A forum for information and analysis on the Arkansas economy
The state employment report for June showed continued recovery from the sharp job losses registered in April during the peak of pandemic-related economic shutdowns. The Arkansas unemployment rate dropped from a revised 9.6% in May to 8.0% in June. The national unemployment rate declined from 13.3% to 11.1%. The household survey indicated a decline in the number of unemployed Arkansans of nearly 24,000 to 105,338. The number of employed declined as well (down 9,300), resulting in a sharp downturn in the measured labor force. The Arkansas labor force participation rate has dropped 2.4 percentage points from 58.2% in January and February to 55.8% in June. The U.S. labor force participation rate declined 1.9 percentage points (from 63.4% to 61.5%) over the same period.
Arkansas nonfarm payroll employment rose by 23,700 in June, an increase of 2.0%. The June increase was proportionately not quite as large as the national total, which showed an increase of 3.6%. From February through June, the net decline in Arkansas payroll employment was 5.7%, while the U.S. total showed a decline of 9.6%.
Employment gains continued to be concentrated in the sectors that were most effected by pandemic-related shutdowns. Employment in Retail Trade increased by 10,300 in May and June, almost completely offsetting the April decline. Leisure and Hospitality Services added 8,500 jobs in June, but remains far below levels of a year ago. Significant gains were also registered in June for Professional and Business Services (particularly in Administrative and Support Services) and in Other Services.
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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.
In the latest report on state-level GDP, the U.S. Bureau of Economic Analysis reported that Arkansas’ economy contracted at a 5.0% annual rate in the first quarter, the same rate as the U.S. That was also the median growth rate among states. GDP declined in all 50 states, with growth rates ranging from -1.3% in Nebraska to -8.2% in New York and Nevada.
Over the course of 2018 and 2019, Arkansas GDP growth averaged 1.9% compared to the U.S. average growth rate of 2.4%. Arkansas growth rate had exceeded that of the U.S. in the second half of 2019. Accordingly, year-over-year increase for Arkansas is slightly higher than the U.S.: +0.5% versus +0.3%.
The breakdown of GDP by sector shows that although Arkansas contracted at the same rate as the U.S., the composition of the decline was somewhat different. Arkansas benefited from relatively strong growth in Construction and Management of Companies and Enterprises. Manufacturing contributed more to Arkansas decline than to the U.S. for two reasons: Manufacturing represents a larger share of the state’s output and both durable goods and nondurable goods manufacturing declined more sharply in Arkansas. In sectors considered most-affected by pandemic-related shutdowns (e.g. Retail Trade, Health Care, Accommodation & Food Services, etc.), Arkansas’ declines tended to be smaller than the national average.
The May employment report for metropolitan areas showed slight employment gains in all of Arkansas’ metro areas, offsetting a portion of the sharp declines in April. The table below showed revisions to the nonfarm payroll employment data for April along with the new numbers for May. The preliminary numbers for April had originally shown that all of the metro areas contracted as much or more than the statewide average, suggesting that non-metro areas in the state fared better than average. After revisions, there is more variation among the metros. Employment totals for Fort Smith, Jonesboro, Pine Bluff and Texarkana were revised to show smaller losses April, while the magnitude of the statewide decline was revised from -8.0% to -8.6%. The preliminary numbers for May show rebounds in all metro areas, with the size of the rebound generally related to the size of the April decline. Hot Springs bounced back from a 14.9% loss to register a gain of 6.3% in May. Jonesboro’s revised April job losses were 6.9%, with a May rebound of only 0.9%. Since February, cumulative changes in nonfarm payroll employment range from -3.7% in Pine bluff to -10.1% in Hot Springs.
Unemployment rates also showed a partial reversal from April, with rates declining in all of Arkansas’ metro areas. Texarkana saw the largest decline (2.9 percentage points) followed closely by Hot Springs (2.6 percentage points). Pine Bluff showed the smallest decline in unemployment (-0.4 percentage points) but had also experienced the smallest April increase among Arkansas’ metro areas.
The pattern of reversals from April’s unemployment rate spike generally carried over to the county level as well. Unemployment rates were unchanged in four counties and were slightly higher in 5 counties. The other 66 counties saw declining unemployment. The interactive map below shows unemployment rates for May, along with the change from April’s (revised) rates. (Note that the data are not seasonally adjusted. Statewide, the seasonal change in the unemployment rate from April to May averages +0.3%)
The Arkansas Department of Finance and Administration has published new data on local sales tax collections paid to counties and municipalities in June. There is generally a one month lag between actual sales and the collection of sales tax and an additional month for the distribution to be made to the local governments. Consequently, the sales taxes remitted to the counties and cities in June largely reflect sales in April – the month in which COVID-19 related shutdowns are likely to have had their largest impact on economic activity.
We had projected declines on the order of 15% on a year-over-year basis, based on the estimated impact of COVID shutdowns on retail sales. As it turns out, most counties in Arkansas fared better than that, albeit with significant diversity among counties. The interactive map below shows the percentage changes in sales tax receipts by county between April 2019 and April 2020 (expressed in terms of taxable sales as an adjustment for tax-rate changes). The largest decline was in Carroll County (-21.9%), while the largest increase was Calhoun (+42.4%).
There are several possible explanations for the better-than-expected sales tax figures. First, it might be the case that support from government transfer programs helped maintain consumer spending, in spite of income losses due to layoffs and business closures. Second, sales tax in Arkansas is collected on more than just final retail sales to consumers; tax collections on other business-to-business transactions might have mitigated the effects of declines in retail sales. Third, the recent change in the law that required out-of-state retailers to collect and remit sales taxes from Arkansas residents began in July 2019, so that the year-over-year comparison for April includes an expansion of the tax base.
A preliminary analysis of sales tax collections by sector for Pulaski County suggests that all of these factors contributed to the April 2019-20 comparison. Tax collections in services categories showed the expected declines; for example, Arts, Entertainment, and Recreation was down 45.6% and Accommodation and Food Services were down 41.9%. In contrast, Retail Trade was down only 2.0%, with large losses in some sub-sectors (e.g. Furniture stores down 29%) offset by others (e.g. Beer, Wine, and Liquor Stores up 40%). Patterns of consumer spending were affected, but overall consumer spending appears to have fallen less than anticipated. Increases in sales tax collections were particularly strong in the non-retail sectors; Collections from Manufacturing (primarily from Iron and Steel manufacturing) were up 234% and taxes related to Construction activity were up 242%.
There is also evidence that the collection of sales tax from out-of-state vendors played a significant role in sustaining sales tax collections. In the Pulaski County data, sales tax collections from Sector 4541, Electronic Shopping and Mail-Order Houses, was up 205%. Without this component, the total for Retail Trade would have declined 8.6% instead of 2.0%.
In order to approximate an impact of internet sales tax collections on the county statistics, the interactive map below compares the year-over-year growth rate for April, relative to a trend growth rate that is calculated as the average of year-over-year changes from July 2019 through February 2020 (corresponding the the period since out-of-state vendors were required by law to collect and remit taxes). With this adjustment, the relative performances of counties changes little, but the interpretation of the numbers is altered. For example, the raw April-April growth rate for Garland County was -9.2%. Compared to a trend rate of growth averaging 10.2%, the April growth rate is 19.5% below trend (after rounding).
One other factor that should be considered: The correspondence between sales in April and taxes remitted to the counties in June is a general, but not exact relationship. Not all tax reporters submit monthly, and the tax receipts are reported for the month in which they are received. Any extraordinary effects of reduced taxable sales in April are likely to be reflected, in part, in subsequent monthly reports of tax remittances.
Data for city and county tax collections, broken down by NAICS-code sectors, are available for all tax jurisdictions in Arkansas. We will continue to monitor and analyze these data in our continuing efforts to gauge the impact of COVID-19 (and efforts to prevent its spread) on the economy of Arkansas.
Note: Monroe County has no countywide sales tax and Saline County initiated one in April 2019. For these two counties, the taxable sales figures reported are aggregates of the cities with sales taxes in those counties.
The Bureau of Economic Analysis released the state-level personal income report for the first quarter of 2020 this morning. The BEA noted that this was the first-quarter to be “impacted by the response to the spread of COVID-19, as governments issued ‘stay-at-home’ orders” in the latter part of March.
The report shows that Personal Income in Arkansas rose at a 1.9% annual rate in the first quarter, somewhat slower than the U.S. rate of 2.3%. Nationwide, growth rates ranged ranged from 4.9% in New Mexico to -0.3% in Michigan
Arkansas’ growth rate for the fourth quarter of 2019 was revised down slightly from 2.7% to 2.5%. Over the past four quarters personal income in Arkansas has increased 3.3%, while U.S. growth has been 3.2%.
Arkansas growth rate in the first quarter was again buffeted by swings in Farm Income, which declined at a 68.5% annual rate, subtracting 0.9 percentage points from the overall growth rate. The decline in Proprietors’ Income was also driven by Farm Proprietors’ component. Nonfarm Proprietors’ Income was up at a 3.7% rate. The BLS report noted that “increases in transfer receipts and property income (dividends, interest, and rent) contributed to personal income growth in all states and the nation.” In Arkansas property income accounted for 0.6 percentage points of the states total personal income growth; transfer payments accounted for 1.4 percentage points. Net earnings (which excludes contributions for government social insurance programs and is adjusted for state of residence) accounted for a tiny net decline (-0.1 percentage points) in total income.
The BEA noted that increases in transfer payments “reflected a 1.6 percent cost of living adjustment for social security recipients; an increase in state unemployment insurance compensation; and an increase in refundable tax credits.”
The table below shows a breakdown of total earnings by sector, expressed as contribution to total personal income growth. In addition to losses from Farm earnings, Arkansas saw losses in Mining, Durable Goods Manufacturing, along with several service-sector categories. Earnings in Health Care, Accommodation and Food Services, and other service sectors experienced earnings declines, but of smaller magnitude than the U.S. totals.
Covering the first quarter, today’s report encompassed only the very early weeks of the COVID-19 pandemic and the business shut-downs that it engendered. The BEA took special steps to assure that the full impacts were reflected: “BEA used both March and April CES state level data to better capture business closures and job losses that occurred in March. BEA also used weekly state level Unemployment Insurance (UI) claims data to inform its 2020 Q1 state estimates of wages and salaries.” A fuller accounting will likely be embedded in the report for the second quarter.
Last month, the April employment report for Arkansas was not as bad as expected. The May report is better than expected.
The unemployment rate dropped from a revised 10.8% in April to 9.5% in May. The number employed rebounded sharply from its April decline, up 46,378. The number of unemployed dropped by 12,663 from 140,898 to 128,235. The labor force total continues to fluctuate widely, increasing by 33,715 in May after declining by 76,788 in April.
The drop in unemployment reported in the household survey is certainly welcome news, but it is somewhat at odds with the unemployment insurance claims data. For both Arkansas and the U.S., continuing claims for unemployment insurance were higher in May than in April, and both continuing claims and initial claims remain elevated as of the latest data released yesterday. Expressed as a percent of the labor force, the continuing claims data suggest insured unemployment rates of approximately 14% for the U.S. and 10% for Arkansas.
The elevated unemployment insurance claims levels suggest that there is a great deal of churning going on in labor markets, complicating the interpretation of the unemployment data. In addition, there continue to be some survey problems in the proper classification of “employed” versus “unemployed” for persons displaced by COVID-related shutdowns. But the clear gains employment (reinforced by the payroll data), indicate that the labor market improved in May, and that Arkansas has thus far fared better than the rest of the nation, on average.
Nonfarm payroll employment jumped 21,400 in May, bouncing back somewhat from a revised 109,200 decline in April (seasonally adjusted). The April report had shown proportionally smaller declines for Arkansas than in the U.S. data, particularly in sectors directly affected by COVID-related shutdowns (e.g. Retail Trade and Accommodations & Food Services). Consequently, we had not expected to see as sharp a rebound in May as reported in the national data. As it turns out, the May rebound in Arkansas was a 1.8% jump, nearly equal to the 1.9% increase for the U.S. From February through May, Arkansas payroll employment has shown a net decline of 7.6%, compared to 12.8% in the U.S. data.
A breakdown by sector shows that the largest employment gains were in Leisure & Hospitality Services, Education & Health Services, and Retail Trade, each of which suffered particularly sharp declines in April. Not all sectors saw increases in May: Employment in Wholesale Trade dropped slightly, and Manufacturing employment slid deeper into negative territory. Government employment declined by 4,400, due to employment declines at educational institutions. This decline is not unusual, but it typically shows up in June and July. Compared to a year earlier, payroll employment in Arkansas was down 91,000 jobs.
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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.
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.
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.” 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.
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.
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.
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.
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.
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.
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.
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.
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.
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%.
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.
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 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.
The latest report on metropolitan area employment and unemployment from the Bureau of Labor Statistics showed increases in unemployment in all 389 metro areas across the U.S. Compared to a year earlier, nonfarm payroll employment declined in 377 metro areas and was essentially unchanged in the other 12.
Unemployment rates in Arkansas metro areas increased to varying degrees. Unemployment increased the most sharply in Hot Springs – up 11 percentage points to 16%. The smallest increase in April was registered in Pine Bluff, where unemployment rose from 7.1% to 10.9%. Only Jonesboro and Northwest Arkansas metro areas remained in single digits and below the statewide average.
Nonfarm payroll employment declined by approximately 8% in Jonesboro, Little Rock and Pine Bluff, with somewhat larger percentage declines in the other metro areas. The largest decline was in Hot Springs, down 14.7%. Hot Springs was the only metro area to experience a larger percentage decline than the U.S. total. The remaining metro areas saw declines that were smaller than the national average, but at least as large as the statewide average. With all metro areas recording percentage declines as large or larger than the Arkansas total, a clear implication is the non-metro areas of the state generally experienced smaller declines.
As anticipated, the state-level employment and unemployment report for April showed a sharp increase in unemployment and precipitous declines in employment. The official unemployment rate rose from 5.0% (revised) to 10.2%. Nonfarm payrolls declined by over 100,000.
Despite these stunning magnitudes, the report suggests that Arkansas has not been hit as hard as other parts of the country. For example, the national unemployment rate was reported as 14.7% in April. Based on the national employment report that came out two weeks ago, we were anticipating an even higher unemployment rate and larger employment declines for Arkansas.
Underlying the increase in the unemployment rate, the total number of unemployed increased by 64,234 in April. The number of employed dropped 133,832. Based on unemployment insurance claims in April, we had anticipated a larger increase in unemployment. On the other hand, the decline in the number of employed was larger than expected. The sum of the two, the labor force, declined by 69,598 (about 5%).
The decline in the labor force is consistent with reported nationwide data and shows that the uptick in March was an anomaly. Since February, the U.S. labor force has declined by 4.9% and the Arkansas labor force is down 3.7%. Labor force participation rates have dropped by 3.2 percentage points for the U.S. and by 2.2 percentage points for Arkansas.
The Bureau of Labor Statistics reported that April’s household survey was affected by the same misclassification as in March: “some workers who were not at work during the entire reference week were not classified as unemployed on temporary layoff in April 2020. Rather, they were classified as employed but absent from work. BLS analysis of the underlying data suggests that most of these workers were misclassified; they should have been classified as unemployed on temporary layoff.” The special report went on to say that after adjusting for this misclassification, the unemployment rate would be approximately 19.5% instead of the reported 14.7%.
The state-level unemployment numbers are based on the national survey, but are also refined using other information. It is quite possible (but not entirely clear), how the misclassification might have effected the calculation of the Arkansas unemployment rate for April.
Nonfarm payroll employment declined by 102.1 thousand in April (seasonally adjusted). Losses were recorded in all sectors, with the largest absolute declines in Leisure & Hospitality Services and Education & Health Services. Retail Trade and Manufacturing also showed large declines.
The job-losses were not, however, as bad as the nationwide numbers had suggested they might be. Apply sector-by-sector percentage declines from the U.S. data, Arkansas employment was expected to decline of over 160 thousand. As shown in the table below, the percentage declines in nearly every sector were smaller for Arkansas than for the U.S.
The predicted values in the table show the results of applying the national percent changes to the Arkansas data. The difference between the predicted and actual values gives an indication of where Arkansas employment showed relative strength or resilience compared to the nationwide averages. Notably, the some of the largest deviations between predicted and actual values were in sectors particularly affected by COVID-19-related restrictions: Retail Trade, Leisure and Hospitality, and Other Services showed smaller proportionate job losses in Arkansas than in the national data.
The data suggest that Arkansas’ less restrictive economic response to the COVID-19 pandemic helped to mitigate job losses. The causality is complicated, however. Had there been more serious outbreaks in Arkansas, we might have suffered larger declines—whether or not more stringent government-imposed restrictions were put into place. And for that matter, tighter restrictions might have been the outcome of a more virulent outbreak as well.
As shown in the figure below, the declines in payroll employment, for both Arkansas and the U.S., bring us to levels close to the trough of the “great recession.” Mathematically speaking, nearly all of the job growth over the past 10 years was reversed in two months.
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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 Department of Workforce Services, can be found here: Table-Seasonally Adjusted NFPE.
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.
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
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
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