Forecast: Uncertainty now, but no recession on horizon

There are no signs of a recession in Arkansas on the horizon, despite projected slowing growth and the uncertain effects of tariffs.

That's according to Dr. Michael Pakko, chief economist and state economic forecaster at the Arkansas Economic Development Institute at the University of Arkansas at Little Rock.

Pakko made his relatively optimistic comments at the annual Arkansas Economic Forecast Luncheon Nov. 6. Federal Reserve Bank of St. Louis economists Kathleen Navin and B. Ravikumar also spoke.

The three economists were hampered in their analyses because they didn't have access to third quarter statistics because of the government shutdown.

Still, they offered some important takeaways about inflation, unemployment, tariffs and artificial intelligence.

Arkansas' economy has been on somewhat of a roller coaster ride lately. The state was in the top 10 in economic growth in the last half of 2024. Then in the second quarter of this year, it had the nation's slowest growth largely because of reduced farm income.

Pakko said inflation remains elevated. Arkansans are spending 32% more on groceries than they were in 2019 while buying about the same quantity. But current overall inflation rates for Arkansas' region of the country are closer to 2%, compared to 2.7% for the nation as of August.

"As a result of this lower inflation, recently Arkansas has resumed its place as the lowest cost-of-living state in the nation," he said. "So here's a good example of being last is good."

Navin said inflation nationally will be elevated this year and next but should return to 2% by 2028. The Federal Reserve has a national target of 2%. With the August rate at 2.7%, the Fed won't be in a hurry to cut interest rates much. Doing so could make inflation worse. She noted that this year's third expected rate cut in December is not a certainty.

Tariffs are contributing to the rising prices. Pakko said 2025 has been the "year of uncertainty" with tariffs rising from a previous average of 2.5% to an estimated 18% now. The last time tariffs were close to that high was the 1930s.

Navin said Americans' personal consumption expenditures were soft in the first quarter but picked up in the second and were projected to be healthy in the third. However, the Fed's October Beige Book noted that while upper-income households and corporations have been spending on travel, events and luxuries, middle-income consumers are becoming more cautious and are using credit to maintain their spending. Lower- and middle-income households appear to be using food pantries more often. They also are becoming more delinquent on their credit cards.

Pakko expects Arkansas' unemployment rate will grow from 3.8% to perhaps 4.2% next year. Navin said the 4.3% national rate in August should rise to 4.5% by the fourth quarter before falling gradually to 4.2% by 2028.

Arkansas has a lower unemployment rate than the national average, but it also has a lower labor force participation rate, 58.5% versus 62.3%. Whatever their reasons, fewer Arkansans work or try to work. Those who do neither are not considered to be unemployed. Meanwhile, Arkansas has a higher job openings rate than the national average.

The national unemployment rate is remaining stable because of two conflicting forces, Navin said. The slowing economy has created less demand for jobs. At the same time, the supply of workers is declining because of immigration policies. Hirings, layoffs and quits have been flat. She called it a "no hiring, no firing economy."

However, more firms are signaling layoffs, some of it related to artificial intelligence adoption.

Pakko isn't worried about the latter. In a panel discussion, he said that each time a new technology has arisen, such as mechanization, people have worried about the jobs that were being lost. But the economy has always created new jobs.

"I can't predict what the new jobs of the future are going to look like, but they're going to be there," he said.

Ravikumar said the percentage of Americans employed in manufacturing has fallen from slightly less than 40% during World War 2 to a stabilized 6% to 7% now. A large part of that decline is due to automation and productivity increases. In the 1950s, nine workers could produce one car. Today, one worker can produce nine cars.

That equation will continue changing with artificial intelligence. Even fewer workers will be needed per car, which will be a good thing – from a macroeconomic perspective. However, those who lose their jobs will have their lives and livelihoods disrupted.

The uncertainty will continue, for sure.

Steve Brawner's column is syndicated to 21 outlets in Arkansas. Email him at [email protected].