.70 for an income level of $23,600 and rises to $128.50 for incomes of approximately $80,000.
Figure 4:
For a range of incomes from $84,500 to $91,900 the tax cut represents more substantial savings, peaking at $385 for incomes just over $85,100. The magnitude of the tax cut drops to $170 at an income level of just over $91,450.
In dollar-value, the value of the tax cuts cannot be dismissed, but in terms of percent-of-income they are relatively small. Figure 5 converts the tax-cut savings into changes in average tax rates. For incomes below $24,000 the tax cuts amount to about 0.05% of taxable income. The percentage rises to 0.16% for incomes above 80,000. At higher incomes (above $92,000), the percentage tax savings converge toward the 0.2% change in the statutory maximum marginal tax rate.
Figure 5:
Taxpayers with incomes in the range of $84,500 to $91,900 receive the largest tax reductions, both in absolute dollar terms and as a percent of income. For this segment of taxpayers, the incentive effects of tax cuts are most likely to have an impact. Those who face the highest marginal tax rates are those who benefit the most from tax-rate reductions.
The ongoing presence of an effective marginal tax rate of nearly 15% over a range of incomes is a significant potential source of economic distortions. Arkansas is the only state in the U.S. with this kind of two-tiered tax table—a remnant of past political compromise that has become a fixture of our tax system. Tax reform to increase the efficiency of our tax system should address this built-in artifact of our tax code as much as it addresses the issue of lowering the statutory marginal tax rate.
Arkansas Employment and Unemployment – February 2023
State-level data on employment and unemployment in February were mixed for Arkansas. Information from the household survey showed a sharp drop in the number of employed, and hence a drop in the unemployment rate from 3.4% to 3.2% (in contrast to the 0.2 percentage point increase previously reported for the U.S.). On the other hand, seasonally adjusted payroll data showed a slight decline for the month. Nevertheless, following the data revisions reported earlier this month, Arkansas’ labor markets appear to remain relatively robust.
Source: Bureau of Labor Statistics
The decline in the unemployment rate was driven by a sharp drop in the number of unemployed, down 2,964 for the month and down over 4,000 since October. The number of employed was up by 3,051 for a fifth consecutive month of growth. As a result, the labor force was higher in February as well.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
Payroll Employment
Nonfarm payroll employment edged slightly lower for the month (seasonally adjusted), falling by 1,700. Declining sectors included Durable Goods Manufacturing, Transportation & Utilities, and several other service-providing sectors. Sectors adding jobs included Nondurables Manufacturing, Wholesale, and Retail Trade.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
Following the upward revisions to recent payroll growth, the slight decline in February does not represent much of a set-back. Employment growth over the past twelve months has totaled 32,500 jobs, nearly 2.5% growth. Since the previous employment peak of February 2020 Arkansas has added 62,100 jobs, a cumulative increase of 4.7%. By comparison, U.S. employment in February 2023 was up only 2.0% since February 2020.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
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Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format consistent with the monthly news release from the Arkansas Division of Workforce Services, can be found here: Table-Seasonally Adjusted NFPE.
Metro Area Employment and Unemployment – January 2023
New and revised data on metropolitan area employment and unemployment were released this morning from the Bureau of Labor Statistics. As was the case with the state-level data earlier this week, data from both the household and payroll surveys were subject to annual revisions. In the case of unemployment rates and other indicators from the household survey, the revised data are only partly available (the full revisions will be available April 21, 2023).
The table below shows the revisions to metro area unemployment rates for January 2022 and December 2022, along with the new estimate for January 2023 (not-seasonally adjusted data). As of December 2022, the revised data shows slightly lower unemployment rates for Hot Springs, Little Rock, Memphis, and Pine Bluff. Texarkana’s rate was revised slightly upward, while the other metro areas were unchanged. From December 2022 to January 2023, unemployment rates increased for all metro areas, reflecting typical seasonal changes. (The unemployment rate always increases at the beginning of the new year, after the holiday season ends.)
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
The figure below summarizes the unemployment rates for metro areas in January and the change since a year ago. The pattern of rates around the state has changed little over the past year. The unemployment rates in Northwest Arkansas and in Jonesboro are running below the statewide average, while rates in Hot Springs, Memphis, Pine Bluff and Texarkana are running higher. In Fort Smith and the Central Arkansas metro area, unemployment rates are close to the statewide average.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
Payroll Employment
Nonfarm payroll employment data were extensively revised as part of the annual benchmark revision process. The figure below illustrates the changes. As was the case with the statewide data, the metro are employment numbers for Arkansas metro areas were generally revised higher. The exceptions were Memphis and Pine Bluff (where the revisions were mixed) and Texarkana (where the data were revised lower).
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
The revised data now show that employment has expanded beyond pre-pandemic levels in all metro areas except Pine Bluff. All eight metro areas displayed significant growth over the past twelve months. The monthly data for January show robust increases in Pine Bluff and Texarkana, with smaller gains in Hot Springs, Jonesboro and Little Rock. Data for the Memphis metro area show a slight decline for the month.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
Arkansas Employment and Unemployment – January 2023 (with Revisions)
The state-level report on employment and unemployment that was released today shows little change in current conditions or the near-term outlook for Arkansas. For example, the unemployment rate, at 3.4%, remains in the 3.5%+/- range in which it has fluctuated over the second half of 2022. The rate remains historically low.
Source: Bureau of Labor Statistics
However, revisions to the underlying data for both the household and employment surveys shows much stronger employment growth over the past two years than previously estimated. The revision to the unemployment rate amounted to 0.2 percentage points in December: previously reported at 4.6%, it is now reported to have been 4.4% (with the January rate unchanged from that revised estimate). On the other hand, the number of employed Arkansans was revised upward over the past two years, resulting in a total for December that is 22,642 higher than previously reported. From December 2020 through December 2022, previous reports showed an increase in the number of employed of approximately 35,000. The revised figures show an increase of nearly 59,000 jobs. This revision implies an annual growth rate of 2.3% from December 2020 through December 2022, compared to the 1.4% pace that was previously reported.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics
The increase in employment resulted in a similar boost to the total labor force figures. After the revisions, Arkansas post-pandemic decline in the labor force participation rate appears much smaller than previously reported, and the rate is now only about 0.5 percentage points below the pre-COVID level.
Source: Bureau of Labor Statistics
Payroll Employment
The data from the Nonfarm Payroll Employment report were also subject to annual revisions. Although compiled from completely independent source data, the revisions to Arkansas payroll employment were also substantial. Total employment for December 2022 was revised upward by 27,000 jobs. Most of the revision was for 2022: the growth rate from December 2021 through December 2022 was originally reported to be 1.4%; it is now estimated to have been 3.3%.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
The table below summarizes the revisions to the super-sectors covered by the payroll employment data. The sectors with the largest revisions to both growth and employment levels included Construction, Retail Trade, and Other Services. The only sectors to show negative data revisions were Manufacturing (related to nondurables production), Information Services, and Government.
Source:
The newly-revised data, updated for January 2023, show a monthly increase of 6,700 jobs (seasonally adjusted), with a cumulative twelve-month gain of 44,200 (a 3.4% growth rate). The sectors showing substantial one-month increases were concentrated in the service-providing sectors: Professional & Business Services, Education and Health Services, & Leisure and Hospitality Services. Wholesale Trade also expanded by over 1,000 jobs, while Retail declined slightly.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
Compared to the pre-pandemic peak of February 2020, the revised nonfarm payroll statistics show a net gain of 56,700 jobs — approximately 4.9% cumulative growth. By comparison, U.S. payroll employment is only 1.8% above the pre-pandemic level.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
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Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format consistent with the monthly news release from the Arkansas Division of Workforce Services, can be found here: Table-Seasonally Adjusted NFPE.
Metro Area Employment and Unemployment – December 2022
The end-of-year employment data for metropolitan areas is in. Most of Arkansas metro areas finished 2022 with unemployment rates slightly higher than in December of 2021. Compared to the statewide average of 3.5%, metro area unemployment rates were relatively low in Northwest Arkansas (F-S-R) and Jonesboro and relatively high in Hot Springs, Memphis, Pine Bluff and Texarkana. An approximation of the unemployment rate for the remaining parts of the state (Non-Metro areas*) suggests an above average rate in those areas as well. In Fort Smith and Central Arkansas (LR-NLR-C), the unemployment rate was statistically equal to the statewide average.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
There were no significant changes in unemployment rates from November to December. Compared to a year ago, rates were generally up slightly across Arkansas metro areas, with the exception of the border-areas of Memphis and Texarkana, where unemployment rates declined relative December 2021. Our approximation for non-metro* portions of the state suggests an increase in unemployment rates than in any of the state’s metro areas.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
Payroll Employment
Nonfarm payroll employment increased slightly in Hot Springs, Jonesboro, and Little Rock, while Texarkana and Pine Bluff saw larger monthly increases. Data for Memphis showed a small decline. Compared to a year ago, employment is higher in every metro area, with most exceeding the statewide growth rate (with the exception of Pine Bluff). Approximating the change in non-metro* employment, there was little employment growth over the past twelve months. Compared to the previous business cycle peak (February 2020), employment growth in non-metro regions appears to have exceeded every metro area except Northwest Arkansas. All Metro areas except Pine Bluff had higher employment at year-end than in February 2020.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
County Unemployment Rates
Data on unemployment rates at the county level (not seasonally adjusted) reflect a fairly typical pattern of unemployment rates around the state. Rates tend to be highest in counties in the Delta and along the southern tier of the state. The lowest unemployment rates were in Northwest Arkansas, with Washington and Benton Counties registering rates of 2.0% and 2.1%, respectively. The counties with the highest unemployment rates were Ashley County (6.0%) and Phillips County (7.3%). For reference, the statewide not-seasonally adjusted unemployment rate was 2.9%.
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*NOTE: The method used to estimate the non-metro portions of the state — subtracting the totals for all metro areas except Memphis and Texarkana from the statewide totals — is an approximation. It effectively includes Crittenden County and Miller County in the approximated non-metro total, while incorrectly subtracting employment and unemployment for Le Flore County, OK; Sequoyah County, OK; and McDonald County, MO.
Arkansas Employment and Unemployment – December 2022
Many economists have been predicting weakening economic conditions as the Federal Reserve hikes interest rates to fight inflation, but the impact on labor markets has not yet materialized. The data for the final month of the year (released yesterday) revealed stable labor markets both nationwide and here in Arkansas. The unemployment rate for Arkansas ticked down from 3.7% to 3.6% in December as the number of unemployed Arkansans fell for the first time in nine months (-333). Household employment and labor market participation both increased in December (by 596 and 263, respectively), interrupting six-month gradual downtrends. National data released two weeks ago showed that the U.S. unemployment rate declined from 3.6% to 3.5% in December.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
Payroll Employment
From the establishment survey, nonfarm payroll employment was up 2,300 in December (seasonally adjusted). Gains and losses across sectors were mixed. Sectors with higher employment included Construction, Durables Manufacturing, Transportation and Utilities, and Other Services. Small declines were reported for Nondurables Manufacturing and a handful of service-providing sectors.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
Compared to December 2021, payroll employment was up by 18,800—about 1.4%. The only sectors that showed negative growth over the past 12 months were Mining and Logging, Construction, Retail Trade, and Professional & Business Services. The latter two declines suggest a 2022 holiday shopping season somewhat less robust than in 2021. Relative to the pre-pandemic peak in February 2020, Arkansas payroll employment is up by 25,400, or 2.1%. For the entire U.S., December payroll employment was 0.8% higher than in February 2020.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
This is the last state employment report before the annual data revision process. We’ll be back in March with revised statistics for both the household and payroll survey data.
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Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format consistent with the monthly news release from the Arkansas Division of Workforce Services, can be found here: Table-Seasonally Adjusted NFPE.
Arkansas GDP – 2022:Q3
The Bureau of Economic Analysis reported today that Arkansas GDP expanded at an annual growth rate of 1.3% in the third quarter. The BEA report noted that 47 states plus the District of Columbia showed positive growth. Arkansas’ growth rate ranked 41st among the states, and was significantly lower than the U.S. growth rate of 3.2%.
Source: Bureau of Economic Analysis
Data for previous quarters was unrevised, so the latest data represents an update to our previous report.
Although Arkansas’ growth rate has been slower than the national average in the second and third quarters of 2022, cumulative growth since 2019:Q4 shows Arkansas well-above the U.S. In the 11 quarters since that pre-COVID reference point, Arkansas cumulative growth rate of 6.9% translates to an average annual rate of 2.4%. By comparison the U.S. annual average growth rate over that period was 1.6%.
Source: Bureau of Economic Analysis
The growth rate of implicit price deflators (a measure of inflation) slowed sharply in the third quarter. For all private-sector industries, the deflator for Arkansas increased at an annual rate of 5.3%, down from 11.6% in the second quarter. Over the four quarters from 2021:Q3 through 2022:Q4, this proxy for inflation was 8.9%. The deflator for the U.S. slowed as well, with a four-quarter growth rate declining to 7.6% in 2022:Q3.
Source: Bureau of Economic Analysis
Returning to real GDP, the contribution of sectors to third quarter growth is broken down in the table below. Arkansas showed larger declines than the national average in good-producing sectors. Service-providing sectors showed positive growth rates both nationwide and here in Arkansas, and in many cases contributed more to Arkansas GDP growth than to U.S. growth.
Source: Bureau of Economic Analysis
The concentration of the growth slowdown in goods-producing sectors is consistent with the slowing we would expect in response to a higher interest rate environment, and is likely a precursor to continued weakness going into 2023. Nevertheless, newly-released GDP data are subject to considerable future revision, so the latest figures provide only a rough indication of recent trends.
Arkansas Employment and Unemployment – November 2022
Data on labor markets showed deteriorating conditions in November: Unemployment continued its upward creep, while both household and payroll surveys showed employment contractions.
The unemployment rate ticked up from 3.6% to 3.7%, matching the national unemployment rate. The number of unemployed increased for the 8th consecutive month, rising by 875 in November. Since March, the number of unemployed has risen by 7,949. The household survey also showed a decline in the number employed, with that total falling by 2,292 in November. Having fallen for four consecutive months, employment is down by more than 9,000 since July. The Arkansas labor force has also contracted for four months now, falling 1,417 in November and approximately 4,300 since July.
Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)
Payroll Employment
Nonfarm payroll employment was also down in November, declining by 3,200 jobs (seasonally adjusted). Net job losses were registered for nearly every major sector, with the notable exception of Education and Health Services (up by 900 jobs). Transportation and Utilities also registered a small increase. Employment in Retail Trade dropped by 1,200, suggesting that the hire of temporary workers for the holidays was running below the typical pace.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
Although employment was down for the month, the number of payroll jobs remains 18,300 higher than a year ago (+1.4%). Year-over-year growth rates are particularly notable in Education & Health Services and Leisure & Hospitality Services, both being supersectors that suffered huge employment losses during the COVID pandemic. Relative to the employment peak of February 2020, employment in Arkansas is up by 27,000 jobs or 1.8%. By comparison, U.S. payroll employment is only 0.7% above the level of February 2020.
Source: Bureau of Labor Statistics, Current Employment Statistics (CES)
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Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format consistent with the monthly news release from the Arkansas Division of Workforce Services, can be found here: Table-Seasonally Adjusted NFPE.
Arkansas Economic Forecast Conference – Nov. 9th, 2023
Mark your calendar to join the Little Rock Branch of the Federal Reserve Bank of St. Louis, in partnership with the Arkansas Economic Development Institute, for the 2023 Arkansas Economic Forecast Conference.
Date: Thurs., Nov. 9, 2023
Time: 7:30 – 9:30 a.m.
Click Here for More Information