State of the State 2022: Arkansas economy expected to outpace 2021 despite Omicron push

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Arkansas’ economy was on track for robust gains in 2022 until the Omicron variant of COVID-19 put a bend in the line. Economists still believe the state’s economy will grow in 2022, with labor shortages possibly a factor limiting growth.

John Shelnutt, administrator of economic and tax research at the Arkansas Department of Finance and Government, said strong growth in several sectors – travel, restaurants, personal services and educational services – expected in early 2022 could be pushed back to the middle of the year because of the surge of Omicron. That surge peaked in late January, after active cases topped 101,000 and hospitalizations approached 1,700. Active cases by February 5 had fallen to 41,069 and hospitalizations to 1,512.

“Recent gains in sectors hard hit by COVID-19 will be challenged again in the first half by the faster spread of the omicron variant. Strong growth in the state’s private sector employment base in The second half of 2021 was marked by a mix of strong growth due to the rebound in hard-hit sectors and continued expansion in sectors in early recovery.A resumption of this pattern is expected by the middle of the year, but not before it has dampened the initially projected annual growth,” Shelnutt told Talk Business & Politics.

Shelnutt estimates Arkansas’ economy in 2022 will “mirror and slightly exceed the growth rebound year of 2021,” with 2.3% growth in 2022 outpacing 2.1% growth in 2021 Growth in 2022, if achieved, would be well above the pre-pandemic five-year average growth of 1.8%.

SECTOR, GDP ESTIMATES
Here are more estimates from Shelnutt on economic conditions in 2022.
• Continued high growth in professional and business services is expected with growth of 6.3% in 2022, following an impressive gain of 5.7% in 2021.
• Growth is also projected in the state’s historical sector benefits, with 8.8% job growth projected in transportation, including trucking. Manufacturing employment looks anemic in 2022, but could surprise on the high side with expansions in food processing and further expansion in steel fabrication and primary steel.
• Employment growth in construction could also surprise on the high side with gains coming from a combination of federal infrastructure spending and industrial projects.
• A surge in infrastructure programs and the anticipated rapid start of construction of the recently announced U.S. steel mill in northeast Arkansas will offset slower growth due to higher interest rates in many other market segments.
Attempts to attract skilled workers to meet growing demand in the state with economic development-type incentives could offset rising mortgage rates and highlight the falling cost of living in Arkansas.
• Investments in renewable energy and transport could add a diversification aspect to growth.
• The rollout of other state and federal stimulus programs will benefit telecommunications construction and health services.

Dr. Michael Pakko, chief economist and state economic forecaster at the Institute for Economic Advancement at the University of Arkansas at Little Rock, sees state GDP rising 4.2% in the fourth quarter 2021 compared to the same quarter in 2020, with growth moderating to 3% for all of 2022. In dollar terms, Dr. Latesha Settlage, Dean of the College of Business at the University of Arkansas at Fort Smith, pegs the state’s GDP (final estimate) at $152 billion in 2022, up from $144 billion in 2021.

Settlage also estimates that the economic sectors in Arkansas that will create the most jobs in 2022 will be information, recreation and hospitality, professional and business services. She said consumers were in a “low debt-to-income position” and would have money to spend on the state’s tourism sector. Higher wages will attract people to manufacturing.

THE LABOR FACTOR
Finding labor to fuel and sustain economic growth will be a national and national challenge.

“The real concern for policy makers is how to turn the tide on labor market participation. The workforce is a critical component to support increased business and government investment. Without a reliable supply of skilled talent, companies producing goods and services must forego sales. In short, economic growth is not at its potential,” Settlage said in an early December 2021 note to Talk Business & Politics.

Arkansas’ December jobs report released Jan. 25 provided an example of Settlage’s concern. The state’s unemployment rate fell to a record low of 3.1% in December from 3.4% in November and below 4.9% in December 2020. However, there were fewer Arkansans employees in December compared to December 2020. The number of employees in Arkansas during December was estimated at 1,310,494, down 1,643 jobs from December 2020.

The state’s labor force, that is, the number of people eligible to work, has also declined. The December tally was 1,353,108 in December, 26,205 people lower than the 1,379,312 in December 2020, and even below the 1,354,206 in November. Arkansas’ labor force participation rate was 56.9% in December, down from 58.3% in December 2020 and below 57% for the first time in 2021.

Shelnutt thinks conditions will improve in 2022 for the state labor market and for workers.

“Overall, the story of continued labor market recovery and expansion is still on track. Total wage income growth will still be high in 2022 due to the combined factors of job creation, accelerating wages, inflation and the carry over from the deployment of past and current stimulus measures. Stimulus payments to households will be replaced by greater opportunities in the labor market.

GLOBAL AND US ECONOMIC ESTIMATES
• S&P Global Ratings estimates of US GDP growth: 5.5% in 2021, 3.9% in 2022 and 2.7% in 2023

• Fitch Ratings estimates of US GDP growth: 5.7% in 2021, 3.7% in 2022 and 1.9% in 2023

• Moody’s estimates that the advanced G20 countries will experience collective growth of 5.8% in 2021 and 4.4% in 2022, following a 3.2% contraction in 2020. Previous growth estimates in its Moody’s report August were 6.2% for this year and 4.5% for next year.

• “Weaker-than-expected growth momentum and a surprise rise in inflation have shaken some of the optimism surrounding the global economic recovery,” according to Moody’s.

• “Supply chain disruptions, labor shortages and higher prices for some goods and services resulting from pandemic-induced closures and intermittent reopenings will extend into 2022, but their effects will subside in the second half,” Elena, managing director of Moody’s Duggar

• “With inflation continuing to rise and appearing less transitory, the Fed has advanced its tightening schedule. We now expect a faster cut and hike in policy rates in the third quarter of 2022,” according to S&P Global Ratings.

• Fitch Ratings’ recent global growth forecast for 2022 is 4.2%, down from a previous forecast of 4.4%, with most of the decline due to a “more intense slowdown in China” .

• “We expect goods prices to stabilize in 2022 as spending shifts back to services, strong investment drives goods supply and fiscal stimulus unwinds,” Fitch noted.

Editor’s note: Link here to connect to the Status section of the Status.

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