Inflation is slowing down, and labor force participation should rise over the next two years, economists Michael Pakko and Tyler Mondres said Thursday at a Virtual Financial Forecast hosted by the Arkansas State Chamber.
“There's still a decent amount of uncertainty about exactly how far inflation is going to come down, what sort of factors might impact that, but it does look like … inflation has essentially reached its peak,” Mondres, senior manager of research for the Office of the Chief Economist with the American Bankers Association, said. He said that peak likely occurred in December or will occur in January.
“We have a lot of signs that are pointing in that direction, and we're hopeful that we're going to continue seeing more indicators that inflation is slowing and eventually starting to turn back down. While prices do continue to rise, they’re rising at a slower rate,” he said.
Inflation is expected to hover around 3% by the end of 2022 and still be above 2% next year, “but nothing in the realm of what we're seeing right now,” Mondres continued.
Pakko, chief economist and state economic forecaster at the Arkansas Economic Development Institute at the University of Arkansas at Little Rock, added, “I spent most of my career working with the Federal Reserve, where the name of the game was trying to stop inflation or wring inflation out of the economy for literally decades. And so I'm concerned going forward.”
He didn’t have any estimates to offer, but said he doesn’t believe inflation will moderate on its own. Pakko also said he is encouraged that the Fed seems to be “on top of things and moving quickly,” but he hopes it's moving fast enough.
Mondres cautioned that the country hasn’t fully felt the economic impact of the Omicron variant surge.
For example, it could dampen improving supply chain disruptions. He said, “I want to be clear here. Deliveries are still slow. Prices are still high, but they're moving in the right direction. The prices are increasing at a slower pace. The deliveries are one-week delayed instead of two-weeks delayed.”
But the disruptions could worsen again given China’s strict policies to stop the spread. Also, the vaccines available there have been traditional vaccines rather than the mRNA vaccines that appear to be more effective against variants.
Jobs, jobs, jobs
The good news is that Arkansas and the country seem to be nearing full employment, the economists said, even though the country is still down a couple million jobs from February 2020.
The state’s unemployment rate is expected to stabilize around 3.5% over the next few months and reach 4% in 2023. National unemployment is expected to drop to 3.5% by the end of the year.
“There's really not a whole lot of room on the downside for unemployment rates to go any further than this,” Pakko said. “But what we do need to see is some change in the labor force participation rate. Because, while the unemployment rates are down to historic lows, the labor force participation rates have dropped off since the recession and not recovered.”
He said the state’s rate had dropped by about 1.5%, the same decline the nation experienced as a whole.
Pakko expects the participation rate to rise by one-half of a percentage point in Arkansas over the next couple of years. Mondres also expects it to improve nationwide, when pandemic-related reasons for staying home and not working fade away. Those reasons include needing to care for children who are learning remotely and for unhealthy relatives, but also just fear of catching COVID.
The state’s labor force participation is lower than the national average, but that is in part because of its older population, Pakko said. He doesn’t see this rate returning to its pre-pandemic level, but that’s in part due to retiring baby boomers.
A forecast attendee asked what employers could do to encourage people to rejoin the workforce.
Mondres cited a November survey conducted by the chamber in his response.
He said most of the unemployed who participated in that survey said they’d rejoin the workforce for a $1,000 hiring bonus. Other popular answers were flexible hours and the ability to work from home.
Concern about catching COVID and about child care were cited as reasons for not working.
On how soon they were likely to come back to work, 35% of the unemployed surveyed expected to be back before the end of 2021, while 31% responded that they would come back in the first quarter of 2022 and 8% said they had no intention of returning, Mondres said. The rest said they’d come back after the first quarter of 2022.
“A lot of long-term unemployed folks are starting to experience skill atrophy. There's some skill mismatches between those who are still unemployed right now, looking for work, versus what positions are actually open,” Mondres said.
There are also a lot of employers struggling to find qualified workers, he said.
“Part of the reason businesses are experiencing so much trouble sourcing labor is because everyone's trying to hire at the same time right now,” Mondres said.
Retaining talent has been challenging, too, as a record 4.5 million quit their jobs in November, he said.
Among the reasons people are quitting are burnout, and that is especially true for pandemic frontline workers, Mondres said.
People are also reassessing their career trajectory because the federal pandemic support gave them the resources to do so. People are trying to get more education or get into a new career as well.
Businesses, in response, are paying their people more, the economists said. A record high percentage of small businesses, 48%, recently reported increasing pay during the last three months, Mondres said. Another record high of 32% say they are intending to increase compensation in the coming three months, he said.