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Recession revisited.

Recession Revisited

The inability of Washington to agree on tax increases and budget cuts has grave implications for Arkansas and the rest of the nation.

Adding the effects of the budget impasse to the current economic downturn magnifies the already uncertain outcome. Poor states suffer more than wealthy states during recessionary times, and that makes Arkansas' economic prospects particularly bleak.

Measuring the performance of the Arkansas economy and the national economy provides some insight into the response of the state's economy to fluctuations in the larger national economy.

Reading The Tea Leaves

The Arkansas Business Index measures the performance of the Arkansas economy. Southwestern Bell Telephone Co., based in St. Louis, maintains and provides this index. The solid line in the accompanying graph traces the quarterly path of the Arkansas Business Index beginning the first quarter of 1970 and continuing through the second quarter of this year.

A commonly acknowledged predictor for the national economy is the index of leading economic indicators. The index of leading economic indicators and the Arkansas Business Index move in tandem.

While both indexes move together, the index of leading indicators moves first and is followed by the state's economic indicator, making the leading index a reliable indicator of the future course of the state's economy.

Referring to the graph, the peak in the index of leading indicators in 1973 leads the peak in the Arkansas Business Index by four quarters. Both indexes bottomed at the same time in 1975.

The pace of Arkansas' expansion in the late 1970s exceeded the growth rate of the leading indicators, though the state economy peaked two quarters before the leading indicator.

The national and state economies declined from 1978 until late 1982 with the pickup in the U.S. economy beginning a quarter before the upturn in the Arkansas economy. Both the national and the state's economy have expanded since 1983 with only one small pause in late 1984.

The Beginning Of The End

The national economy began its present decline late last year. This decline differs from earlier downturns, because all the usual measures of recessions - high interest rates, growing unemployment, slowing retail sales (particularly auto sales), a drop in housing starts, and few plant expansions - aren't all present during the first 10 months of 1990.

The Arkansas variables exhibit the same disorganized pattern observed in the national picture.

Since all indicators are not yet moving in the direction required to define a full-fledged recession, some commentators hesitate to pronounce a recession is underway. I state without hesitation that the national economy is in the early stages of a recession.

The two remaining unanswered questions are the lenth and severity of the 1990 recession.

The budget gridlock in Washington controls the outlook for the Arkansas economy along with the increase in petroleum prices. Here are some possible pressure points for the state's economy:

* The state's major trucking concerns will be battered by an increase in fuel prices and decline in economic activity;

J.B. Hunt Transport, Arkansas Freightways and Cannon Express profits will be caught in a squeeze between the increase in fuel costs on one side and the decline in cargo volume on the other. Wal-Mart's growth rate of sales, not offset by an expansion in market share, will decline, reflecting the drop in spending after consumers pay higher sin taxes and more for gasoline;

* Oil revenues originating in south Arkansas' producing areas will increase following the increase in the world's oil prices. The western and southern Arkansas timber industry will experience a decline in sales reflecting the bleary construction outlook in the state's traditional timber markets;

* Cash receipts of farmers will decline when federal expenditures for agriculture price support programs decline. Tyson and Hudson Foods may benefit when the squeezed consumers substitute less expensive beef and pork.

Future Forecasts

The accompanying graph also shows a speculative outlook for the state's economy.

The arrow points to the beginning of the forecasts in the third quarter of this year. The outlook for the index of leading economic indicators is that it will have a modest decline until a slight upturn begins in the second quarter of 1991.

The Arkansas economy will experience the same decline following a lag of six to 12 months. These forecasts assume only a moderate and short-lived pause in growth rate of the national economy. If a more severe recession develops, then the state's economy will suffer accordingly.

The Arkansas business person should closely monitor the outlook in the national economy. The astute and informed executive will cease haggling about whether or not a recession is in progress and instead focus on measuring the severity and length of the one in progress. Those that master these two critical issues will jump one step ahead of their lagging competitors.
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Author:Pickett, John C.
Publication:Arkansas Business
Date:Oct 22, 1990
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