On Wednesday, Arkansas Business spoke to Michael Pakko, chief economist and state economic forecaster at the Arkansas Economic Development Institute at the University of Arkansas at Little Rock, about the state of the Arkansas economy amid COVID-19.
Pakko had just released his latest state economic forecast, writing that the “economic impact of the COVID-19 pandemic continues to be more rapid and more severe than initially expected.”
He now expects the state’s unemployment rate for April, set to be released next week, to be about 12%, with that rate peaking at 17% in the third quarter.
Arkansas Business asked Pakko about his new forecast, what metrics he’s watching closely and how Arkansas’ unique economy is positioned to weather the recession.
You can watch our edited conversation in the video below. A complete transcript is also available.
Arkansas Business: You just released your revised outlook for May. And I got a chance to look at that a little bit yesterday. And it starts by saying the economic impact of the COVID-19 pandemic “continues to be more rapid and more severe than initially expected.” What have you found? And how has the forecast changed since you originally put it out?
Michael Pakko: Well, the first forecast I put out was in late March, when we were really just beginning to see the direct impacts of the shutdown on the US economy. And ever since incoming information has just painted a bleaker picture of the outlook as we go along. And particularly the the real high frequency data that we’re getting in is the initial claims for unemployment insurance, you know, that just begin to go through the roof in the last couple of weeks of March and all throughout April. And that’s really the basis that’s driving at least the unemployment component of the forecast.
But overall, the numbers as they come in slowly they trickle in are indicating that it’s a serious economic recession that we’re in right now.
Arkansas Business: I think now you’re expecting April unemployment to be north of 12%. And that was a level that you hadn’t expected to hit so early, I believe.
Michael Pakko: Yeah, the surprising thing about this downturn is how rapidly it’s taken hold. And I guess that’s not to be expected. This is an unprecedented situation that’s different than other recessions we’ve had in the past where there’s often a constellation of reasons that the economy goes negative, and it’s hard to pin it down on any particular thing.
In this case, it’s pretty clear what the cause of this downturn is. But that doesn’t really help us very much when it comes to dealing with the consequences of it. If we had a quick and easy answer for how to get the economy out of a recession, we’d be in pretty good shape. But of course, we don’t have that kind of knowledge.
Arkansas Business: Right. So it probably seems laughable now to ask you about the next six months — we’ve asked some of our business executives to try to think about the next six months. I know you probably don’t want to venture that far out, but what are the things you’ll be looking at over the next six months and in terms of certain trends and certain metrics that you’ll be watching?
Michael Pakko: Well, as we move forward from this point, you know, we’re starting to enter this phase where we’re trying to reopen the economy. But there are a couple of obstacles in the way. One is simply, there’s going to be continued vigilance on the part of households, consumers, businesses, about the virus and that’s going to constrain economic activity regardless of what restrictions are in place or which businesses are open, and to what extent.
But we’ve also got the kind of the internal dynamics of the business cycle to contend with now. We’re in an economic downturn, thousands are unemployed, incomes are suffering, people are having trouble making payments and so we’ve got that dynamic going on as well.
So, over the next six months, I anticipate that the economy is going to continue to really slide further into recession. And really, we won’t be looking at recovery, maybe toward the end of this year, I guess, when we’ve kind of bottomed out in the third quarter. And then it’s going to be a slow process, even going forward after that to get back to the kind of the full employment economy that we had before this all started.
Arkansas Business: So how might Arkansas’ efforts to slowly reopen affect the metrics that you’re watching? I mean, are these slow efforts – and admittedly, they’re going to be slow — are they going to be big enough to move these needles in these metrics in any significant way?
Michael Pakko: Well, you know, I think it’s going to be a slow process. As I mentioned before, the people are still going to be vigilant about social distancing, and things like that. And that’s going to slow down consumer demand for especially for a lot of in person services. So that’s going to continue to kind of be a drag on the economy.
Arkansas Business: But I just wonder — you’re looking at certain tax collections in certain sectors. I mean, can these efforts really make a meaningful difference in the next three months or so? I guess that does depend obviously on the demand of people and their comfortability of going out.
Michael Pakko: Right now, I think it’s important to note that here in Arkansas, we did not have as severe a shutdown, as in many other parts of the country. We didn’t have, you know, stay-at-home orders. And there were still many businesses open cautiously for business. And so I think that’s going to make a difference in the in the statistics as they come out that Arkansas is going to fare relatively well compared to some other parts of the country. It’s just really hard to quantify exactly how much that’s going to make a difference. And how much the efforts to open the economy and get things moving again are going to help.
Clearly we’re in a sharp downturn — anything that can help support demand and we can give people more confidence is going to be helpful. But a big part of what we have to look at right now is that people are going to be cautious about their spending and investment plans, especially when it comes to big ticket items — durable goods, automobiles, home, furnishings. And so while we continue to see people buy groceries and eating at home rather than eating in restaurants, that still represents a lowering of consumer spending and hence, like economic activity across the board.
Arkansas Business: The governor the other day talked about how Arkansas is uniquely positioned apart from other states in terms of weathering these kinds of downturns and sounded some of those same notes in terms of, well, number one, we didn’t shut down completely. But then number two, we’ve got a diverse economy. How is that playing out in terms of Arkansas’ ability to weather this unprecedented downturn?
Michael Pakko: Well you know the structure of the economy does matter. You know, I’ve just gone through and taken a very careful look at the national employment statistics for April. We won’t find out what Arkansas’ numbers are for April for a couple of weeks now. But if we look sector by sector at the job declines and kind of add that up for Arkansas, it’s not quite as severe in percentage terms as the national report was. And that’s because our employment is concentrated less in industries that are really at risk of the COVID-19 shutdown effects and all that, and more dependent on goods production and manufacturing that hasn’t been quite as hard hit in terms of employment.
So already the structure of economy buffers us a little bit from some of the most severe effects that we’re seeing in other parts of the country. And the fact that we are smoothly transitioning back to some form of new normal, I think will also serve as well as we slowly go through the recovery process.
Arkansas Business: Were there any surprises and looking at those industries that were the hardest hit? I mean, obviously, restaurants, hospitality were pretty badly affected. Were there any others that surprised you in terms of how they took a hit?
Michael Pakko: Well, it’s interesting that the restaurants in particular, or food service in general, is one category where my forecast is actually improved a little bit since last month. And it’s because we’ve seen really a lot of resilience in the food services sector being able to have takeout, curbside service, drive throughs — really more activity there than we really anticipated is going to be able to take place.
On the other side of things, the surprising aspect of what we’re looking at on the job losses, at least nationwide, is the fact that they’re across the board. It’s the job losses are not concentrated in just those industries that are more at risk for social distancing impact, but really a contraction of overall economic activity and that spreads to manufacturing – even even health care.
That surprised me at first, but considering the fact that we’re basically canceling all nonessential surgery and shutting down dentists offices and things like that, even health care is taking a big hit when it comes to jobs. So if the reason and the focus for this recession is clear, it’s really spread across the economy at this point.
Arkansas Business: We’re hearing a lot about V-shaped recoveries and I guess U-shaped recoveries or W — I’m not sure what the letters are these days. But obviously, the V-shaped recovery would be the optimistic scenario here — you see this big decline, but then suddenly, we feel confident and everyone’s out again, and demand surges. And the W-shape is that there’s a second wave that forces everyone to shut down again. Are there any historic models out there that you can look at that indicates where we may be going, or is that just too hard to tell right now?
Michael Pakko: Well, yeah, the shape of the recovery is a really important feature of forecasting here. We’ve kind of gone through a couple of phases. You know the Great Recession was more like an L-shape recovery, where it was a drop and then a kind of a continuation along the trend from that point on.
The most optimistic outlook, as you’ve noted, would be a V-shaped recovery, that once we get past the initial effects of the virus and efforts to suppress its spread, that things recover very rapidly.
I think it’s probably more likely that we see something of a U-shaped recovery. There’s going to be — it’s going to take some time to get things moving, again, simply from the aspect of people being cautious and taking precautions, and also some time to just get the economy up and running, getting that employment back up to where people are more comfortable spending. … That is probably a U-shaped recovery, hopefully with the bottom not lasting for too very long.
But it’s looking right now like we might see the beginnings of a recovery in the fourth quarter of this year. And that’s kind of — that’s an optimistic outlook. It might still be flat, and we have to wait until beginning of 2021 before we really see any signs of true recovery.
Arkansas Business: When you’re when you’re putting these forecast models together, are you having to incorporate some new sources of information that are different than what you’ve had in the past? I mean, are you looking at health policy experts? Are you looking at sources that are a little different from what you’ve had to do before just because of the nature of what we’re dealing with?
Michael Pakko: Well, one of the things this requires us to do is to look more closely at the very high frequency data. In the past, for instance, I’ve never really paid a whole lot of attention to initial claims for unemployment insurance. It’s typically little fluctuations from week to week. But at times like this, where we’re seeing dramatic changes in the economy, the fact that the information comes out at the lag of only a week really gives us some up-to-date information about what’s going on.
You know, more generally, I subscribe to a national forecasting service that has an entire staff looking into every aspect of the economy sector by sector, and those briefings and those inputs to the forecasting models are extremely helpful. It’s not just running a few equations in my basement, we have a lot of information coming in that helps us try to sort out what’s the likely effect of this really unprecedented situation.
And while this is the time when economic forecasts can be the most useful when we’re trying to get a grip on this unusual situation and what it might entail, I have to point out also that the error bands, the confidence intervals, are extremely wide. There’s a huge range of uncertainty about any of this.
Really, it’s almost a matter of trying to forecast what has already happened and get a grip on the data that — as it comes in — that’s kind of looking in the rearview mirror at this point.
Arkansas Business: What’s the one thing you wish businesses knew about economic conditions now, in terms of how you see them at this moment? Is there a point here that everybody’s missing? Or what do you what would you like to share in that regard?
Michael Pakko: Well, you know, I think in some quarters, there is a sense of optimism that I don’t necessarily share that we can make it emerge from this with sharp V-shape recovery, for instance. That all we have to do is lift the restrictions on the economy, and everything will go back to normal. And I think it’s unrealistic to think that that’s going to be the case for behavioral and simply data reasons.
This is going to take some time to play out. But I think people are really beginning to realize that. It’s even surprised those of us who try economic figures day in and day out, some of the magnitudes and the speed with which things are changing. It’s just been so surprising that we’re all kind of running to keep up with understanding the situation.
Arkansas Business: How has the pandemic changed your life? Has there been any meaningful changes to how you work or do things in light of all this?
Michael Pakko: Well, we spent several weeks at home. It was an interesting experience, but I found that I was a lot more productive working from home than I thought I would be — and maybe a little bit more difficult to put things down at the end of the day. There’s not that break in the workday that you have — spend your days in the office and then go home.
And so that was a big change, and it’s required new technologies. I now have two different Zoom accounts. And so it’s kind of changed the nature of collaboration in academia and in economic development, where instead of having meetings, bringing community leaders together, we’re getting together virtually. And so those kind of things, I think we’re going to emerge in a different world and space that we didn’t necessarily expect some of these new technologies and practices will carry over.
Arkansas Business: Well Dr. Michael Pakko, the chief economist at the University of Arkansas at Little Rock, thank you for joining us. We appreciate your time.
Michael Pakko: Thank you for inviting me.
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