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Arkansas won't shake recession; food processing and light industry keep state economy stable, forecast says.

Arkansas Won't Shake Recession

Food Processing and Light Industry Keep State Economy Stable, Forecast Says

Arkansas has outpaced the nation since May 1989 in new jobs but will probably follow the United States into a mild recession.

These two conclusions were presented recently to the Economic Forecasting Conference in Little Rock by John Shelnutt, the man responsible for the care and feeding of the state econometric model.

According to Shelnutt, head of the University of Arkansas at Little Rock Forecasting Center, U.S. job growth has stalled since June 1990, while Arkansas employment gains continue.

The UALR forecast follows the middle, base-case forecast for the United States prepared by the Wharton Economic Forecasting Associates, a national firm. WEFA forecasts a mild recession of two quarters beginning in the fourth quarter of 1990.

The Arkansas forecast is for a two-quarter recession beginning in the first quarter of 1991 with unemployment increasing from about 7 to 8 percent. Real disposable personal income is projected to decrease approximately .5 percent for 1991, with a decrease of roughly 2 percent for the first two quarters of 1991.

Holding The Recession Wolf At Bay

Should Arkansas follow the nation into recession, the state's usual position would be altered. Normally, Arkansas leads into a recession but lags coming out. In three of the last four recessions, Arkansas' slowdown preceded that of the United States and lasted longer.

Arkansas may delay the recession wolf longer this time due to the different status of energy shocks, interest rates and an altering mix of employment, particularly in manufacturing and food processing. (The recent announcements of additional jobs by Tyson Inc. and Petit Jean Poultry are good examples.)

Manufacturing employment in Arkansas, which has been flat or decreasing from about September 1989 to May 1990, has picked up. Arkansas manufacturing has the relatively highest share of employment compared with the national portion of the labor force. UALR forecasts that manufacturing jobs will increase 0.6 percent in 1990, but will decrease 0.6 percent in 1991.

Manufacturing employment in Arkansas is split almost evenly between durable goods -- like Whirlpool -- and nondurable manufacturing -- like International Paper and the new S&J Industries in Malvern.

The durable goods sector is volatile in good and bad times -- durable goods jobs are expected to decline in 1990 and 1991. (Whirlpool, for example, laid off about 1,600 in late September.)

The Arkansas service sector (including banks and large companies like Acxiom and Systematics), outperformed the U.S. average in 1989 and is projected to repeat in 1990. On the other hand, transportation and utilities are predicted to drop in employment by 1.3 percent in 1991, chiefly due to the variable trucking portion.

"In Arkansas," Shelnutt notes, "trucking is a bigger part of the economy than for the rest of the country and much depends on a few. If a large trucking company like J.B. Hunt can cope with hard times, some grief can be avoided."

Slowdown Hits Home

Arkansas homebuilders probably feel they have been in a recession for several years, as have builders nationwide. However, since a dismal first half of 1988, Arkansas has seen a mild recovery in single-family home building.

In 1988 and 1989, Arkansas home building grew faster than the national average, probably because employment was somewhat brighter. That mild recovery is projected to evaporate, however, with home building dropping about 5 percent for 1991. The state's car business also may be headed in the same direction.

Dennis Jungmeyer, executive VP of the Arkansas Automobile Dealers Association, noted at the conference that flat sales, coupled with structural changes in the auto retailing business, will further reduce the number of dealers and employees.

"M.D.'s and economists seldom have good news," Jungmeyer says wryly.

The UALR forecast is "driven" by the WEFA national forecast, which is dependent on assumptions about outside influences on the U.S. economy.

Among those assumptions are that a deficit-reduction accord will lower interest rates, and that a face-off will continue in the Middle East with oil prices stabilizing or declining.

The WEFA mild-recession baseline case, incorporated in the Arkansas prediction, is judged at a 50 percent probability. WEFA assigns 30 percent probability to a higher growth alternative and 20 percent probability to a deeper and longer recession.

"The more pessimistic scenario," Shelnutt observes, "would produce a severe 1982-style deep recession by disrupting consumer spending and increasing financial defaults."

Chilly Forecasts

The probability of a recession in Arkansas is independently supported by a report of the Economic Forecasting Center of Georgia State University, a group that forecasts for 12 southeastern states.

Arkansas was fifth among the 12 in recent job growth but slowed in the second quarter of 1990. The state's economic revival originated in 1987 with a surge in manufacturing activity and farm earnings, according to GSU.

Factory employment, representing 25 percent of employment, expanded by 10,000 over three years. Farm earnings jumped 24 percent in 1988. Arkansas has the highest ratio of farm earnings to total earnings in the Southeast (8 percent).

Another supporting view is given in "A Good 2nd Quarter, An Uncertain Future" by Dr. Donald Market in the most recent issue of Arkansas Business and Economic Review.

"Personal income and unemployment rate showed improvement during the first half of 1990," Market notes. "There is the likelihood that the U.S. and Arkansas face a recession, but it is not apt to be as severe as the last one. However, uncertainties will remain until the current Middle East crisis is resolved."

A Trace Of Optimism

A recession, the experts think, is shaping up in Arkansas and may be seen in the downward sales revisions for consumer appliances, auto sales, housing, clothing, restaurants and transportation. Still, there's a glimmer of hope in other areas.

Aggressive, market-niche investments and recent acquisitions by J.B. Hunt offer some optimism along with expansion by companies like Nucor Steel in Conway.

"Food production and processing are relatively recession-proof," observes Doug Heinson, chief economic forecaster for AP&L. "Arkansas seems naturally suited for food production, with a comparative advantage over the rest of the country in climate."

The data in the UALR and ABER reports also contain a paradox in regard to Arkansas' economy. During the last 18 months, Arkansas has outperformed the nation in job creation. Real personal income, however, declined in the second and third quarters of 1989 and was below the national and regional averages for second quarter 1990. Part of that is due to cyclical drops in farm payments, and part of that is due to weakness in Arkansas manufacturing. Many of new jobs have been relatively low paying.

Overall, the report failed to warm the hearts of conference attendees who represented an interesting mix of Arkansas banks, utilities and government. They had to settle for an economic forecast that sounded more like it was meant for Arkansas weather -- not too hot, but not too cold.

Robert Johnston, Ph. D., is an economic and government consultant. Dr. Johnston taught both economics and politics at the U.S. Military Academy, West Point, N.Y., and at the University of Arkansas at Little Rock.
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Author:Johnston, Robert
Publication:Arkansas Business
Date:Oct 29, 1990
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