Mervin Jebaraj, an economist and the director of the Center for Business and Economic Research at the University of Arkansas, provided insights on the economic outlook during the UA Quarterly Business Analysis Luncheon in Fayetteville. Jebaraj indicated that the economic growth for both the United States and Arkansas is slowing. Despite the deceleration, he does not anticipate a recession this year.
One key factor affecting the economy is the tariffs imposed and threatened by the administration of President Donald Trump. These tariffs are expected to adversely impact business investments and consumer spending later in the summer. Companies have been proactive in increasing their inventories, particularly electronics, to mitigate the impending tariff effects. This strategy contributed to economic growth in the second quarter, following a minor GDP decline of 0.2% in the first quarter, which translated to trillions in lost revenue.
The GDP growth for the second quarter is projected at 1.4%, with expectations for even lower growth in the subsequent quarters. As the economy contracts compared to previous years, future growth will likely hinge on investments in data centers to support burgeoning artificial intelligence demands. However, this will be balanced by reductions in the healthcare and leisure sectors.
Consumer spending, which accounts for about two-thirds of GDP, faces pressure from rising costs and employment uncertainty. Proposed federal spending cuts in healthcare and insurance are anticipated to further challenge consumer expenditure by potentially leading to higher service prices and fewer job opportunities in the sector.
The introduction of higher tariffs, currently averaging 15.6%, compels businesses to choose between passing costs onto consumers or absorbing them, which could hinder business investments and lead to workforce reductions. This adjustment has not yet prompted a significant shift in manufacturing to the U.S. due to high tariff rates on materials such as steel and aluminum, which have increased domestic inventory costs. While manufacturing output might rise, job creation may not follow suit due to automation.
Interest rates remain elevated as the Federal Reserve adopts a cautious approach, monitoring the tariff-driven impacts on inflation. Although a rate cut was anticipated later this year, only one adjustment is now expected. Arkansas’s unemployment rate is 3.7%, with Northwest Arkansas slightly lower at 3%. Recent graduates are experiencing difficulties in securing employment due to a preference for experienced candidates by employers.
Potential risks to economic stability include reduced tourism resulting from decreased discretionary spending, as well as federal layoffs and rising default rates on student loans. Interest rates are projected to hover between 6.5% and 7%, impacting housing demand as many homeowners previously refinanced at significantly lower rates. Additionally, a sustained oil price increase could further hinder growth, although current spikes are not expected to last.
In conclusion, the economic landscape is beset by uncertainties, primarily from trade policies and tariffs, which are likely to suppress business earnings and potentially lead to lower employment figures.
