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Arkansas' resilient economy.

Arkansas' Resilient Economy

Fueled By Growing Services, Exports And Investments, Arkansas Continues To Beat The Recession

"Those who predict the future do so at their peril." -- Alan S. Blinder, Princeton University

For the past year, University of Arkansas at Little Rock economist John Shelnutt has been trying to tell the future.

Shelnutt compiles quarterly Arkansas economic forecasts for the Division of Regional Economic Analysis at the university. Recently Shelnutt unveiled his predictions for Arkansas in the second quarter, throughout the rest of the year and beyond.

If his prognostications are correct, Arkansas, in general, will not only escape the national recession, but profit from it.

"The Arkansas economy continues to avoid serious damage from the national recession," says Shelnutt in the notes to his forecast. "In addition, explosive export growth through the fourth quarter of 1990 helped buoy state manufacturing in the face of slack domestic demand."

Why should Arkansas be so lucky?

Shelnutt cites seven factors that have allowed Arkansas to escape the recession so far, and should enable it to continue to grow throughout 1991.

They are:

* Record rates of new investment in 1989;

* Record rates of investment announcements for expansion in 1990;

* Double-digit growth in foreign exports in both 1989 and 1990;

* Service employment gains that double the national growth rate;

* Mild interest rate effects;

* The 1990 construction surge;

* Regional resilience of the Midwest and southwest.

The only negatives in this optimistic picture are layoffs in the state's durable goods industries -- like lumber mills and electrical equipment manufacturers -- and statewide unemployment rates that may go as high as 7.8 percent in 1991.

Plus, possible military base closings in Fort Smith and Blytheville could create serious local problems. But those closing dates are indefinite and, at the least, far into the future.

And, in the best of all possible worlds, as the national economy rebounds in the second half of 1991, Arkansas can continuing growing right along with a revived national economy.

"Overall the outlook calls for moderate growth after a year of significantly outperforming the nation," writes Shelnutt.

Explosive Exports

Export growth has been a key to Arkansas' growth while the national economy slumped over 2 percent in the fourth quarter of 1990.

Arkansas' exports grew by 30 percent last year, far outstripping the United State's seven percent growth in exports. Significantly, Arkansas' export boom was a turn around from 1988 when the state's exports grew just two percent.

Tracking Arkansas' healthy rate of export growth, Shelnutt has compiled an Arkansas Export Indicator Index. The trend line doubled from a base of 100 in January 1987 to 200 in July of 1990.

But that rapid growth won't last, cautions Shelnutt.

"The rate of export growth probably peaked in 1990 and lower positive changes will be the function of slowing rest-of-world GNP growth in 1991," Shelnutt notes.

Ninety percent of Arkansas' exports are in manufactured goods. Industrial equipment represents 27 percent of the durable goods shipped, with electrical equipment close behind at 22 percent.

Somewhat surprisingly, agricultural products make up just a little over 8 percent of total exports.

Among our major trade partners are Canada, Japan, Mexico and the United Kingdom.

Service Industries Climb

Service employment growth has been an important part of the Arkansas economic engine over the past few years with a growth rate doubling the national average.

Since 1989, service sector employment jobs have climbed from 170,000 to nearly 200,000. Last year, the 8.6 percent growth of this sector was twice the national average. And that trend is continuing this year.

"First quarter growth in services continued at a very high rate (7.6 percent above last year), especially for a national recession," says Shelnutt. "We will not match the 8.6 percent growth of 1990, however."

Shelnutt expects service sector growth of about 5 percent for 1990, then declining to 4.4 percent in 1993.

Service sector growth in Arkansas is about double overall non-agricultural job growth.

For example, non-agricultural jobs grew just 3.6 percent in 1990, less than half of the service sector increase.

Similar to the slowdown in service sector job growth, Shelnutt also expects overall non-agricultural job growth to decline in the next few years. By 1993, the UALR economist forecasts new job growth in the non-agricultural sector to be a scant 1.7 percent increase.

But even this less-than-optimistic news has a positive side when compared to trends in the United States.

For example, Shelnutt predicts that the 2.8 percent growth in non-agricultural job growth in Arkansas will be far more than the 0.3 percent growth forecast for the same job sector on the national level.

Pushing Steel, Pushing Profits

Last year, the real Arkansas standout was the construction industry and the state's record rate of new investment.

"Recent upward revisions in construction employment for 1990 better reflect what many state contractors called their best year ever," says Shelnutt.

Last year, construction employment grew by 12.8 percent as the number of construction workers hit the 41,000 mark in July 1990. Shelnutt expects the building boom to slacken considerably throughout 1991, but overall the trend is still up.

He forecasts construction growth of:

* 4.8 percent in 1991;

* 3.3. percent in 1992;

* 2.3 percent in 1993.

Arkansas' record rate of new investment announcements in 1990 and a 12 percent gain in investment spending in 1989 has helped propel the construction industry.

In 1989, non-residential spending hit the $784 million mark, far above the $320 million level reached the year before. Total spending for 1990 was $468 million.

A Dissenting View

Early this month, the Economic Forecasting Center of Georgia State University issued its report on the Southeastern states and agreed with Shelnutt that Arkansas has so far escaped being hammered by the recession in 1990.

However, EFC predicts that Arkansas will slip into a recession in the current quarter.

"Arkansas' faltering leading index is now flashing a recession warning for 1991," says the EFC. "Without stimulus from goods production, the service and trade sectors will continue to lose momentum."

The report goes on.

"Arkansas' 1987 economic revival originated with a surge of manufacturing activity and farm earnings. Factory employment, comprising a significant 25 percent of total employment, expanded by 10,000 during the 1987 through 1989 period. Farm earnings jumped 24 percent in 1988. In mid-1989, factory output stalled and farm earnings peaked.

"Renewed growth in services and trade offset slowing goods production through 1990. However, these sectors are now expected to rapidly decelerate. The public sector will limit employment growth in response to slowing tax receipts. The construction industry is experiencing contraction after an early 1990 rebound. Under these conditions, Arkansas' economy is probably sliding into a moderate recession during the first quarter of 1991. By summer, recovering national demand for factory production should stimulate a modest economic expansion in Arkansas."

Shelnutt disagrees.

"Collectively, the outlook calls for moderate growth after a year of significantly outperforming the nation," Shelnutt says. "The more stable Arkansas economy will neither suffer by comparison with a rebounding national economy nor will it match recent superlative growth rates."

For those interested in learning more about Shelnutt and the Regional Economic Analysis forecast, contact Shelnutt at 569-8550.

Annual subscriptions to the service run from $300 to $1,000 and include: copies of the Arkansas Economic Outlook, extended access to state data banks, limited access to national data forecasts, national economic indicator tables, and attendance at REA conferences. Single copies of the Arkansas Economic Outlook cost $50.

Wythe Walker Jr. Arkansas Business Staff
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Walker, Wythe, Jr.
Publication:Arkansas Business
Date:Apr 29, 1991
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