U.S. and Arkansas economic growth continues to slow with fewer jobs added this year and the cost of living rising with inflation on essentials like food and shelter, according to Mervin Jebaraj.

Jebaraj, economist and director of the Center for Business and Economic Research at the University of Arkansas, provided a cloudy growth forecast at the UA Quarterly Business Analysis Luncheon held in Fayetteville on Wednesday (June 18).

While the economy is slowing, Jebaraj did not forecast a recession for this year. He said tariffs implement and threatened by the Trump administration are likely to negatively impact business investment and consumer spending later this summer.

He said there was considerable front-loading of inventory ahead of the tariffs on goods from China. He said businesses upgraded electronics and retailers stocked up in hopes of selling those goods to consumers before the full-tariff impact takes effect. That additional spending helped prop up growth in the second quarter, coming off of 0.2% GDP dip in the first quarter. Jebaraj said even though the dip was fractional, it still amounted to several trillion dollars in lost revenue for the U.S. economy.

He said second quarter growth is forecast at 1.4%, but the third and fourth quarters are expected to be lower. He said the forecasts take into account the size of the economy compared to recent years. He said economists forecast a smaller economy going forward, but an economy that is growing. Leading that growth will require business investment in new data centers needed to support increased artificial intelligence (AI) computing power. He said the growth will be offset by a pullback in the healthcare sectors and later the leisure and hospitality sectors.

Jebaraj said the 3% GDP growth achieved last year is likely to be sliced in half for the balance of this year and not much higher in 2026.

CONSUMER SPENDING, MANUFACTURING ISSUES

Jebaraj said proposed federal spending cuts in health care and insurance payments will mean providers have less money to invest, hire fewer people and likely increase prices for services. He said consumer spending, which is roughly two-thirds of GDP, is under pressure from higher prices and job uncertainty.

“I think families have made summer vacation plans and those will take place, but a pullback in spending could happen by this fall,” he said.

With the effective overall tariff rate around 15.6%, up sharply from the 2.5% to start the year, Jebaraj said businesses are having to decide whether they pass costs along to consumers and risk no sales, or try and absorb the costs which will likely mean they can’t invest in their business including new hires and maybe even layoffs. While the 15.6% seems high, it’s not yet high enough for companies to move their manufacturing to the U.S. or some other country, he added. He said the hefty 50% tariffs on steel and aluminum have also raised the cost of domestic inventories.

He said many U.S. manufacturers import parts from China and this will raise the cost of production on everything from lawn mowers and power drills to bicycles. Jebarai said a U.S. manufacturing output gain does not always equate to more jobs because much of manufacturing is automated.

INTEREST RATES, TOURISM HIT

Interest rates are likely to remain elevated with Fed Chair Jerome Powell saying Wednesday that “uncertainty is unusually elevated.” The Federal Reserve held steady on interest rates and said it would wait to move rates, while watching for tariff impacts on inflation. Powell did not forecast a weaker U.S. economy, but said the economy will weaken at some point. The Fed rate cuts that had been on the table for later this year are now in question. Jebaraj said he expects one rate cut by year-end, not two as was previously expected.

The unemployment rate in Arkansas is 3.7% and in Northwest Arkansas it is 3%, elevated from the past year. Jebaraj said groups having the most difficult time finding work are recent graduates because employers favor experienced employees.

While consumer spending remains somewhat resilient, Jebaraj said delinquency rates on student loans and car loans are rising. He said higher interest rates, coupled with rising prices for cars and homes, will also likely pinch those sectors in the coming quarters.

The biggest risks to the economy over the balance of this year include lower tourism because of households reducing discretionary spending. Layoffs in the federal government and ongoing higher default rates among student loan borrowers would hinder their ability to obtain credit. He said interest rates should hover between 6.5% and 7% for this year, which is twice the interest rate of millions of homeowners who refinanced at 3% during the pandemic or shortly after. This will mean lower housing demand.

He also sees any sustained spike in oil prices as a big hit to the overall economy. He does not see the recent spike as a sustained increase. But if oil prices were to stay elevated through the summer, economic growth could be 0.5% lower.

Other risks to economic growth include weaker business investment due to policy uncertainty around trade, taxes and regulation, he said. There also are negative business impacts on business earnings from higher tariffs, which could result in lower employment numbers.