Barring trade shift, forecasts agree path steady for economy

Forecasters predict no major changes in the state and national economies over the next few years, though one big uncertainty could alter everything: trade policy.

Economists with the Federal Reserve and the Arkansas Economic Development Institute told a breakfast audience Thursday that the state and national economies should remain steady, with low unemployment, stable consumer spending and no inflation threats on the horizon.

About 75 business leaders, mostly banking officials, were on hand at the Clinton Presidential Center in Little Rock for the annual economic report card review.

“Job growth should look pretty good going forward,” Kevin Kliesen, business economist with the Federal Reserve Bank of St. Louis, said regarding the overall U.S. economy. The Fed’s St. Louis office monitors economic activity in Arkansas and surrounding states.

In Arkansas, economic growth has lagged behind national activity though the state is experiencing positive trends that will continue. In particular, while the manufacturing sector is shrinking across the country, it’s expanding in the state, according to Michael Pakko, chief economist with the Arkansas Economic Development Institute.

Generally, all indicators

are positive and there will be no dramatic shifts in the economy, the economists agreed.

However, trade policy and the effect of tariffs on imported and exported goods is a looming uncertainty.

Business executives are anxious about trade policy, citing it as the biggest uncertainty related to the national economy, with the policy posing “a substantial threat to the economy going forward in 2020,” Kliesen said.

“Why does uncertainty matter? Uncertainty is bad for business,” he added.

Trade policy aside, Kliesen expects no significant economic shifts through the end of 2020. He said unemployment will remain low and consumer spending should be solid while inflation is predicted to hold below 2%. The Fed, Kliesen said, has been “buying insurance” to sustain economic growth by lowering interest rates three times this year.

Two chief concerns nationally are a continued decline in the manufacturing sector and businesses reducing their capital expenditures and investments, a trend that has been ongoing for about a year.

“The weakest part of the economy is clearly manufacturing,” he said.

The decline in business investments in plants, machinery and other equipment is not a good sign. “This is a drag on the economy that is worrisome,” Kliesen said. “That is pretty troubling.”

There’s a different manufacturing story developing in Arkansas, which is experiencing a boost from the sector, Pakko said. “In some sense, Arkansas has been bucking the national trend,” he said.

“For the past 2½ years, we’ve seen manufacturing jobs grow faster than the rest of the economy,” he said. “This increase in manufacturing is also helping those areas that have been left behind.”

For example, Arkansas counties that have experienced job and population losses like pockets of the Delta region and northcentral Arkansas are gaining manufacturing work.

One challenge in Arkansas is uneven growth: Northwest Arkansas, northeast Arkansas and the central area around Little Rock all are growing. More than two-thirds of the state’s counties are suffering from lower population, higher unemployment and less consumer spending. “There are certainly areas in the state that have been left behind,” Pakko said.

About 95% of the state’s jobs are in the Fayetteville, Jonesboro and Little Rock corridors.

“The metropolitan areas have been growing at the expense of the rest of the state,” he added.

At the same time, over the past five years Arkansas’ growth rate has persistently fallen short of the national average.

From the fourth quarter of 2014 through June of this year, the gross domestic product in the state averaged 1.1%, compared with 2.5% for the nation.

“We’ve been growing but growing more slowly than the rest of the nation,” Pakko said.

Little Rock’s economy also should experience growth lagging slightly behind national averages. “Our forecast here is going to follow a similar trend to what’s going on throughout the nation and the state,” said Carlos Silva, regional economist at the economic development institute.

Perhaps 2020’s biggest event, the presidential election, isn’t factored into any of the forecasts. Kliesen noted that economic predictions are “conditioned on what goes on in the [national] economy and not what goes on in Washington, D.C.”

The predicting and modeling and forecasting is helpful, but there’s really no way to know what’s going to happen, the economists warned.

Trade policy is the greatest uncertainty on the mind of business leaders but Kliesen said the unknown is always a factor.

“I’ve been in this business a long time and it’s always the thing behind the corner that you can’t see” that will come around to shock the economy, said Kliesen. “You never know what can happen.”