The powerful tornado that plowed through Little Rock and surrounding areas on March 31 produced an economic setback for the region though consumer spending and other key metrics are showing signs of recovery, according to an analysis released Wednesday.
Consumer spending in Arkansas, lifted predominantly by a continued economic surge in the Northwest corridor, appears to be higher than in the other six states in the Federal Reserve Bank's eighth district.
"In consumer spending, Arkansas was probably a little stronger than the district as a whole," Nathan Jefferson, regional economist who covers the region for the Fed, said Wednesday. "Some businesses have told us they lowered their expectations a little bit but they are still seeing steady spending at that lower expectation level."
The tornado was the biggest economic influencer in recent months, lowering activity in the hospitality and food-service industries in particular. Nevertheless, businesses, especially restaurants, have begun reopening and spending is bouncing back after a brief stall, Jefferson said.
"This was definitely a setback for the hospitality industry and for consumer spending in general for that area," he said, noting the devastation in Central Arkansas. "People pointed out that this was only temporary ...and we didn't get any indication the impacts would be permanent."
Labor markets remain problematic though businesses are having an easier time hiring and retaining workers. "Overall, there still is a tight labor market but we keep getting reports over and over again that it is easing," Jefferson said. "Businesses are getting more applications than they have previously and turnover isn't quite as bad."
The state's real estate market is rebounding from the shock of interest rate increases, which drove up the amounts on mortgage payments and reduced homebuying. Short-term interest rates, spurred by the Fed's rate increases, are five points higher than they were a year ago.
"The big story out of the real-estate market is that it was hit pretty abruptly last year when interest rates started rising up and the market bottomed out last fall or winter," Jefferson said. "We've seen a steady level of activity over the past couple of months. While inventory remains low, there is still a demand."
Most economic conditions in Arkansas remain stable since the last Beige Book report was issued in mid-April. Prices continue to rise and those increases are being absorbed by businesses, fearing they will lose customers if they keep raising consumer costs. "Firms struggled to pass on higher costs to customers, which resulted in wage growth compressing profit margins," the report said.
Summer travel seems to be in good shape, with Jefferson reporting that the potential for vacation spending appears robust while long-term spending plans may stall somewhat. "Looking toward the end of the year, it's still a mixed outlook," he said. "For the time being, demand is holding up for summer recreational activity."
Fed Gov. Philip Jefferson, speaking Wednesday at the 22nd Annual International Conference on Policy Challenges for the Financial Sector in Washington, D.C., also said economic conditions could deteriorate as the year goes on.
"I expect spending and economic growth to remain quite slow over the rest of 2023, due to tight financial conditions, low consumer sentiment, heightened uncertainty and a decline in household savings that had built up after the onset of the pandemic," he said. "While it is reasonable to expect that the recent banking stress events will lead banks to tighten credit standards further, the amount of tightening and the magnitude of the effect such tightening might have on the U.S. economy is not yet clear, and this uncertainty complicates economic forecasts."
Yet improvements in inflation and other key economic indicators may dampen future rate increases, according to the Fed leader.
"Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming," Jefferson said, referring to the Federal Open Market Committee, which meets again mid-June to evaluate the economy and determine whether another rate hike is appropriate.
The Beige Book summarizes national economic conditions, including those for the eighth district that encompasses all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. The region includes the major metro areas of Little Rock, the Fayetteville-Rogers-Springdale corridor, Louisville, Memphis and St. Louis.