Trade policy has been a “shock” to the economy, and uncertainty over it is rising sharply, Kevin Kliesen of the Federal Reserve Bank of St. Louis said Thursday at the Little Rock Regional Economic Briefing.
The presentation, hosted by the Little Rock branch of the Fed and the Arkansas Economic Development Institute (AEDI), was held at the Clinton Presidential Library.
Kliesen, the first of three speakers, is a business economist and officer in the Fed’s research division.
“One of the things that you have to realize is that the economy is always going to be hit by these unexpected developments,” Kliesen said during his half-hour address. “Economists call these shocks. And these shocks come along every so often and cause outcomes to deviate from expectations, and that’s when policy adjusts. ... One of the shocks that we’ve seen recently is trade policy.”
Kliesen also said, “There’s this view among those in the forecast profession that the risks associated with trade policy pose a significant threat to the economy going forward into 2020.”
But “it’s a double-edged sword,” he explained, because economists are also saying reaching an agreement with China could give the economy a boost by diminishing uncertainty.
“Why does uncertainty matter? I think the biggest thing is uncertainty is bad for business,” Kliesen said, because macro-level factors are important in micro-level investment decisions and businesses as well as lenders are reluctant to make long-term investments when they don’t know what the payoff will be.
Other points he made included:
- The risk of a recession is elevated, but not as elevated as it had been;
- The Fed’s easier monetary policy and diminished headwinds — should they occur — could produce modestly faster growth in 2020;
- GDP growth of 2% or less is expected to continue;
- Inflation is expected to remain low and stable,;
- October’s employment report was strong, with unemployment staying low;
- Retailers are anticipating a solid holiday season (because consumer spending has been strong);
- The housing market is rebounding (but perhaps temporarily);
- Manufacturing and business investment have been weak spots; and
- Services and transportation have been strong.
Michael Pakko, chief economist and state economic forecaster at AEDI, gave the Arkansas forecast, and said the economy here has been slow and uneven.
“Our growth rates in Arkansas have been slower than the national average, pretty much across the board,” he said. The state’s population growth has also been slower than the national average.
Pakko said that growth has been uneven, both geographically and by source of income. Dividends, interest and rent have been growing faster than the national average while wages and salaries have been growing slower.
Geographically, faster-growth areas include northwest Arkansas, central Arkansas and the Jonesboro area.
But one of his main points was that the state has bucked the trend of declining manufacturing employment by seeing a recent resurgence of that. That resurgence has also been more widespread, in areas that “may feel they’ve been left behind by the expansion so far,” including the Delta. The economist also expects manufacturing job growth to continue.
In addition, while Arkansas’ unemployment rate has hit historic lows and is expected to stay low, the labor force participation rate in the state has dropped from 63% in 2008 to 58%, he said.
Pakko expects the state’s GDP growth to be 1.5% to 2% and personal income growth to be 4% to 5% going forward, with wages and salaries reaching a healthy 5% over the next few years.
The third speaker was Carlos Silva, a regional economist at AEDI.
He said, compared to similar out-of-state MSAs (metro statistical areas) and in-state MSAs, the Little Rock MSA is middle-of-the-road on economic performance. But it is stable and expected to remain that way, Silva said.