A new economic normal post-pandemic may include pandemic realities such as online shopping, working from home and zoom meetings. It also will include a struggle for the tourism industry – restaurants and hotels – to recover in a world with deep changes in consumer behavior.
That is the collective insight of three economists who spoke with Talk Business & Politics about how the COVID-19 pandemic hit the Arkansas economy and how the economy responds when vaccines help daily life return to some sense of normalcy.
To be sure, the Arkansas economy was hit hard. The number of unemployed jumped to 137,367 in April 2020, up 193% compared with the 46,929 in April 2019. The number of unemployed declined through the year, with the estimate reaching 63,536 in January 2021 – but that was still 27% higher than the 50,132 unemployed in January 2020.
“Bars and restaurants also suffered significant revenue losses. Employment in the Leisure and Hospitality sector overall was down by 35% in April, and remains more than 10% below pre-pandemic levels,” noted Michael Pakko, chief economist and state economic forecaster at the Arkansas Economic Development Institute at the University of Arkansas at Little Rock.
The tourism sector also was not able to capitalize on consumer spending shifts during the pandemic that helped boost overall sales tax revenue in the state.
“Accommodations and Food Services (restaurants) have been hit hardest in percentage plunge from the base period of February 2020 and greatest duration for those losses. Considering all the other economic distortions and shifts in consumer spending, this pattern of decline means full-service restaurants and travel-related accommodations subsectors missed out on the COVID-19 phenomenon of spending local at the expense of out-of-state travel spending,” said John Shelnutt, director of economic analysis and tax research at the Arkansas Department of Finance and Administration.
Shelnutt also said “survival rates of small business will still be in question” through 2022 “as stimulus aid, market recovery, and financial condition are all assessed.”
Mervin Jebaraj, director of the Center for Business & Economic Research at the University of Arkansas, said manufacturing and education and health services jobs were also lost during the pandemic.
“It comes as no surprise, but Leisure and Hospitality, Manufacturing, and Education and Health Services,” he said when asked which job sectors were hit the hardest. “These sectors still have a lot of jobs that have not come back, and particularly in Leisure and Hospitality, the jobs that are back are paying less.”
A CHANGED WORLD
As to post-pandemic economic possibilities, the following are comments from the three economists.
Jebaraj: “I think we will continue to see some amount of remote work remain with us for a longer period of time which will raise some long-term issues for how electricity and internet are used during the daytime (residential vs. commercial). Other than that, we have seen business closures, the jobs and capital associated with that will be a drag on the economy for a while.”
Pakko: “There are likely to be many service-sector businesses that do not survive the pandemic. Restaurants and retail, in particular, have been subject to more consolidation as larger firms weather the storm while smaller businesses struggle to get by. Support for small business has been robust, but changes in consumer habits might be insurmountable in the end. Speculating about consumer habits and business practices, I suspect that many changes in behavior will outlive the pandemic. For example, online shopping has surged and is likely to retain a larger role in the retail sector. In the business environment, remote work arrangements and the adoption of online meetings to replace in-person meetings are also trends that have accelerated during the pandemic and are likely to retain momentum.”
Shelnutt: “The conveniences of remote meetings and time savings for consumers in shopping have all been tested in mass on more households and age groups than was conceivable before the pandemic. These conveniences and cost savings will be added to the list of choices for consumers and employers going forward. There will be some return to traditional shopping, office demand, and business travel but time and cost considerations will likely determine the new mix. Like the shift to self-service gasoline stations, the new trends are irreversible in many markets.”
FUTURE ECONOMIC TRENDS
Returning to economic trends prior to the pandemic will take some time. Pakko estimates it will be the end of 2022 before the economy begins to show a solid footing, to include a return of pre-pandemic labor force participation rates. He does include a caveat with his projection.
“A ‘hangover’ economic contraction, occurring simultaneously with rising prices, could bring on a stagflation scenario. I’m not a chicken-little and I’m generally optimistic, but these longer-term issues have been swept under the rug during the emergency situation of the COVID-19 pandemic, and we should be thinking about how they might be addressed should they emerge,” Pakko said.
Shelnutt sees job numbers returning a little sooner, and will include a “rebound phase.”
“Total payroll employment in Arkansas will probably return to the prior peak equal to late 2019 levels in mid-2022. Public education and health services will likely rebound faster than some of the hard-hit private sectors. Annual percentage growth will exceed the 10-year trend average in 2021 and 22 during the rebound phase and then decelerate back to 0.6% annual growth in 2023 and 24,” he noted.
Jebaraj believes the recently approved $1.9 trillion American Rescue Plan will help the economy recover a year sooner than otherwise. He also believes vaccine acceptance will have an impact on economic recovery.
“According to Moody’s this (federal relief) package will get us back to full employment mid next year, a year sooner than it would have without the $1.9 trillion. Other than that, the pace of vaccine distribution and its effectiveness against variants will determine our path.”
Shelnutt also believes the $1.9 trillion plan passed by Congress will benefit the state economy.
“The impact of this package in Arkansas will be another spike in consumer activity above the trend growth average and an extension of high savings rates in households that were not severely impacted,” he noted. “Deployment of the package in the economy will coincide with greater access to vaccines and more noticeable employment rebound in a larger group of sectors. The unusual employment declines in public education and health services will recover faster than other depressed sectors.”
Read the full story on the Talk Business & Politics website here.