A forum for information and analysis on the Arkansas economy

Unemployment Insurance Claims – Week Ending April 25

As the COVID-19 pandemic continues to take its toll on the economy, the number of initial unemployment insurance claims remains elevated but has declined sharply from its peak in early April. In the week ending April 25, initial claims in Arkansas were 16,745 (preliminary), down from 25,404 (revised) the previous week. During the week ending April 4, initial claims peaked at 62,086. The latest figure represents a 73% decline from that peak. Continuing claims (insured unemployment) have risen from approximately 11,000 in mid-March to 106,460 in the week ended April 18.

Source: Department of Labor, U.S. Employment and Training Administration

By comparison, U.S. initial claims peaked a week earlier than in Arkansas and have not declined as rapidly since. In the week ended April 25, U.S. initial claims were down only 44% from their peak in the week ending March 28. U.S. continuing claims (insured employment) have risen from 1.78 million in the week ending March 14 to 18.0 million in the week ending April 25.

Source: Department of Labor, U.S. Employment and Training Administration

Expressed relative to total covered employment, the continuing claims data are used to calculate the Insured Unemployment Rate (available at the state level with a one-week lag). In the week ending April 11, the Insured Unemployment rate in Arkansas was 7.6%. During the same period, the U.S. rate was 10.9%. Before the COVID-19 pandemic hit, the Insured Unemployment Rate was 1.2% nationwide and less than 1% in Arkansas.

Source: Department of Labor, U.S. Employment and Training Administration
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Metro Area Employment and Unemployment – March 2020

The latest report on metro area employment shows that Arkansas’ metro areas generally followed the same pattern as the statewide statistics reported on April 17th: sharply higher unemployment and substantial declines in payroll employment.

Metro area unemployment data were revised last week, with new numbers reported today for March. The revised seasonally adjusted estimates show little change in unemployment rates from December through February. The newly-released estimates for March show higher unemployment for all of Arkansas’ metro areas, with the increases ranging from 0.1% in Memphis to 1.7% in Pine Bluff.

Source: Bureau of Labor Statistics, Seasonally Adjusted Metropolitan Area Estimates

Payroll Employment
Nonfarm payroll employment declined in most of Arkansas’ metro areas, although Texarkana and Memphis recorded increases. The largest percentage decline was in Hot Springs — down 1.5%. The Little Rock metro area was down 0.7%, reflecting a loss of 2,400 jobs. A decline of 0.4% in Northwest Arkansas reflected approximately 1,000 fewer jobs.

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

The March declines left some metro areas below year-ago employment levels. Little Rock is down 1.9% and Pine Bluff down 1.8%. Fort Smith and Hot Springs were also below employment levels from March 2019. Northwest Arkansas, Jonesboro, Memphis and Texarkana have employment totals that remain above year-ago levels.

It is anticipated that March will be seen as a transitional month, with the full impact of the COVID-19 pandemic and efforts to control its spread showing up in the data for April.

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What Was the Unemployment Rate in March?

In Friday’s post covering the March report on Arkansas employment and unemployment, we noted an anomalous implication of the data used to calculate the unemployment rate: With the number of unemployed going up by 18,526 and the number of employed rising slightly (+530), the labor force expanded by over 19,000. This change is far larger than any historical precedent, runs counter to the labor force change at the national level, and makes little economic sense.

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Several factors appear to have contributed to this result, presenting a number of questions. What does it mean for interpreting the unemployment rate, measured by dividing the number unemployed by the labor force? And for that matter, how should the underlying statistics on the number employed and unemployed by interpreted and understood?

The Arkansas Division of Workforce services has been very helpful in our examination of the data for March. Their primary explanation for the anomaly is that the BEA methodology led to some double-counting. According to spokesperson Zoë Calkins, “March was truly a unique situation, were workers were counted as employed (because they were drawing a paycheck) even if they were not on the job.  Many of those same workers were also eligible to and did apply for Unemployment Insurance benefits.  So under BLS definition, they were counted as both employed and unemployed.”

There are several factors that might have contributed to the the double counting, but the first matter to consider is how much it matters. Suppose that all of the newly unemployed were double-counted. Subtracting 18,526 from the reported number of employed implies an increase in the labor force is only 513. The direction is unexpected, but well-within the range of past magnitudes of change. More importantly, the impact on the unemployment rate is insignificant. In fact, rounded to the nearest tenth, the adjustment does not change the conclusion that the Arkansas unemployment rate was 4.8% in March. Moreover, confidence intervals around monthly unemployment rate estimates for Arkansas are generally in the magnitude of +/-0.5% in a normal month, and there is clearly more uncertainty for this unusual month.

Sources: Bureau of Labor Statistics, LAUS; Author’s calculations.

So at least on one level, the answer to the question posed in the title of this article is: 4.8%.

Nevertheless, the processes used to estimate U.S. and Arkansas unemployment rates for March (and the problems encountered in the process) make for an interesting story that helps shed light on the interpretation of the March statistics. Our analysis shows how rapidly and severely the COVID-19 crisis has affected the economy, both nationally and here in Arkansas.

The U.S. Unemployment Rate
At the national level, the unemployment rate is estimated using the Current Population Survey (CPS), a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics. It asks survey respondents to describe their employment status during a “survey reference week” which was, for this particular report, the week of March 8 -14.

The BLS news release for the U.S. unemployment statistics noted that the reference week survey “predated many coronavirus-related business and school closures that occurred in the second half of the month.” In that respect, the estimate of a nationwide increase in the unemployment rate from 3.5% to 4.4% was somewhat surprising in the suddenness of its impact.

But there were problems with the March CPS survey. The BLS news release noted that “in-person interviews were suspended, and that survey response rates were down 10 percentage points from recent months. There were also problems with the classification those affected by COVID-19 related closures: Some workers who should have been classified as ‘unemployed on temporary layoff’ were instead categorized as ’employed but absent from work.’”

The mis-classification in the survey would tend to underestimate the unemployment rate. In a special FAQ release accompanying the national employment report, the BLS considered one scenario in which 1.4 million workers considered not at work for “other reasons” (the number exceeding the average for recent March observations) were hypothetically reclassified as unemployed instead of employed. In this calculation the U.S. unemployment rate would be 5.3% instead of 4.4%. This may be the relevant benchmark for comparing Arkansas’ unemployment rate to the national average.

Despite the recognized problems with the CPS, the BLS maintained a policy of methodological consistency: “[T]he data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reassign survey responses.”

The Arkansas Unemployment Rate
State-level estimates of the unemployment rate begin with the national CPS survey, but are subject to the methodology of the Local Area Unemployment Statistics (LAUS) program.

In particular, additional information is used to refine state-level estimates, to compensate for uncertainty associated with smaller sample sizes. “Payroll employment estimates from the (CES) survey of establishments and unemployment insurance (UI) claims counts from the state workforce agencies are also used as model inputs to help mitigate volatility in the monthly state-level CPS estimates.”

In the news release announcing the Arkansas unemployment results, the Arkansas Division of Workforce services noted that “The increase in the number of unemployed Arkansans is, in large part, a reflection of the number of Unemployment Insurance claims filed during the week of March 12th.” (The survey reference week is typically the week including the 12th of the month.)

This suggests that the mis-classification at the national level might have been particularly disruptive to the application of methodologies to measure unemployment in Arkansas. And in fact, the news release went on to note “The small gain in employment is based largely on a monthly survey of Arkansas households, which was significantly impacted by the outbreak.”

With regard to the number unemployed, if the mis-classification of unemployment status was particularly prevalent in the Arkansas sub-sample, LAUS procedures to incorporate additional information–in particular, data from state unemployment insurance (UI) claims–might well have been influential in refining the estimate for Arkansas unemployment.

The problem with this simple explanation is the timing of unemployment insurance claims. During the survey reference week (the week ending March 14th, there was no perceptible change in initial claims or continued claims (insured unemployment). In fact, both measures declined slightly.

Source: Department of Labor, Employment and Training Administration

But the LAUS methodology specifies that unemployment insurance (UI) claims data are used as “as model inputs to help mitigate volatility in the monthly state-level CPS estimates.” It does not specify that UI data for the reference week alone are used. In fact, for the purpose of helping to “mitigate volatility” in the survey data, it would make sense to use data for the full month, or at least a centered moving average around the reference week, which would incorporate data from later weeks in the month. Under ordinary circumstances, this distinction would make little difference and would help refine survey estimates, but could very well be of consequence when it comes to measuring unemployment in the rapidly-changing situation we had in March.

On the employment side: The estimate for the number of employed Arkansans was reported to have increased slightly, in contrast to a sharp decline in payroll employment. This is another indication of a tainted Arkansas survey. If data from the payroll survey was used to “mitigate volatility” in the CPS survey data, the raw survey data must have shown an even larger increase in employment.

So, the unemployment numbers were “a reflection of the number of Unemployment Insurance claims” and the employment totals were “based largely on a monthly survey … significantly impacted by the outbreak.” These observations suggest that the problems identified in the national CPS survey were particularly problematic for Arkansas. The established procedures for estimating state-level estimates ended up placing routine data-refinement techniques center-stage in the estimation of state-level unemployment rate calculations.

Throwing out the CPS March Survey
If you are the type of reader who might enjoy wandering even deeper into the weeds than we’ve already gone, let’s consider the possibility that the CPS (household) survey for March is too tainted to be of use at the state level (at least for Arkansas). Using contemporaneous information from unemployment insurance claims and nonfarm payroll employment, what might we estimate the unemployment rate to be?

In order to answer that question, we estimated monthly models for one-month-ahead forecasts of unemployment and employment, using UI claims and nonfarm payroll employment data. The models were estimated for the period from January 1986 through February 2020, then used to forecast values for March 2020. The exercise here is not to forecast actual employment and unemployment, but to predict March values for the series reported by the BLS.

We derived unemployment estimates from a time-series model relating monthly (log) changes in LAUS unemployment to changes in monthly averages of continuing unemployment claims (insured unemployment). The estimation model also included a constant, time-trend, and lagged dependent variable. The March forecast from this model produces a not-seasonally-adjusted estimate indicating an increase of 10,974 in the number unemployed. This is remarkably close to the reported value for not-seasonally-adjusted data, 11,303.

The BLS and DWS noted that the usual seasonal adjustment procedures were modified to treat the March 2020 figures as “level-shift outliers.” The level shifts “preserved movements in published estimates that the models otherwise would have discounted, without requiring changes to how the models create estimates at other points in the time series.”

In an effort to replicate the seasonal adjustment process, we implemented a Census X-13 procedure, treating March 2020 as an outlier. The resulting, seasonally adjusted forecast value for March indicated an increase of 16,933 in the number unemployed. This is a close, but imperfect approximation of the BLS seasonal adjustment procedures which use a combination of X-11 seasonal adjustment techniques along with a special smoothing algorithm. If we simply take the implicit seasonal factors calculated by taking the ratios of seasonally-adjusted to not-seasonally-adjusted values in the published data, the adjustment to our March forecast value implies an increase of 18,190 in the number of unemployed — remarkably similar to the published estimate of 18,526.

A similar approach was used to estimate a monthly change in the number of employed. A model relating monthly (log) changes in household employment to (log) changes in nonfarm payroll employment was estimated through February 2020, then used to forecast a value for March. Using not-seasonally-adjusted data, this yields a forecasted employment decline of 1,431. Using the implied seasonal factors from the BLS to seasonally adjust the estimates, we get a seasonally-adjusted decline of 7,375.

With these estimates, we can construct an alternative measure of the unemployment rate that uses no information from the household survey. The model-generated estimates yield an unemployment rate of 4.8%.

Although the forecast-model version of the unemployment rate is nearly identical to the published value, the information used to construct the estimates was not limited to the survey reference week. Monthly averages of UI claims data were used to generate the unemployment estimates. The employment estimates are derived using nonfarm payroll employment from the CES survey of establishments. While the reference period is the same as the household survey, the reporting is on a pay-period basis, with many employers reporting bi-weekly or monthly figures in their reports. Hence, the alternative figures presented here are not representative of the early-March situation, which “predated many coronavirus-related business and school closures in the second half of the month.”

When it comes to estimating a figure for March unemployment, however, there is nothing magical about the survey-reference period. What made the situation in March unique was the suddenness with which a wave of unemployment spread across the economy, as evidenced by the UI Claims data. It is clear that the unemployment rate was rising during the month, and the estimates, official or alternative, attempt to capture point-in-time estimates of the March situation.

On might note that, just like the published estimates, the forecast-generated values for employment and unemployment imply an unusually large increase in the labor force, +10,815. This isn’t quite so large as the change implied by the published numbers, but it is still uncharacteristically large and moves opposite to what one might expect. The reason for this anomaly appearing again is the same as it was for the published estimates: double-counting. In this case, estimates of employment using payroll data and estimates of unemployment using UI insurance claims counted some people twice. In particular, those who were on active payrolls early in the month and were subsequently unemployed later in the month. The double-counting is an inescapable implication of trying to estimate fixed values for rapidly-changing numbers.

Ultimately, March will be seen as a transition month, wedged between February, when no impact of COVID-19 was evident, and April, when the effects of the virus and efforts to control it will be fully reflected in the employment data.

For now, as best we can tell, the Arkansas unemployment rate in March was about 4.8%.

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Arkansas Employment and Unemployment – March 2020

(Updated 4:55 P.M., Revised April 18, 2020)

The March report on state-level employment and unemployment showed early, initial impacts of the COVID-19 pandemic. Although the survey reference periods for the report predate many business and school closures that occurred later in the month, today’s report clearly indicates the COVID-19 pandemic had substantial impacts on on labor markets in March.

The survey reference week for both the household and establishment surveys was March 8th – 14th, the week before initial claims for unemployment insurance showed sharp increases during the last two weeks of the month. Nevertheless, the Arkansas unemployment rate was estimated to be 4.8%, up from 3.5% in February. The national unemployment rate rose from 3.5% to 4.4%.

Source: Bureau of Labor Statistics

The Bureau of Labor statistics reported several problems that were encountered in the process of collecting survey data in March. For the household survey (on which the unemployment statistics are based) the BLS noted that in-person interviews were suspended, and that survey response rates were down 10 percentage points from recent months. There were also problems with the classification those affected by COVID-19 related closures: Some workers who should have been classified as “unemployed on temporary layoff” were instead categorized as “employed but absent from work.”

In their news release for Arkansas, the Division of Workforce Services, reported that “The increase in the number of unemployed Arkansans is, in large part, a reflection of the number of Unemployment Insurance claims filed during the week of March 12th. The small gain in employment is based largely on a monthly survey of Arkansas households, which was significantly impacted by the outbreak.” Correspondence seeking clarification indicated that both the survey data and the Unemployment Insurance Claims data are typically used to estimate the monthly unemployment levels.

Evidently, data on UI Claims were used from later weeks in the month. The number of initial claims filed during the week ending March 14th was 1,382. For the week ending March 21st, new claims were 9,275. (The really big increase didn’t come until a week later.) The increase in the number of unemployed in today’s report was 18,526.

Whatever procedure was used to estimate the numbers of employed and unemployed for March, the calculations lead to an odd result: The labor force expanded by 19,032. This includes the increase in the number unemployed and an increase of 513 in the number employed (see figure, below). An observation that the labor force expanded one-for-one with the number of newly unemployed really makes no economic sense. Literally, it suggests that thousands of unemployed people, who weren’t in the labor force in February, were dumped into the Arkansas economy in March. Because the unemployment rate is the ratio of the number of unemployed to the labor force, this odd co-movement leads us to question how the March unemployment rate should be interpreted, or how it can be put into context. Perhaps the best conclusion we can draw is this: unemployment increased significantly during March.

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Update (4:55 PM): After consultation with the Arkansas Department of Workforce Services, we appear to have an explanation for the anomaly described above; namely, that the number of unemployed and employed (the labor force) jumped by an inordinate magnitude.

As we described earlier, some workers who should have been classified as “unemployed on temporary layoff” were instead categorized as “employed but absent from work.” As a result of this (and perhaps other) classification issues, workers were counted as employed in the survey, but were also eligible to apply for unemployment insurance. Consequently, the Arkansas data appear to include a number of workers double-counted as both employed an unemployed.

This explains the anomaly, but does not clarify the interpretation of this month’s unemployment rate. If anything, it suggest that the March unemployment rate is understated: many of those counted as “employed” in the labor force should be dropped from the labor force total (because they’re already counted as “unemployed”), which would raise the calculated unemployment rate.

(A perusal of the data for all 50 states suggest that the unemployment rate calculations for as many as 7 -10 states may have been affected by this anomaly.)

Payroll Employment
Nonfarm payroll employment declined by 7,700 jobs from February to March (seasonally adjusted). The largest declines were in Leisure & Hospitality Services and Education and Health Services (fully attributable to a decline in Health Care & Social Assistance). Other Services and Manufacturing also showed notable declines. Employment in several sectors increased, including Construction, Financial Services and Professional & Business Services.

After the March decline, Arkansas employment is down 3,300 from a year earlier.

The BLS reported problems with the establishment survey as well. Regional call centers that are usually used for phone surveys were closed, so electronic data collection methods were used instead. The collection rate was reported to be about 9 percentage points lower than average.

Despite the data collection problems in both the household and establishment surveys, the BLS concluded in both cases that the agency “was still able to obtain estimates that met our standards for accuracy and reliability.”


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Forecast Update: Impact of Covid-19 on the Arkansas Economic Outlook (April)

In a report released on March 23, AEDI presented a preliminary forecast for the Arkansas economy, taking into account the impact of the novel coronavirus disease 2019 (COVID-19).  In addition to disruption of world supply chains, the decline in consumer spending associated with “social distancing” is generating forecasts with significant declines in aggregate demand, creating the conditions for a severe recession.

In this note we update that forecast with new estimates of the magnitude of the downturn, taking into account the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27.  We also update and extend our previous guidance on how the forecast is likely to impact sales tax receipts of local governments.

The forecast is based on the latest update to the national outlook from IHS Markit, dated April 2, 2020.  The new forecast sees GDP growth falling at a 26.5% annual rate in the second quarter – down from a 12.6% rate of decline forecast just two weeks earlier.  National unemployment is now projected to peak at over 10% in the fourth quarter of the year.  According to IHS, the new forecast “reflects inclusion of new high-frequency data and reports on developments in industries directly affected by social distancing, as well as new judgment on how efforts to slow the spread of coronavirus disease 2019 (COVID-19) will permeate the economy.”

As with our previous forecast for the Arkansas economy, we have applied the recent IHS forecast adjustments to our model for Arkansas, adjusting the components of each aggregate separately in order to capture the unique characteristics of the Arkansas economy. Our state forecast is also informed by an update to the IHS Arkansas model published on March 27 that reflected the March 20 national forecast assumptions.

In a nutshell, the latest forecast projects far sharper downturns in employment and consumer spending, with deeper and broader effects.  Nonfarm payrolls are expected to decline by over 100,000 and unemployment is expected to peak at 9.2%.  Consumer spending is expected to be down over 9% in the second quarter.  Most components of income are also expected to decline more sharply than in the previous forecast, but estimates of transfer payments stemming from the CARES Act are expected to buffer the impact on total personal income.

The following sections present our latest post-COVID-19 forecasts for Arkansas, comparing the projections to our forecast from March 30, as well as the previous, pre-COVID-19 baseline forecast. 

Employment
The latest forecast indicates a decline of 108,000 jobs by the fourth quarter of 2020, an 8.4% drop.  The previous forecast had indicated a loss of 77,000 jobs.

Figure 1:

Sources: IHS Markit, Arkansas Economic Development Institute

As shown in Table 1, job losses are concentrated in service-providing sectors that are considered especially impacted by “social distancing.”  However, the new forecast shows declines across the entire economy. Even Health Care & Social Assistance is now expected to see job losses by the end of the year.  In light of new patterns of consumer behavior, some sectors have been revised to show smaller declines than previously forecasted.  For example, employment in Accommodation and Food Services was previously expected to decline by 13%, but drive-through, carry-out, and delivery options are now anticipated to limit that sector’s decline to only 9%.  Employment in nondurable goods production—primarily in food processing—is expected to decline by only 2.9%, as opposed to a previously-forecast decline of 3.5%.  The largest downward revisions are associated with employment in sectors that are not directly impacted by COVID-19 or social-distancing practices, as the effects of the economic downturn spread throughout the economy.

Table 1:

Sources: IHS Markit, Arkansas Economic Development Institute

Unemployment
The Arkansas unemployment rate was previously forecast to peak at 8.7%.  The latest forecast suggests 9.2%. As dire as that sounds, the forecast for Arkansas is lower than the national projection of 10.3%.  The increase in forecasted unemployment is buffered somewhat, particularly in this most recent forecast, by a decline in the labor force participation rate.  The participation rate is expected to fall by over a full percentage point, from 56.8% to 55.5%.

Figure 2:

Sources: IHS Markit, Arkansas Economic Development Institute

Personal Income
The latest forecast for personal income includes a surge in transfer payments in the second quarter of 2020, reflecting payments associated with automatic stabilizers such as unemployment insurance, as well as the large cash transfers approved under the CARES Act.  In the U.S. forecasts, IHS Markit predicts an increase of nearly 24% in second-quarter transfers, with an additional 3% increase in the third quarter.  That translates to a path for total personal income that is basically flat through the third quarter (down 0.2% from Q1).

If we apply the national adjustment factors directly to personal income, Arkansas follows a similar trajectory—labeled as “U.S. Equivalent” in Figure 3.  However, transfer payments account for a larger share of total personal income in Arkansas than for the U.S. average (about 24% vs. 17%).  Consequently, if transfer payments surge by as much as 24% in the second quarter, Arkansas would see an increase in total income through the third quarter – up 2.6% from Q1 (labeled as “April Forecast” in Figure 3). 

Figure 3:

Sources: IHS Markit, Arkansas Economic Development Institute

Is it reasonable to expect transfer payments to increase in the same proportions as the national total?  On the one hand, a given dollar-amount transfer payment translates to a smaller percentage increase when the base is larger, so we might expect something smaller than a 24% increase in Arkansas.  On the other hand, as a relatively low-income state we are likely to have fewer people excluded from transfer programs by means-testing.  Looking back to the stimulus programs of the “great recession,” transfer payments in the second quarter of 2008 were up from the previous year by 25.6% (U.S.) and 25.3% (Arkansas).  So it is, perhaps, not unreasonable to expect similar growth rates of transfer payments in the present situation.  All of this discussion highlights the fact that there is considerable uncertainty about all forecasts, particularly in unusual times and circumstances.

Overall, the new personal income forecasts indicate sharper declines in all categories of earnings and other income, but higher transfer payments will significantly offset those losses, at least for a time.

Consumer Spending
Despite the boost to incomes from expected transfer payments, the balance of forces is now expected to result in sharper declines in Personal Consumption Expenditures (PCE) than in the previous forecast.  Spending in the second quarter is now projected to decline by 9%, with additional weakness expected in the first quarter statistics as well (-0.7%).  The trajectory for recovery is now more optimistic, however, with growth beginning to rebound in the third quarter.

Figure 4:

Sources: IHS Markit, Arkansas Economic Development Institute

Table 2 shows the initial declines expected for components of consumer spending, comparing the previous forecast to the current outlook.  As is typically the case during recessions, durable goods purchases are expected to fall dramatically, with declines in purchase of motor vehicles down 33%.  Nondurable Goods purchases are less-affected during economic declines, and particularly in the present situation with meals-at-home substituting for dining-out, overall Nondurable Goods purchases are expected to decline by less than 7%.  Nondurables also includes gasoline, where price reductions account for much of a 42% drop in spending, as well as Food and Beverages Purchased for Off-premises Consumption, which are expected to increase by 15%.  Spending on services also tends to be more resilient to economic downturns, but some sectors in particular are expected to show sharp declines.  While overall spending on services is projected to decline less than 9%, spending on Recreation is expected to drop by 40% and Accommodations and Food Services by over 60%.

Table 2:

Sources: IHS Markit, Arkansas Economic Development Institute

Figure 5 shows index values (relative to 2019:Q4=100), illustrating the relative paths for total PCE, Durable Goods, Nondurable Goods (less Gasoline & Other Energy) and Services.  The relative severity of the downturn in Durable Goods is evident.  With the exclusion of gasoline, Nondurable Goods are projected to show a modest decline in the second quarter and remain relatively stable.  However, the dashed line shows that the stability of Nondurables is attributable to Food and Beverages Purchased for Off-Premises Consumption.

Figure 5:

Sources: IHS Markit, Arkansas Economic Development Institute

Implications for Local Sales Tax Collections
In a follow-up to our forecast from two weeks ago, we prepared a report on how changes in consumer spending are likely to affect local sales tax collections.  This section presents an update on that report.

For assessing the impact on county and municipal sales tax collections, the question is how the tax base is reflected in the various components of spending.  Durable goods are taxable and represent a significant share of the sales tax base.  Nondurable goods, excluding gasoline, are also taxable.  Services are generally not taxable, with the exception of some categories that are expected to be hard-hit by the downturn; in particular, Recreation and Food Services & Accommodation.  On the other hand, the surge in grocery sales represent a component of county and municipal sales tax bases that should help offset declines in other categories.

As a proxy for local sales tax bases in Arkansas, we take a simple sum of Durable Goods plus Nondurable Goods (less Gasoline and other energy) plus two services components, Recreation and Food Services & Accommodation.  This isn’t a perfect measure.  For example, it excludes the utilities component of Housing and Utilities, as well as some taxable components of Other Services.  Moreover, as a measure of consumer spending, it does not include some taxable business-to-business sales.  Nevertheless, this aggregate measures some of the key components of the tax base. 

Figure 6 shows the trajectory of this measure compared to total Personal Consumption Expenditures.  Figure 6 also compares the current outlook to our previous forecast, in which grocery sales were expected to buffer the decline in other categories of spending.  In the new forecast, the steepness of declines in spending on Durable Goods, Recreation, and Food Services & Accommodation overwhelms the grocery effect.  The proxy for taxable sales was projected to decline by 4% from 2019:Q4 through 2020:Q2 in the March forecast.  Now it is expected to fall by 18% and it is not expected to recover to 2019 levels until late in 2021.

Figure 6:

Sources: IHS Markit, Arkansas Economic Development Institute

Figure 7 breaks down the outlook for the taxable sales proxy in two ways:  as year-over-year growth rates and as deviations from trend.  It is hoped that these figures might help local governments anticipate the timing and magnitude of declines in taxable sales and tax revenue.

In terms of year-over-year growth rates, the first quarter of 2020 is now expected to have declined by nearly 3% from the previous year.  The second quarter year-over-year growth rate drops to -16.8%.   The figures for deviations from trend illustrate the lasting impact of reduced revenues relative to a pre-existing outlook, dropping to 18% below-trend and remaining in negative territory through the end of 2021.

Figure 7:

Sources: IHS Markit, Arkansas Economic Development Institute

These estimates suggest large declines in sales beginning in the second quarter.  There is typically a one-month lag in the remittance of sales tax proceeds by the vendors and an additional month before the revenue shows up in local government accounts.  Hence, the hit to sales tax receipts might not show up in full impact until near the middle of calendar year 2020.

These comparisons are subject to a great deal of uncertainty.  They do not reflect seasonal patterns in the data and do not reflect regional differences in consumption patterns and growth trends.  As with any forecast, they should be used only as rough estimates. 

A PDF File of this report is available HERE.

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Arkansas GDP – 2019:Q4

The U.S. Bureau of Economic Analysis released a report this morning on state-level GDP for the fourth quarter of 2019. Arkansas real GDP increased at a 2.4% annual rate, surpassing the national average of 2.1%. Arkansas’ growth rate was the 13th highest in the nation.

Source: Bureau of Economic Analysis

From four quarters earlier, Arkansas GDP increased 2.2%, nearly keeping pace with the national average of 2.3%.

Source: Bureau of Economic Analysis

2019 Annual Data
Comparing 2019 to 2018, Arkansas GDP was up 1.8%, accelerating slightly from the 1.7% pace of the previous year. Growth in 2019 was the fastest since the 2.8% pace recorded in 2013.

Source: Bureau of Economic Analysis

Contributions to GDP growth in 2019 came mostly from service sectors, particularly those associated with information, finance, and professional & business services. Health care services were also a contributor to growth. Agriculture and nondurable goods manufacturing subtracted from annual growth.

Source: Bureau of Economic Analysis
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Initial Claims for Unemployment Insurance – Week ending March 28

The latest report on initial claims for unemployment insurance, covering the week ending March 28, came out this morning. Nationwide, initial claims were up 6,648,000, more than double the size of the record-breaking increase from the previous week (which was revised up by 24,000). For Arkansas, initial claims totaled 26,944, nearly three times the number from the previous week. The Arkansas increase was a record high, exceeding even seasonal end-of-year peaks recorded in 2001 and 2002.

Source: Department of Labor

The report from the Department of Labor noted that comments from states continued to cite the COVID-19 virus as a factor, and that the job losses were “related to the services industries broadly, again led by accommodation and food services.” The report when on to report broader impacts: “Many states continued to cite the health care and social assistance, and manufacturing industries, while an increasing number of states identified the retail and wholesale trade and construction industries.”

In order to put the numbers in perspective: If we take the number of initial claims over the most recent two weeks, add that to the number of unemployed in February, and subtract it from the number of employed, we get a hypothetical unemployment rate for the U.S. of 9.2%. For Arkansas, the same calculation yields a hypothetical unemployment rate of 6.2%.

This is not how the actual unemployment rates are calculated. A survey polls individuals on their employment status during one “reference week” each month (usually the week including the 12th of the month). Consequently, the unemployment numbers for March are unlikely to capture the late-month surge in the newly unemployed.

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Impact of Covid-19 on Arkansas Consumer Spending: Implications for Local Government Sales Tax Collections

(Revised and corrected, April 2, 2020)

In a report released on March 23, AEDI presented a preliminary forecast for the Arkansas economy, taking into account the impact of the novel coronavirus disease 2019 (COVID-19).  In addition to disruption of world supply chains, the decline in consumer spending associated with “social distancing” is generating forecasts with significant declines in aggregate demand that make a recession appear inevitable.

In this note, we focus on consumer spending and the outlook for sales tax collections by county and municipal governments.

Social distancing practices are expected to have significant direct effect on consumer spending in the first and second quarters of 2020, with lingering effects due to the impact of declining employment and income later in the year and beyond. Total consumer spending is expected to decline by 5.1% in the second quarter of 2020. While some recovery is expected in the second half of 2020, total consumer spending is expected to remain well below the baseline forecast through the end of 2021. 

Figure 1:

Sources: IHS Markit, Arkansas Economic Development Institute

While the 5% decline in total PCE provides an indication of the overall impact of COVID-19 on overall consumer spending, sub-components show some widely differing trajectories.  Durable goods are expected to suffer the largest decline, dropping 10.4% from 2019:Q4 through 2020:Q2 and remaining below recent levels through the end of 2021.  Services show a smaller decline, 4.7%, and recover to positive territory by the end of 2020.  Nondurable goods (less Gasoline) are expected to increase through the second quarter of the year (+4.2%), driven by an increase in spending on Food & Beverages Purchased for Off-Premises Consumption.

Figure 2:

Sources: IHS Markit, Arkansas Economic Development Institute

Table 1 shows the initial declines expected for components of consumer spending, along with cumulative changes expected by the first quarter of 2021. ( Table 1 is a corrected and extended version of a table presented in our previous forecast analysis.)

Table 1:

Sources: IHS Markit, Arkansas Economic Development Institute

For assessing the impact on county and municipal sales tax collections, the question is how the tax base is reflected in the various components of spending.  Durable goods are taxable and represent a significant share of the sales tax base.  Nondurable goods, excluding gasoline, are also taxable.  Services are generally not taxable, with the exception of some categories that are expected to be hard-hit by the downturn; in particular, Recreation and Food Services & Accommodation.  On the other hand, the surge in grocery sales represent a component of county and municipal sales tax bases, and should help buffer declines in other categories.

As a proxy for local sales tax bases in Arkansas, we take a simple sum of Durable Goods plus Nondurable Goods (less Gasoline and other energy) plus two services components, Recreation and Food Services & Accommodation.  This isn’t a perfect measure.  For example, it excludes the utilities component of Housing and Utilities, as well as some taxable components of Other Services.  Moreover, as a measure of consumer spending, it does not include some taxable business-to-business sales.  Nevertheless, this aggregate measures some of the key components of the tax base. 

Figure 3 shows the trajectory of this measure compared to total Personal Consumption Expenditures. Grocery sales boost this measure into positive territory for 2020:Q1, but by the second quarter the proxy declines by 4% relative to the end of 2019.  Recovery proceeds more slowly than for PCE, with the proxy not reaching recent levels until the third quarter of 2021.

Figure 3:

Sources: IHS Markit, Arkansas Economic Development Institute

In terms of year-over-year growth rates, the first quarter increase in grocery sales (along with growth through 2019) suggest a 6.2% increase for 2020:Q1.  The second quarter sees a decline of 0.6% compared to a year earlier, with the cumulative effects showing up as a 3.9% drop in the third quarter.  Further year-over-year declines are registered through the first quarter of 2021.

Figure 4:

Sources: IHS Markit, Arkansas Economic Development Institute

These comparisons are subject to a great deal of uncertainty.  They do not reflect regional differences in consumption patterns and growth trends.  They should be used only as rough estimates.   

Moreover, as we concluded in our earlier report, there is a great deal of uncertainty associated with any forecast of the current, unprecedented situation. Risks to the forecast are more likely to be on the down-side: The presumed scenario where economic recovery begins by the end of 2020 might prove to be overly optimistic. The declines in consumer spending and income may reinforce one another to create an even more dramatic downturn.  In fact, more recent national forecasts are suggesting far more dramatic declines in economic activity.

There are, however, two additional effects that might make the outlook appear less dire.  First, since 2019:Q3 the state has been collecting sales taxes from out-of-state internet vendors.  This should continue to boost year-over-year sales tax growth in the first half of 2020 (although the magnitude of this change is uncertain).  Second, the federal government has recently approved stimulus spending that will result in substantial inflows of purchasing power to our state.  We estimate that the personal tax rebates of $1,200 per person and $500 per child will result in almost $2 billion in additional purchasing power, representing about 1.9% of annual personal consumption expenditures.  If consumers spend this and other stimulus cash on taxable goods and services, the negative impact on taxable sales could be ameliorated considerably.

Note: A previous version of this report erroneously included an ad hoc adjustment for internet sales tax receipts. The growth rates reported here are more conservative, making no assumptions about how internet sales tax receipts might affect year-over-year growth comparisons in the first half of 2020.

A PDF file of this report is available HERE

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Arkansas Employment and Unemployment – February 2020

The Bureau of Labor Statistics has released state-level data on employment and unemployment for the month of February. Arkansas’ unemployment rate remained unchanged for the month at 3.5%, matching the U.S. rate. The number of unemployed was down by 269 and the number of employed was up 1,239. As a result, the labor force expanded by 970.

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS)

Initial Claims
We don’t normally track weekly initial claims for unemployment insurance, but yesterday’s release for the week ending March 21 was noteworthy. For the U.S., the number of new unemployment claims was 3,283,000, shattering the previous record-high of 695,000 recorded in October 1982. The labor department reported that “nearly every state providing comments cited the COVID-19 virus impacts” to explain the surge. In Arkansas, new claims were up by 8,958, an increase of 548% from the previous week. Most states experienced even larger increases, with the largest percentage gain being 3308% in New Hampshire. The increase in Arkansas was the 40th-largest percentage gain among the 50 states and District of Columbia.

The initial claims data give an indication of what is in store for upcoming unemployment reports. A simple back-of-the-envelope calculation — adding the number of new claims to the number of unemployed in February (and subtracting the same number from the number employed) — suggests a two percentage point increase in the national unemployment rate, from 3.5% to 5.5%. The same calculation for Arkansas suggests a smaller increase, from 3.5% to 4.2%. This is not the way the actual unemployment rate is calculated, but it is indicative of the magnitude and likely impact of the initial claims data that came out this week.

Payroll Employment
Arkansas nonfarm payroll employment declined by 2,900 in February. The number for January — originally reported as an increase of 400 — was revised to show a 400-job decline. February’s job total was slightly lower than the number posted for a year earlier (-700).

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

Employment in most sectors showed small changes, with the exceptions including job losses in Transportation & Utilities (-1,500) and Leisure & Hospitality Services (-2,200). Employment in the Professional & Business Services sector was up by 1,100.

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

The year-over-year decline in employment includes prominent job-losses in Manufacturing (-3,000), Leisure & Hospitality Services (-2,300) and Retail Trade (-1,600). Employment in Government declined by 1,500 compared to year earlier, with the decline entirely attributable to local government employment (in the educational services sub-sector).

Sectors adding jobs over the past 12 months included Education & Health Services (+3,400), Wholesale Trade (+1,700) and Construction (+1,400).

Metro-Area Employment
The annual march-madness of BLS data revisions was reflected in updated payroll data for metropolitan areas last week. The downward revision to the state total as of December (reported previously) was reflected in lower estimates of employment for Northwest Arkansas and Central Arkansas. Data for Jonesboro and Texarkana were revised upward.

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

The data revisions had the effect of lowering two-year growth estimates for most metro areas, with the exceptions again being Jonesboro and Texarkana.

New data for February was also available following this morning’s state employment report. Declines were reported for four of the state’s metro areas, with gains reported for Hot Springs, Memphis and Texarkana. Jonesboro was unchanged. Compared to a year earlier, Fayetteville and Jonesboro top the list for job growth. Year-over-year declines were registered for Fort Smith, Little Rock and Pine Bluff. For Little Rock, the combination of data-revisions and the February decline make for a rather different trajectory for job growth than was indicated in the previously-published data.

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

The figures below illustrate the effects of revisions and newly-released data on recent employment trends in Arkansas’ metro areas.

Source: Bureau of Labor Statistics, Current Employment Statistics (CES)

# # #

Seasonally adjusted data for Arkansas nonfarm payroll employment, reported in a format consistent with the monthly news release from the Arkansas Department of Workforce Services, can be found here: Table-Seasonally Adjusted NFPE.

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Arkansas Personal Income – 2019:Q4

The Bureau of Economic Analysis released new state-level personal income data for the final quarter of 2019. Total personal income in Arkansas is estimated to have increased at a 2.7% annual rate, slightly lower than the 3.0% rate for the nation. Arkansas third-quarter growth was also revised from the previously-reported 6.5% down to 3.1%. For the four quarters from 2018:Q4 through 2019:Q4, Arkansas personal income increased 3.4%. Over the same period the nationwide total increased 4.1%.

Source: Bureau of Economic Analysis

Focusing on the fourth quarter, personal income gains were entirely in the nonfarm sectors, with farm income down at a 2.3% annual rate. However, the decline in farm income was tiny compared to the increase at annualized rate of 21,771% that was reported in the third quarter (revised up to nearly 29,000% in yesterday’s report). Annualized quarterly percent changes are not necessarily a revealing way to view a series that has been as volatile as farm income. The third quarter increase reflected increased payments associated with the Department of Agriculture’s Market Facilitation Program. The fourth quarter figures suggest that those payments continued to be relevant. For the year as a whole, Arkansas farm income was down 34% from 2018.

Source: Bureau of Economic Analysis

Earnings were up at a 3.6% rate, for both Arkansas and the U.S, with growth in wages and salaries, supplements, and proprietors’ income supporting that growth. Growth in dividends, interest and rent slowed to 1.1% and transfer receipts increased a rate of 2.09% — both lower than the corresponding national rates.

Source: Bureau of Economic Analysis

Growth in earnings accounted for 2.2% of the 2.7% personal income growth rate. Breaking down the contributions by sector, the largest gains — for both Arkansas and the nation — came from health care sector. Prominent gains in construction and in transportation & warehousing were also relevant. In Arkansas, management of companies and enterprises was also a contributing factor to growth.

Source: Bureau of Economic Analysis

Annual Data
Annual averages show that Arkansas personal income was up 3.9% in 2019, down from the 4.5% growth rate in 2018.

Source: Bureau of Economic Analysis

Nationwide, annual growth averaged 4.4%. Growth rates by state ranged from 6.1% in Colorado to 2.8% in West Virginia. Arkansas’ 3.9% growth rate ranked 32nd among the 50 states.

Source: Bureau of Economic Analysis
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Special Reports: Impact of Covid-19 on the Arkansas Economy

Forecast Update (June)
Information since May has suggested that Arkansas has not been as severely impacted as other parts of the country, and that the sharp declines in national employment have abated.
Read more…

Forecast Update (May)
“The economic impact of the COVID-19 pandemic continues to be more rapid and more severe than initially expected… In this updated report we present new projections for the Arkansas economy.”
Read more…

Forecast Update (April)
“In this note we update that forecast with new estimates of the magnitude of the downturn. We also update and extend our previous guidance on how the forecast is likely to impact sales tax receipts of local governments.”
Read more …

Implications for Local Government Sales Tax Collections
“In this note, we focus on consumer spending and the outlook for sales tax collections by county and municipal governments.” Read more…

Arkansas Economic Outlook (March)
“It appears that a dramatic downturn in economic activity over the remainder of 2020 is unavoidable for the nation and for Arkansas.”  Read more…

 

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